budget

2015 Summer Budget

Summer Budget 8th July 2015

Summary 

Chancellor George Osborne has delivered the first Budget by a wholly Conservative government in almost 20 years. The March 2015 Budget provided some clues as to possible new measures and of course, the Conservative election manifesto contained a wide range of commitments to be introduced during the course of the current parliament.

The Chancellor said that this is a Budget for working families in a ‘one-nation society’. In ‘a big Budget for a country with big ambitions’, he focused on how the government will continue with its deficit-reduction plans, whilst giving the promised support to ‘hard-working families’. He said that whilst the deficit would be cut at the same pace as under the previous government, it would be a bold budget containing bold new measures.

As predicted, savings in welfare spending of around £12bn, and increases in revenue from tax avoidance and evasion to yield around £5bn made an early couple of headlines in the Chancellor’s speech.

The welfare savings are to be funded by:

  • ensuring those aged 18 to 21 who receive Universal Credit apply for an apprenticeship or traineeship, gain work-based skills, or go on a work placement 6 months after the start of their claim;
  • subjecting benefit payments to a regional cap (£23,000 per year in London and £20,000 in other areas – cut from £26,000 a year);
  • limiting child tax credits to two children for new claimants;
  • working-age benefits, including tax credits and Local Housing Allowance, will be frozen for 4 years from 2016-17 and
  • reducing rents for social housing by 1% a year for 4 years. Tenants on higher incomes (over £40,000 in London and over £30,000 outside London) will be required to pay market rate, or near market rate, rents.

With regards to tax avoidance and evasion, HMRC is to be given significant extra investment – some £60m between now and 2020 – for increased work on tackling evasion and non-compliance. It will be interesting to see how and where this money will be spent.

The Conservative manifesto pledged to introduce a new law within the first one hundred days of a Conservative government to prevent any rises in income tax, VAT or national insurance in the next parliament and it seems that this promise is now to be delivered. Broadly, a five-year ‘tax lock’ will guarantee no increases in income tax rates; no increases in VAT, nor an extension of its scope; and no increase in national insurance, nor an increase in its ceiling above the higher rate threshold. However, the Chancellor could still move the goalposts – there will still be plenty of scope to raise more revenue without increasing tax rates by widening the definitions of what is taxed, or by withdrawing tax reliefs.

This newsletter provides a summary of the key tax points from the July Budget, based on the documents released on 8 July 2015. It is possible that changes will be made between now and the publication of the draft legislation, which is due to be published on 15 July 2015. We will keep you informed of any significant developments.

Individuals 

Tax rates and the personal allowance

Although the personal allowance for 2016-17 was set at £10,800 by the first Finance Act 2015, it has now been confirmed that it will rise from its current level of £10,600 to £11,000 for 2016-17. The government plans to increase the personal allowance to £12,500 by 2020.

The personal allowance will automatically increase in line with the equivalent of 30 hours a week at the national minimum wage for individuals over 21, once the personal allowance has reached £12,500. The Chancellor of the Exchequer will have a legal duty to consider the level of the national minimum wage in setting the personal allowance each year, until it reaches £12,500.

Increases to the personal allowance since 2010, when it was £6,475, mean that a typical taxpayer will be £905 a year better off in 2016-17.

The basic rate limit will be increased to £32,000 for 2016-17 and to £32,400 for 2017-18. As a result, the higher rate threshold will be £43,000 in 2016-17 and £43,600 in 2017-18.

National living wage

From April 2016, a new National Living Wage of £7.20 an hour for the over 25s will be introduced. This will rise to over £9 an hour by 2020.

Dividends

The dividend tax credit (which reduces the amount of tax paid on income from shares) is to be replaced with a new £5,000 tax-free dividend allowance for all taxpayers from April 2016.

Tax rates on dividend income will also be increased. The new rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Non-domiciled individual

Whilst the Chancellor stopped short of Labour’s proposals to completely abolish non-dom status, he said that ‘it is not fair that people live in this country for very long periods of their lives, benefit from our public services, and yet operate under different tax rules from everyone else.’

From April 2017 anybody who has been resident in the UK for more than 15 of the past 20 tax years will be deemed to be domiciled in the UK for tax purposes and will therefore be required to pay UK tax on their worldwide income. A technical consultation on the finer points of this change will be published later this year.

