Planning ahead for dividend reforms
From 6 April 2016 the way in which dividends are taxed is changing significantly. The 10% dividend tax credit is abolished. That means that it will no longer be necessary to gross up the net dividend actually paid to determine the gross dividend charged to tax. Instead, the amount actually paid will be the amount that is treated as taxable income. While this makes life simpler, the downside is that there will be no tax credit to offset against the tax due on the dividend. To compensate for this, all taxpayers will receive a tax-free dividend allowance of £5,000. Dividends received in excess of this will be taxed at the new dividend rates of tax applying for 2016/17, which are as follows:
• 7.5% to the extent that the dividends fall in the basic rate band;
• 32.5% to the extent that the dividends fall in the higher rate band; and
• 38.1% to the extent that the dividends fall in the additional rate band.
Planning ahead Although the new rules do not apply until 2016/17, it is advisable to discuss your dividend extraction strategy before the end of the 2015/16 tax year to formulate the most efficient strategy depending on your personal circumstances.
Under the current rules, as long as total income does not exceed the rate at which higher rate tax becomes payable (£42,385 for 2015/16) there is no further tax to pay on dividends. If total income for 2015/16 is below that level, it may be worthwhile paying dividends before 6 April 2016 rather than afterwards to make the most of the opportunity to pay dividends tax free, where retained profits are sufficient to facilitate this.
For higher and additional rate taxpayers, the availability of the £5,000 dividend allowance will mean that from 2016/17 they are able to enjoy the first £5,000 of dividends they receive tax-free. However, higher and additional rate taxpayers who withdraw dividends in excess of that from a family company may benefit from paying some dividends before 6 April 2016 to take advantage of the lower dividend rates applying for 2015/16. Again, it is advisable to speak to us to determine what strategy works best for you.
New personal savings allowance
A new tax-free savings allowance will be available to basic and higher rate taxpayers from 6 April 2016. The new allowance will mean that no tax will be payable on savings income until the new savings allowance has been used up. For the 2016/17 tax year, the new savings allowance is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers. There is no savings allowance for additional rate taxpayers, who will be taxed, as now, on all of their savings income.
As a result of this change, banks and building societies will no longer deduct tax at source from interest paid to savers. Consequently, if you are a non-taxpayer, you will no longer need to elect to receive your bank and building society interest gross.
For those whose income comprises wholly or mainly savings income, the 0% savings starting rate remains available on the first £5,000 of taxable savings income. However, this band is reduced by any taxable non-savings income (such that those who have taxable non-savings income of at least £5,000 do not benefit from the 0% starting rate band). The combined effect of the personal allowance (£11,000 for 2016/17), the new savings allowance (£1,000 for basic rate taxpayers for 2016/17) and £5,000 starting rate band means that it is possible to receive up to £17,000 tax-free in savings income in 2016/17 (in addition to that received in tax-free wrappers such as ISAs).
In light of the changes to the taxation of savings, it may be beneficial to undertake a savings review with your tax or financial adviser.
All change for employers
There are lots of changes that will affect employers from the start of 2016/17. These include fundamental reforms to the taxation of expenses and benefits, the replacement of the dispensation regime with a new statutory exemption for qualifying expenses and the option to tax some benefits in kind through the payroll, rather than reporting them to HMRC after the end of the tax year.
Expenses and benefits reform From 6 April 2016 the rules for taxing non-cash benefits and expenses provided to employees are reformed. From that date, the same rules apply to all employees, regardless of whether or not they are earning at a rate of £8,500 a year. That means that a wide range of benefits, including popular benefits such as company cars and private medical insurance, will become taxable when provided to employees whose earnings rate (including the value of any benefits provided) is less than £8,500.
The abolition of the £8,500 threshold also means an end to form P9D. While employers will still need to complete P9Ds for 2015/16, from 2016/17 where benefits are not payrolled, they will need to be returned on form P11D.
Payrolling of benefits in kind From 6 April 2016 employers will have to option to deal with the tax on non-cash benefits and expenses via the payroll rather than reporting those benefits to HMRC after the year end on form P11D. The opportunity to payroll benefits in kind is available for most benefits in kind, except vouchers and credit cards, living accommodation and beneficial loans. Broadly, where a benefit is payrolled, the cash equivalent of the benefit is treated like extra pay and the associated tax deducted from the employee’s cash salary. Employers wishing to payroll some or all of the benefits that they provide to employees need to register with HMRC to do so before 6 April 2016. If the deadline is missed, it is will not be possible to payroll benefits in kind for 2016/17 as HMRC cannot process registrations in-year.
