What’s changed for the New Tax Year and Beyond
If you are a director or employee, this will be a year to pay particular attention to your PAYE code. The standard tax code for 2015/16 will be 1060L. This gives £10,600 tax free pay, so if your tax code is different, make sure you know why. As your tax adviser is no longer sent a copy of the notice of coding, if you think it may be wrong, let us know. Two of the reasons why a tax code could be different from the standard 1060L are:
The new Marriage Allowance
If you have a spouse or civil partner who is not a taxpayer, or who has savings income, the new ‘Marriage Allowance’ means that you may be able to save tax by transferring 10% of his or her personal allowance (£1,060) to the partner with the higher income. There are two main conditions:
- Neither of you must be liable to pay tax at 40% or 45%
- You are both under the age of 80 on 5 April 2015
Some publicity has said that the lower income spouse must have income of under £10,600 a year for the Marriage Allowance to be ‘claimed’, but this is misleading. From 6 April 2015, the first £5,000 of savings income is taxed at 0%, so the lower income partner could have significant savings income and still not be a taxpayer. ‘Savings income’ includes bank and building society interest, but not dividends paid by PLCs or private companies.
The timescale for this allowance is not completely straightforward. Although there has been a lot of advance publicity about the allowance, the online system will probably launch about the time you receive this newsletter and it is unlikely to be fully functional before the summer.
Although we shall, over coming weeks, be trying to identify those clients who may benefit from this new allowance, there will be some situations where we only deal with the tax affairs of one spouse or civil partner and therefore do not know if the allowance will apply. If you are likely to be in this situation please contact us.
The Budget on 18 March announced that there will be a further above inflation increase to £10,800 for 2016/17 and £11,000 in 2017/18. Those aged 75 and over will continue to receive a personal allowance of £10,660 for 2015/16 and by 2016/17 they will receive the basic personal allowance. Note that if your adjusted net income exceeds £100,000, the personal allowance is reduced by £1 for every £2 over £100,000 giving an effective rate of 60% on income between £100,000 and £121,200 for 2015/16. Contact us if this may apply to you.
Income tax bands
The 20% basic rate band is £31,785 for 2015/16 and will be £31,900 for 2016/17. This means that you pay 40% tax if your taxable income exceeds £42,385 for 2015/16 and £42,700 for 2016/17. It is proposed that the higher rate tax threshold will increase to £43,300 for 2017/18. The 45% top rate continues to apply to taxable income over £150,000 for 2015/16.
Owing money to HMRC
HMRC has long had a power to collect money owing to it by changing PAYE tax codes. This can be a useful way of paying smaller tax bills, but from 6 April 2015, the limits increase. HMRC will be able to recover much larger debts through PAYE: up to £17,000 a year for those on incomes of £90,000 or over. Make sure you know what you owe HMRC and how you are paying it.
Other changes in the budget
Capital gains tax changes on property
Following consultation the government has confirmed that the from 6 April 2015 non-UK resident individuals, trusts, personal representatives and narrowly controlled companies will be subject to Capital Gains Tax (CGT) on gains accruing on the disposal of UK residential property on or after that date. Non-resident individuals will be subject to tax at the same rates as UK taxpayers (28% or 18% on gains above the annual exempt amount). Non-resident companies will be subject to tax at the same rates as UK corporates (20%) and will have access to an indexation allowance.
The government will restrict access to Private residence relief (PRR) in circumstances where a property is located in a jurisdiction in which a taxpayer is not tax resident. In those circumstances, the property will only be capable of being regarded as the person’s only or main residence for PRR purposes for a tax year where the person meets a 90-day test for time spent in the property over the year.
From 1 April 2015 the VAT registration threshold will be increased from £81,000 to £82,000 and the deregistration threshold from £79,000 to £80,000.
Further changes to ISAs
The current £15,000 ISA limit is to be increased to £15,240 from 6 April 2015. Remember that the 50% cash ISA restriction was abolished from 1 July 2014 so that any combination of cash and stocks and shares can be held within the ISA wrapper up to the overall £15,240 limit. The Junior ISA limit increases to £4,080 from 6 April 2015.
In the 2015/16 tax year individuals will be able to take money out of their ISA and put it back in within the same year, without losing their ISA tax benefits as long as the repayment is made in the same financial year as the withdrawal.
Help to buy ISAs
These new accounts to help first time buyers save for a deposit to buy their first home will be available from Autumn 2015. First time buyers over 16 will be able to open these special ISAs, make an initial deposit of up to £1,000 and then save up to £200 a month, and the Government will boost it by 25%. That’s a £50 bonus for every £200 saved, up to £3,000 in total topping up their £12,000 savings to £15,000.
