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  • Tax Under Labour – Top 5 Things To Consider

    1. Pension Income Tax Relief – The temptation to raise several billion from higher earners must be great. Restricting tax relief to 20%, is still 20%, and is the tax rate most people pay during their lifetime and in retirement. The Chancellor, should she feel the need, might particularly blame this one on the ‘unexpected’ poor state of the country’s finances.

    This may encourage you to maximise your pension contributions before Budget Day on 30th October or before 6 April 2025. It would be odd to make a change effective mid tax year, but still possible! 

    Company owner-managers making company pension contributions may still benefit from 25%/26.5% tax relief making this look even more tax efficient in comparison.

    2. Capital Gains Tax Rates (CGT)– Most people don’t pay capital gains tax. If you do it’s a 18%/24% rate on buy-to-let residential/second home properties or 10%/20% on selling a successful business or other assets. It’s easy to argue this should be closer to the 40% rate many of the same people pay in income tax. 

    If you were planning to sell an asset anyway you may decide to sell it soon. Even if you weren’t, it may be a reason to lock in the lower rates, if you believe they will increase.

    In this area, it’s easy for the Chancellor to make the increase effective immediately on Budget Day so you may want to aim to exchange before 30th October rather than before 6 April 2025. 

    3. Pensions Inheritance Tax (IHT) – Wealthier semi/full retirees are often not drawing their pension (above the 25% tax free lump sum) before 75. If you die before 75, there’s no inheritance tax due, leaving ‘only’ the rest of your estate to pay 40% above the threshold.

    Without a lifetime limit on pension pots, and with the increased £60k per year gross contribution limit, you can understand why many are paying maximums into their pension pots, not for a pension but for inheritance tax protection! Even after 75, the beneficiaries pay only their marginal tax rate. This might be 20% if beneficiaries keep their other income low, possibly encouraging older adult children to reduce hours or stop working, which is presumably not what the government wants.

    As you’ll still benefit from tax relief, for now, from paying into a pension pot, it may be worth carrying on as planned, unless you’d rather invest in (currently) other inheritance tax friendly areas such as unquoted shares. If you stopped making payments or started to withdraw your pension earlier than planned, you may end up with that cash in your estate which would anyway suffer inheritance tax. It may therefore be sensible to wait-and-see what’s announced in the Budget.

    4. Furnished Holiday Lets (FHLs) – Although already announced by both the previous and current governments, the changes treating FHLs the same as normal Assured Shorthold Tenancy (AST) lettings aren’t effective until 6 April 2025. 

    Existing FHLs will lose a semi-trading status which essentially enabled:

    • Full tax relief on mortgage interest
    • 10% capital gains tax up to £1m of lifetime gains, 20% above that instead of 18%/24% for other assets
    • Better tax relief on fittings and furnishings
    • Flexible spousal split of profits and losses

    The knock-on effect of the mortgage interest relief change is potentially very expensive. Your income before tax is increased by the mortgage interest, which can take you into unexpected tax bands such as the 40% tax band at £50k, child benefit loss between £60k to £80k, loss of tax free personal allowance after £100k or 45% tax rates from £125k. With only a 20% tax credit after your (higher) tax has been calculated, you pay more tax overall.

    Any FHL tax losses in existence on 5 April 2025, will be available to reduce other property rental profits in later years, which isn’t currently possible. Therefore, if you have a mixed portfolio of FHLs and ASTs, ensure any FHL losses are correctly calculated taking advantage of existing rules such as first time purchases of kitchen equipment, bed linen etc which will can reduce rental profits on your other properties from 6 April 2025. 

    If all this looks too expensive or unattractive compared with future net-of-tax capital growth, you may wish to sell up before 6 April 2025, pay 10% capital gains tax and invest your cash elsewhere. This won’t upset the government too much, as, in theory, these properties are released into the rented or owned sectors for normal homes. If your rental business ceases altogether before 6 April 2025, you may have three years in which to sell and benefit from the 10% rate.

    Alternatively, incorporation of your FHL business to ensure corporation tax relief for mortgage interest and then control over income tax may look more attractive than before.

    5. Non-Doms Abolition – Foreign Income Gains (FIGs) and IHT – A welcome simplification announced by both governments but not so welcome tax liabilities once non-UK domiciled people have been tax resident for 4 years. Enjoy no UK tax on your worldwide income for the first 4 years, whether you bring it into the country or not, after which it’s all subject to UK tax, with a credit (usually) for any tax paid elsewhere. 