End of dispensation regime A dispensation effectively allows employers and employees to ignore benefits and expenses for tax purposes where the resulting liability is exactly matched by a deduction so that no tax is actually due. The dispensation process is abolished from 2016/17 and replaced with a statutory exemption for qualifying paid and reimbursed expenses. Where the conditions for the exemption are met, the exemption is given automatically and there is no need to report the benefit or expense to HMRC.
New exemption for trivial benefits The long-awaited exemption for trivial benefits looks set to be introduced from 6 April 2016. Employers will no longer need to report trivial benefits in kind costing £50 or less to HMRC. However an annual cap of £300 will apply to trivial benefits provided to directors of close companies and members of their families who are also employees.
Higher employment allowance The employment allowance which employers can set against the employer’s (secondary) Class 1 National Insurance that they must pay over to HMRC is being increased to £3,000 for 2016/17. The allowance is set at £2,000 for 2015/16. However, from 2016/17 it will no longer be available to one-man companies where the director is the sole employee.
Diesel supplement to stay until 2021 Where an employee is provided with a company car that is a diesel car, the appropriate percentage is subject to a 3% supplement as compared to a petrol car with the same CO2 emissions (subject to the cap at 37% of the list price). The diesel supplement was to have been abolished from 6 April 2016. It has been announced that this will not now happen and the supplement will be retained until 2021. You may wish to speak to us about what these changes will mean for you and your business.
Mandatory online filing of CIS returns
HM Revenue and Customs have announced that from 6 April 2016 it will no longer be possible to submit paper CIS returns. Therefore if you are not currently using the online system to make your monthly CIS submissions you will need to apply to use online services before this date.
Any returns submitted on paper after 6 April 2016 will be rejected by HMRC.
In addition, HMRC have announced that from 6 April 2017 you will no longer be able to verify subcontractors over the phone. This will also need to be done online.
If you are unable to make online submissions and would like us to do this on your behalf, please contact us.
RTI concessions to end from 6 April 2016
The government announced in the 2015 Autumn statement that the current temporary reporting relaxation will end as planned on 5 April 2016. The relaxation permitted employers who at 5 April 2014 employed no more than 9 employees to report their PAYE information for the tax month ‘on or before’ the last payday in the tax month instead of ‘on or before’ each payday.
If you are currently not providing us with all the details of payments before they are made (or if you are not submitting all payments to HMRC before they are made) you could be subject to a penalty from 6 April 2016.
Is it worth your company paying for private fuel?
Where fuel is provided for employees using a company car for private travel, a fuel benefit is charged based on the CO2 emissions of the car. The maximum tax payable in tax year ended 5 April 2016 is £3,271 for cars with emissions of £210g/km and above.
Even with fairly high private mileage (around 18,000 miles) any car with emissions over 150g/km will attract a tax charge that exceeds the likely cost of the fuel paid for. As private mileage falls the emissions must be even lower for the fuel cost to exceed the tax charged.
Therefore unless private mileage is very high, it is likely that it is not worthwhile for your company to pay for fuel for your private journeys.
Restriction of tax relief for travel expenses for IR35 workers
One of the controversial measures included in the draft Finance Bill 2016 was the proposed restriction of the deduction for travel and subsistence expenses incurred by certain workers within the IR35 regime. This proposed change was consulted on during summer 2015 and, if enacted, will significantly restrict the tax relief available for those affected.
The proposals will only apply if the IR35 rules apply to the engagement and there is supervision, direction and control (SDC) over the worker. The examples in the consultation document seem to suggest that if there is no expertise within the end user organisation, then there is likely to be limited SDC and the worker will be entitled to relief for travelling to the client’s premises.
Any tax debt arising from the deliberate misapplication of the rules is to be transferred ‘jointly and severally’ from the ‘intermediary company’ to its director(s). It is intended that these rules will be implemented where it can be shown that the ‘intermediary’ had knowingly failed to apply the rules correctly.
Please get in touch with us if these new rules are likely to have an impact on your business.
A number of companies will reach their staging date for auto-enrolment in 2016 and, if we have not already done so, we shall be contacting you this year to advise you of your responsibilities. While businesses with no employees other than directors are exempt from auto-enrolment, if you have any non-director employees you will have obligations to meet.
There are a few points to note:
- Auto-enrolment applies to all staff aged between 22 and state pension age earning over £10,000 a year.
- You may have responsibilities for other members of staff aged between 16 and 74.
- Even if you know that your staff do not want to join the company pension scheme, you MUST still have a scheme in place and enrol them. They are then able to opt out once enrolled.
You should give yourself plenty of time to consider which pension provider you will use. We are not able to advise you on the selection of a scheme, but can put you in touch with a financial advisor if you wish. Alternatively you will find information on providers on the Pensions Regulator website.
We are able to offer differing levels of administrative support, so you need to consider how much you would like to be responsible for when you reach your staging date.