Further pension flexibility
The Government will bring in new legislation from 6 April 2016 to allow people who are already receiving income from an annuity to agree with their provider to assign their annuity income to a third party in exchange for a lump sum or an alternative retirement product. Currently such action would give rise to a 55% charge, but this is to be abolished. This change will allow those who are already in receipt of a pension annuity to access the new flexible pension rules.
Pension fund lifetime allowance
From 6 April 2016 the pension fund lifetime allowance will be reduced from £1.25million to £1million. Transitional protection for pension rights already over £1million will be introduced alongside this reduction to ensure the change is not retrospective. The lifetime allowance will then be indexed annually in line with CPI from 6 April 2018.
It had already been announced that the CGT annual exempt amount would increase to £11,100 for 2015/16. With a top CGT rate of 28% this allowance potentially saves £3,108 a year, or £6,216 for a married couple.
There has been no change in the inheritance tax nil rate band which remains at £325,000 until 2018. There are a number of changes to the inheritance tax treatment of trusts. Please contact us if you wish to discuss these or any other capital tax planning matters.
Further restrictions to CGT entrepreneurs’ relief
You may recall that in the 2014 Autumn Statement it was announced that it is no longer possible to claim CGT entrepreneurs’ relief against the gains arising on the sale on or after 3 December 2014 of goodwill by a sole trader or partnership to a limited company in which they have a controlling interest.
It has now been announced that from 18 March 2015 CGT entrepreneurs’ relief will be restricted on certain “associated disposals”. The 10% CGT rate will no longer be available on the disposal of personalassets used in a business carried on by a company or a partnership unless they are disposed of in connection with a disposal of at least a 5% shareholding in the company or a 5% share in the partnership assets.
Single 20% Corporation tax rate
A single corporation tax rate of 20% will apply from 1 April 2015 whatever the level of your company’s profits.
As already announced in the 2014 Autumn Statement there will be a new 25% rate of tax on profits artificially diverted by multi-national companies away from the United Kingdom, being labelled “Google Tax”.
Annual investment allowance
The Annual Investment Allowance (AIA) provides a 100% tax write off for the cost of most plant and machinery acquired by businesses, a notable exception being motor cars. In Budget 2014 the Chancellor announced that the allowance would be increased to £500,000 per annum for expenditure incurred between 1 April 2014 and 31 December 2015 (from 6 April 2014 for unincorporated businesses).
This generous allowance was due to fall to just £25,000 from 1 January 2016 and the Chancellor acknowledged that such a level would be too low. However, the new limit will not be announced until later this year. Remember that the AIA is available for assets bought on hire purchase as well as those bought for cash. It can also be claimed in respect of fixtures and fittings within buildings. Contact us to help you maximise tax relief for capital expenditure as the timing of expenditure can be critical.
The end of Tax returns?
The Government proposes to transform the tax system over the next Parliament by introducing online tax accounts to remove the need for individuals and small businesses to complete annual tax returns. These online accounts will show details of how much tax has been paid and how much is owed and will be pre-populated with information such as employment and pension income provided by RTI. This may work for individual taxpayers with straightforward affairs, but many accountants will have concerns, based on past experience, about the accuracy of the data and the calculations.
Taxpayers will still need to provide any details HMRC does not have and will be responsible for checking that the information is correct.
Looking after the children
Most of us have got used to the topsy-turvy rules for Child Benefit and higher earners, where one member of a couple receives Child Benefit in full, and the other may have to pay part of it back to the Government through self-assessment, if earnings are over £50,000 a year. This is called the ‘High Income Child Benefit Charge’.
It works like this: Jean and Ken have one child. Jean is the main carer and gets child benefit of £20.50 a week (in 2014/15). Ken earns just over £52,000 a year and has to pay back £213 of the Child Benefit through self assessment. But it is still possible for the detailed rules to catch people out.
Are you missing out?
The basic principles are clear enough. Where a single parent, or a member of a couple, has income of over £50,000 a year, there will be a High Income Child Benefit Charge. The charge is 1% of the Child Benefit due, for every £100 of income over £50,000. This means, mathematically, that all the Child Benefit will have been clawed back where income reaches £60,000. In consequence, where earnings are over £60,000 a year, it simplifies the administration if the person entitled to the Child Benefit (who may not be the higher earner of the couple), makes an election to forgo the Child Benefit.
But now for the surprises. Income here means ‘adjusted net income’. This is a technical term meaning that you deduct the gross equivalent of pension contributions which have received basic rate tax relief at source, and Gift Aid payments. So if the ‘high earner’ makes significant pension contributions or Gift Aid payments during the year, you may find that you have a net Child Benefit entitlement after all.
If this happens, you are allowed to restart your Child Benefit claim, but the high earner will now be liable to pay the Child Benefit charge through self assessment. You can ‘change your mind’ within two years of the end of the tax year in which you would have been entitled to Child Benefit. Unfortunately, if you delay, this could mean changes to your self assessment return and possible interest and late payment penalties.