    If you’re in your first 4 years of residency, keen to bring in some cash or assets into the UK, you may now be able to do so tax free before your 4 years is up. However, not for any FIGs that arose before 6 April 2025 which will still be taxed in the UK under the Remittance rules.

    This sounds like it could be good for certain areas of the economy in the first 4 years, such as luxury purchases or high end property purchases. But will it encourage people to set up business interests and stay for longer?  For these, Business Investment Relief remains available and may remain attractive.

    If you’re here for 10 years or more, you’ll now also pay IHT, like everyone else, on your UK and worldwide assets. Don’t try to avoid it after 10 years by leaving temporarily, as you’re still caught for the following 10 years after leaving the UK. 

    There are still lots of details to come out, presumably some soon after the summer break, so only take action when you have the full facts or are willing to take a risk. You may take the view that the direction of travel doesn’t suit you and you decide to leave the UK. Others may be attracted to come to the UK to enjoy the four years ‘tax free’ and then leave.

     

    Other – Sign Posting – VAT on school fees may be a great idea to signal an element of levelling up, but, in all likelihood, it won’t be a significant overall net win for the economy. Meals, transport, books and childcare during holiday clubs remain VAT-free, so expect detailed invoicing and allocation of prices to these categories. It’s interesting as to whether private medical services will ultimately suffer the same fate! There seems little difference to me.

    In all decisions referred to above, take appropriate advice such as investment advice, because tax mustn’t be the only consideration in any financial decision.

  • GE2024 – Actions To Take Before 4 July 2024

    Capital Gains Tax – Rate Increases

    Current rates of 10%/18%/20%/24% might increase closer to, but not as high as, income tax rates of 20%/40%/45%.

    For example, if you’re in the process of selling a buy-to-let residential property expecting to pay a 24% capital gains tax rate, you may want to ensure you exchange before 4 July to save an increase to say 30%. The effective date for capital gains tax is exchange, not completion, so if you can only exchange before 4 July this should be sufficient.

    Action: If you agree this is likely to happen you may want to ensure you exchange on sales of chargeable assets, such as second residential properties, before 4 July.

    Pension Contributions – Threshold Decreases

    The current recently introduced more generous thresholds of up to £60k per tax year of total contributions enjoying income tax relief and no maximum on your pension fund pot value, will probably be dialled down by a Labour government.

    We’d expect any contributions paid and pension pot values already enjoying these rules to continue to benefit from them, with conditions. For example, when a pension pot maximum was initially introduced existing pots over the maximum remained tax free as long as no further contributions were made.

    It’s also possible the 40% and 45% tax relief is reduced to 20%, often mentioned, but so far not adopted by any government even during the financial crash.

    Action: Subject to Independent Financial Adviser advice, make further pension payments before 4 July. For example, if so far this tax year you’ve paid say £10k into your pension scheme, you might want to try making a further maximum £50k, whatever is affordable/advisable, before 4 July to obtain maximum tax relief for this tax year.

    Tax Avoidance Clamp Down

    The truth about public bodies trying to demonstrate results is that they end up going for ‘low hanging fruit’. For HMRC this often translates in going to the taxpayers they already know about and digging deep hoping they’ll give in.

    A classic example is the recent campaign against weak research and development – R&D – tax relief claims. HMRC has attacked many genuine claims as part of their sweep up picking on certain easily identifiable claim types, hoping the less financially robust who can’t afford the professional fees or who simply don’t have the time, will give up. The real culprits not necessarily caught within the rigid simple crtieria managing to avoid scrutiny.  

    Action: At the minimum, ensure you retain evidence of tax claims and that your bookkeeping is simple and clear, so when asked it’s easier to respond to queries and you don’t have to give in because it’s hard to reply.

    Preparing a good tax return is a skill. All tax returns should be prepared with possible queries in mind, so provide explanations where needed enabling HMRC to see what is happening; it may make the difference to encourage HMRC not to write to you for clarifications.

    NB The current government has now matched Labour’s anti-avoidance pledge, so there’s more reason to act.

    VAT On School Fees

    This is a definite promise from Labour. The exact increase in cost of school fees is unlikely to be simply 20% because the school will recover VAT on many of its costs and may also decide to absorb some of the potential price increase.

    Action: Much has been said about you can do to reduce your exposure to any increase, the simplest and most robust is to pay school fees in advance before 4 July. However, do consider the possibility of the school failing and therefore losing your fees completely!

