My Blog

Tag: Child Benefit

Child Benefit

  • 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’)

  • (Residential) Property Is Dead! Long Live (Commercial) Property!

    If you are a basic rate taxpayer, be prepared to be taken into a higher rate tax bracket or child benefit to be taken away, effectively another tax charge.

    If we assume you’re an employee, with two children, earning a £47k salary and property profits of £3k, your gross income is £50k. Assuming your spouse isn’t earning more than £50k, you get to keep all your child benefit.

    Your £3k property rent is calculated as follows:

    Rental income  £7,000

    Interest            (£3,000)

    Agent fees          (£400)

    Insurance           (£100)

    Other eg repairs (£500)

    Profit                  £3,000

    On which you’re paying 40% tax of £1,200. If your property is worth £120k, you’re receiving a modest after-tax return of 1.5%. 

    However, this picture changes when the new rules, starting next April 2017, are fully in place in 2020. The interest of £3k above is no longer deductible and your taxable property profit doubles to £6,000.

    Your gross taxable income is now £53k. So what?

    1. More of your income is now taxed at 40%, rather than 20%.

    2. Your child benefit now starts to be withdrawn.

    On these figures the additional tax due on top of the £1,200 is:

    Child benefit withdrawn           £536

    Additional higher rate tax      £1,200

    Less 20% interest tax relief    (£600)

    Additional tax                         £1,136

    Your modest after-tax return is now reduced to £664 (£3,000 profit – £1,136 new tax – £1,200 current tax) of £120k which is 0.5%!

    Similar considerations apply for taxpayers near to the £100k gross income level as you’ll start to see your tax free personal allowance allowance withdrawn at income above £100k. 

    If you rent out a furnished property you’re currently enjoying an additional tax deduction of 10% of £7,000 saving you £280 of tax. This will be withdrawn from this April 2016, reducing your net of tax returns even further.

    You may ask yourself whether it’s worth the hassle! 

    If you do still benefit from capital growth, remember that when you sell the property HMRC will require the capital gains tax within 30 days of exchange, so make sure the gap between exchange and completion isn’t longer than 30 days so you have the funds available. Please remember to include your accountant before exchange!

    You may want to look at transferring or putting new purchases into a limited company which doesn’t suffer all these changes. However, currently, banks seem reluctant to lend to these companies. 

    Commerical Property

    Comparatively speaking, commercial property is now looking very attractive. It isn’t going to suffer from any changes and also enjoys lower stamp duty rates. It can be held within a pension wrapper and benefit from those tax advantages. This may be enough to entice you to look at something different and compare the returns. After taking appropriate advice of course.

     

     

     

     

     

     

     

     

  • New Dividend Tax – How Will You React?

    £5,000 For Free?

    Everyone will receive £5k of dividend income at a zero rate. Your basic rate band or tax free personal allowance still gets used, but you pay £Nil tax on dividends up to £5k. Your final tax bill varies after this with the introduction of a 7.5% tax charge for a basic rate taxpayer, and a 32.5% tax charge for a higher rate taxpayer.

    Assuming a tax free personal allowance of £11k and a higher rate tax band of £43k for comparisons:

    • If you earn a salary of £43k and receive £6k of grossed up dividends (net cash received of £5.4k), your tax bill this year would be £1,350.
    • Happily, in the next tax year, £5k of the net cash dividends of £5.4k will be tax free and your tax bill will only be 32.5% of £400, or £130.
    • A fall of over £1.2k.
    • However, if you are an owner director taking a small £11k salary and grossed up dividends of £32k (net cash received of £29K), a total £43k of taxable income, your personal income tax bill this year would be £Nil.
    • Unhappily, in the next tax year your income tax bill based on the net cash dividend of £29k, after taking off £5k of tax free dividend, will be 7.5% of £24k, or £1.8k.
    • An increase of £1.8k. 

    On a £43k salary, employees are paying high national insurance, of course, which shareholders don’t pay, and this helps close that difference.

    It’s interesting to note that pensioners may also receive taxable pensions at this level, but as they don’t pay national insurance either, they receive a benefit without the national insurance downside of being an employee. 

    High Income Child Benefit Charge – £50k to £60k Taxable Income

    As the HICBC will now only refer to the net cash received without any ‘grossing up’ of dividends, those near to £50k of gross income may find their child benefit increased.

    Shareholder-directors taking a salary of £11k and net cash dividends of £40k receive a reduced child benefit in this tax year based on gross income of over £55k. Fortunately, in the next tax year, their gross income for this purpose will only be £51k. 

    Loss of Personal Allowances – £100k to £122k Taxable Income

    Similarly, the Taxable Income where the tax free personal allowance is taken away will also be based on the net cash dividend received and not the grossed up version, saving some tax for people near to these thresholds.

    How Might Shareholder-Directors Respond to this New Dividend Tax?

