Lift off for the 2018/19 tax year
The new income tax rates and allowances came into effect as usual on 6th April, the start of the 2018/19 tax year.
Many tax allowances have increased. For example, the personal allowance has risen from £11,500 to £11,850. The capital gains tax annual exempt amount is now £11,700, up from £11,300 in 2017/18. However, the dividend allowance has been reduced to £2,000, down from £5,000, and this will especially hit director-shareholders who draw most of their remuneration as dividends.
Income tax differences
For England, Wales and Northern Ireland, the higher rate income tax threshold in 2018/19 is £46,350 (£45,000 in 2017/18). Scottish income tax payers have a different structure, with new starter (19%) and intermediate (21%) rates, along with a 41% higher rate tax on income from £43,430 to £150,000. The top rate for Scottish income over £150,000 is now 46%. Savings and dividend income is taxed in the same way as in the rest of the UK.
Directors and employees who drive company cars will also pay more tax. Most fuel benefit rates have increased by 2%, and the rate for electric cars and cars with CO2 emissions up to 50g/km have increased to 13% from 9%. The diesel supplement is now 4% for cars that do not meet the Real Driving Emissions Step 2 (RDE2) standards.
Hybrid cars or diesels that meet RDE2 don’t incur the diesel supplement. Employees who recharge their own electric or hybrid car at work will also no longer be taxed on the employer-provided electricity.
Inheritance tax and pensions
The inheritance tax residence nil rate band has risen to £125,000, and will rise to £175,000 over the next two years. The inheritance tax residence nil rate band has risen to £125,000, and will rise to £175,000 over the next two years. This allowance covers property left to direct descendants, although it is tapered away for estates worth more than £2 million. The pension lifetime allowance has also been indexed to £1.03 million.
May deadline for data protection
Major changes in the rules governing how businesses manage personal data take effect this May. It is essential you are familiar with the new requirements.
The EU General Data Protection Regulation (GDPR) comes into effect on 25 May 2018 and will replace existing data protection rules. Although this is EU law, the government has said it will remain in force after Brexit.
The GDPR gives individuals – including customers and employees – greater control of their personal data held by businesses and other organisations. Businesses will need explicit consent to hold, and share, a person’s data in electronic format. A new right to data portability will allow individuals to move, copy or transfer personal data from one IT environment to another. Your business must therefore be able to identify all of an individual’s data, and make it available in a structured, accessible form, such as CSV files.
Subject to various conditions, individuals will also have the right to: be informed how their data will be used; have their data corrected or deleted; restrict or object to processing of their data; and object to automated decision making.
By 25 May you need to know what data you are holding and why. In particular organisations must:
- Ensure that employees are fully informed about the uses being made of their personal data, and that HR staff have training in the new rules.
- Delete all information about employees and customers they no longer need.
- Only collect and process personal data they legitimately need for identified purposes.
- Update their procedures for managing access requests by data subject.
Don’t delay: the penalty for getting it wrong after 25 May could be up to €20 million or 4% of worldwide turnover – whichever is the higher.
A round-up of payroll
If you are not using HM Revenue & Customs’ (HMRC) payrolling benefits in kind service for 2016/17, you need to register online before 5 April 2017 if you want to use it for 2017/18.
It is advisable to register as soon as possible to avoid being sent multiple tax codes for employees. You will not be able to register after the start of the tax year – so if you miss the deadline you will have to wait for another year. Ensure that your payroll software can cope with payrolling before registering.
You can choose which benefits to payroll, but once the tax year has started, you will have to continue to payroll those benefits for the whole of the year – unless you stop providing them. HMRC will amend the tax codes for those employees receiving payrolled benefits. Any employee who does not want their benefits to be payrolled can be excluded.
With payrolling, taxable benefits are put through your payroll on a current basis in the same way as cash earnings which can be advantageous. Your employees pay the correct amount of tax when they receive the benefit, so self-assessment is more straightforward for those who need to complete a tax return. There is less administration for you because there is no need to report payrolled benefits on form P11D. Payrolling company car benefits will avoid the need to complete P46 (Car) forms.
