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Directors

  • Budget 2021 – Help To ReGroup & Grow

    Help To ReGroup

    Corporation Tax and Self Employed Losses – Carried Back 3 Years

    A bit like after the financial crisis, the usual 1 year loss carry back is extended to 3 years, meaning that tax paid on previous profitable years, will generate much needed cashflow through a tax refund.

    This applies from 1 April 2020 to 31 March 2022 which helpfully covers the worst of Covid’s effects. Get your 2021 tax returns in early to receive your tax refund as soon as possible.

    SEISS 4.0 & 5.0, Furlough Extension, VAT Rate Cut Extension, Business Rates

    SEISS 4.0 covers February, March, April and will now include those who’ve traded in both 2019/20 and 2020/21 and submitted 2019/20 before today. Claims can’t be made for a while – late April. 

    SEISS 5.0 will look at your turnover reduction in the year April 2020 to April 2021 with a similar £7,500 cap if your turnover reduced by 30% or more, but a much smaller cap of £2,850 if your turnover reduced by less than 30%.

    The furlough extension to the end of September tapered down to 70% for July and 60% for August & September is something for small limited company directors, as well as larger businesses, the main aim to help ensure employees stay in the jobs market.

    The 5% VAT rate extension to the end of September and 12.5% to 31 March 2022 will be valuable to eligible businesses and is another reason to become voluntarily VAT registered! With the current compulsory threshold remaining at £85k, you may need to be registered sooner than you think.

    Continuing with £NIL business rates for April, May, June is a much welcome cashflow saving until all property-based businesses can fully open.

    Help To Grow

    Management Training & Digital, Other Grants, Recovery Loan Scheme

    New management training and digital schemes for businesses with over 5 employees are aimed at improving productivity, an elusive goal for many governments, will be 90% funded by the government. New restart grants were also announced for non-essential retail, hospitality, leisure, personal care and gyms. Plus, picking up from the end of BBLs and CBILs, a new Recovery Loan Scheme will be available with 80% government backing.

    With so many different existing grants around available to all sorts of businesses, it must be worth most  checking whether there might be something available to them. Check the State Aid rules, though. 

    Investment – Super-Deduction – Companies 

    Increasing the tax deduction when purchasing plant & equipment from 100% to 130% from 1 April 2021 to 31 March 2023. At a corporation tax rate of 19%, £1,000 of investment, currently saves £190 of corporation tax, with the 130% super deduction, it saves £247, an increase of £57. Don’t forget to bring in 130% proceeds if you sell that equipment one day!

    If the plant is purchased through hire purchase there will be some further requirements, unlike under the current 100% deduction.

    Corporation Tax Rate Increase – 19% to 25%

    Happily, this is delayed until 1 April 2023 and with a taper from £50k to £250k profits, the effective rate on those profits will be between 19% to 25% for many small businesses. Apart from helping out the country’s finances, higher corporation tax rates arguably encourage investment. The more you invest, the more you save…  Interesting the start date is at the same time as the super deduction mentioned above comes to an end which mathematically seems to come to a similar answer: £1,000 @6% = £60

    It’ll be interesting to see whether fewer sole traders/partnerships will incorporate or at least delay doing so, although the freezing of tax free personal allowances and the higher rate tax bands through to April 2026 might encourage more incorporations. Each case will be different. In any event, ambitious businesses can easily incorporate later.

    Enterprise Management Incentive – EMI and Research & Development – Consultations

    Are these working? Should they be extended? etc etc. Let’s hope these come to quick conclusions so businesses can benefit from any improvements. The maximum repayable credit of £20k plus 3x PAYE bill won’t be disturbed.

    UK Infrastructure Bank, Grants

    There doesn’t seem to be any minimum sized business, so small green or local growth projects might be eligible. 

    What Didn’t We See? 

    Interesting the things that weren’t mentioned:

    • Business rates fundamental reform
    • Long term care funding ideas, perhaps through the national insurance system
    • Capital gains tax changes, but there have been several in recent years!
    • Pension tax relief, ditto! Although freezing the lifetime allowance will affect some.

    The focus has been on growth as the way to pay our way out of the enormous debt, with some important taxpayer help from corporation tax and freezing tax allowances. 