It is unclear how many individuals will be affected by the new rules. Those resident in the UK for more than seven years are currently required to either pay UK tax, or pay an annual charge that ranges from £30,000 to £90,000, depending on how long the individual has lived in the UK. The latest figures show that in 2012-13, some 5,080 paid the annual charge.

Inheritance tax on the family home

Currently, inheritance tax is charged at 40% on estates over the tax-free allowance of £325,000 per person. Married couples and civil partners can pass any unused allowance on to one another. From April 2017, each individual will be offered a family home allowance so they can pass their home on to their children or grandchildren tax-free after their death. This will be phased in from 2017-18. Broadly, the family home allowance will be added to the existing £325,000 IHT threshold, meaning the total tax-free allowance for a surviving spouse or civil partner will be up to £1 million in 2020-21. The new allowance will be tapered away from those leaving more than £2 million with the intention that those leaving more than £2.35m will not benefit from the new allowance. The tapering policy does, however, have a major flaw -where a home worth £175,000 is included in an estate with a value of between £2m and £2.35m, an effective rate of 60% will be payable.

Property income

Currently, individual landlords can deduct their costs – including mortgage interest – from their profits before they pay tax, giving them an advantage over other home buyers. Wealthier landlords receive tax relief at 40% and 45%. This tax relief will be restricted to 20% for all individuals by April 2020.

Landlords will be able to obtain relief as follows:

  • in 2017-18 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction.
  • in 2018-19, 50% finance costs deduction and 50% given as a basic rate tax reduction.
  • in 2019-20, 25% finance costs deduction and 75% given as a basic rate tax reduction.
  • from 2020-21 all financing costs incurred by a landlord will be given as a basic rate tax reduction.

In addition, from April 2016, the ‘wear and tear allowance’, which allows landlords to reduce the tax they pay (regardless of whether they replace furnishings in their property) will also be replaced by a new system that only allows them to get tax relief when they replace furnishings.

Rent-a-room relief

The rent-a-room relief limit is to be increased from the current level of £4,250 to £7,500 from April 2016. This means that from 6 April 2016 a person will be able to receive up to £7,500 tax-free income from renting out a room or rooms in their only or main residential property. The relief also covers bed & breakfast receipts as long as the rooms are in the landlord’s main residence.

Tax-free childcare

From September 2017, working families with three and four year olds will receive 30 hours of free childcare – an increase from the 15 hours they are currently offered.

In addition, from 2017, parents will benefit from up to £5,000 worth of free childcare a year in a policy designed to help parents work. The government will also fund 15 hours a week of free childcare for all disadvantaged two-year-olds, worth £2,500 a year per child.

Taxation of lump sum death benefits

A change is being made to the pensions tax rules to reduce the tax charge that applies to taxable lump sum death benefits paid from registered pension schemes or non-UK pension schemes. Broadly, the rate of tax payable will be reduced from 45% to the recipient’s marginal rate of income tax. This change will apply in relation to lump sums paid on or after 6 April 2016.

2015 Anniversary Games 

Non-UK resident sportspeople will be exempt from UK income tax on any income received as a result of their performance at the 2015 Anniversary Games which are taking place at the Queen Elizabeth II Olympic Park and stadium between 24 and 26 July 2015.

Councillors’ travel expenses 

In relation to payments made on or after 6 April 2016, travel expenses paid to councillors by their local authority will be exempt from income tax and NICs.

Tax-advantaged venture capital schemes amendments

Amendments are to be made to the existing Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) rules. Broadly, the changes are as follows:

  • The first measure specifies the age of a company that is eligible for investment under EIS and VCT. Companies must raise their first investment under EIS, VCT or other risk finance investment within 7 years of making their first commercial sale or 10 years if the company is a knowledge-intensive company. However, no age limit will apply to companies raising an investment where the amount of the investment is at least 50% of the company’s annual turnover, averaged over the previous five years. The age limit will apply also to any business that has been owned previously by another company.
  • In addition to the existing cap on annual investments of £5 million, there will be a new cap on the total amount of investments a company may raise under EIS, VCT or other risk finance investment, of £12 million or £20 million for knowledge-intensive companies (see below). Any risk finance investments used by a business previously owned by another company will count towards the total funding limit.
  • If an individual subscribes for shares in a company and that individual already holds shares in the company, the new shares will not be eligible for EIS unless the individual has made a risk finance investment in the company before Royal Assent or the individual’s shares in the company (excluding founders’ shares) were a risk finance investment. A risk finance investment is an investment under EIS, SEIS or Social Investment Tax Relief.
  • There will be a new requirement for the money to be used for the growth and development of the company (or subsidiary company).
  • The rule prohibiting the use of money for the acquisition of shares will be extended to all investments made by VCTs on or after the operative date and will therefore apply to non-qualifying holdings.
  • A new rule will prevent companies from using EIS and VCT investments to acquire a business.
  • Higher limits are being introduced on total investment, age of company and number of employees to provide support for knowledge-intensive companies that are particularly likely to struggle to access finance. A knowledge-intensive company is a company:

- whose costs of research and development or innovation are at least 15% of the company’s operating costs in at least one of the previous three years, or at least 10% of the company’s operating costs in each of the previous three years and either

 

- which has created, is creating or is intending to create, intellectual property or

 

- which has employees with a relevant Masters or higher degree who are engaged in research and development or innovation and who comprise at least 20% of the company’s total workforce.

For knowledge-intensive companies, the limit on employees will be raised from less than 250 to less than 500 employees.

  • The following measures will be introduced with the intention of smoothing the interaction between SEIS and EIS:

- companies will no longer need to use at least 70% of SEIS funds before raising funds under EIS or VCT respectively;

 

- the EIS relief of investors in companies that redeem the shares of SEIS investors will no longer be reduced, so long as the SEIS relief on the redeemed shares is repaid;

 

- the legislation will be amended to clarify that farming outside the UK is not an eligible activity for EIS, SEIS, VCT and Enterprise Management Incentives.

The measures will have effect from April 2014 for the change to the rule on redemption of shares of SEIS investors; 6 April 2015 for the provision removing the requirement for 70% of SEIS funds to be used before a company may raise funds under EIS or VCT; and Royal Assent for shares issued under EIS and for investments made by VCTs and for determining whether investments held by the VCT are to be regarded as qualifying holdings.

Possible pension reform

The Chancellor indicated that there are major changes afoot in the pension tax regime. Changes to the current regime may mean that in future, pension savings operate along similar lines to ISAs – where money is invested, the government makes top-ups to the investment, and the proceeds can eventually be taken out tax-free. There are no further details on this at present but a pension reform Green Paper is to be published for consultation, so we will be monitoring this area for further developments.

Investment managers Capital Gains Tax treatment of carried interest

Carried interest arises from an individual’s participation in an investment vehicle, typically a partnership, and they will normally be charged to capital gains tax on the full amounts they receive in respect of that interest. In relation to all carried interest arising on or after 8 July 2015, whenever the arrangements were entered into, deductions will only be allowed in respect of sums actually given by the individuals as consideration for acquiring the right to that carried interest. This change will not affect genuine investments in funds made by managers on an arm’s length basis (known as ‘co-invest’).

Businesses 

Annual investment allowance

The annual investment allowance (AIA), which has previously been increased temporarily to £500,000 until 1 January 2016, will be set permanently at £200,000 from that date.

Broadly, the AIA allows businesses to deduct the full value of certain items, including equipment and machinery, up to a total value of £200,000 from their profits before tax. This helps them with cash flow because it means the full tax relief is given in the year that items are purchased, rather than over several years. Any businesses considering making large investment on items qualifying for the AIA should now consider the timing of such spending.

Personal service companies

The government is concerned that the IR35 rules are not effective enough and non-compliance in this area is estimated to cost over £400 million a year. The government has therefore asked HMRC to liaise with business on how to improve the effectiveness of existing IR35 legislation. We can expect to see further developments in this area.

Extending averaging for farmers 

As announced in the Spring Budget, the averaging period for farmers will be extended from two years to five years from April 2016. A consultation on the measure has now been published.

Corporation Tax 

Reduction in corporation tax rate

The main rate of corporation tax has already been cut from 28% in 2010 to its current rate of 20%. The Chancellor has announced that the main rate will now be cut further from 20% to 19% in 2017, and then to 18% in 2020, benefiting over a million businesses.

Business goodwill amortisation 

Corporation tax relief for the cost of purchased goodwill will be restricted for acquisitions and disposals on or after 8 July 2015. This measure will be enacted in Summer Finance Bill 2015.

Research and development tax credits

Universities and charities will no longer be able to claim the research & development expenditure tax credit with effect from 1 August 2015. This corrects an anomaly in the legislation and restores the original policy intention. This measure will be enacted in Summer Finance Bill 2015.