Three-day grace period – HMRC can charge you penalties on a monthly basis if your real time PAYE submissions are late. There is no penalty for the first month in a tax year for which you make a late submission, but after that there may be a monthly late filing penalty depending on how many employees you have. This ranges from £100, for one to nine employees, to £400 if you have 250 or more employees.
HMRC has until now given you an extra three days to make submissions before applying a penalty. However, this will end on 5 April 2017. Although HMRC has been reviewing its approach to charging penalties, you will need to take care that you file next year’s returns on time.
If you do receive a penalty notice, remember that you can appeal if there is a reasonable excuse for late filing, for example an IT problem, ill health, a natural disaster or you no longer have any employees or did not pay any employees. Of course if you do not pay any employees, you are still expected to report this to HMRC.
Automatic enrolment penalties – The Pensions Regulator has reported a huge rise in the number of fines for not complying with automatic enrolment requirements. That is perhaps not surprising given that it is now the turn of smaller employers. Most employers with fewer than 50 employees have to automatically enrol them by 1 April 2017.
Penalties can be substantial, with even the very smallest of employers facing a daily penalty of £50 if they ignore a 28-day warning notice. If you have between 5 and 49 employees, the daily penalty is £500. Auto-enrolment is not something you can leave to the last minute. There are some key dates for completing various tasks including choosing a pension scheme, establishing who you will have to enrol, writing to employees individually to explain how automatic enrolment applies to them and declaring your compliance.
Illness or being short-staffed are not accepted as reasonable excuses for non-compliance.
Limits on pension contributions
Higher earners are now subject to tight limits on how much they can pay into tax-relieved pension schemes and it is essential to take care to avoid a substantial extra tax charge. With the tax year coming to an end, this is a good time to review your pension planning.
The allowance effectively limits pension contributions. The allowance is normally £40,000 if your ‘adjusted income’ is £150,000 or less, but is tapered down – by £1 for each £2 of income – to £10,000 for income of £210,000 or more. Adjusted income consists of all your taxable income before personal allowances, plus the value of certain pension contributions during the tax year, including employer contributions.
If the input into your pension schemes is greater than the annual allowance, you may have to pay tax at your marginal rate on the excess. You also will not receive tax relief on any contributions you make over the allowance. Tapering the annual allowance started in 2016/17. Any unused allowance from earlier years can normally be carried forward for up to three years. You can only use annual allowance from earlier years after you have used the current year’s annual allowance. Another tax charge – at 25% or 55% – may arise if the value of your pension benefits is greater than the lifetime allowance, now £1 million, when you draw benefits. You need to plan ahead now to avoid it.
Tax allowances: use them or lose them
With just a few months left until the end of the tax year, consider making use of the following before 5 April 2017 comes around.
Pension contributions: Making an additional pension contribution will be particularly beneficial if you have a high marginal income tax rate for 2016/17. Maybe you have income taxed at 40% or 45%, although the tax saving can be even higher if a contribution allows you to retain your personal allowance or child benefit.
ISAs: With low interest rates, cash ISAs may not be particularly attractive right now. However, for 2016/17, an innovative ISA is available, allowing you to shelter £15,240 of peer-to-peer lending. Stocks and shares ISAs could be an option for investors who can save capital gains tax (CGT) at the higher 20% rate. And don’t forget the £4,080 that you can put into a junior ISA for each child or grandchild.
EIS and SEIS: Although high-risk investments, this risk is mitigated if you can benefit fully from the available tax reliefs. You could also invest in a professionally managed portfolio rather than in individual companies. With the SEIS, the combined income tax and capital gains tax reliefs can save tax of up to 64%.
Venture capital trusts (VCTs): You can obtain 30% income tax relief by investing in VCTs. However, this is a longer-term investment and like EIS is quite high-risk – although the 20 to 80 different companies that a VCT typically invests in should give a good level of diversification.
CGT exempt amount: Aim to use your exemption of £11,100 by making disposals. If you have already made gains of more than £11,100 this tax year, dispose of investments standing at a loss that can be set against the gains. It might also be beneficial to dispose of further investments if gains will only be taxed at the basic rate of 10%.