    After 4 July 2024

    It’s worth noting that the above actions may turn out not to be needed immediately, but are still worth considering over the next few months. [EDIT: For a later Budget now expected in the Autumn].

    In addition, despite recent assurances that taxes won’t increase, the public finances are fragile which Labour might later declare worse than expected, paving the way for certain other popular increases. 

    Action: Keep in touch with your On The Spot Accountant to ensure you’re kept up to date. 

  • Budget 2024 – Your Country Needs You

    1. Employee & Self Employed NI Reductions – 6 April 2024. VAT Threshold Increase – 1 April 2024

    In time to see several payslip improvements before the election, but not necessarily the self employed unless they prepare an early tax return, this should be encouraging. It could be possibly one reason for someone who hasn’t yet gone back to work since Covid, to think again…. 

    The maximum saving for an employee is 4% of £37,700 = £1,508, and on average pay of about £35k it’s £900, which does start to get more interesting.

    The total self employed Class 4 reduction of 3% is very welcome. Along with the abolition of Class 2 this saves the average self employed person £650. The Press Release refers to an average sole trader profit of £28k which sounds about right. After deducting the Class 4 tax free threshold of £12,570, 3% is worth £463 and add on the Class 2 saving gets to you to about £650.

    Despite the many complaints about thresholds of £50k and £100k, there are lots of people in work and self employment earning less than this who are being targetted.

    Family companies will need to revisit the dividend-salary debate and calculations, lower NI clearly tipping in favour of more salary than you may have taken before.

    A small mention for the VAT threshold increase from £85k to £90k which will prevent some businesses from working less to avoid getting into the VAT system. However, it’s only a 5.8% increase which doesn’t offset inflation. Businesses who don’t want to be VAT registered, are likely to suffer from a lack of real growth. 

    2. Higher Income Child Benefit Charge Improvements – 6 April 2024

    Again, this is in time to be appreciated before an election. The starting threshold increase from £50k to £60k and the reduction in child benefit from that now to £80k rather than £60k means that child benefit is taken away from you more gradually and will feel a lot fairer. 

    After this, from April 2026 – following consultation – it is planned that child benefit will be based on household income, which many commentators wanted from the beginning when it was first brought in. Perhaps IT systems can now cope with this? Or it’s become obvious that it discourages either parent near the threshold to work any harder.

    3. Furnished Holiday Lettings (FHL) – Abolished – 6 April 2025

    Most employees won’t be affected by this apart from potentially benefitting from more properties being sold or moved into the normal rental property pool.

    The tax benefits for FHLs include full tax relief for loans against the property so they may become unaffordable for some landlords to continue. If so, there’s a small encouragement one year earlier to sell up…..

    4. Residential Properties Capital Gains Tax – Small Reduction – 28% to 24% – Exchanges From 6 April 2024

    The normal capital gains tax rate for higher rate taxpayers on other assets, apart from residential property, is 20%, so this 24% is a half-way house. If FHL landlords need to sell they at least save a bit of capital gains tax.

    On the other hand, it might encourage some professional landlords already providing ‘normal’ AST rentals, to stick around to provide rental properties for hard-working people.  

    Remember the tax free Annual Exemption is halving from April from £6k to £3k, so the net saving is reduced slightly. 

    Interestingly, the 24% rate makes owning rental properties in a limited company paying 26.5%/25% corporation tax look less favourable than before. 

    5. Creative Industries 

    Playing to one of the UK’s strengths and therefore likely adding to growth, there was good news for films, orchestras, theatres, museum and galleries. We can at least be entertained after our hard work.

    6. Other Simplifications To Make You Feel Good

    Workers feel aggrieved that others seem to get a better deal, so these may help:

    Abolition of Stamp Duty Mulitple Dwellings Relief – 1 June 2024 – No longer rewarding owners of multiple properties and saves court time arguing about what multiple properties actually mean!

    Abolition of Non-Dom status – April 2025 – This will go, but there’ll be something available for a limited period, looking a lot simpler, short term and fairer.

    Public Sector Productivity Improvements – Lots going on here, which should make our experiences feel more streamlined and efficient – eventually! No-one minds paying tax, if it’s spent wisely.

    It might also have been an election Budget – we shall we see….

  • 2024 Tax Year End Planning

    1. Frozen Allowances

    With continued frozen tax allowances, more people are getting caught by a 40%, 60% or 45% tax rate and many will have to repay child benefit when they didn’t before.

