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The election result and your finances.

Archive for the ‘Tax planning’ Category

The election result and your finances.

Wednesday, January 22nd, 2020

With the Conservative’s having won their largest majority since 1987, we thought now would be a good time to reflect on some of the pledges made during the election campaign. How will the promised reforms affect you and your finances? 

Increase of the National Insurance threshold

The NIC threshold is set to rise from £8,632 to £9,500, which will lead to savings of around £100 a year for the 31 million workers who earn above that amount. Over the long term, the Conservatives have set an ambitious £12,500 threshold which would result in a tax reduction of £500 for those who earn over that figure.  

State pension triple lock

The state pension lock is set to be maintained, which is unsurprising, particularly after Theresa May’s plans to change the system cost her voters back in 2017. Currently, under the triple lock the state pension increases year on year, in line with whichever is the highest of these three measurements: the average earnings increase, the rate of inflation or 2.5%.

Further pension pledges

The government has pledged to address a separate pension anomaly which can result in people earning under £12,500 to be denied pension tax relief, if their provider uses the ‘net pay arrangement’ approach as opposed to the ’relief at source’ method. 

The government has also mentioned that it will address the ‘taper tax’ issue that is causing many senior NHS medical professionals to turn down work and overtime, rather than risk a retrospective pension tax charge. 

Steve Webb, director of policy at Royal London, raises the concern that there is a “lack of detail” in the suggested reforms, mentioning that “the measure proposed is far too narrow and may not even work. The tapered allowance affects far more people than senior NHS clinicians and creates complexity and uncertainty in the tax system.”

More will be revealed, no doubt, when Sajid Javid delivers his budget on 11 March.  

Income tax

When he was battling for leadership of the Conservatives, Boris Johnson promised to reduce Britain’s tax burden, making the bold statement that he would raise the threshold for the 40% higher-rate income tax band from £50,000 to £80,000. This would have resulted in serious tax savings for the top 10% of earners. It appears, however, that the plan has been shelved, at least for now. 

Rest assured, we’ll keep our ears to the ground and will update you of any significant policy changes in the budget that might affect your finances. In the meantime, if you have any queries, please don’t hesitate to get in touch.

Ready for the end of the tax year?

Wednesday, January 15th, 2020

The tax year will end on April 5th. Are you confident that you have made appropriate preparations and maximised your tax allowances?

Here are some of the allowances that you should consider: 

The Marriage Allowance

You can transfer £1,250 of your Personal Allowance to your spouse or civil partner if they earn more than you and pay tax at the basic rate. This could yield a potential tax saving of £250. You need to make sure that you have income within your Personal Allowance of £12,500. An application to HMRC needs to be made for this allowance. It’s also worth noting that you can backdate your claim to include any tax year since April 5th 2015. 

Enterprise Investment Scheme, SEIS and VCT

Investments made with the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) during the current tax year can be carried back for relief for the 2018/2019 tax year, potentially providing both income tax relief and capital gains tax deferral relief. However, rules differ between the two so be sure to check with each provider. 

For the EIS, you can obtain 30% income tax relief on the amount allocated for shares in EIS qualifying companies, from a minimum of £500 up to a maximum of £2,000,000. For Venture Capital Trusts (VCT), you receive 30% of tax relief on investments up to £200,000. For SEIS qualifying companies, you can receive 50% income tax relief on up to £100,000 per year.  

The Tapered Annual Allowance

For higher income earners, the tapered annual allowance will apply. For every £2 of adjusted income, including employer pension contributions, as well as income over £150,000, your annual allowance is reduced by £1. The Government has a comprehensive guide for working out whether your income will have the allowance applied. You may only be able to assess this accurately as you get closer to April 5th. If you can assess the figures accurately in time to make a pension contribution, then ensure you do so. If not, as soon as the most accurate figures become available, you can take steps to make up any shortfall by carrying it forward to the next year.