IHT exemptions: Gifts up to £3,000 a year are exempt. If you have not used the exemption for 2015/16, you can make IHT-free gifts of up to £6,000 before 6 April 2017. Small gifts up to £250 per person in each tax year are also exempt from IHT.
Remember that we are here to help, so please get in touch.
Making tax digital – details still uncertain
Most businesses, self-employed people and landlords will soon have to manage their tax affairs digitally and update HM Revenue & Customs (HMRC) at least quarterly.
The radical reform will spell an end to the annual tax return by 2020 and the government is promoting it as a simplification of the tax system. But it has caused some confusion and concern among those affected.
Many of the details of how Making Tax Digital (MTD) will work have yet to be decided and have been subject to consultation. So far HMRC has announced two exemptions from MTD and these are: all unincorporated businesses and landlords with turnover under £10,000, and anyone who is unable to use digital tools. MTD for income tax and national insurance will start in April 2018.
However, to give smaller businesses more time to prepare, the government has postponed its introduction until 2019 for small unincorporated businesses with income between £10,000 and an upper threshold to be determined.
One issue still subject to consultation is the continuation of ‘three-line accounting’, whereby businesses below the VAT registration threshold currently only have to report income, total expenses and profit. The facility may be removed or restricted. However, there may be an extension of the cash basis for income tax. HMRC has no plans to offer its own free software, but wants software developers to provide free and low cost software for businesses with the most straightforward affairs. HMRC has confirmed that quarterly updates need only be summary data. Partnerships may benefit because quarterly updates by the partnership could feed directly into each partner’s digital tax account.
MTD will also enable businesses and landlords to make voluntary tax payments towards their liabilities. Voluntary ‘pay-as-you-go’ (PAYG) sums would sit as credits on a taxpayer’s digital tax account and be allocated against tax, including VAT, liabilities as they become due.
For taxpayers who do not have business or letting income, MTD may remove the need to complete a self-assessment tax return. HMRC hopes to receive information directly from third parties about a greater range of income types, such as dividends.
Much of the detail remains uncertain, but as all gradually becomes clear we will be here to help you understand and comply with the new obligations.
Benefits of charitable giving
Saving tax may not be the main concern when giving to charity, but you might as well benefit if you can.
Any donations should be made under a gift aid declaration. Although there is no tax relief as such for basic rate taxpayers, a donation of £100 will be worth £125 to the charity. Higher and additional rate taxpayers save tax, so for an additional rate taxpayer, the net cost of a £100 gift is £55. If you are in the position that your personal allowance is tapered away (income between £100,000 and £122,000), then the net cost drops to just £40. Donations can also help preserve entitlement to tax credits and limit the impact of the child benefit tax charge.
Consider which family member will benefit the most from making donations – it will not necessarily be the highest earner.
Gifts of certain land, property and shares will save you both income tax and capital gains tax (CGT). The value of the donation is deducted from taxable income, saving tax at your marginal rate – which could be as high as 60%. There is also relief from CGT, which could be as high as 28% for residential property. Obviously, the amount of relief depends on how much the asset has appreciated in value. Sales at less than market value also qualify for relief, so you can realise some money as well as save tax.
Inheritance tax (IHT)
Any donations you make in your will reduce the IHT payable on your estate. So if you leave more than 10% of your estate to charity, then the rate of IHT on the remainder is reduced from 40% to 36%. The actual amount required might be much lower than you think. For example, for an estate valued at £800,000 with 50% left to a spouse, donations of £7,500 are required.
You can avoid the need to continually revise your will with a clause worded so that a specific legacy to charity will always meet the 10% test.
Be warned that the detailed rules can be quite complicated, so please contact us for advice.
Capital gains tax: reliefs and timing
It’s important to make the most of the various capital gains tax (CGT) reliefs available.
Principal private residence relief (PRR) exempts one home from CGT provided it is used as your main residence. There are various planning possibilities should you own additional properties. If you live in two (or more) properties, then an election can be made as to which one is treated as your main residence. If PRR is available, then the final 18 months of ownership are always exempt.