 

 

Orchestra tax relief 

The Government will go ahead with its proposed new tax relief for orchestras with effect from 1 April 2016. Corporation tax relief will be available at a rate of 25% on qualifying expenditure. This measure will be enacted in Finance Bill 2016.

National Insurance 

Employment allowance

Businesses will have their employer national insurance bill cut by another £1,000 from April 2016, as the employment allowance rises from £2,000 to £3,000. This increase means that from April next year, businesses will be able to employ four people full time on the national living wage and pay no national insurance at all.

Also from April 2016, companies where the director is the sole employee will no longer be able to claim the employment allowance.

Abolition of Class 2 NICs and reform of Class 4

The government has confirmed that it will consult in autumn 2015 on abolishing Class 2 NICs and reforming Class 4 NICs for the self-employed.

VAT 

VAT on services used and enjoyed in the UK 

The VAT “use and enjoyment” provisions will apply so that from next year, all UK repairs made under UK insurance contracts are subject to UK VAT.

Also, the government will consider a wider review of off-shore based avoidance in VAT-exempt sectors, with a view to introducing additional “use and enjoyment” measures for services such as advertising in the following year.

VAT refunds for shared services 

The Finance Bill 2016 will provide for refunds to eligible public bodies of VAT incurred on specified shared services.

Tax Simplification 

Office for Tax Simplification

Legislation will be included in Finance Bill 2016 to put the Office for Tax Simplification (OTS) on a statutory basis and it will become a permanent office of HM Treasury.

The OTS are to review:

  • the closer alignment of income tax and National Insurance contributions; and
  • the taxation of small companies.

Taxation of employee benefits and expenses

A new statutory exemption for trivial benefits in kind costing less than £50 will be introduced with effect from April 2016. This was first announced at Autumn Statement 2014 as part of a package of measures intended to simplify the taxation and reporting of employee benefits and expenses. Although the other measures were included in Finance Act 2015, this measure has been held over for inclusion in Finance Bill 2016.

Simplified expenses

Finance Act 2013 introduced simpler rules that can be used by unincorporated businesses to claim relief for some business expenses. Legislation will be included in Finance Bill 2016 to amend those rules to ensure that partnerships can fully access the provisions in respect of the use of a home and where business premises are also a home.

Simplification of the treatment of termination payments

The government will consult on the tax and NICs treatment of termination payments with a view to making the rules simpler and fairer.

Reviewing the rules for tax relief on travel and subsistence expenses 

A discussion paper will shortly be published outlining proposals for new rules for tax relief on travel and subsistence expenses.

HMRC debtor and creditor interest rate

Currently, different rates of interest apply to tax-related debt depending on whether or not it follows from court action. Legislation will be included in the Summer Finance Bill 2015 to ensure that rates of interest payable on tax-related debts to which HMRC is a party are all contained within tax legislation.

With effect for interest accruing on and after 8 July 2015, the government will set the rate of interest which applies on taxation-related debts payable under a court judgment or order by HMRC to a rate equal to the Bank of England base rate plus 2%; and it will apply the late payment interest rate of 3% to taxation-related debts owed to HMRC under a court judgment or order.

tax

Personal Tax Rates 2015/16

Personal taxation

Income tax allowances and reliefs 2015/16 2014/15
Personal (basic) £10,600 £10,000
Personal allowance reduced if net income exceeds* £100,000 £100,000
Transferable tax allowance for married couples/civil partners £1,060 N/A
Personal (age) if born between 6/4/38 and 5/4/48 N/A £10,500
Personal (age) if born before 6/4/38 £10,660 £10,660
Personal (age) reduced if net income exceeds* £27,700 £27,000
Married couples/civil partners (minimum) at 10% § £3,220 £3,140
Married couples/civil partners (maximum) at 10%* § £8,355 £8,165
Child benefit charge:
- 1% of benefit for every £100 of income between £50,000 and £60,000
Blind person’s allowance £2,290 £2,230
Rent-a-room tax-free income £4,250 £4,250
Venture capital trust (VCT) at 30% £200,000 £200,000
Enterprise investment scheme (EIS) at 30% £1,000,000 £1,000,000
- EIS eligible for capital gains tax (CGT) deferral relief No limit No limit
Seed EIS (SEIS) at 50% £100,000 £100,000
- SEIS CGT reinvestment relief 50% 50%
Registered pension scheme:
- annual allowance £40,000 £40,000
- money purchase annual allowance £10,000 N/A
- lifetime allowance £1,250,000 £1,250,000
* £1 reduction for every £2 of additional income over the income threshold.
§ Where at least one spouse/civil partner was born before 6/4/35.
Income tax rates 2015/16 2014/15
Starting rate 0% 10%
- on savings income up to** £5,000 £2,880
Basic rate of 20% on income up to £31,785 £31,865
Higher rate of 40% on income £31,786- £150,000 £31,866- £150,000
Additional rate of 45% on income over £150,000 £150,000
Dividends for:
- basic rate taxpayers 10% 10%
- higher rate taxpayers 32.5% 32.5%
- additional rate taxpayers 37.5% 37.5%
Trusts:  
- standard rate band generally £1,000 £1,000
- dividends (rate applicable to trusts) 37.5% 37.5%
- other income (rate applicable to trusts) 45% 45%
** Not available if taxable non-savings income exceeds the starting rate band.