The Money Purchase Annual Allowance

You can get tax relief on pension contributions of up to £40,000 per year or 100% of your taxable salary. However, if you have already started drawing income from a defined contribution pension scheme, the amount you can pay into a pension without suffering a tax charge reduces. 

The allowance for the 2019/2020 tax year remains unchanged from last year at £4,000 and applies if you have taken any taxed income from a money purchase or defined contribution pension. This extends to personal pensions, SIPPs and workplace pensions.

Expenses

If you’re an employee, you may be able to claim for expenses not reimbursed by your employer, such as travel mileage (not including home to work), the cost of buying small essential items or equipment needed to do your job, such as tools or professional subscriptions. 

If your employer reimburses you at a rate lower than the current standard mileage rate of 45p per mile for the first 10,000 miles and 25p per mile thereafter, you can claim the difference back in your tax return. 

Taking the time now to make sure you’re maximising your allowances can yield notable tax savings at the end of the tax year on April 5th. If you require any help with your tax planning, don’t hesitate to get in contact with us and we will make sure that you’re on the right track. 

Allowances to use before the end of the tax year

Thursday, January 2nd, 2020

The tax year will be coming to an end on 5th April. With that deadline in mind, we wanted to remind our clients of all the allowances available to you during the tax year. It’s important to make sure you’re maximising your allowances in all areas so that you mitigate the impact of tax. Listed below are a few allowances you should be considering: 

ISA Allowance

With a cash ISA or a stocks and shares ISA (or a combination of the two), you can save or invest up to £20,000 each year per person, meaning that a married couple can invest up to £40,000 between the two of them. 

Top up your pension contributions

You should make sure you check your pension contributions at least once per tax year as they can be a great way to manage your tax liabilities. For the high earners among you, however, it’s important to keep the lifetime pension allowance in mind. The current lifetime allowance is set at £1,055,000. Remember that contributions causing you to exceed the allowance are taxable. 

For those of you who aren’t nearing the limit, upping your pension contributions can be an effective way to mitigate the impact of tax. If you haven’t managed to make full use of your £40,000 annual allowance, you can carry it forward for up to three years. 

Inheritance Tax

The current tax-free threshold is set at £325,000 for single individuals and £650,000 for married couples. Anything over this amount will be taxed. Inheritance tax is where a little bit of planning can pay dividends in the future. This might be by making full use of your annual gift allowance of £3,000 (£6,000 for married couples), putting assets into trust or re-writing your will. 

Capital Gains Tax

Capital gains tax is a tax on the profits you make when you sell something, such as a second home or a personal possession worth £6,000 or more, except for your car. The tax-free allowance for the 2019/20 tax year is £12,000 per person so couples can pay no tax on a total of £24,000 of gains. Remember that genuine gifts from a spouse or civil partner do not count towards the allowance. 

Boost your children’s savings

The Junior ISA limit is set at £4,368 for this tax year. Why not take the time to give your children’s savings a boost by making sure they’re at the limit? You may even want to contribute to your grown up children’s Lifetime ISA if they have one, and the government will provide a bonus of 25% of the money invested, up to £1,000 per year. 

Your dividend allowance

If you receive dividends through a Stocks and Shares ISA or you’re a company shareholder or director, you can currently receive £2,000 worth of dividends tax free. 

For more information on how to make sure you’re maximising your tax allowances, feel free to contact us. 

Why you must make sure your will is accessible

Wednesday, December 18th, 2019

Do you know where your will is? Even more importantly, do the people who will act as your executors, in the event of your death, know where your will is stored?  

The recent discovery at Lloyds Banking Group that 9,000 wills had been left in storage and not passed on to customers serves as a stark, cautionary tale. The bank is now desperately trying to match envelopes with the relevant families.  

The wills were kept in the bank’s ‘Safe Custody’ service – an ironic name given that the custody actually proved too safe, with no one knowing about the wills’ existence. The service closed to new customers in 2011.

The error means that some executors may have administered a deceased’s estate using what turned out to be the wrong will, unaware that the right one was stored at Lloyds. As a result, some families are having to re-examine old bequests years after they were thought to have been settled.     

Not only will this have caused great inconvenience, it will also have been incredibly distressing for those involved. 

Michael Culver, chairman of Solicitors for the Elderly, commented that the processing failure could lead to estates being wrongly distributed, contentious probate claims, negligence claims against executors and administrators, issues with tax payments and, ultimately, the last wishes of the deceased not being honoured.     

The bank, however, has said that it was only in a small percentage of cases that they did not trace the will when a customer died. According to their spokesperson, 90 per cent of the newly discovered wills had already been superseded by a later will or there were copies available elsewhere. In some cases, the estates were declared intestate but had been distributed in line with the deceased’s wishes anyway.         

What action can be taken? Families affected should make a complaint to the Financial Ombudsman and a counter claim against Lloyds directly. Compensation will be offered, including legal costs, and LLoyds have promised that it won’t claw back assets given to the wrong people. 

As for the future, what lessons can be learnt? It is recommended to always register a will. This case illustrates that it is often better to use a solicitor, who will be specialised in making and storing wills, rather than a high street bank. You can also register a will with the Probate Service for a one-off fee of £20. 

The Society of Trust and Estate Practitioners (STEP) advises against safety deposit boxes for wills as it means the executor cannot get access until they get probate and this cannot be granted without a will, so it becomes a bit of a Catch 22 situation.  

If you do have a will stored in a safety deposit box, consider moving it elsewhere to ensure it is accessible. Make sure its whereabouts is known to your executors. It may not be something you or your family want to think about right now but it could save a lot of stress and worry at a difficult time later.

Sole trader vs limited company?

Thursday, December 5th, 2019

When people are setting up a business, one of the first questions they have to grapple with is what legal structure they are going to trade under – sole trader, limited company or partnership.

If you’re one of our clients, you will already have made this decision but we thought it would be useful to give a quick outline of the differences.  

Sole trader

Being a sole trader is the most popular legal structure. Approximately 3.4 million sole proprietorships were created in 2017 and they accounted for 60% of small businesses in the UK. 

On the plus side, there are no set up costs and it’s very simple to get up and running. The only requirement is to inform HMRC by 5th Oct of your business’ second tax year. There is very little paperwork and you don’t have to have any dealings with Companies House. None of your information is held on the public record.    

As a sole trader, however, you are completely responsible for your business and its finances. You need to be aware that if your business goes bust or you have any business debts, your personal finances and assets could be in danger. Legally, your liability is unlimited.

It’s advisable, therefore, to take out small business insurance policies. This way you can avoid getting sued personally should there be any legal disputes. Remember, the buck stops with you! 

You and your business are treated as a single entity, which is also significant for tax purposes. You will have to pay tax on the profits that are above your personal tax allowance (£12,500 for the 2019/20 tax year). This is calculated through the self-assessment system and you will also pay Class 2 and Class 4 NICs.

Being a sole trader is thought to be less tax efficient than being a limited company as there is less opportunity for tax planning via the self-assessment system. 

Limited company

The second most popular legal structure is a limited company of which there were 1.9 million in 2017. There is a certain amount of paperwork required and you need to deal with Companies House but it is relatively straightforward. Note that your company details will be on public record.   

The main advantage of having a limited company is that you have limited personal liability should something go wrong. The business is treated as a separate entity from its owners so your own assets are protected.    

Despite the higher dividend taxes that were introduced in 2016, a limited company is still  considered to be more tax efficient. The company will pay corporation tax and dividend tax and employer’s Class 1 NICs on salaries, while staff pay employees’ Class 1 NICs on salaries. Under the limited company structure, there are more possibilities for tax planning by delaying dividends, for example, until a future tax year to minimise the tax liability. 

One of the disadvantages, though, is that you are obliged to prepare annual accounts which need to be filed with Companies House. You also need to file a full set of corporate tax accounts for HMRC. As a limited company, it’s advisable to use an accountant to make sure the accounts are done thoroughly.

In our article next month, ‘Do you need an accountant?’, we’ll be looking at this in more detail.  In the meantime, if you know anyone who has any questions about the right company structure for them, we’re always happy to have a chat.    

Is inheritance tax for the chop?

Wednesday, November 13th, 2019

Inheritance tax is deeply unpopular, there’s no denying it. According to a 2015 YouGov poll, 59 per cent of the population think it’s unfair. 

So whichever party is in power after the Election, it’s likely they will include it as one of the taxes to be reviewed.    

Indeed, at the Tory party conference in September, the Chancellor, Sajid Javid, went so far as to hint he was considering scrapping inheritance tax altogether. He is thought to be uneasy that revenue from the tax reached an unprecedented £5.4 billion in 2018-19; a figure made even more noteworthy when only 4-5 per cent of UK estates are liable for inheritance tax.    

Politicians have protested against the tax for many years – and not just in the UK. Way back in 2007, George Osborne proposed that the threshold should be raised to £1 million. In the US, the Republicans under George W Bush gradually reduced inheritance tax until it was abolished altogether for a temporary period in 2010. As for the current day, Donald Trump has doubled the threshold from $5.5m to $11.2m. Other countries that have eliminated the tax altogether include Sweden and Norway, India, Canada and Austria.     

Inheritance tax is thought to be unjust, sometimes even referred to as the ‘death tax’, because it is deemed to be a form of double taxation. As Sajid Javid put it, “I do think when people have paid taxes already through work or through investments — capital gains and other taxes — there is a real issue with then asking them to, on that income, pay taxes all over again.” 

But it’s not the only instance of double taxation in everyday life. For example, we all pay VAT on goods with income that has already been taxed. What’s more, it is the bequeathed estate that is taxed, not the person. The tax (at a rate of 40 per cent) only kicks in on estates above £325,0000 or £650,00 for a couple, with the relatively new nil rate band allowance enabling property up to £1million to be transferred.   

Those who defend a progressive inheritance tax system do so in the interests of equality of opportunity. They believe it prevents privilege simply being transferred from one generation to the next.  

It seems likely, however, that political parties on each side of the spectrum will propose an alternative to the current rules. Whatever is introduced, a simplified system would be welcome. The Institute for Public Policy Research (IPPR) has put forward a solution which would abolish the tax and replace it with a lifetime donee-based gift tax. This new tax would be due on any gifts received by an individual over a lifetime allowance of £125,000, at the same rate as income tax, but gifts between partners would be exempt. 

The Resolution Foundation estimate this would raise £15 bn in 2020/21, £9.2 bn more than the existing system, making it an effective way to replace the current £5.4 bn.   

Watch this space to see how this this particularly contentious hot potato is handled by whoever is in power next.

Help to Buy ISA deadline is looming

Wednesday, October 2nd, 2019

After 30th November 2019, potential first-time buyers will no longer be able to apply for a new Help to Buy ISA.   

Savers who already have an account will be able to keep saving into it until 30th November 2029, regardless of when the ISA was opened, but accounts will close to additional contributions after that date. 

What is the Help to Buy ISA?   

The Help to Buy ISA was introduced to help first-time buyers over the age of 16. Individuals receive a bonus of 25% of their savings when it comes to purchasing a property, up to a value of £3,000. They can put £1,200 into the ISA in the first month, while subsequent payments are limited to £200 a month. The final criteria is that the property purchase cannot exceed £250,000 (£450,000 for London) if the buyer wants to receive the 25% boost. 

How does the Lifetime ISA differ?

The Help to Buy ISA is not the only option available. The Lifetime ISA is designed to help people aged between 18 and 40 to save towards their first home or for later life. The Government will again give a bonus worth 25% of what is paid in, up to a maximum of £4,000 per year. Savers can then receive a maximum of £1,000 per year as a government bonus. This can be used to buy a home worth up to £450,000 anywhere in the country. 