The decision of which property to elect as your main residence will depend on the amounts of potential gain, lengths of ownership and disposal plans. However, you only have two years after acquiring an additional residence to make the election. If a let property qualifies at some point for PRR, then a further letting relief (of up to £40,000) is available. It might therefore be worthwhile moving into a let property before its disposal.
Disposal of a business
A disposal of a business qualifying for entrepreneurs’ relief benefits from a 10% tax rate. There is a general one-year qualifying condition, so it might be worth delaying a disposal if not currently met. However, where a sole trade or partnership is being disposed of, it is only the business itself which must be run for one year. Although the whole business need not be disposed of, it is necessary to dispose of a clearly identifiable part. If a shareholding is disposed of, the company must be a trading company for the preceding year. If this test is not met because surplus funds have been invested in property or other investments, it might be possible to rectify the situation before disposal.
Replacing business assets
Gains on the disposal of certain business assets can be deferred (rolled over) if new qualifying assets are bought. This must be done during the four-year period running from one year before the disposal to three years after. The most common qualifying assets are land and buildings, fixed plant and machinery and goodwill (disposals by individuals only). So plan carefully – it might be worthwhile bringing forward a disposal to match an acquisition within the previous year if no more purchases are planned.
Be warned that CGT is far more complicated than this basic outline, so please contact us for more detailed advice.
Changes to entrepreneurs’ relief
Entrepreneurs’ relief is important for all business owners, because the capital gains tax charge on qualifying assets is only 10%. But directors could be hit by a new change.
There is an overall lifetime limit of £10 million on the amount of gains on which you can claim the relief, and you can claim as often as you like up to this level. ‘Disposal’ could be a sale or even the liquidation of a personal company.
Several types of assets can qualify for entrepreneurs’ relief. These include all or part of a business owned by a sole trader or business partner, including the business’s assets after it closed, and shares (or securities) in a company where the person making the disposal has at least 5% of the shares and voting rights. The business or company being disposed of must be trading to qualify for the relief.
An important change made this April to entrepreneurs’ relief hit directors who wind up a solvent company. They can no longer claim entrepreneurs’ relief if they continue to work in the same trade as the company in the following two years after the liquidation. A record number of solvent companies were wound up in March in anticipation of this change.
The new rule will affect situations where a shareholding director sells the goodwill and other business assets out of their company and then puts the company into liquidation and takes the proceeds as a capital gain taxed at just 10%. In such circumstances, the buyer of the underlying business might well expect the outgoing owner to continue working as a consultant for a changeover period. This could now present a problem and you should be aware of this possibility when negotiating a deal. It is essential to get advice on this matter.
There can also be complications where a company owns a share in a joint venture with another company, especially following changes in the Finance Bill.
Sole traders or business partners must have owned the business for at least one year before the date on which they sell it. And if an owner is closing their business, they must have owned it for at least a year before the closure. The business assets must then be disposed of within three years to qualify for relief.
For a sale of shares or securities, the seller must have been an employee, a director or some other office holder of the company being sold or one in the same group.
Dividends v salary for director-shareholders
The new dividend tax rules have reduced the benefit of paying dividends instead of salary for many shareholder-directors, but dividends still have advantages.
Since 6 April 2016, dividends no longer come with a 10% tax credit. Instead, individuals receive a £5,000 tax-free dividend allowance. Further dividends are taxed at 7.5% basic rate, 32.5% in the higher rate band and 38.1% in the additional rate band. These rates are lower than income tax rates on earnings, but that’s not the whole story. Unlike dividends, salary payments reduce the company’s corporation tax, but are liable for national insurance contributions (NICs). Comparison between salary and dividends is therefore not straightforward.
Considering the company and individual together, and supposing £40,000 of company profit is available to fund a bonus or dividend on top of a £50,000 basic salary, a bonus of £35,149 (after employer’s NICs) would produce a net salary of £20,386, whereas a dividend of £32,000 (after 20% corporation tax) would leave a net dividend of £23,225.