    As a business owner, you have more options than a regular employee, but it’s worth everyone checking in with what is available and affordable. Some sole traders work less to keep their income under the 40% higher rate band of £50k or an employee may decide to go part time.

    Shareholder-directors should review their mix of dividends and salary to ensure they are optimised. For example, if your company suffers the 26.5% marginal tax rate and some or all of the £5k national insurance employer annual allowance is available to you, you’re likely to find that a salary higher than £12,570 is more tax efficient for you.

    A sole trader could add another person such as a spouse and set up a general partnership to even out the use of their income tax bands, or an employee might make more payments into a pension scheme, as described next.

    2. Pensions

    With higher corporation tax of 25%/26.5% for many company owners, you may wish to re-visit your company pension contributions to ensure you optimise your corporation tax relief.

    With a March year end if your profits might be higher in the year to 31 March 2024 than in the year to 31 March 2025, you may find you’re likely to save more tax from making pension contributions in this earlier year, subject to the £60k annual allowance.

    High earners should always check they’re keeping taxable earnings under £100k wherever possible which might be achieved by paying more into your pension scheme before the end of the relevant tax year.

    If your income is over £100k, you’ll save an extra 40% from gross pension contributions made to get income down in the range between £100k and £125k. Under £100k, you save an extra 20%, whereas for income over £125k, you save an extra 25%. Your pension pot also receives 20% direct from the government, boosting its value in the background.

    3. State Pension Top Up

    The original deadline to top up your state pension, if needed, has been extended to 6 April 2025, but as time flies, it’s worth a reminder!

    Currently many people can make catch up Class 3 NI payments all the way back to 6 April 2006 to fill any gaps in state pension qualifying years. From 6 April 2025 this is being reduced to 6 years, which is still valuable and will be sufficient for many people.

    You should check your Personal Tax Account, which despite its name also shows your state pension years. You can identify any missing years, any errors and check whether it’s worth making the payments.

    State pension credit years can arise from a variety of sources, but if you need to make the most expensive Class 3 national insurance payment, it costs £824 to add on a missing year, which although expensive is often still worth it – but do check!

    4. Spouse Dividends

    Dividend tax is at its highest level and as dividends also form part of your gross income trapped within the frozen allowances mentioned above, you may ask your spouse to take on some shareholder responsibilities and receive some dividends to use their basic rate tax bands or to keep your income under £100k.

    From 6 April 2024, the £1k 0% dividend tax is again halved to £500 so the advantage of paying tax free dividends to a spouse is less than it used to be and spreading family tax costs across lower tax bands has become more advantageous.

    5. Annual Investment Allowance and Electric Car First Year Allowance – 100%

    For all businesses, sole traders and limited companies. the Annual Investment Allowance is now permanently at £1m meaning that you can spend up to £1m on plant and equipment or on eligible commercial property refurbishment costs and receive 100% tax relief. Similarly, new electric cars purchased before 6 April 2025 benefit from 100% tax relief with no limit.

    If you plan to incur these costs near to your year end, such as 31 March 2024, ensure you meet the conditions for a claim in the earlier year, so you don’t have to wait a year to get the cashflow tax saving.

    For example, investing £100k might save £25k of corporation tax (25%), or £45k of income tax (45%) which is better in your pocket one year earlier than with HMRC.

    Remember hire purchase contracts work, so you don’t need to have bought the assets outright to get full tax relief, assuming the hire purchase contract is good value overall.

    6. Research & Development

    The new merged R&D scheme – for SMEs and large companies – takes effect for accounting periods beginning on or after 1 April 2024, but with the existing SME intensive scheme remaining for now.

    As you’d expect the new merged scheme isn’t as generous and R&D expenditure and claims should be made in earlier accounting periods wherever possible.

    If a major part of your claim is overseas contractors, from 1 April 2024 these will no longer be eligible and you may also wish to bring some of those forward.

    7. Director Small Wins

    Remember to maximise your director treats for the tax year ended 5 April 2024; trivial benefits totalling £300 each, annual parties expenditure up to £300 each with guest or having a private health care check.

    8. Capital Gains Tax

    If you’re about to exchange on an asset, you may want to ensure this definitely happens before 5 April 2024, after which your tax free annual exemption of £6,000 is reduced by a further half to £3,000. For a couple selling a buy-to-let property this might cost tax of up to £1,680 for the sake of a few days.

    Each taxpayer is different and you should only act after being advised about all the financial impacts of your actions. Also, the Budget on 6 March 2024, may affect your optimum position.