 

Income tax – personal allowance and basic rate band

For 2015/16 the personal allowance will rise from £10,000 to £10,600 and there will be an £80 reduction in the basic rate band to £31,785, as previously announced. The personal allowance will be increased to £10,800 for 2016/17 and £11,000 for 2017/18. The basic rate limit will be increased to £31,900 for 2016/17 and £32,300 for 2017/18.

SAVER – Protect your personal allowance. In 2015/16 your personal allowance is reduced by 50p for every pound your income is over £100,000. If you can reduce your income below £100,000, eg by making a pension contribution or charitable gift, you should benefit from the full allowance.

Class 2 national insurance contributions (NICs)

The government intends to abolish Class 2 NICs in the next parliament and reform Class 4 NICs to introduce a new benefit test. There will be consultation on the detail and timing of these reforms later in 2015.

Tax-free childcare

The maximum amount that parents of disabled children will be able to receive under the new childcare scheme starting in the autumn will be increased from £2,000 to £4,000 a year for each disabled child.

Company car benefit

From 2019/20 the scale percentage of the list price of company cars that are subject to tax will be increased by 3% up to a maximum of 37% for cars emitting more than 75g/km of CO2. There will be a 3% differential between the 0–50g/km and 51–75g/km bands and between the 51–75g/km and 76–94g/km bands. The rates for years up to 2018/19 are as previously announced.

Van benefit charge (VBC)

From 6 April 2016 the main VBC will increase in line with RPI. As previously announced, lower rates of VBC for zero emission vans will be extended to 5 April 2020 on a tapered basis.

Fuel benefit charge

From 6 April 2016 the fuel benefit charge multiplier for both cars and vans will increase in line with RPI.

Tax returns and tax payment

During the next parliament, digital tax accounts will be introduced to remove the need for individuals and small businesses to complete annual tax returns. Further details about the policy and administrative changes will be published later in 2015. Over the summer there will also be consultation on a new payment process to enable tax and NICs to be collected via digital accounts.

Employee benefits and expenses

From April 2015 there will be a statutory exemption for employees’ trivial benefits-in-kind costing less than £50, as previously announced. An annual cap of £300 will also be introduced for directors and other office holders of close companies and employees who are family members of those office holders.

From April 2016, the £8,500 threshold below which employees do not pay income tax on certain benefits-in-kind will be removed and replaced with new exemptions for carers and ministers of religion. The current dispensation regime will be replaced with an exemption for certain reimbursed expenses and a statutory framework will be introduced for voluntary payrolling. The new exemptions for reimbursed expenses will not be available if used in conjunction with salary sacrifice.

SAVER – The new £5,000 0% starting rate band comes into being in 2015/16. If your earnings and/or pensions total not more than £10,600 you may be able to register to receive interest without deduction of tax.

Gift Aid small donations scheme

The maximum annual donation amount that can be claimed through the Gift Aid small donations scheme will increase from £5,000 to £8,000. This will take effect from April 2016, allowing charities and Community Amateur Sports Clubs to claim Gift Aid top-up payments of up to £2,000 a year.

 

budget

March 2015 Budget Summary

20 March 2015

Chancellor George Osborne delivered his sixth and final Budget of this Parliament. Whilst there were no pre-election give-aways there was a clear message for the public that he and his party were the people to trust in rebuilding the UK economy.

Summing up, he said: “Today I present the Budget of an economy stronger in every way from the one we inherited. The Budget of an economy taking another big step from austerity to prosperity.”