Some owner-directors take an annual salary of £8,060 to avoid employee’s NICs, and draw the rest of their income as dividends. After the first £5,000 tax free allowance, they will now pay 7.5% on the dividends that fall within the basic rate band, compared with no tax previously because the dividend tax credit covered the basic rate tax liability. The higher rate for dividends remains at 32.5%, but there is now no tax credit to reduce it. In most cases, there is still a saving compared with salary, although it is marginal at the additional rate of tax.
It will generally be worthwhile to pay dividends up to £5,000. Spreading shares among family members will add to the benefit. Remember, however, that companies affected by the personal services company rules (IR35) will be limited in what dividends they can pay.
Another way of saving tax is to leave profits in the company. Retained profits are subject only to 20% corporation tax and provide the company with working capital.
One of the most efficient ways of benefiting from company profits is to make pension contributions as they are usually fully deductible in calculating the profits subject to corporation tax.
The best option in each case depends on several factors, so please come to us for advice tailored to your needs.
Incorporation for buy-to-let: pros and cons
Tax changes announced during 2015 will increase costs for many buy-to-let landlords and may make some lettings unprofitable. But there may be ways of mitigating some of these costs.
The summer 2015 Budget ushered in the removal of higher and additional rate income tax relief on the costs of buying residential property for letting, a change that will be phased in over four years starting in 2017/18. Owners of commercial property and furnished holiday lettings will still be able to get full tax relief for interest, so one way of avoiding the restriction will be to diversify into these types of properties.
Another possibility is to hold properties in a company. Companies are not affected by the restriction on interest relief and moreover by 2020/21 the corporation tax rate will have fallen to 18%. Against this benefit must be set some costs. Further tax will arise if income is drawn from the company, though from April 2016 every individual will have a tax-free dividend allowance of £5,000. Spreading ownership of the company’s shares among family members, especially those who do not pay more than basic rate tax, will reduce the tax on distributions. The 18% corporation tax rate will normally also apply to a company’s profits on selling properties. Furthermore, companies benefit from an indexation allowance which reduces the chargeable gain. However an individual who withdraws the profits will have to pay further tax, so the low corporation tax rate is most valuable if profits are to be reinvested within the company.
A major downside to incorporation is the capital gains tax and stamp duty land tax (SDLT) on the transfer of properties to a company because these taxes will be based on the market value of the properties. Therefore the corporate structure is most useful for new investment in residential property.
Holding property in a company will not, however, avoid the 3% added to SDLT rates on purchases of buy-tolet property, though the government is considering some exemptions for both companies and individuals.
If you are thinking of investing in property do consult us first because there are many factors to consider.
Owner/managed companies hit for six
The new basis of taxing dividends, which will come in from 6 April 2016, is particularly targeted at company owner/managers who draw profits as dividends rather than as salary in order to avoid paying national insurance contributions (NICs).
The existing 10% tax credit is to be replaced by a tax-free dividend allowance of £5,000 for basic, higher and additional rate taxpayers. Once the allowance is exceeded, dividends will be taxed at:
- 7.5% within the basic rate band.
- 32.5% within the higher rate band.
- 38.1% within the additional rate band.
The overall effect of these changes will be to increase the rate of tax on dividends above the tax-free allowance of 7.5% compared with current rates. And the allowance is not quite as generous as it could be, because it counts towards the basic and higher rate bands. It is not really a tax allowance in the usual meaning of the phrase.
Owner/managers typically draw a small amount of director’s remuneration to preserve their entitlement to the state pension, and take the remainder of their drawings as dividends. Most will see a substantial increase to their tax bills from 2016/17 compared with this year. For example, take a company with profits of £50,000, of which the owner/manager draws £8,000 as remuneration and a further £33,500 as dividends. Using estimated 2016/17 rates, the overall tax and NICs will go up from £8,900 in the current year to £10,312, an increase of £1,412. The extra tax cost gets even worse as the level of dividends increases, and the problem is doubled where spouses or civil partners run a company together.
