National Insurance and Your Pension
The Chancellor’s 2017 Budget introduced, as expected, a narrowing of the gap between the favourable tax treatment of companies compared to sole traders and partnerships, with the dividend nil rate band of £5,000 to be reduced to £2,000 from April 2018. For basic rate taxpayers there is an extra tax charge of £225 (£3,000 @ 7.5%).
Class 4 National Insurance paid by the self-employed was set to rise but in view of the pledge made in the Government’s manifesto that NI would not increase and the furore the Chancellor’s announcement raised, this has since been withdrawn. Whilst Class 2 contributions are to be phased out, there will now be no increase in Class 4 contributions.
On this subject, Class 2 contributions have, until 5 April 2016, been the required contributions for a self-employed person to qualify for the state pension; at least 30 qualifying years were needed in order to get the full pension. The qualifying years figure has since been revised and rose to 35 years from April 2016.
With Class 2 being phased out you will need to ensure that each year you pay Class 4 contributions or make voluntary contributions in order to obtain the 35 qualifying years. It is always sensible to get a pension forecast, we suggest at least every five years, to ensure your history is up to date and accurate. Be aware that many people have incomplete histories, which can be for reasons such as:
- employed but had low earnings
- unemployed and were not claiming benefits
- self-employed but did not pay contributions because of small profits
- living abroad
- contributions have been missed as the wrong NI number was entered by
- employers or automatic entitlement for home duties was not logged
One year’s contributions currently entitles you to £4.45 of pension per week, so if you are short of qualifying years it is important to make sure your history is accurate.
With the new digital tax accounts you can access your contribution history if you log in (see our article on page 3) or you can go online, or ring the Future Pension Office (0345 3000 168), or you can write to Pension Service 9, Mail Handling Site A, Wolverhampton WV98 1LU.
For more advice please contact email@example.com
Business Rates Appeal
In the light of publicity surrounding the new property valuations we thought we would share our own experience. Business rates changed in April 2017: some will be lower, some higher, and some the same.
Several clients have received letters from rating specialists offering rates’ reviews with fees based on a percentage of savings, if any. But beware! Some people have appointed specialists only to find that their rates have gone up!
Rates paid are calculated by the Rateable Value of the property multiplied by the rate poundage (the chargeable percentage in the pound) and reduced by any applicable small business relief. Councils set their own rate poundage depending on the number of properties in their location. The rateable value of all properties is accessible on the Valuation Office website and will give you a good idea of whether your rateable value is in line with surrounding properties. Google “gov.co.uk - my valuation”; you can then decide whether to lodge an appeal yourself or instruct a specialist. This may be a lot cheaper than following up an unsolicited letter and paying a percentage of any reduction.
We carried out our own successful rates’ appeal a couple of years ago.
For more advice please contact firstname.lastname@example.org
Making Tax Digital Update
Making Tax Digital (MTD) is currently on hold following the general election. However, it is our feeling that this initiative is postponed rather than cancelled. This article updates you on the progress made by the Government up to the point of deferral.
Following the concerns of many professionals and lobbying of the Government, the Chancellor had already confirmed a delay until April 2019 in imposing MTD for businesses with turnover below the VAT limit of £85,000 (2017/18). It is our expectation that this will now be delayed until at least 2020. We also understand that trials of MTD have shown up functionality issues that will require resolution before the system can be rolled out.
When MTD is finally introduced, unincorporated businesses with turnover above the VAT limit, limited companies and some individuals will need to comply.
Those affected will need to keep records digitally, will need to buy accounting software and must computerise records for the accounting period from when MTD is introduced. Those already using computerised recording will need to update software to ensure it can deal with the quarterly submissions.
One point that has not been well publicised is the effect of year end dates on the frequency of reporting. As an example, let’s assume we are into the MTD regime, our business has a year-end date of 31 October and we have a couple of rental properties with rental income in excess of £10,000, which is reported on a tax year basis.
Taxpayers will be required to report quarterly returns as well as a final return for both the business and the rental income. For the second MTD year ended 31 October 2021, and our rental income to 5 April 2022, the reporting requirements will be:
- Business 01.11.20 to 31.10.21
- Quarterly deadlines:
- 28 February 2021
- 30 May 2021
- 31 August 2021
- 30 November 2021
- Final Return deadlines:
- Rental Income 06.04.20 to 05.04.21
- Quarterly deadline:
- 5 August 2021
- 5 November 2021
- 5 February 2022
- 5 May 2022
- Final Return deadline:
That’s ten submissions for one person!
The prospect of MTD is likely to be daunting for many. We are fully conversant with all accounting software packages and, when the time comes, we will be able to provide any help you may need.
Financial Reporting Standards
Company accounts are governed by strict legislation in company law, generally accepted accounting practice and specific financial reporting standards. New regulations and guidelines - presented in Financial Reporting Standards FRS 101 to 105 - became effective for accounts commencing on or after 1 January 2015.
For most of our corporate clients FRS102 is the relevant standard. The main changes affecting clients include the treatment of property, leases and lease incentives, intangible assets, foreign currency translation, and loans and derivatives that include forward currency contracts.
We have had to get to grips with these specialised and technical changes, and their impact on the software we use. Layout and content in most company accounts has changed; previous year’s figures and reserves have to be restated and tax consequences may result.
For some clients the effects are quite significant. Where the changes affect our clients, we will have already met with them, or be meeting very soon, to explain the process and the tax consequences.