Both ISAs can be helpful when it comes to saving for a first-time property purchase, although there are some marked differences between the two. 

The Lifetime ISA rules mean that savers have to wait at least a year before they can use it to buy a home. With the Help to Buy ISA, individuals have to have saved £1,600 before they can claim the minimum government bonus of £400 but this can be done over a period of three months: £1,200 in the first month followed by two subsequent deposits of £200 in the next two months. 

It is possible to spread deposits across multiple ISAs. However, the maximum that can currently be saved in ISAs is £20,000 for the 2019-2020 tax year. 

Helping your children get their first house 

Given the struggles the younger generation face to get on the property ladder today, you may be wondering the best way to give financial support. If you’re considering giving your child enough money for a deposit, there are no immediate tax implications. You can give as much money as you like to your children tax free, but if you were to pass away within seven years of the gift, they could be faced with an inheritance tax bill if your estate was worth more than £325,000. You can gift up to £3,000 a year without paying inheritance tax.            

If your children or grandchildren are interested in taking out a Help to Buy ISA, encourage them to do so as soon as possible before time runs out. If you would like to know more about the options around gifting money to your children to help with a deposit on a house, don’t hesitate to get in touch.  

Own a second property? Look out for Capital Gains Tax changes.

Wednesday, September 25th, 2019

There have been several changes relating to Capital Gains Tax (CGT) over the past few years. The coming years are set to bring more. Here’s our summary of some of the more important changes coming that might be coming into effect from April 2020. 

If you are thinking about selling a residential property in the next year or two, you need to know about proposed changes to the capital gains tax rules for disposals from April 6th 2020. 

If you only own one property and have always lived there, you should not be affected. However, if you own more than one property or you moved out of your only property for a period of time, you might face a capital gains tax bill. 

The two main changes you should be aware of are: 

Final period exemption 

The last period of ownership counting towards private residence relief will be reduced from 18 months to just nine. Currently, the final period exemption allows individuals a period of grace to sell their home after they have moved out. However, the government feels that individuals with multiple residences have been taking advantage, hence the reduction.   

Lettings relief

Lettings relief is set to be removed, unless you live in the property with the tenant. For UK property, HMRC must be notified and tax paid 30 days after completion rather than the January following the end of the tax year in which the disposal took place. Failure to pay on time will result in HMRC imposing interest and potential penalties. 

With no transitional measures in place, this means that higher-rate taxpayers previously expecting to benefit from the maximum potential relief of £40,000 could be lumped with £11,200 extra tax overnight. 

Here’s an example of how the new taxes could influence a sale:

Steve, a higher rate taxpayer, bought a flat in April 2009 for £100,000. He lived there for 6 years until April 2015 before moving out to live with his partner. He let the flat until 2020 when he sold it for £300,000. The sale was completed on 4th June 2020. 

If the contracts were to be exchanged before the April 2020 changes, a CGT of £6,618 would be due. However, after the deadline a CGT of £21,636 would be due, payable seven months earlier – this is due to there being a lower period of private residence relief and a lack of lettings relief. 

The next steps

The two above changes are set to be enacted as part of the 2020 Finance Act and at the moment are not definite. The consultation to these steps closed on 5th September 2019. Assuming that draft provisions reach the Finance Bill 2019-20, we will have to see if any changes are made to either after it is debated in Parliament. 

IR35 reforms: what you need to know

Wednesday, August 21st, 2019

Changes to  IR35 legislation are coming into effect in April 2020. IR35 legislation is designed to target “disguised employment” between firms and freelancers. This is where a company hires freelancers and contractors to undertake work, yet they are effectively employees of the company. It also affects freelancers who operate as sole traders or limited companies. The change in 2020 shifts the onus onto employers in relation to proving the contractor’s self-employed status. 