    Having seen how shareholder-directors are adversely affected, how might you react to this new tax?

    1. Sell your business sooner? You’re likely to pay only 10% capital gains on a lump sum, rather than be burdened with 7.5% and 32.5% on your dividends every year.
    2. Pay employer pension contributions? These save 20% corporation tax and aren’t taxed on you. Beware the limits, but they may have a place in your financial strategy.
    3. Give some shares to your spouse to at least use the £5k tax free amount, if it’s not used elsewhere.
    4. Pay more dividends in this tax year, even some higher rate ones, if you’re likely to need that level of cash for the foreseeable future, and if your company has sufficient profits after tax.
    5. Invest in more ISAs if their returns and charges warrant it, keeping as much of the £5k tax free dividends available for your own company dividends.
    6. Disincorporate and revert to a sole trader or partnership? You may find at profits of £30k to £40k the additional administration isn’t worth the reduced tax savings. The current Class 4 national insurance is 9%, but you might want to wait to see what the new Class 4 rate will be when Class 2 national insurance is abolished. And remember that at least with a company you can choose when you pay your personal income tax whereas sole traders and partners are taxed at higher tax levels in the year the profits are earnt.
    7. Revisit any home office rent charge to see whether you may still have a net £Nil profit after a rent increase. Or use up your tax free personal allowance fully, if it’s not used by salary or other income such as buy to let profits.
    8. Use your directors loans account more often? Despite both temporary and permanent tax charges, these may be a cost effective tool if you need some cash temporarily so you don’t suffer a permanent dividend tax charge.

    Conclusion

    Odd that the Office for Tax Simplification was made permanent in the same Summer Budget, when the need for accountants to work through this complexity and advise on the specific response for each client, has never been stronger.

     

     

     

     

     

     

     

     

     

     

  • How does George affect his parents’ after-tax income?

    Meaning the baby, not the Chancellor!

    If his father’s only income was his RAF’s officer income, with a salary under £50k, and with a non-earning mother, they would receive the full child benefit of £20.30 per week, or £1,055.60 per year until as late as 31 August 2033 if he is in qualifying education or in the armed forces by then.

    If his father receives a pay rise in the next 16 to 20 years, taking his income over £50k, child benefit is reduced or if it reaches £60k, becomes £NIL. This assumes the thresholds aren’t increased with wage inflation which is probably the intention.

    If his mother works for her parents’ company for a modest salary below the tax free personal allowance of £9,440 and the company runs a childcare voucher scheme for all its employees paying up to £243 pcm or £2,916 per annum until 1 September 2028, corporation tax of £2,471 (£1,888 + £583) per year is saved with no tax charge on George’s mother. And no loss or reduction in child benefit.

    This childcare can be paid despite a private education if it’s an out-of-hours school club such as rugby practice.

    Before starting school, his father may take George to a workplace nursery paid for by the RAF with no tax cost to him, and with no income limits, this can be very valuable. It could be paid at the same time as George’s mother’s childcare vouchers with no effect on the level of childcare vouchers paid to her.

    In addition, if his mother had shares in her parent’s company and received dividends, they wouldn’t affect the level of childcare vouchers paid, but might affect child benefit if the gross dividends plus salary totalled £50k or more.

    Potentially, child tax credits are available if their combined income, including gross dividends, dropped to £25,798 or less before 1 September 2029. Or if they need to spend spend £175 per week on childcare and their combined income is under £40k, they might receive the childcare element of working tax credits, but only if both of them worked 16 hours per week somewhere.

    Simple enough? Not really. With all the different dates, different income definitions and different thresholds, it’s certainly not child’s play!

  • Why it might pay to furnish your buy-to-let property

    When you spend money on your buy-to-let property, you expect to get a tax deduction against the rents received to help keep your tax bill down.

    For those with children, this is even more important if your rented property might take you into the ‘no-go’ £50,000 – £60,000 income level where child benefit might be reduced or taken away completely.

    With residential properties, costs like agent’s fees and gas certificates are easily deductible. But what about the costs of white goods and furniture?

    The usual (now very valuable) capital allowances for trades, aren’t available for residential properties. Therefore, instead, before April 2013, there was a useful ‘non-statutory’ relief that allowed you to claim the cost of say replacing a cooker (the original cost can’t be claimed). This relief has now been taken away.

    What remains is, instead, claiming a 10% Wear & Tear allowance based on 10% of the rent due on your property. However, this only applies to furnished properties. Furnished means the sort of things you’d expect to see in a home such as a bed, sofa, dining table and chairs.

    With the availability of cheap furniture, you might find this is an investment worth making. You’d get tax relief for replacing white goods in the future. Of course, if the furniture itself gets damaged, you’d need to include its replacement cost within the 10% claim.

    As the Wear & Tear allowance is based on rent due, you can see that this is more of a possibility in higher rent areas.