USE YOUR ALLOWANCES FOR 2019-20
PERSONAL ALLOWANCE, MARRIAGE ALLOWANCE AND MARRIED COUPLE’S ALLOWANCE
The 2019/20 tax year comes to an end on 5 April 2020. If you have not used up your personal allowances by that date, you will lose them – they cannot be carried forward.
For 2019/20 the personal allowance is set at £12,500. It is reduced by £1 for every £2 by which adjusted net income exceeds £100,000, such that individuals whose income exceeds £125,000 will not receive a personal allowance for 2019/20. Where possible, steps can be taken to preserve the personal allowance, such as making pension contributions or charitable donations to take income to below the abatement limit. Consideration can also be given to deferring income to 2020/21 or transferring income or income-earning assets to a spouse or civil partner to preserve the allowance.
Where the personal allowance has not been fully utilised, consider whether it is possible to increase income for 2019/20; in a family company scenario this could be achieved by paying a bonus or a dividend, for example, to mop up unused allowances.
If you, or your spouse or civil partner, are unable to use their full allowance for 2019/20, consider claiming the marriage allowance. This allows one spouse or civil partner to transfer 10% of their personal allowance – equivalent to £1,250 for 2019/20 – to their partner, as long as the recipient does not pay tax at the higher or additional rate. Where the marriage allowance is claimed, the partner making the transfer has a reduced personal allowance of £11,250 for 2019/20, whereas the recipient has a higher personal allowance of £13,750. Claiming the marriage allowance will save a couple £250 in tax for 2019/20.
The married couple’s allowance is set at £8,915 for 2019/20. It is available where at least one spouse or civil partner was born before 6 April 1935. However, the allowance is reduced by £1 for every £2 of income over £29,600 until the allowance is reduced to the minimum amount of £3,450. The married couple’s allowance reduces the tax payable by 10% of the allowance, meaning it is worth between £345 and £891 for 2019/20. If one partner’s income exceeds the income limit, couples should look to equalise income where possible to minimise the reduction in the allowance.
Speak to us to discuss what action you can take to ensure that your personal allowances for 2019/20 are not wasted.
The dividend allowance is set at £2,000 for 2019/20. The beauty of the dividend allowance is that is it available to all taxpayers including those paying tax at the higher and additional rates. The dividend allowance is actually a nil rate band; dividends falling within the band are taxed at a zero rate. Dividends are taxed as the top slice of income.
In a family company scenario, dividends can be paid to family members to utilise any unused dividend allowances. This is a useful way to extract profits from the company in a tax efficient manner. However, remember that dividends can only be paid out of retained profits, so you must have sufficient retained profits to cover the dividends that you wish to pay out. Also, dividends must be paid in proportion to shareholdings; however, having an alphabet share structure overcomes this limitation providing the flexibility to tailor dividend payments depending on the individual’s circumstances.
Speak to us to discuss your dividend strategy to ensure dividend allowances for 2019/20 are not wasted.
A savings allowance is available to basic and higher rate taxpayers only – there is no savings allowance for additional rate taxpayers. The allowance is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers. It is available in addition to the savings zero rate. Interest earned on tax-free savings, such as ISAs, does not count towards the limit.
Couples should look at how their savings are held to ensure that allowances are not wasted. For example, if one partner is an additional rate taxpayer and the other is a basic rate taxpayer, ensuring any savings income accrues to the partner paying tax at the basic rate will ensure that the first £1,000 is tax-free rather than taxable at the additional rate.
CAPITAL GAINS TAX ANNUAL EXEMPT AMOUNT
For capital gains tax purposes, individuals are allowed to realise net gains (after deducting any capital losses) of £12,000 for 2019/20 tax-free. Where capital disposals are on the cards, if the annual exempt amount remains available, consider making the disposal prior to 6 April 2020 to utilise the 2019/20 annual exempt amount, paving the way to realise gains free of capital gains tax in 2020/21.
Spouses and civil partners can take advantage of the no gain/no loss rules to transfer assets between them prior to sale to maximise available annual exempt amounts.
The annual exempt amount is lost if it is not used in the tax year – it cannot be carried forward.
It is important to be aware that property sales are treated as occurring on the date of contract exchange, not completion.
Speak to us to discuss how to minimise your capital gains tax bill by making best use of your annual exempt amount.
PENSION ANNUAL ALLOWANCE
Individuals are able to make tax-relieved pension contributions up to the higher of 100% of earnings and £3,600, subject to having sufficient annual allowance available. The annual allowance is set at £40,000 for 2019/20. Dividends do not count as earnings.
Where the allowance is not fully utilised, it can be carried forward for up to three years. Thus, for 2019/20, the available annual allowance is that for 2019/20 plus any unused allowances for 2016/17, 2017/18 and 2018/19. However, the current year’s allowance must be used fully before using up brought forward allowances, with earlier years being used first. Any brought forward allowances from 2016/17 will be lost if not used by 5 April 2020.
The pension annual allowance is reduced where both threshold income (broadly income excluding pension contributions) is more than £110,000 and adjusted net income (broadly income including pension contributions) is more than £150,000. The allowance is reduced by £1 for every £2 by which adjusted net income exceeds £150,000 until the minimum annual allowance of £10,000 is reached. This will be the case where adjusted net income is more than £210,000 (and threshold income is more than £110,000).
A reduced annual allowance is available where a money purchase scheme has been flexibly accessed on or after the age of 55. The allowance – the money purchase annual allowance (MPAA) – is set at £4,000 for 2019/20.
Speak to us about whether it is worthwhile making pension contributions prior to 6 April 2020 to minimise your tax liability, although advice from an independent financial adviser should also be taken on the merits of pension investments.
All individuals have an annual gift allowance of £3,000 a year for inheritance tax purposes, which allows them to make gifts of up to £3,000 a year without them being added to the value of their estate for inheritance tax purposes. The allowance can be carried forward to the following tax year if it has not been used. Thus, if you have not yet used your allowance for 2018/19 and 2019/20 you can make £6,000 of gifts IHT-free by 5 April 2020.
Speak to us to ascertain how you can use the annual allowance and other exemptions to make gifts free of inheritance tax.
EFFICIENT PROFIT EXTRACTION FOR 2019/20
As the end of the 2019/20 tax year approaches, now is the time to review your profit extraction strategy for 2019/20 to ensure that it is tax-efficient – and to pay additional bonuses or dividends if necessary.
Where the employment allowance is not available, it is generally tax efficient to pay a salary equal to £8,632 and to take any additional profits as dividends, assuming that the company has sufficient retained profits available. Where the employment allowance is available, it is tax efficient to take a salary equal to the personal allowance of £12,500 (assuming that this is not used elsewhere) before taking further profits as dividends.
Remember, all taxpayers are entitled to a dividend allowance and you can take advantage of this to pay dividends to family members who are shareholders. The dividend allowance is set at £2,000 for 2019/20.
Speak to us to review your profit extraction strategy for 2019/20 before the end of the tax year.
REDUCTION IN FINAL PERIOD EXEMPTION
From 6 April 2020, the final period exemption, which shelters the final period of ownership from capital gains tax where a property has at some point been the owner’s only or main residence, is reduced from 18 months to 9 months. However, it will remain at 36 months where the owner is disabled or goes into care.
If you are planning to sell a property which has been your only or main residence for some but not all of the period for which you have owned it, speak to us about the benefits of selling before 6 April 2020 to maximise the final period exemption.
CURTAILMENT OF LETTINGS RELIEF
Lettings relief is a valuable relief which is available to landlords where they sell a property which has been let out and which has also been the landlord’s only or main residence at some point in the period of ownership.
In its current form, lettings relief will shelter gains of up to £40,000. However, it is to be curtailed significantly from 6 April 2020, and from that date it will only be available where the landlord shares occupancy with the tenant.
If you are thinking of selling a property which has been your main residence at some point and which has been let out, speak to us about the benefits of selling prior to 6 April 2020 to benefit from lettings relief in its current form and also from the 18-month final period exemption.
CAPITAL GAINS ON RESIDENTIAL PROPERTY – CHANGES FROM 6 APRIL 2020
From 6 April 2020, where a taxpayer makes a capital gain on the sale of a residential property (such as an investment property or a second home), they will need to notify HMRC of the sale on a new return within 30 days of completion. They will also need to make a payment on account of the capital gains tax due. This will bring forward the payment date considerably – currently it is due by 31 January after the end of the tax year in which the gain was realised.
If you are planning to sell a residential property which is not fully covered by private residence relief, speak to us to discuss what these changes will mean for you.
PLAN AHEAD FOR CHANGES TO OFF-PAYROLL WORKING RULES
From 6 April 2020, the off-payroll working rules as they currently apply where services are provided through an intermediary to a public sector body are to be extended to the private sector. From that date, private sector organisations which are medium-sized or large and which engage workers who provide their services through an intermediary, such as a personal service company, will need to carry out a status determination. If, ignoring the intermediary, the worker would be an employee of the organisation, the off-payroll working rules apply and the organisation (or fee-payer if different) must deduct tax and National Insurance from payments made to the worker’s personal service company. The organisation must also pay employer’s National Insurance. Where these rules apply, the worker’s intermediary will no longer need to work out the deemed payment under the IR35 rules – instead the worker will effectively be ‘on-payroll’.
The rules do not apply where the end client is a small private sector organisation. As now, the worker must determine whether IR35 applies and work out the deemed payment and pay tax and National Insurance if it does.
Speak to us to understand how the changes to the off-payroll working rules will affect you and what you need to do to prepare.
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.