Cars and Vans – Benefits in Kind
If assets owned by an employer are made available to directors or staff there will usually be a benefit in kind tax charge. The most common concerns cars and vans but loans, accommodation, shopping vouchers and many other things are included. Generally, if the employer provides money or ‘money’s worth’ then that value is treated as taxable.
Benefit charge for cars is calculated by reference to the manufacturer‘s list price when new. Also taken into account is the Revenue’s published scale rates based on CO2 emissions. For second-hand cars the price paid is irrelevant, so if you are provided with a £10,000 car where the list price was £30,000 the tax charge will be calculated on £30,000. In addition, a fuel benefit is charged where fuel is paid for by the employer.
Nowadays, punitive tax costs mean owner managers should generally keep cars out of their company. The argument that the car is only used for business (a pool car) is difficult as the test to determine whether a benefit arises is judged on whether the vehicle is available for private use, not whether it is actually used. In reality, it is tricky to prevent a car being available, although where the correct documentation and procedures are in place and it is only insured for business, it may be possible.
In some cases company cars for directors can be tax and cost effective but generally the tax outweighs any saving.
The taxable benefit for a van and its fuel is far lower than for cars, and there are many attractive “vans” on the market. The four-by-four crew cabs have always been popular and are an example of vans that make acceptable substitutes for cars. Take care though, as the vehicle must qualify as a van. You must look carefully at the vehicle you are buying, consider its original construction and any later conversions. A list on the Government website gives vehicles accepted as vans, but beware, as it is not definitive! For example, Land Rover produce many variants of the Defender, some of which are classed as vans and some not.
The advice is to consult us before you make your decision about buying your company vehicles email@example.com
Marginal Rates of Tax
Most people know that there are three rates of tax: 20% basic rate and 40% or 45% for higher rate taxpayers. If only life were that simple. In fact there are many rates of tax depending on income, allowances and reliefs, whether you have children and how old you are.
Now that personal allowances, child benefit and pension relief are being withdrawn at various levels of income, there are many marginal points where for every extra £1 you earn you may lose more than 45% or even more than 100%.
Being aware of this and recognising and avoiding these tax points, if you can, is sensible tax planning. Where we have the information we discuss this with clients but there is nothing we can do after the event. If your income or circumstances change from year to year, check with us to see if you will fall anywhere near the trigger points and whether there is anything you can do to avoid these punitive marginal rates. Here are some areas to note:
- The 40% tax rate starts when income reaches £43,000
- Child benefit starts to be withdrawn when one spouse’s income exceeds £50,000
- Personal allowances start to be withdrawn when income exceeds £100,000
- The 45% rate of tax starts when income reaches £150,000
Tax laws have allowed for some very unfair trigger points and high marginal rates of tax to be charged. This is mainly a result of new reliefs and allowances being introduced only in later years to either be capped or means tested; the resulting change creates very odd marginal rates.
Individuals can remedy the position by making pension contributions, paying gift aid or, if possible, delaying income so it falls in a later period. However, planning must be done in the tax year to which it applies - any later is not allowed!
Many years ago, the marginal rate of tax was as high as 97.5% with the investment income surcharge forcing many wealthy people to move overseas. But that was long ago! Despite the rhetoric that tax is getting simpler and fairer, we still have anomalies that create these very unfair high rates of tax and affect middle earners as well as the wealthy. All we can do is watch for problem areas and see if they can be avoided.
We have only mentioned Income Tax but when VAT, National Insurance and other taxes are considered there are many more trigger points. Whether the Government will ever address and rectify these matters is a moot point, but it does demonstrate the need for awareness and planning.
For help with any tax related issue, contact firstname.lastname@example.org
Capital Gains Tax – Know Your Exemptions!
In this year’s March budget, the Chancellor announced a reduction in the mainstream capital gains tax rates. As is often the case, there are caveats, and so we thought it would be useful to provide a reminder of the various current capital gains tax rates.
The annual exemption allows an individual to make up to £11,100 capital gain per tax year without a tax liability. This is available to each spouse or civil partner, therefore double this amount is available for jointly owned assets. The exemption cannot be carried forward if unused.
The mainstream rates are now 20% for higher rate taxpayers and 10% for basic rate taxpayers, but how is this calculated?
Capital gains are added to the individual’s income to determine the rate. So, if income is £25,000 and the higher rate threshold is £43,000, then £18,000 of the gain over the annual exemption will be taxed at 10% and the remainder at 20%.
This seems good news for residential property landlords who, after the property boom of recent years, are sitting on large gains. However, the Chancellor specifically removed those people from the reduced rates. Gains on residential properties remain taxable at 18% and/or 28% depending on the taxpayer’s income, as described above.
The increase to 20% in the mainstream tax rates can be avoided by higher rate taxpayers if they are able to take advantage of two business related reliefs.
Entrepreneurs’ Relief ensures that all of the gain is taxed at 10% for the sale of business assets or shares in personally owned companies. There are numerous rules and definitions and so advice should be sought to ensure compliance.
A similar but wider relief has been introduced called Investors’ Relief. Again, this ensures the 10% tax rate for gains on the sale of shares where the shareholder originally purchased shares by allotment. This relief aims to encourage investment in unlisted companies. Again, ‘the devil is in the detail’, so speak to us for more information.
For help with capital gains tax or any other tax related issue, contact email@example.com