February 2021 Newsletter

Use your allowances for 2020-21

Limited window for using your 2020/21 tax allowances

Individuals are entitled to a number of allowances each year. However, many of them are lost if they are not used in the tax year to which they relate – it is not possible to carry most unused allowances forward. The 2020/21 tax year comes to an end on 5 April 2021. With the end of the tax year approaching, now is the time to review your allowances and consider whether there is anything that can be done to prevent those allowances being wasted. Remember, any Covid grants that you have received in 2020/21 are taxable and will need to be taken into account when assessing your income.

Personal allowance

The personal allowance for 2020/21 is set at £12,500. It is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. This means that individuals whose income exceeds £125,000 will not receive a personal allowance for 2020/21. Where possible, steps can be taken to preserve the personal allowance, such as making pension contributions or gift aided charitable donations to take income to below the abatement limit. Consideration can also be given to deferring income to 2021/22 and to 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 2020/21. The impact of Covid-19 may mean that opportunities to do this are limited. However, if you have a family company, you may be able to pay 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 2020/21, consider whether you can claim the marriage allowance. This allows one spouse or civil partner to transfer 10% of their personal allowance – equivalent to £1,250 for 2020/21 – 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 allowance of £11,250 for this year, whereas the recipient has a higher personal allowance of £13,750. Claiming the marriage allowance will save a couple up to £250 in tax for 2020/21.

The married couple’s allowance is set at £9,075 for 2020/21. 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 £30,200 until the allowance is reduced to the minimum amount of £3,510. The married couple’s allowance reduces the tax payable by 10% of the allowance, meaning it is worth between £351 and £908 for 2020/21. If one partner’s income exceeds the income limit, couples should look to equalise income where possible to minimise the reduction in the allowance.

Contact us to discuss what action you can take to ensure that your personal allowances for 2020/21 are not wasted.

Dividend allowance

All taxpayers, regardless of the highest rate at which they pay tax, are entitled to the dividend allowance, set at £2,000 for 2020/21. The dividend allowance is actually a nil rate band; dividends falling within the band are taxed at a zero rate. Dividends in excess of the allowance are taxed at the dividend tax rates as the top slice of income.

The dividend allowance is a handy tax planning tool in a family company scenario. Dividends can be paid to family members to utilise any unused dividend allowances (and also any unused personal 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. Care should be taken this year where profits may have taken a hit as a result of the Covid-19 pandemic. 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.

Discuss your dividend strategy with us to ensure dividend allowances for 2020/21 are not wasted.

Savings allowance

A separate allowance is available for savings. However the 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 £12,300 for 2020/21 tax-free. Where capital disposals are on the cards, if the annual exempt amount remains available, consider making the disposal prior to 6 April 2021 to utilise the 2020/21 annual exempt amount, paving the way to realise gains free of capital gains tax in 2021/22.

Spouses and civil partners can take advantage of the no gain/no loss rules to transfer assets between themselves 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.

Contact 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 2020/21.

Where the allowance is not fully utilised, it can be carried forward for up to three years. Thus, for 2020/21, the available annual allowance is that for 2020/21 plus any unused allowances for 2017/18, 2018/19 and 2019/20. 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 2017/18 will be lost if not used by 5 April 2021.

The pension annual allowance is reduced where both threshold income (broadly income excluding pension contributions) is more than £200,000 and adjusted net income (broadly income including pension contributions) is more than £240,000. The allowance is reduced by £1 for every £2 by which adjusted net income exceeds £240,000 until the minimum annual allowance of £4,000 is reached. This will be the case where adjusted net income is more than £312,000 (and threshold income is more than £200,000).

A separate allowance – the money purchase annual allowance (MPAA) – is available where a money purchase pension pot has been flexibly accessed after age 55. For 2020/21, it is set at £4,000.

Speak to your independent financial adviser about whether it is worthwhile making pension contributions prior to 6 April 2021.

Inheritance tax annual gift allowance

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 2019/20 or for 2020/21 you can make £6,000 of gifts IHT-free by 5 April 2021.

Off-Payroll Working

Off-payroll working rules extended

The extended off-payroll working rules finally come into effect from 6 April 2021. From that date, the rules currently applying where the end client is a public sector body also apply where the end client is a medium or large private sector organisation.

If you provide your services through an intermediary such as a personal service company, or you engage staff providing their services in this way, it is important that you understand how the rules affect you.