  • Looking Forward To Tax Changes In 2024

    HMRC Resources

    Don’t underestimate the impact of limited resources on HMRC’s policy and behaviour. 

    Recent changes include taking all PAYE earners up to £150k, with no other taxable income, out of the tax return system and setting default taxable income for all sole traders and partnerships regardless of size to be based on cash. 

    A few years ago these would have been unthinkable explained mostly as a way of saving HMRC time. 

    How might you react?

    PAYE Income Up to £150k

    – It’s common for payments into employer pension schemes to receive only 20% income tax relief via direct payment by HMRC into your pension scheme. We see many cases where even 40% taxpayers aren’t claiming the additional 20% relief. With earnings over £100k the additional relief is 40% and over £125k it’s 25%, which are often missed. You may be encouraged to claim this through your tax code but they’re hard to understand and we see many errors here too.

    Advice: Continue to prepare a tax return

    Cash Accounting 

    – So much to say! Essentially, this ignores all the good things accountants learn to help you monitor your business. Yes, for many small businesses, there’s not too much difference between cash and the accountants accruals basis, however, if you want to make true comparisons between each year or more often, you should check further.

    For example, if you pay for materials, do the work for a customer and raise invoices not paid before 31 March, you’ll have delayed tax and national insurance on the unpaid invoices. But what about the next year? What if all invoices are paid before 31 March? You’ll be taxed on the previous year’s delayed income and this year’s cash income.

    If your profits are near £50k you may tip over and then start losing child beneft as well as pay 40% income tax instead of 20%.

    How will you know what your actual margins are? Successful businesses track their margins ensuring increased costs are passed on and whether they should do better with suppliers, or change their model.

    Advice: Choose accruals accounting 

    Yes, accountants would say this wouldn’t they? However, we see so many errors and problems which we genuinely want you to avoid and it’s in our DNA to help you run a successful business and keep you as tax efficient as possible.

    Sole Trader/Partnership or Limited Company?

    Increased dividend tax and corporation tax but lower self employed national insurance, together with the temptation of cash accounting makes being a limited company less attractive than it used to be.

    All factors need to be taken into account, not the least of which is the ability with a limited company to control your income tax bill and hang onto all your child benefit or personal tax free allowances!

    Advice: Consult an accountant who lives and breathes these things.

    Pension Contributions

    The increase in the annual gross contributions of £60k together with the removal of the lifetime limit, may be reversed or amended by a Labour government.

    How might you react?

    – You may want to make higher contributions than normal to take advantage of these generous thresholds while you can. In particular if your limited company is likely to pay 25%/26.5% corporation tax, employer pension contributions save more corporation tax than in previous years.

    Advice: Check your personal and company cash and profits to identify whether you can afford and should make pension contributions. Take IFA advice as always, who should also work with your accountant.

    Capital Gains Tax

    The reduction in the tax free annual exemption from £12,300 to £3,000 from April 2024, costs over £5k for residential property jointly owned by higher rate taxpayers.

    If Labour wins the general election you might expect an increase in rates possibly from 10%/20% to the residential property rates of 18%/28% or even higher for all assets. 

    How might you react?

    – The tax free annual exemption is already down to £6k. If you’re about to sell an asset sometime in March you may want to ensure you exchange before 5 April 2024, as one day’s difference might cost you a maximum of £1,680 for a jointly owned residential property.

    Advice: If you consider Labour will form the next government and likely to increase capital gains rates, you may want to consider bringing forward asset disposals. Naturally, never forget commercial considerations such as how much more or less you might receive if the market moves for or against you.

    Inheritance Tax

    Continuing rumours suggest the current government wants to reduce inheritance tax. Perhaps something will be announced in the Budget on 6 March 2024 such as higher tax free thresholds or a reduction in rates. It’s a strange one where it’s more unpopular than it’s impact would suggest, that is, not many people actually pay any inheritance tax.

    How might you react?

    – Rumours and speculation really aren’t a basis for good tax planning and never more so with inheritance tax as often the assets are very valuable! There may be a favourable change under the current government after which a Labour government waters it down. 

    Advice: Ensure any inheritance tax reliefs are as secure as possible such as business property relief, review your Will in conjunction with inheritance tax considerations and consult your accountant/solicitor/IFA, ideally all three! – on whether early gifts are likely to be the best defence against inheritance tax and whether existing reliefs such as expenditure out of normal income could be utilised.