Who pays the piper?
Another hazard for couples is where both members of the couple earn close to the £50,000 or £60,000 limits. It may seem like a technicality, but HMRC doesn’t just want the money, it wants the money from the right person.
For example Jack and Jill have two children. Their Child Benefit entitlement in 2014/15 is £20.50 a week for the elder child and £13.55 a week for the younger child (£1,770.60 a year in total). Jack paid the High Income Child Benefit Charge in 2013/14.
In 2014/15, Jill earns £52,000 as an employee and is not registered for self assessment. Jack is self-employed. He usually earns about £55,000 a year, but in 2014/15 he invested in a new computer system for the business and his taxable profit falls to £51,000.
As Jill is the higher earner for 2014/15, she will need to register for self assessment (before 5 October 2015) and pay the High Income Child Benefit Charge by 31 January 2016.
The rules apply to all couples whether married, civil partners, or simply living together. Exceptionally, the High Income Child Benefit Charge can even apply where the child is living with someone else, but you are supporting them and claiming Child Benefit. All in all, whoever is looking after the children, if someone is claiming Child Benefit and you are connected with that person, it’s time to talk to your tax adviser.
Beating the system
In a world where there are penalties for everything, people can be tempted to try and beat the system. Some employers have attempted to avoid late filing penalties for PAYE RTI returns by all sorts of ruses: asking for employee hours earlier in the month; carrying overtime forward to the next month; or otherwise using approximate figures. Figures tweaked like this can lead to inaccuracies in the payroll, increased National Insurance costs and lower benefit entitlement for some lower paid workers. Remember:
It is possible to send an Earlier Period Update without incurring a penalty.
- Paying a worker for fewer hours than they actually worked one month, and adding the hours onto the following month, could mean that the employee is paid below the Lower Earnings Limit one month and so misses out on National Insurance credits. It also means that the National Insurance cost in the following month will be higher than if earnings had been spread evenly.
Tweaking the figures is inadvisable and can have a sting in the tail
Have you been turned into an intermediary?
How many UK businesses would think they were affected by new rules for ‘offshore employment intermediaries’? Or, for that matter, ‘onshore’ employment intermediaries? After the dust has settled on the Government consultation, new rules are here for ‘employment intermediaries’, and you may unwittingly, be one.
Owner-managed businesses which are run as limited companies or as partnerships can be affected. This is because the rules now treat anyone who is a link in the chain between an ‘end user client’ and a worker as an ‘intermediary’. If your business structure involves an ‘employment intermediary’, there are two sets of rules to watch out for:
Agency rules which could make you an employee of your own business, or challenge your remuneration split
Reporting rules which would require you to make quarterly reports to HMRC of people who work for you and who are not treated as employees.
As we have come to expect, there are penalties for failure to make returns, or to apply PAYE as required.
The reporting rules apply from 6 April 2015. The rules are complex, so it is worth taking advice if you think the rules could apply to you. The reporting rules require you to make returns to HMRC if you are an ‘employment intermediary’ as described above and you supply more than one worker to an end client. How this works is best seen by looking at two examples:
How you could be taxed as an employee
William Wallace is a partner in a restaurant business, ‘Haggis and Neeps’. However, he also worked for two weeks in another restaurant business, ‘The Bruce and Spider’, to provide holiday cover. If William is under ‘supervision, direction or control’ when he provides holiday cover at ‘The Bruce and Spider’, he is caught by the revised Agency rules, and is taxed as an employee.
His own partnership, ‘Haggis and Neeps’, would become his employer for the holiday cover work and it would be liable to deduct PAYE from his earnings from ‘The Bruce and Spider’. Such income would then become William’s personal income for tax purposes, and not that of the ‘Haggis and Neeps’ partnership.
On the other hand, if William provides holiday cover as head chef, he might not be subject to ‘supervision, direction or control’. In this case, earnings from ‘The Bruce and Spider’ would be partnership income of ‘Haggis and Neeps’.
The dividing line can be very fine, and the consequences of getting it wrong could be substantial.
When you might need to make returns
Malcolm trades via his own limited company, Malcolm IV Ltd. He supplies his services to Daylight Holdings plc. He is not subject to ‘supervision, direction or control’.
In May 2015, David joins the team at Malcolm IV Ltd, and assists on the contract with Daylight Holdings plc. As Malcolm IV Ltd now supplies two workers, it needs to consider the new reporting requirements.
If you work through your own partnership, such as a farming partnership carrying out contract work for other farms, the reporting rules could also apply.
There are exceptions to these rules, but these are narrowly drawn. As the PAYE deductions and reporting requirements apply now, this cannot wait until your usual year end accounts.
As so much depends on the detail of the arrangement, we would recommend that anyone concerned about these issues gets in touch.
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 http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm.