May 2019 Newsletter

RATES AND ALLOWANCES

Personal allowances for 2019/20

For the 2019/20 tax year, the personal allowance is set at £12,500. As in previous years, the allowance is reduced by £1 for every £2 by which income exceeds £100,000. The effect of this is that for 2019/20, individuals with income of £125,000 or more will not receive a personal allowance.

For 2019/20 the marriage allowance is £1,250. Spouses and civil partners can transfer this to their partner, as long as the recipient is not a higher or additional rate taxpayer. Where the allowance would otherwise be wasted, claiming the marriage allowance will save the couple tax of £250 for 2019/20.

The other allowance for married couples and civil partners is the married couple’s allowance. This is only available where at least one partner was born before 6 April 1935. The allowance is set at £8,915 for 2019/20, but is reduced by £1 for every £2 by which income exceeds £29,600 until the level of the minimum allowance is reached – set at £3,450 for 2019/20.

The savings allowance is available to basic and higher rate taxpayers only – additional rate taxpayers do not benefit. The recipient is able to enjoy tax-free savings income up to the amount of the allowance (in addition to any savings income sheltered by the personal allowance). For 2019/20, the savings allowance remains at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers.

Likewise, the dividend allowance remains at £2,000 for 2019/20. It is available to all taxpayers regardless of their marginal rate of tax. Dividends covered by the allowance are effectively tax-free, being taxed at a zero rate.

Income tax rates

Income tax rates for the UK excluding Scotland remain unchanged for 2019/20, with a basic rate of 20%, a higher rate of 40% and an additional rate of 45%. The basic rate applies to the first £37,500 of taxable income, the higher rate to the next £112,500 and the additional rate to taxable income in excess of £150,000.   Scottish taxpayers pay income tax on their non-savings non-dividend income at the Scottish rates of income tax. Welsh taxpayers pay income tax on their non-savings non-dividend income at the Welsh rates, which for 2019/20 are the same as the rest of the UK excluding Scotland.

Dividend tax rates

The dividend rates are also unchanged for 2019/20, remaining at 7.5% to the extent that taxable dividend income falls with the basic rate band, at 32.5% to the extent that it falls in the higher rate band and at 38.1% to the extent that it falls within the additional rate band. The dividend rates apply to the whole of the UK, including Scottish and Welsh taxpayers.

Capital gains tax

For 2019/20 the capital gains tax annual exempt amount is increased to £12,000. However, the rates of capital gains tax remain unchanged with gains chargeable at a rate of 10% to the extent that total income and gains do not exceed the basic rate band (set at £37,500 for 2019/20), and at 20% thereafter. Higher rates apply to chargeable gains on residential property, of 18% and 28% respectively.

Corporation tax

The rate of corporation tax rate remains at 19% for the financial year 2019, starting on 1 April 2019.

TAX EFFICIENT PROFIT EXTRACTION

Changes to the rates and allowances impact on directors of personal and family companies looking to extract profits in a tax-efficient manner. As always, the optimal strategy will depend on circumstance, and professional advice should be sought.

It is generally beneficial to take a small salary, particularly where the recipient does not have the 35 qualifying years needed for the full single-tier state pension. Where the employment allowance is not available (as is the case for a company with a single employee who is also a director, or where it is utilised elsewhere), the optimal salary for 2019/20 is one equal to the primary threshold for Class 1 National Insurance purposes, which for 2019/20 is set at £8,632 (equivalent to £166 per week and £719 per month).

If the employment allowance is available, for example in a family company with a number of employees, the optimal salary is one equal to the personal allowance of £12,500, assuming it is available and not used elsewhere.

Above these limits, it will generally be more beneficial to extract further profits as dividends, making use of shareholders’ dividend allowances and basic rate bands, where possible.

Before extracting profits from your company, discuss your optimal profit extraction strategy with us.

TAX IMPLICATIONS OF DIRECTORS’ LOANS

For directors of personal and family companies, borrowing money from the company can be a cheap source of finance. Indeed, it is possible to borrow up to £10,000 tax-free for up to 21 months.