    In Summary: Be wary of being taken out of the tax return system, check the impact of ‘simplifications’ and don’t overreact to speculation. 

    Wishing you all the best for 2024.

  • Autumn Statement 2023 – More Drip Than Waterfall

    This was very much about ‘making work pay’ and aiming to improve productivity. Important though national insurance tax reductions are to help sole traders and partnerships, they do nothing to help those caught by frozen thresholds or running small limited companies.

    Sole traders and partners

    With Class 2 national insurance abolished and Class 4 national insurance reduced by 1% from April 2024 but dividend tax unchanged, more businesses may decide to remain as sole traders rather than incorporate or even prefer to disincorporate.

    When you add in that the cash basis will become the default way to measure tax profits from April 2024 (for any size sole trader) together with the previously known companies house reforms requiring more company information to be made public, the government clearly wants small businesses to stay as sole traders unless they’re large enough to embrace being a limited company in full.

    To back this up, the cash basis for measuring tax profits from April 2024 will allow losses to be offset in the same way they are for the accruals basis (the one that accountants with use) and there won’t be an interest deduction cap of £500 with all trading interest becoming tax deductible.

    The cash basis may have been improved to also ease the introduction of Making Tax Digital – MTD – which will benefit from some simplifications from April 2026 (with over £50k turnover or rents) and from April 2027 (over £30k) where the quarterly submissions will now be cumulative and there won’t be an end of period statement (EOPS). MTD won’t yet be required for partnerships or jointly owned property. 

    NB For sole traders and partners with profits under £6,725, or tax losses, who want or need a state pension credit year, can still voluntarily pay Class 2 £3.45 a week, so Class 2 will still exist for many. 

    Owner-Directors

    With dividend tax at 8.75% between £12,570 and £50,270 but employee national insurance at 10% from January 2024, this differential is narrowed further, making it more likely than before that an owner-director should take a salary instead of a dividend. If you continue to take dividends, your income tax return will need to show your own company dividends separately from any others and your percentage share ownership, presumably to help HMRC track these back to your company.

    If you continue to embrace being a limited company, investing to save the higher corporation tax, but need funding to do so, you might benefit from an external EIS investor who will continue to benefit from tax breaks until 2035, which should encourage more investors to enter the small business scene.

    If, despite it being harder, you remain eligible for research and development tax credits, the R&D work you’ll need to do if you’re loss-making to maximise your cashback at 14.5% will fall from 40% to 30% from April 2024, meaning that you’re not expected to spend as much on R&D. Perhaps the 40% threshold was probably too high for many!

    Limited companies – 100% tax relief on new assets – ‘Full expensing’

    Much is said about full expensing but it has no value for most small limited companies who already benefit from 100% tax relief, called AIA, on most fixed asset spend of up to £1m per year. Full expensing only applies to new assets purchased by limited companies whereas AIA applies to sole traders and partners and second hand assets. 

    And don’t forget the same Chancellor increased corporation tax from 19% to 25%/26.5% meaning many companies won’t be better off overall. 

    After all the media interviews I was expecting a waterfall of tax improvements for small businesses, but we’ve  ended up with a dripping tap.

  • After lots of Tricks, it’s time for some Treats!

    Please see below for further details. We do hope these prove to be some treats during a time of plenty of tricks.

    • Salary – If you have no other income you should each consider using your £12.5k tax free personal allowance.
    • Trivial Benefits – These are new and are designed to save HMRC’s time dealing with small items. Each benefit must cost less than £50 Incl VAT otherwise the whole amount is taxable.
    • Annual Parties – One of our old favourites. This could be a Halloween party, as well as a Christmas party. Everyone has to be invited and it’s £150 Incl VAT per person plus £150 Incl VAT for a guest. Again, if you spend more than this including on extras such as taxis, the whole amount is taxable.
    • Cycle To Work Scheme – Has to be offered to everyone and the bike used more than 50% of the time for commuting or business journeys. The bike is lent to you and you then buy it from the company at a second hand value a few years later.
    • Private Health Checks – A little known annual exemption regardless of any other taxable private healthcare arrangements you may have.
    • Eye Tests – A more well-known exemption and assumes you need a test because you use a computer monitor, which is most of us!
    • Tax Free Dividends – Whatever other income you earn, everyone gets £1k of dividends tax free. If you have any of your £12.5k tax free personal allowance available, that’s also available for a tax free dividend.
    • Pensions – These need to be Employer Contributions and usually the limit is £60k each but take care on the detail and take IFA advice. The limit might be higher or lower in certain situations.
    • Relevant Life Policies – A death in service policy where neither the premiums paid by the company or the benefits paid out are taxed on you or your beneficiaries. Again, IFA advice is recommended.