Who will be hit the most by the IR35 changes?

Many industries rely heavily on freelance workers. The trade off is simple – the more freelancers operating in a sector, the heavier the effect. In a document published in 2018, HMRC predicted that 90% of freelancers who fall within IR35 are not complying with the existing IR35 rules. It’s clear that from April 2020, private sector businesses will need to do more to comply with the legislation.

What are the critics saying?

The general view is that the reforms will increase burdens and costs on businesses during a time of uncertainty and change, whilst also having to comply with many other acts of legislation that are evolving in all areas. 

The fact that HMRC have lost a number of tax tribunal cases surrounding IR35 also illustrates the point that there is a possibility for different conclusions to be reached on the same facts and for tribunals to even take opposing views against HMRC. 

So, as we can see, the influences of IR35 are not quite as definitive as HMRC would like. 

How can a firm protect themselves? 

HMRC has a tool named CEST that determines whether an individual should be classed as employed or self-employed for tax purposes although concerns have been raised around the tool due to its rate of accuracy. HMRC says that the tool arrives to a conclusion 85% of the time, leaving 15% of cases pending further investigation. 

There has even been debate between HMRC and professionals around the validity of those percentages. This is further highlighted by a number of high profile cases involving television hosts and broadcastersthat have gone against HMRC. 

Here are a few extra tips to make sure your firm is compliant:

  • Develop a robust process for recording the use of freelancers centrally. 
  • Determine how those contracts are being carried out. 
  • Use CEST as a starting point. CEST can be very black and white, however, so it’s best to also develop a back-up process. 
  • Identify who IR35 will apply to and make sure they’re trained to comply. 
  • Monitor each freelancer’s status and re-run status determinations periodically (every 6 months is a good rule of thumb). 
  • Ensure that there is an appropriately drafted contract for each engagement which reflects the working arrangements and status determination. This will give the business the right to deduct PAYE and employer NICs from the fees if required. 
  • Decide which freelancers are critical to the business and for whom the business is prepared to pay extra due to IR35. 
  • Consider looking into business processes to determine if any changes are required. 

With over 1.4 million British freelancers working across all sectors, IR35 is set to affect many working relationships all over the country. Making sure your firm is compliant with the changing legislation is critical to avoiding any HMRC investigations.

For more expertise on changing legislation in the world of tax, don’t hesitate to get in contact. We’re here to help.

Making Tax Digital: are you onboard?

Wednesday, July 17th, 2019

A survey of small to medium-sized businesses, conducted by the Independent, has found that 11% of UK companies are unaware of new ‘making tax digital’ requirements.

As of 1st April, more than one million firms with annual taxable income over £85,000 are now required by law to submit VAT returns online. The same rules will then apply to trusts, local authorities, not-for-profits and public corporations from October. This is all part of HMRC’s new Making Tax Digital (MTD) initiative.

Of all the businesses leaders who responded to the survey, 46% of those who believed they were compliant with the new rules were found not to be, whilst 25% of compliant companies believed they were underprepared. 

HMRC have been quoted to be taking a “light touch” approach towards penalties during the first year of the law’s implementation. However, this is only where they believe businesses are doing their best to comply. 

Only 13% of respondents said that moving to MTD was more time consuming than they thought it would be. Showing that the government’s plans to slow the pace of mandation might be working. MTD will not be mandated for taxes other than VAT until at least April 2020. Further to this, the government announced in March that any new taxes or businesses will not have to worry about the legislation until 2020. 

Businesses also need to keep digital records from the start of their accounting period using MTD-compatible software. It’s best to do some research into which software may be best for you, as many providers offer extra benefits that might be of help. The government has even provided a handy search tool to help businesses find the right MTD-compatible software to suit their needs.

Rules for MTD VAT rules can be found here

For more information on the government’s MTD initiative and how to best prepare yourselves for the new era of digital taxation,  get in touch.