However, there are tax implications if the loan balance exceeds £10,000 at any point during the tax year, or if all or part of the loan is outstanding at the end of the accounting period and has not been fully repaid by the date on which the corporation tax for the accounting period is due. This is nine months and one day after the end of the accounting period.

Where the loan balance exceeds £10,000 at any point in the tax year – even if only for one day – a benefit in kind tax charge is due on the loan. The company must also pay Class 1A National Insurance contributions.

As far as the company is concerned, a tax charge equal to 32.5% of the loan balance that remains outstanding nine months and one day after the year end must be paid with the corporation tax for the period, regardless of the level of borrowing.

Discuss the tax implications of taking a director’s loan with us.

PENSION CHANGES

Auto-enrolment minimum contributions

From 6 April 2019 the level of minimum contributions which must be paid into a qualifying pension scheme under auto-enrolment went up to 8% of qualifying earnings, of which employers must make a minimum contribution of at least 3%, with employees contributing the balance. Prior to 1 April 2019, the minimum contribution was 5%, of which employers were required to contribute a minimum of 2%. Employers should ensure that they are meeting the new minimum contribution requirements and advise employees of any increase in their contributions.

Allowances

The pensions annual allowance remains unchanged at £40,000 for 2019/20. Unused allowances can be carried forward for up to three years. However, as previously, the annual allowance is reduced where income excluding pension contributions is £110,000 or more and income including pension contributions is £150,000 or more. Where this is the case, the annual allowance is reduced by £1 for every £2 by which income exceeds £150,000 until the minimum allowance of £10,000 is reached. Consequently, anyone who has income of £210,000 or more (inclusive of pension contributions) for 2019/20 will only receive the minimum allowance of £10,000.

For 2019/20 the money purchase annual allowance remains at £4,000.

The lifetime allowance is increased in line with inflation to £1.055 million for 2019/20.

COMPANY CAR CHANGES 

For 2019/20 the appropriate percentage for cars with CO2 emissions of 50g/km or less rises to 16%, while the appropriate percentage for cars with CO2 emissions of 51-75g/km increases to 19%. The appropriate percentage is set at 22% for cars with emissions in the 76-94g/km band and at 23% for cars within the 95-99g/km band. Thereafter, the charge increases by 1% for each 5g/km rise in CO2 emissions until the maximum charge of 37% is reached for cars with CO2 emissions of 265g/km and above.

The diesel supplement remains at 4% for 2019/20 and applies to cars with emissions not certified to Real Driving Emissions 2 (RDE2) standards or which do not meet the Euro standard 6d (subject to not exceeding the maximum charge of 37%).

For 2019/20 the fuel multiplier is set at £24,100.

Looking ahead to 2020/21, the charge for electric and hybrid cars is to be reduced. From 6 April 2020, the appropriate percentage for zero emission cars falls to 2% and the appropriate percentage applying to cars in the 1-50g/km band will depend on the level of the car’s CO2 emissions as shown in the table below.

CO2 emissions

Electric range Appropriate percentage

0

N/A

2%

1 – 50g/km

130 miles or more

2%

70 – 129 miles

5%

40 – 69 miles

8%

30 – 39 miles

12%

Less than 30 miles

14%

51 – 54g/km

N/A

15%

55 – 59g/km

N/A

16%

60 – 64g/km

N/A

17%

65 – 69g/km

N/A

18%

70 – 74g/km N/A

19%

By choosing an electric or hybrid company car, it is possible to significantly reduce the associated tax bill from 2020/21 onwards.

Speak to us about the tax   implications of your company car and how to make a tax-efficient choice.

MAKING TAX DIGITAL FOR VAT

MTD goes live

Making Tax Digital (MTD) for VAT went live from 1 April 2019. It applies to businesses with VATable turnover over the VAT registration threshold of £85,000 from the start of their first VAT accounting period on or after 1 April 2019, unless they fall within one of the categories of businesses with more complex affairs (such as those in a VAT group) in respect of which the start date is deferred until the start of the first VAT accounting period beginning on or after 1 October 2019.