     

  • Dear HMRC…Why We Need To Talk

    Dear HMRC

    Why we need to talk to you…..

    As an unrepresented taxpayer with apparently very simple tax affairs, I find myself needing to call you. I really don’t want to. I have better things to do, but I like to know I’m not going to upset you.

    Over the last few years, I’ve needed to talk to you about:

    Incorrect PAYE code – In common with the mightiest Finance Directors, I don’t like surprises. If this code is wrong and you send me a demand after the end of the tax year, it’s a worry. I don’t have spare resources to conjure up extra cash.

    No matter how hard I try, I don’t understand my code. If you change it, I won’t know why and I need to ask you. I need someone to say it’s OK, no need to worry.

    High Income Child Benefit Charge – A couple of times, I’ve earnt over £50,000, and you came back to me a few years later and asked me to repay some child benefit. This is a confusing rule. You saw my income, but child benefit continued to be paid. You told me this is on the website for me to see clearly.

    Sorry, but I don’t hang out on HMRC’s website just in case something applies to me. You know the jargon because you see and hear it every day. I don’t, so occasionally I need a human to explain things to me.

    Pensions – Full Tax Relief – When I earn over £50,270 (different to the £50,000 for child benefit) I’m told I can claim an additional 20% income tax on some of the gross pension payment made to my employer’s pension scheme. I have only the vaguest idea what this means and suspect there are a lot of us missing out on full tax relief.

    I’d quite like you to explain this to me. HMRC’s site assumes a certain level of starter knowledge eg what ‘relief at source’ means.

    Self Employed Class 2 NICs – My side hustle self employed income is sometimes very low and you refunded me the Class 2 NICs I’d asked to pay voluntarily. On enquiry a person explained that voluntary contributions aren’t accepted unless a certain form has been completed.

    For years, I’ve reported a small self employed business on the side. This isn’t enough to earn me a state pension credit should I ever need to pay Class 2 NICs voluntarily. How confusing is that? I couldn’t have worked this out on my own.

    Self Employed Tax Payments Due – In my busier years, no matter how hard I try I don’t understand any statement I see. I pay the figure at the bottom and hope for the best. You tell me the payment on account system is explained online.

    You’re the only organisation I deal with that has a twice a year payment system with half of it in advance and the other half after the end of a period. Unless someone takes me through how that works, I’m not going to understand it.

    It seems the people sitting in rooms talking familiar language make rules that suit their ends. The rest of us get on board as best we can.

    Or are you saying we now all need to pay an accountant?

    Yours confused

    Unrepresented Customer (who can’t choose another ‘supplier’)

  • Budget 2023 – Are we just refilling potholes?

    Corporation Tax

    The increase from 19% to 26.5%/25% remains with all the cost implications to SMEs.

    The pothole being refilled is to then state that a new ‘Full Expensing’ allowance for companies without limit for the next 3 years will help alleviate this increased tax. This isn’t true for most SMEs who already receive 100%, full expensing tax relief for capital investment because they don’t use the existing maximum AIA £1m. They are still stuck with a 26.5% marginal tax rate.

    It’s worth noting that if you do need Full Expensing it doesn’t apply to solar panels or thermal insulation which will only benefit from 50% allowances, not fitting in with the zero carbon agenda. Fortunately, SMEs will largely get 100% under the existing AIA 100% £1m allowance.

    Pensions Allowances

    Happily, companies can save some of their higher 26.5%/25% by investing more into their pension schemes, the annual maximum increasing from £40k to £60k. However, this may not be affordable for many SMEs who therefore don’t need this increase, although more profitable SMEs will welcome it. 

    The lifetime allowance of £1m, frozen alongside income and national insurance thresholds, will now be abolished taking us back to before 2006, but making it ‘out of step’ with the general devaluing of tax allowances. Presumably this abolition is too late for the retiree who is already taking his/her pension so won’t bring back those people to the workplace. 

    Following flexibly withdrawing your pension the money purchase annual allowance was reduced to £4k and is being restored to a previous £10k, making it another pothole refiller.

    Research & Development Tax Relief

    For loss making SMEs investing more than 40% of their expenses, the 14.5% credit that was taken away will return, being another pothole refiller. However, the expenditure will still only be extended by 86% instead of 130%. Meaning that the original 33% now becomes 27% but only if you fulfil the 40% rule. You’ll probably need ChatGPT to help you understand all those percentages! 

    The one year delay to excluding overseas costs to 2024 is very welcome and perhaps will change once further analysis is carried out.

    Reshaping The Workforce

    SMEs should check in with the initiatives that are actually new road surfaces, not refilling something we already had, such as the new investment zones, the over 50s apprenticeships, childcare help for earners under £100k, EMI simplification and encouraging more investment by defined contribution pension schemes.

  • 2023 Tax Year End Planning

    Pensions

    With corporation tax increasing from 19% to 25%/26.5% many company owners may wish to delay some pension contributions to after April 2023, subject to using the £40k annual allowance effectively.

    High earners should always check they’re keeping taxable earnings under £100k wherever possible which might be achieved by paying more into your pension scheme before the end of the relevant tax year.

    If you’re likely to become an additional 45% taxpayer from April 2023 for the first time because your income is between £125k and £150k, you’ll save an extra 25% instead of 20% by making pension contributions after April 2023.

    Spouse Dividends

    Since 6 April 2022, dividend tax has been at its highest level. If you can take more dividends from your company you might consider asking your spouse to take on some shareholder responsibilities and  receive some dividends, particularly before 5 April 2023 while the £2k 0% tax band remains available.

    From 6 April 2023, the £2k is halved to £1k so this advantage reduces, however, spreading the tax costs across lower tax bands is likely to remain advantageous.

    National Insurance – State Pension Top Up

    From 6 April 2023 the ability to make top up payments for earlier years is significantly reduced.

    Currently many people can make catch up Class 3 NI payments all the way back to 6 April 2006 to fill any gaps in your state pension qualifying years. From this April this is being reduced to 6 years, which is still valuable and will be sufficient for many people.

    If you’re not sure, you need to check your Personal Tax Account, which despite its name also shows your state pension.

    Research & Development

    One major change from this April is the reduced cash credit for tax loss-making SMEs. The effective value is currently 33.35% but this is being reduced by nearly a half to 18.6%. (The government is punishing SMEs for the poor practices of non-qualified companies set up to claim cash backs.) You may therefore wish to check whether some costs can be brought forward to access the current higher cashback rate.

    On the other hand, if you’re profitable with over £50k profits your marginal tax rate will be increasing by at least an absolute 6%. The combination of this rate increase and the reduced credit from 230% to 186% is a net value increase from 43.7% to 46.5% for R&D spend from April 2023.

    The increase in the value of a tax credit under the alternative RDEC scheme is a net tax credit of 15%, still lower than the percentages above, meaning it may remain less appropriate for many SMEs. 

    If a major part of your claim is overseas contractors, these will no longer be eligible and you may wish to bring some of those forward if possible. However, if you’re looking forward to claiming data and cloud hosting as an R&D cost, these become eligible from April and a delay might work out depending on the project plans.

    The requirement to provide more details is already fulfilled when On The Spot Accountants make claims. If the advance notice of a claim ends up in the final legislation we’ll be keeping in touch with you to ensure a notification is submitted even if it’s a protective one. Happily, most client tax returns are easily submitted within the 6 month required timeframe which may supersede the need for any advance notification at all!

    Super Deduction 130%

    As this ends on 31 March 2023, bringing forward a large capital spend might be worthwhile saving an effective 24.7% of corporation tax. However, as this was only a way to mimic the 25% increased corporation tax rate from 1 April 2023 and has certain restrictions, if you have profits over £50k, capital spend is likely to save you more, 25%/26.5%, corporation tax by waiting until 1 April 2023.

    Capital Gains Tax

    If you’re about to exchange on an asset, you may want to ensure this definitely happens before 5 April 2023, after which your tax free annual exemption of £12,300 is reduced by more than half to £6,000. For a couple selling a buy-to-let property this might cost tax of up to £3,528 for the sake of a few days.

    Likely, more valuable, is the increase in corporation tax for companies who might save 6% on the whole gain by exchanging before 1 April 2023 and if your year end isn’t 31 March, it might be worth changing it!

    You’ll see there are some twists and turns with these changes, sometimes bringing forward plans is the better answer, sometimes delaying plans is better. Each taxpayer is different and you should only act after being advised about all the financial impacts of your actions. In particular, some changes have slightly different effects if your year end is not 31 March.