Despite the changes, the dividend route will continue to be far more tax efficient than taking director’s remuneration. The big question is, however, whether incorporation will still be worthwhile. Using estimated 2016/17 NIC rates, the total tax and NICs will be £12,632 for a self-employed person with profits of £50,000. So incorporation can still have a tax advantage, and the saving would be greater if some profits were retained. Another benefit of incorporation is that even if profits fluctuate, the level of drawings can be kept constant – maybe within the basic rate band. So, incorporated businesses should probably remain as they are, at least for now. The decision is no longer so clear cut for unincorporated businesses that might be thinking of incorporating – especially when the simplicity and cost savings of being unincorporated are taken into account. And of course dividend tax rates could be increased in the future. You might want to preempt the tax increases by taking dividends before 6 April 2016. This is a new and complex area, so please get in touch if you need advice.
Mixing social media with business
What your staff say about your business on social media can affect its reputation. But what can you do if disaffected employees post derogatory comments on personal Facebook pages or Twitter accounts in their own time?
The Employment Appeal Tribunal (EAT) decided recently that an employee who posted negative and abusive comments on a social media site was fairly dismissed. But the case highlighted the challenges employers face where employees’ postings – often made with little thought – may instantly receive wide public exposure.
In the recent case of British Waterways Board (BW) v Smith, the employee, Mr Smith, had made offensive comments about colleagues on his personal Facebook page. He also indicated that he had drunk alcohol during a week he was on standby, which was not allowed, although he later denied he had actually done so. BW had a social media policy that expressly forbade “any action on the internet which might embarrass or discredit BW”. The disciplinary hearing found that the remarks could have undermined the confidence that other employees and the public had in BW, and that Mr Smith’s breach of the social media policy amounted to gross misconduct, meriting dismissal.
Mr Smith claimed he had been unfairly dismissed. The EAT clarified that Facebook postings by employees made on personal computers could result in disciplinary action if they mentioned their employer or their work. The decision confirms that the normal legal principles of unfair dismissal apply to cases involving social media, and whether a particular dismissal is fair will depend on the facts. Relevant considerations include the nature and seriousness of the alleged misuse. But the most important factor will be whether the employer had a social media policy that their staff were aware of. Such a policy should set out clear guidelines to employees on what they can and cannot say about the organisation and be cross-referenced to its bullying and harassment policy. It could helpfully include examples of unacceptable conduct and the penalties that might be imposed.
Employers should review their policy frequently as social media evolve. Please contact us for further advice.
Pensions freedom: go steady
The new pensions freedom rules are very useful for people in retirement – providing lots more flexibility – but there are dangers if you draw funds without thinking through the possible tax consequences.
Since 6 April 2015, it has been possible for you to draw a large lump sum form your pension scheme to spend on whatever you like, providing you are aged 55 or over. Pensions freedom could allow you to pay off your debts, go on a world cruise or carry out home improvements, or you may wish to help your children or grandchildren through school or university or fund a deposit for their first home.
But beware, you might receive a lot less from your pension than you expect. Many people think all pension lump sum payments are tax free. Some are, but many are not and you may find the tax deduction is far bigger than you think.
There are two ways in which you can flexibly draw from your pension fund. Flexi-access drawdown lets you take a tax-free lump sum, usually 25% of your fund, and leave the rest invested. Withdrawals from the remaining 75% are then taxable in full. If instead payments are made under the uncrystallised funds pension lump sum (UFPLS) rules, each payment consists of 25% tax-free cash with the rest taxable. There are other differences between flexi-access drawdown and UFPLS, notably that UFPLS is likely eventually to result in a greater amount of tax-free cash. When a taxable payment is made, the tax is calculated under pay as you earn (PAYE) using an emergency ‘month 1’ tax code. That means only one twelfth of the personal allowance and each tax band is set against the payment, resulting in more of it being taxable at higher rates. For example, if you take a payment of £40,000 under UFPLS, £30,000 will be taxable and tax of £11,947 will be deducted. But if that payment is your only income in 2015/16, your correct tax liability would be £3,880. To reclaim the overpayment of £8,067, you have to go to HM Revenue & Customs, leaving you out of pocket while it is processed.
If you are planning to make pension withdrawals, it is essential to take professional advice both on the choice of arrangement and on your potential immediate and final tax liabilities.