Under MTD for VAT businesses must keep digital records and file their VAT returns digitally using MTD-compatible software.

Speak to us to check what you need to do to comply with the requirements of MTD for VAT.

BUSINESS RATES

Business rates for 2019/20

The business rate multipliers for 2019/20 have been set. The standard multiplier in England is 50.4p (51p in the City of London) and the small business multiplier is 49.1p (49.7p in the City of London). In Wales, a single multiplier of 52.6p applies.

The small business multiplier applies to properties with a rateable value of less than £51,000. Small business rate relief is available in respect of properties with a rateable value of less than £15,000 where the business uses only one property. In England, full (100%) relief is available where the rateable value is less than £12,000, with taper relief applying to properties with a rateable value of between £12,000 and £15,000. In Wales, 100% relief is available where the rateable value is £6,000 or less and taper relief is available where the rateable value is between £6,000 and £12,000.

Check that your business rates are correct. Where small business rate relief is available, it must be claimed – it is not given automatically. Claims can be made retrospectively where the relief has not been claimed for past years.

INTEREST RATE RELIEF

Further interest rate restrictions for landlords

Over the past few years the way in which landlords have been able to obtain relief for interest and other finance costs has been changing. The system of relief is moving from one of relief by deduction – which applies for 2016/17 and earlier tax years – to one under which relief is given as a basic rate tax reduction. From 2020/21, relief will be given in full as a basic rate tax reduction.

Transitional rules apply for 2017/18 to 2019/20 inclusive as the changes are phased in, with some interest costs relieved by deduction and the balance as a basic rate tax reduction. For 2019/20, 25% of the interest costs can be deducted in computing profits, with relief for the remaining 75% being given as a tax reduction at the basic rate.

Check with us that you are obtaining relief for interest costs in the correct manner.

CIS CHANGES

Sub-contractors who provide services under the CIS scheme (either paid gross or net with a tax deduction) and are VAT registered are facing a significant change in the way that VAT is dealt with from 1 October 2019.  From that date services supplied in this situation will be accounted for under the reverse charge system for VAT.  Effectively this means that a sub-contractor supplying such services will not add 20% VAT to their invoice and therefore will not be paid this by the contractor customer.  The contractor customer will deal with the VAT charge on the subcontractors invoice through the reverse charge system and will enter this on their own VAT return both within the output tax and input tax section so that they will not effectively recover VAT on the sub-contractor supply as they have not paid any.

This will mean that the sub-contractor will receive less from the contractor but have a lower VAT payment to HMRC when the VAT return is done.  However, although the net position remains the same, there is a significant issue with regard to cash flow.  Under the new system the sub-contractor will receive less from the customer but will only get the benefit of reducing their own VAT payment at some future date which could well be over three months later, depending upon when the invoice is raised and paid.

A simple example might help to explain this.  If we assume that the value of the supply to the contractor is £1,000 plus VAT and that the materials bought for the job amount to £500 plus VAT then under the current situation the subcontractor will invoice the contractor a total of £1,200 and will receive either £1,200 if they have gross CIS status or £1,000 if they have net CIS status.  The cost of materials including VAT will be £600, so if we assume that the customer pays and the supplier gets paid on the same day currently the sub-contractor will receive either £1,000 or £1,200 and pay out £600.  Under the new rules, commencing later this year, using the same value of supplies the sub-contractor will either receive £1,000 if they have gross CIS status or £800 if they have net CIS status, but still have to pay the full £600 to the materials supplier and so there will be a net reduction in cash flow of £200 which will only effectively be recovered when they submit their VAT return and have £200 less to pay to HMRC.

Clearly, this may have significant impact upon your cash flow and if you have concerns regarding this, or any queries in respect of the new procedures, please contact us as soon as possible.

FUEL RATES

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.