Workers and contractors

If you provide your services to an end client through a limited company or other intermediary, from 6 April 2021, if the end client is a private sector organisation, you will need to know whether it is a medium or large private sector organisation or a small organisation.

If the end client is a small organisation, your intermediary must continue to assess whether the engagement falls within the IR35 rules and, if it does, operate those rules (calculating the deemed payment and accounting for tax and National Insurance).

If the end client is a medium or large private sector organisation, you no longer need to consider IR35. The end client must determine whether the off-payroll working rules apply, and deduct tax and National Insurance from payments made to you if they do.

Medium and large private sector organisations

If you are a medium or large private sector organisation that engages workers who provide their services through an intermediary, such as a personal service company, from 6 April 2021, for each engagement you must assess the status of the worker, and give the worker a copy of the determination reached. If, ignoring the intermediary, the worker would be an employee, the off-payroll working rules apply.

Where this is the case, you (or the fee payer if different) must deduct tax and National Insurance from payments made to the worker’s intermediary and account for the tax and National Insurance deducted, together with the associated employer’s National Insurance, to HMRC under Real Time Information.

Small private sector organisations

If you are a small private sector organisation, you do not need to apply the off-payroll working rules. Where workers are engaged via an intermediary, such as a personal service company, you can continue to pay the worker’s intermediary gross.

COVID-19 PANDEMIC

Covid-19 support

As lockdowns continue, many businesses remain affected by the Covid-19 pandemic and in need of financial support. There are various support measures available.

Grants

New grants were announced at the start of the third National lockdown in England to help businesses such as those in the retail, hospitality and leisure sectors which have been forced to close. Businesses in these sectors are entitled to a one-off grant worth up to £9,000 per property.

Discretionary grants are also available for other businesses.

Grants are available from Local Authorities for businesses affected by local restrictions.

Coronavirus Job Retention Scheme

The Coronavirus Job Retention Scheme (CJRS) will continue to run until 30 April 2021. Employers can claim a grant for 80% of the unworked hours of furloughed and flexibly furloughed staff (capped at £2,500 per month) with which to pay employees.

If you are claiming under the scheme, make sure you do not miss the claim deadline – claims must be made no later than 14 days after the end of the month to which the claim relates. Where this falls on a weekend, the deadline is the next working day.

Self-Employment Income Support Scheme

Self-employed taxpayers who are adversely affected by the Covid-19 pandemic during February, March and April 2021 will be able to claim a fourth grant under the scheme. Note that the eligibility criteria are stricter than the initial grants under the scheme and contact us if you are unsure if you will qualify.

NO SELF ASSESSMENT LATE FILING PENALTY IF FILE ONLINE BY 28 FEBRUARY

HMRC has announced Self-Assessment taxpayers who cannot file their tax return by the 31 January 2021 deadline will not receive a late filing penalty if they file online by 28 February.

Taxpayers are still obliged to pay their bill by 31 January. Interest will be charged from 1 February on any outstanding liabilities. Anyone who cannot afford to pay their tax bill on time can apply online to spread their bill over up to 12 months. They will need to file their 2019 to 2020 tax return before setting up a time to pay arrangement, so HMRC is encouraging everyone to do this as soon as possible.

We have filed all of our client’s tax returns by 31 January, but do contact us if you need assistance.

See:  https://www.gov.uk/government/news/no-self-assessment-late-filing-penalty-for-those-who-file-online-by-28-february

CHANGES TO THE KICKSTART SCHEME GRANT

The Kickstart Scheme provides funding to employers to create job placements for 16- to 24-year-olds on Universal Credit is changing. So far more than 120,000 jobs have been created and the new changes make the scheme easier for businesses to apply.

Employers of all sizes can apply for funding which covers:

  • 100% of the National Minimum Wage (or the National Living Wage depending on the age of the participant) for 25 hours per week for a total of 6 months.
  • associated employer National Insurance contributions.
  • employer minimum automatic enrolment contributions.

Employers can spread the start date of the job placements up until the end of December 2021.

From 3 February 2021, employers can apply directly to the Kickstart scheme for any number of job placements. The Government is removing the threshold of 30 job placements.

Businesses can also choose to apply through a Kickstart gateway, including those supporting sole traders. Kickstart gateways already working with the scheme can continue to add more employers and job placements to their grant agreement.

Grants available are:

  • £300 per job placement to cover admin costs.
  • £1,500 per job placement for employers.