  • Coronavirus Grants 2.0 – Finding Your Exit – Small Businesses

    Apart from using the same £2,500 monthly maximum, the two schemes are very different with the self employed now compensated for a maximum of 6 months and employees a maximum of 8 months. This perhaps reflects the fact that the self employed can work as much as possible, but employees cannot work at all or, more likely, the government would prefer employers to take more time to make decisions about redundancies.

    What do I need to know?

    Self Employed (SEISS)

    The current version SEISS 1.0 closes on 13 July 2020 with the new version SEISS 2.0 opening in August 2020.

    The maximum drops from £2,500 per month to £2,187.50 per month, rounded up to a 3 month lump sum of £6,570 being 70% of £3,125 or your average profits, as currently calculated, if lower.

    You can claim both grants or only one: SEISS 2.0 is NOT dependent on claiming SEISS 1.0.

    Presumably if you were adversely affected early on, say in April, where your profits dropped in April, but they have since picked up, you can’t claim SEISS 2.0, but this isn’t yet clear.

    Coronavirus Job Retention Scheme (CJRS)

    June – carries on as now, except any employee who needs to be in a claim from July, must be in a claim in June. With the 3 week minimum, this is an effective last date for newly furloughed employees of 10 June. All claims for June (and presumably earlier) must be made by 31 July.

    July – carries on as now, except employers can choose not to claim for any hours/days employees work paying them their full pay as before the crisis.  

    This could be beneficial for shareholder-directors who may be able to generate good profit for their limited companies in a couple of days but pay themselves only their usual small salary.

    August – as July, except employers must pay any employer’s national insurance (NI) and pension contributions on furloughed pay.

    September – as August, except the government grant to the employer is 70% of pay up to a maximum of 70% of £3,125 = £2,187.50 adjusted for any hours/days worked.

    October – as September, except 70% is now 60%, being a maximum 60% of £3,125 = £1,875 adjusted for any hours/days worked.

    What are the figures for shareholder-directors who can’t work?

    Taking the typical reference salary of £719, the £575.20 current furlough claim will change as follows:

    • June £575.20
    • July £575.20
    • August £575.20 (no NI or pension)
    • September £503.30
    • October £431.40

    Unfortunately, a dividend replacement scheme for shareholder-directors wasn’t announced, with the Chancellor reminding us to use other measures such as business bounceback loans, VAT deferral and income tax deferral. HMRC is also being helpful where companies ask to defer corporation tax under general time to pay provisions.

    Further details on both schemes will be available on 12 June. In the meantime, businesses are still working their way through this, looking for their way out.

    Please ask your usual On The Spot contact for further assistance.

  • Coronavirus – Limited Companies – What Are Your Choices?

    Now we’ve probably heard all the major Coronavirus announcements from the Chancellor, what choices do Director-Shareholder Limited Companies have to help them through this crisis? We provide a checklist below with signposting to the relevant part of gov.uk.

    Time To Pay

    Applicable to all companies and all taxes, you can call HMRC and agree a scheduled delay to paying your taxes. Have a realistic proposal that you can stick to. Signpost: https://www.gov.uk/government/news/tax-helpline-to-support-businesses-affected-by-coronavirus-covid-19

    Time To File

    Companies house will allow you to send in your accounts 3 months later than normal, a increase from the usual 9 months to 12 months, as long as you ask before the 9 month deadline.

    This may help if you’re finding it hard to get your figures prepared, but we would urge all companies to keep their figures and accounts up to date to help them keep on top of their finances particularly cashflow. Signpost: https://www.gov.uk/guidance/apply-for-more-time-to-file-your-companys-accounts#coronavirus-covid-19

    Corporation Tax

    Using an existing, normal rule, remember that if you make a trading loss during your current year end, you can carry it back 12 months and generate a corporation tax refund from the tax you paid in your previous accounting year.  Your loss may be increased by making a higher home office claim, due to working from home more often than usual.

    Business Interruption Loan

    Applicable to all companies, you may borrow from your current bank or another in the scheme, interest free and fee free for 12 months without providing any security up to £250k. If your company should be viable for the long term, this must be worth a look as a flexible option. Signpost: https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils-2/for-businesses-and-advisors/

    Director Personal Income Tax Payments Deferral

    You may be due to pay income tax on your dividends on 31 July 2020 on account for the 2019/20 tax year. HMRC will not charge interest if this isn’t paid on 31 July, as long as it’s paid by 31 January 2021, the next income tax payment date. Again, this is designed to provide some immediate breathing space, but will need to be paid 6 months later along with any other income tax due by 31 January 2021. Signpost: https://www.businesssupport.gov.uk/deferral-of-self-assessment-payment/

    If your dividends are less than expected for this tax year to 5 April 2020, it should be worth sending in your income tax return as soon as possible after 6 April to generate an income tax refund from your January 2020 payment on account.