New living wage
From April 2016 a new mandatory living wage will apply to workers aged 25 and above. The living wage will be set at £7.20 an hour. Workers aged over 21 and under 25 will continue to be subject to the National Minimum Wage, which is currently £6.70 per hour.
National insurance for apprentices
From 6 April 2016, a company will no longer pay employers’ national insurance on wages paid to apprentices under the age of 25. Employers may feel more inclined therefore to employ young apprentices in their businesses.
If you already employ apprentices under the age of 25 it may be worth contacting us before April to ensure that the employee has been identified on our records as an apprentice. We can then make sure that employer national insurance is not charged in error.
There are changes in store regarding directors of limited companies that are themselves limited companies. Although the precise changes are still not finalised, it is likely that from October 2016 restrictions will be introduced and we shall contact these clients that we know are affected at that point.
There has been much speculation concerning possible changes to the tax regime for pension contributions in the March 2016 Budget. It may be worthwhile discussing these with your independent financial adviser before then.
Harsher rules for landlords
A number of changes have been announced that will affect landlords and those purchasing second and subsequent residential properties.
Restricted relief for interest From 2017 measures are being phased in that will restrict the amount of tax relief that landlords will be able to claim in respect of finance costs, such as mortgage interest and interest on loans to buy furnishings and fixtures. For 2017/18 and later tax years, it will no longer be possible to obtain tax relief on all finance costs at higher and additional rates of tax. Relief will be restricted progressively such that from 2020/21 onwards all finance costs will be deductible only as a basic rate tax reduction. Other things being equal this will result in more tax being paid on rental profits by landlords who pay tax at the higher or additional rates.
End of the wear and tear allowance Landlords who let furnished residential accommodation are currently able to claim a deduction to cover wear and tear. This allowance, set at 10% of net rents, is available regardless of whether any items are replaced during the tax year. However, 2015/16 is the last year for which the allowance will be available. From 2016/17 (income tax) or 1 April 2016 (corporation tax) landlords will be able to claim a deduction for the actual cost of replacing furnishings under a new replacement furniture relief. Unlike the wear and tear allowance, the new relief will also be available to landlords who let properties unfurnished (but will not be available in respect of furnished holiday lettings).
Speak to your adviser about what the change in the method of giving relief for the cost of replacing furnishings means for you and the possible tax planning opportunities that arise as a result.
Stamp duty land tax (SDLT) supplement From 1 April 2016 a higher rate of SDLT will be charged on purchases of additional residential properties costing £40,000 or more. The higher rate will be 3% higher than the rates currently applying to residential purchases. The supplement could add a considerable amount to the cost of an investment property, such as a buy-to-let, and where possible, it is advisable to ensure that purchases complete prior to 1 April 2016. A delay of a few days could be very costly.
Inheritance tax on dwellings
In the Summer Budget it was announced that you would be able to pass on a home of up to £1m with no inheritance tax to pay.
The new limit works by adding a total of £175,000 to the existing £325,000 inheritance tax allowance, which only applies to your main residence. This additional amount begins to be added in April 2017 and the full amount will not come into effect until 2020. The relief is also reduced where the estate has a total asset value of over £2m.
The £1m is achieved only by married couples and those in civil partnerships, where the remaining limit is passed upon the death of the first spouse to their partner effectively doubling their inheritance tax limit.
It should also be noted that the additional limit will only apply where the main residence is passed to a ‘direct descendant’ (children, step children, grandchildren). Where a property is left to a sibling or niece or nephew, for example, the standard £325,000 limit (or £650,000 for married couples/those in civil partnerships) would apply.
If you would like to discuss how this change to inheritance tax might affect your tax planning please contact us.
The Government are to invest £1.3bn in creating an advanced digital tax administration system. As part of that process, by 2020 most businesses, self-employed people and landlords will be required to keep track of their tax affairs digitally and to update HMRC at least quarterly via their digital account. The intention is that all small businesses and individuals will have access to digital tax accounts by 2016/17.
The Government plans to consign the personal tax return to the history books. As part of that process, taxpayers whose affairs are simple and in respect of whom HMRC hold the information they need to calculate the taxpayer’s liability will be sent a calculation, which is also a bill telling them what they have to pay. The calculation will replace the need to complete a self-assessment tax return.
Where an employer provides a company car, but the employee pays for the fuel, the employer may pay a mileage allowance for business journeys. HMRC accepts that payments not exceeding the ‘advisory fuel rates’ are reimbursements of expenses, not subject to income tax or Class 1 national insurance contributions.
These rates may be used to reclaim input VAT in respect of fuel used for business journeys (remembering that VAT receipts to cover the amount claimed are required). These rates are scheduled to change quarterly and the current rates can be found at: https://www.gov.uk/government/publications/advisory-fuel-rates.