This funding is for setup costs and to support the young person to develop their employability skills. Employers can choose to get someone else to do this for them, such as a Kickstart gateway or a service provider. If they choose to do this they will have to agree how to share the £1,500.

Kickstart Scheme wages and related costs for employers

  • 100% of the National Minimum Wage (or the National Living Wage depending on the age of the participant) for 25 hours per week for a total of 6 months.
  • associated employer National Insurance contributions.
  • employer minimum automatic enrolment contributions.

See: https://www.gov.uk/government/collections/kickstart-scheme

REVERSE CHARGE ON CONSTRUCTION SERVICES

The reverse charge is a major change to the way VAT is collected in the building and construction industry. It was due to come into effect on 1 October 2019 but was postponed to 1 October 2020 and further postponed to 1 March 2021 and means the customer receiving the service will have to apply the VAT due to HMRC instead of paying the supplier. It will only apply to individuals or businesses registered for VAT in the UK (although it will not apply to consumers). This will affect businesses that supply or received specified services that are reported under the Construction Industry Scheme (CIS),

Businesses liable for the reverse charge

Businesses must use the reverse charge if they are VAT registered in the UK, buy building and construction industry services and:

  • Payment for the supply is reported within the CIS;
  • The supply is standard or reduced rated;
  • They are not hiring either staff or workers, or both; and
  • The business is not using the end-user or intermediary exclusions

Prepare for the charge

Businesses affected by the reverse charge will need to prepare for the 1 March 2021 introduction date by:

  • Checking whether the reverse charge affects either sales, purchases or both;
  • Making sure their accounting systems and software are updated to deal with the reverse charge;
  • Considering whether this change will have an impact on cashflow; and
  • Making sure all staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate.

Scope of the charge

The reverse charge will affect supplies of building and construction services supplied at the standard or reduced rates that also need to be reported under CIS. These are called specified supplies.

Exclusions

The reverse charge does not apply if the service is zero rated for VAT or if the customer is not registered for VAT in the UK. It also does not apply to some services, namely those supplied to end-users or intermediaries connected with end-users. Employment businesses which supply staff and which are responsible for paying the temporary workers they supply are not subject to the reverse charge.

The reverse charge does not apply to consumers or final customers of building and construction services. Any consumers or final customers who are registered for VAT and CIS will need to ensure their suppliers do not apply the reverse charge on services supplied to them.

Completing the VAT return

Suppliers must not enter any output tax on sales under the reverse charge. The supplier only needs to enter the net value of the sale.

If a business buys services subject to the reverse charge, it must enter the VAT charged as output tax in box 1 of the VAT return. Businesses do not enter the net value of the purchase as a net sale. The business may reclaim the input tax on reverse charge purchases in box 4 of the VAT return, subject to the normal VAT rules.

Businesses cannot use Cash Accounting or the Flat Rate Scheme for Small Businesses for supplies subject to the construction industry reverse charge. The reverse charge may also mean a business will make net repayment claims to HMRC, as it no longer receives VAT on its sales. Businesses can apply to move to monthly returns using their online VAT account.

Other point to note: Sub-contractors should also be aware that their customers will no longer be paying them VAT, which will reduce the gross value of payments coming in the business which may impact on day-to-day cashflow.

COMPANIES HOUSE PAUSE STRIKE OFF PROCESSES FOR ONE MONTH

CH have temporarily paused voluntary and compulsory strike off processes for one month from 21 January until 21 February 2021.

CH has reduced the number of staff in their offices to become more Covid safe. This has led to delays in processing correspondence, documents and forms. They have temporarily paused strike off processes so that companies are not adversely affected by these delays.

CH will continue to publish first Gazette notices for voluntary strike off applications to minimise the impact on those who have applied to close their company – but they will not be publishing the second Gazette notice and striking companies off during this period. For companies on the compulsory strike off path, they will not be publishing first and second Gazette notices.

CH state that pausing strike off processes will provide companies with more time to update their records and help them avoid being struck off the register. It will also protect creditors and other interested parties who might have had difficulties in receiving notices or registering an objection, or whose objections have not yet been processed.

CH will continue to remind businesses about their filing responsibilities during this period. CH digital services are available as normal, and they encourage all customers to file online if able to do so.

See:

https://www.gov.uk/government/news/companies-house-to-pause-voluntary-and-compulsory-strike-off-processes-for-one-month?utm_medium=email&utm_campaign=govuk-notifications&utm_source=1e5571b3-be31-4826-a226-11aa6f34e5e6&utm_content=daily

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.