    Director Personal Mortgage Or Rent Deferral

    To help your personal cashflow further, reducing the need to rely fully on your company’s finances, you may ask your mortgage company or landlord for a mortgage or rent deferral for 3 months. This will need paying back in due course, so be confident this is something you should be able to manage.  

    If your personal finances are very stretched you may want to claim state benefits which can also help with housing costs, if you’re eligible.

    VAT Deferral

    If your company is VAT registered, you won’t have to pay any VAT due between 20 March and 30 June 2020. This covers VAT quarters ended 29 February, 31 March, 30 April and possibly 31 May.

    If you pay by direct debit, remember to cancel your direct debit in good time, and then reinstate it afterwards. HMRC won’t ask for any explanation, charge interest or penalties as long as you repay this VAT by 31 March 2021. This may provide good breathing space for the next couple of months, but do have a plan to refund it before 31 March 2021. Signpost: https://www.gov.uk/guidance/deferral-of-vat-payments-due-to-coronavirus-covid-19 

    Your VAT returns are due as normal, refunds will be paid as usual and VAT due outside of this period remains due. 

    Job Retention Scheme

    If you have employees whose jobs are at risk due to a downturn in your business, you can keep them on the books by labelling them as ‘furloughed’ employees for a minimum of 3 weeks at a time for a maximum of the three months March, April and May. They cannot do any work at all for you during the period they are furloughed.

    You need to pay your staff and operate PAYE on either full pay or 80% of their pay. The government will refund you, starting at the end of April, 80% of their pay, up to £2,500 per month, plus the associated national insurance and 3% auto-enrolment pension contribution if the employee is enrolled. Sign post: https://www.gov.uk/guidance/claim-for-wage-costs-through-the-coronavirus-job-retention-scheme

    We are still waiting to hear whether owner-directors can ‘furlough’ themselves where their business is on hold but they need to continue to carry out statutory duties such as preparing VAT returns or filing annual returns. If such a director was on a salary of £719 per month, this should mean a maximum refund of £1,725. [EDIT: It has been confirmed that owner-directors can furlough themselves, as long as they don’t work on the business and confine themselves to statutory duties. This is easy to demonstrate for freelancers and consultants who have no contracts at all or if a high street retailer has closed and isn’t carrying out any alternative business activity. The company through the Board of directors needs to make this decision and record it in the minutes of the meeting.]

    Separate to this, if your employees are off work due to being ill from the Coronavirus you can reclaim their sick pay for up to 2 weeks. This is also available to you as a director. Signpost: https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses#support-for-businesses-who-are-paying-sick-pay-to-employees

    Business Rates

    If you pay business rates, your company may be entitled to receive a £10k or £25k grant, which we assume will be taxable as for most other grants. 

    A £10k grant is available to any business which receives small business grant relief (SBRR) Signpost: https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses#support-for-businesses-that-pay-little-or-no-business-rates

    If you’re in the retail, hospitality or leisure sectors, you’ll pay no business rates from 6 April 2020 to 5 April 2021. If your rateable value is up to £15k, you’ll receive a grant of £10k, or if it’s between £15k and £51k a grant of £25k. Signpost: https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses#support-for-retail-hospitality-and-leisure-businesses-that-pay-business-rates 

    You don’t need to take any action because your local authority will contact you.

    In summary, please take appropriate advice to ensure you optimise your company’s particular situation. We’re in a fast moving situation and HMRC might amend its guidance without any signposting at all! 

    Stay well.

     

  • New Year’s Resolution? – Make Tax Understandable

    1. Training Costs – Allow all relevant business training costs paid by a sole trader to be tax deductible, as they are for limited companies. Surely training is a good thing?
    2. Class 4 National Insurance – Link Class 4 NICs paid by the self employed to benefits. Currently they are the most expensive NICs paid by the self employed but they provide no state pension credit or any link to benefits or the NHS. They are really no different from charging a further 9% of income tax, except they start to be paid at income levels £3.5k lower. 
    3. Gift Aid Carry Back – Allow charitable donations to be carried back to the prior year even if that earlier tax return has already been submitted to HMRC. Why should someone who has delayed sending in a return be treated more favourably?
    4. Corporate Gifts – Apply the same rules for VAT and corporation tax. Corporation tax rules require the presence of a logo and the gift can’t be food or alcohol, but there are no such restrictions for VAT. With a merged tax department surely this can be aligned?
    5. Property Partnerships – Similarly, treat jointly-owned property as a partnership for both income tax and VAT purposes. Currently, only the VAT department will automatically describe this as a partnership.
    6. S/EIS – Be more reasonable with the practical operation of S/EIS. If a taxpayer only needs to claim capital gains tax relief why insist that dummy income tax relief is claimed in a tax return? The investment is either eligible or not. And surely it doesn’t matter if the wrong form is completed by mistake, as long as adequate, relevant details have been provided?
    7. Making Tax Digital – Ensure MPs aren’t exempt from the biggest change to tax reporting for years. If MPs aren’t subject to the same rules, there is no incentive to make them understandable, relevant and proportionate. Is it right that a sole trader preparing perfectly good handwritten tax figures all his working life and filing returns online with HMRC, is now forced to adopt new software because MPs have said so? Whereas well paid supported MPs don’t even need to think about this for themselves?
    8. Personal and Tax Free Allowances – The interaction of these is so complicated even HMRC hasn’t yet managed to code everything correctly into their software. KISS!

    It’s these and many other strange rules which don’t help the public’s perception of HMRC and paying tax, which also adds to the feeling that the system is set up against them. This New Year and decade could be the time to tackle this properly. 

    Thank you. 

    Yours faithfully

    Accountant explaining tax to people every day…

  • Let The Taxman Contribute To Your Christmas Party

    You can spend a maximum of £150 per staff member plus another £150 for their other halves or guests. The only condition is that ALL members of staff at that location must be invited.

    The cost is fully tax deductible with no benefit in kind income tax or national insurance to worry about. Your staff will feel appreciated and you save 19% corporation tax, so everyone gets that holiday feeling!

    Ensure that the costs are called staff entertainment in your detailed Profit & Loss Account.

    Remember it doesn’t have to be AT Christmas; it could be a similar annual function such as a summer BBQ, as long as you spend less than £150 over the whole year.

    The £150 includes VAT and the cost of transport and/or overnight accommodation. Divide the total cost of each function by the total number of people, including non-employees, to arrive at the cost per head.

    The VAT is also fully recoverable when paying for your staff. If you make a small charge to your staff’s guests and pay over a small amount of VAT, the VAT on the total cost for the guests is also fully recoverable.

    I don’t have any staff. Can I benefit from this favourable tax treatment?

    As you are the only director/employee you might think you can’t have a Christmas party – wrong!

    You can avail yourself of the £150 per head exemption as a member of staff (the only one!) and also £150 for your better half even if he/she isn’t a director or employee.

    The cost is fully tax deductible so you save 19% corporation tax.

    Again, ensure that it is called staff entertainment in your detailed Profit & Loss Account.

    In this case we would advise that the VAT shouldn’t be reclaimed.

    Enjoy that Christmas Party a bit more knowing you’ve received a subsidy from ‘The Taxman’.

  • Growing SMEs – The Best Tax Incentive Ever?

    The best tax incentive revolves around the share capital in your company.

    Rather than give away or sell shares up front before the person has proved themselves, you grant an option for him/her to buy shares at a later date. If the person helps grows your company he benefits from that growth by buying the shares at the value they were when s/he joined you.

    S/he makes a profit for no initial cost, and your dividends haven’t been reduced.

    Importantly, there is no tax charge if s/he simply buys the shares and keeps them. More likely, s/he will wait until you sell your higher value company. If s/he has been with you for a year, the tax charge on that gain is only 10%.

    A much improved rate on say 40% income tax if you’d had to pay higher bonuses throughout that period.

    Your company hasn’t taken a risk, and its corporation tax bill is reduced by the gain, so you save 19% corporation tax as IF you had paid him those bonuses.

    How does it work?

    1. You write down a set of EMI share option rules such as what happens if your employee leaves your company.
    2. The company grants share options for no cost and no tax charge.
    3. Eg If your company is worth £90k and you company has issued 90 shares, each share might be worth £1,000. If you grant 10 share options, you’ve immediately given a perceived £10k value to your new person with no cost to you or tax charge to him/her.
    4. You and your new senior executive grow your business over the next, say, 5 years.
    5. You decide to sell your business for, say, £3m. The gain made by your senior executive is £300k less the initial £10k = £290k. After paying 10% capital gains tax of £29k, s/he has received a net £261k over 5 years equating to additional gross salary of over £130k per year. In addition, your company saves 19% corporation tax on the £290k, so its tax bill is reduced by £55k, without incurring any costs.

    Your company has benefitted from employing a senior employee who also benefits, if s/he stays with you and helps grow the company. Your corporation tax bill is reduced as if you’d paid him/her normal taxable bonuses, plus you’ve not paid 13.8% employer NI on top of those bonuses.

    Your senior executive knows that s/he benefits from any incremental value he adds to your company and pays only 10% tax instead of a potential 47% combined income tax and NI rate on bonuses.

  • Budget 2017 – So will the Chancellor be sacked?

    The thing about national insurance

    It’s complicated.

    The Chancellor referred to the lack of payment for public services but the national insurance of £6,170 due on a salary of £32,000 includes £3,297 paid by the employer, not the individual. Plus the employer receives corporation tax relief reducing the net amount paid to the Treasury by £659 to £2,638 from the employer.

    If you look at what the individual pays, the correct comparison is £2,873 from the employee versus £2,300 from the self-employed, a reduced differential of £573. On a salary or profit of £32,000, this gap will drop to about £240 from April 2019. 

    This £240 is effectively the price of no holiday pay, sick pay, maternity pay, having to pay all your own pension contributions etc. 

    Hopefully, the announced review of benefits available to all will improve these comparisons. 

    15 MARCH 2017 UPDATE – THIS CLASS 4 NATIONAL INSURANCE INCREASE HAS BEEN SCRAPPED. 

    Making tax digital

    On top of this a 1 year delay to ‘making tax digital’ quarterly reporting where your turnover is less than £83k won’t reduce this new self-employed burden by much and the self-employed may start to feel a bit hard done by today.

    Dividend tax 

    The 0% tax rate on £5,000 of dividends will from April 2018 be available on only £2,000 of dividends. This will adversely affect small owner-managed businesses but it’s still likely to be beneficial to run many businesses through a limited company, if only to be able to control the timing of your personal taxable income.

    Perhaps when HMRC was told that its example of the interaction of the £5,000 and the tax free personal allowance was wrong, the Treasury had to re-run its numbers and discovered that £5,000 would cost more than they realised!

    Research & Development 

    As part of the Chancellor’s determination to tackle our poor productivity, he seems willing to be more lenient about the details required when making an R&D claim. This needs to be an instruction to HMRC, as the most lengthy information requests are made by inspectors after submission, sometimes for relatively small claims. 

    Conclusion

    The Chancellor’s error in the national insurance comparison and HMRC’s error in calculating the effect of the £5,000 tax free dividend, show how complicated the tax system has become. Even those legislating and running it don’t always understand the interactions across different parts of the system. There has to be more inroads into simplifying the tax system so taxpayers have more certainty over the tax they’ll have to pay.

    On the basis the Chancellor is waiting for the Autumn to deliver a more comprehensive budget, and will check with practitioners before making comparisons, perhaps he won’t be sacked this time. And perhaps we’d like to hear a few more jokes yet. 

  • Top Five Most Common Tax Queries

    1. Pool Car – Can my car be a company pool car?

    Unfortunately, probably not. If the car is taken home overnight by any member of staff, or you, it’s unlikely to be a pool car. If it’s taken to your staff’s home overnight ready for an early start to get to a meeting away from the office, this is acceptable but it’s not expected to be a regular predictable event. It’s probably more tax efficient to keep the car in your personal ownership and charge your company 45p per business mile.

    2. Home Office – Will this mean capital gains tax is charged on my home when I sell it?

    Probably not. If your home office is a room also used for some personal reason eg storing personal files or books, or having a sofa bed for visitors, there is no effect on the tax free status when selling your home later, as long as your home is your main residence throughout.

    3. Lunch – Can I claim the cost of lunch when working away from my office on business?

    Yes, as long as the journey is for business and you’re away from your office base long enough to need a meal, the rule of thumb being 5 hours away, then all costs associated with that journey are business costs as a sole trader or limited company. This might be coffees or meals, such as lunch. There’s no actual upper limit that may be spent, after all your business will still suffer most of the cost, but be prepared for it to be viewed as a private event if you have oysters and champagne!

    4. Salary – What salary should I take from my Limited company?

    For the last tax year, a common salary was £671 per month. This is the maximum that can be paid before national insurance is due, but at the same time still accrues a state pension credit plus some S2P credit. Overall, a very good deal. Where clients don’t have any other income and few staff  so they have enough of their £2k Annual Employer Allowance available, it’s been tax efficient to take a higher salary of £883 per month. There’s still some employee national insurance due but overall it saved £203 per director during the year. For the new tax year, similar considerations apply except the now £3k Annual Employer Allowance is only available if there’s more than director. 

    5. VAT – If I become a Limited company will I have to be VAT registered?

    No, as long as your turnover is less than £82k (now £83k). Similarly, being a sole trader doesn’t exempt you from being VAT registered. The VAT registration threshold applies in exactly the same way to sole traders, partnerships and limited companies. However, depending on your business, you may want to be voluntarily registered. And if you sell electronic services eg Apps or automatic downloads to the EU the £82k threshold is irrelevant when selling into other countries and local VAT (not UK) has to be paid. We therefore make sure we understand your business to ensure opportunities and obligations aren’t overlooked.

  • Budget2016 – Restoring Localism Within A Global Economy

    Small businesses

    Corporation tax rate reduction from 20% to 17% in 2020/21

    This helps restore the balance from the new dividend tax although you’d need to earn £57k more annual taxable profit to recover the additional £1,700 annual dividend tax many are paying from this April.

    It might make other low tax jurisdictions look less attractive, such as Ireland, and encourage international companies to have more valuable taxable activity in the UK.

    Increased higher rate tax threshold to £45k from April 2017

    This has other implications such as on capital gains tax and the dividend tax rate, so is another way to offset the higher dividend tax you’re paying from April 2016.

    Increased tax if you borrow from your company from 25% to 32.5% from April 2016

    It may be worth considering whether you should take more dividends from your company before 6 April 2016 to clear any loans from your company. Paying 25% tax may be preferable to suffering 32.5% later until you do repay the loan. This is an area which has seen many recent changes and is a source of constant irritation to HMRC. With more tax at stake, it makes it more worthwhile for an Inspector to look into this area.

    IR35 changes for the public sector

    If you’re a service provider on longer term contracts with few clients, such as an IT contractor, the plan is to ask public sector clients to decide if you’re an employee in disguise. If they do, you might decide you prefer to work for the private sector. Surely this runs the risk of encouraging good suppliers to no longer work for the public sector. 

    Abolition of Class 2 national insurance from April 2018

    However, no mention of Class 4 national insurance, the real cost of being a sole trader or partner, so we’ll wait and see whether that needs to increase from 9%.

    Business rates and commercial SDLT reduction  

    This helps small retailers compete with the internet, although more so in the Northern and Midlands ‘power houses’ than in the South East.

    Encouraging investment from external investors

    An extension to entrepreneurs relief where new money is invested from tomorrow in an unquoted company and the shares are owned for at least 3 years from 6 April 2016, capital gains tax of only 10% will be due, as it is for many officers and employees.  

    Pensioners

    Reduced capital gains tax to 20% and 10% from April 2016 (except residential property)

    This may be the group most likely to benefit from the reduced capital gains tax. if you own shares in quoted companies or unquoted companies where you’re ineligible for entrepreneurs relief, you may now wish to consider selling these investments after this April.  

    Parents

    Sugar tax

    When children are mentioned Chancellors can get away with a lot but increased prices do also affect adults on low incomes. Introducing a sugar tax on drinks and keeping duty on beer the same may have the unintended consequence of making alcoholic drinks look relatively more attractive! 

    Lifetime ISAs

    A possible alternative or complement to normal pension savings. Together with pensions auto enrolment, ‘putting the next generation first’ may turn out to be true.

    For those on low incomes benefiting more proportionately from tax free personal allowances, combined with saving (possibly with parents’ cash) in a lifetime ISA which receives a 25% uplift from the government, may be a very welcome mix of valuable government subsidy.

     

    This trend of appealing to the many rather than the few, may turn out to be a successful strategy for the Chancellor. It may also help grow the economy as long as the new dividend tax doesn’t increase any further.

     

     

  • 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.