With so many announcements leaked in the days prior, there weren’t many surprises in the 2015 Budget but what were the key headlines for taxpayers:

Income tax

    • Personal allowance to be increased to £10,800 in 2016/17, £11,000 in 2017/18
    • The Chancellor also confirmed an increase in the threshold at which people pay the higher tax rate. This will increase from £42,385 to £43,300 by 2017-18, above the rate of inflation
    • Pensions lifetime allowance cut to £1m from April 2016
    • More flexibilities for ISAs (taking out & put back in the same year without affecting the annual limit)
    • Help-to-buy ISA: the Government will contribute an additional 25% to the amount saved by first time buyers towards a home deposit. The maximum is a £3,000 contribution added to £12,000 individual savings
    • Personal savings allowance (worth a maximum of £200) introduced from 2016/17

 Business taxes

  • Diverted profits tax from April 2015
  • Enhanced film & TV tax reliefs and introducing an orchestra tax relief
  • Confirmation that there will be no employer’s national insurance contributions for under 21 year olds (when paid less than £815 per week) from April 2015 and a similar relief for apprentices under 25 from April 2016
  • Some changes to VCT, EIS and SEIS schemes

 Non-residents and non-domiciliaries

    • Confirmation of CGT on non-UK residents selling UK residential property after 6 April 2015
    • Increases to the remittance basis charge for those who have been resident for 12 out of 14 years from £50,000 to £60,000 and a new £90,000 charge for those who have been resident for 17 out of 20 years

 

There was of course further anti-avoidance measures including closing perceived loopholes within the Entrepreneurs legislation which followed the earlier announcement in the Autumn Statement that Entrepreneurs relief would no longer be due on sales of goodwill by a sole trader or partner to their own trading company.

There had been some rumours that there would be changes to some IHT reliefs but the only announcement was a review on deeds of variation.

And finally we had had a lot of excitement in the office with the morning announcement of the end of the annual income tax return but the headline was perhaps more exciting than the detail. The aim however is for all taxpayers to have individual online accounts starting in 2016 with certain information pre-populated from information HMRC receives direct and the option for you to pay your tax early by instalments should you wish. As your agent we will have access to these accounts to keep your information up to date but there is still much detail yet to come. We can only hope HMRC do not try to rush this process and ensure their systems and their data collection processes are robust so there is no more time spent correcting the information than it currently takes to provide the data in an annual tax return.

budget

March 14 Budget

March 14 Budget

Savings, pensions, and tax avoidance all feature in the March 14 Budget. The Budget is increasingly being used to summarise the state of play and map out the next steps in an increasingly coherent work programme.

Here we set out not only the changes announced in this Budget, but also summarise those announced previously which come into effect in 2014 and 2015. Growth and fairness were the themes of the Budget, you can read the individuals measures below, that we have picked out, which may affect our typical client base of small & micro family businesses. It is an introduction only and should not be used as a definitive guide, since individual circumstances may vary. Specific advice should be obtained, where necessary.

Tax Rates and Thresholds

As previously announced, the personal annual allowance for income tax rises to £10,000 from 6/4/14 but the March 14 Budget announced that it will increase to £10,500 from 6/4/15.  This is the level of tax-free income that a person can earn or receive without paying income tax and has risen substantially over the past few years.   However, as in previous years, the higher rate threshold doesn’t increase by the same amount, so this only benefits basic rate taxpayers, not higher rate taxpayers.

The higher rate threshold will be £41,865 for 2014/15, above which income tax will be 40% on the amount of taxable income over that threshold.  The higher rates and thresholds remain unchanged.  The personal allowance is tapered away for incomes over £100,000 and the top rate 45% income tax applies to incomes over £150,000.  If your taxable income is over any of these thresholds,you really need to consider paying contributions to a pension scheme to get your total taxable income under the threshold, especially the £100,000 threshold where the personal allowance is removed.  As the higher rate thresholds are not increasing in line with inflation nor the increases in the personal allowance, more and more people are being dragged into the higher rates of tax as each year passes.

VAT Thresholds

The trend of increasing the VAT registration and de-registration thresholds continue with the March 14 Budget.  The threshold at which you have to register for VAT increases to £81,000 per annum – NB this is your business total “sales”, not profits, i.e. the total amounts paid to you by your customers, not the amount you receive after charges (such as Paypal) nor the amount of profit made (i.e. after commissions, postages, expenses, etc).  For those already registered, you can now apply to deregister if your sales fall below £79,000.  Remember also that these thresholds relate to any rolling 12 month period, not your business year nor the tax year – if you are anywhere near the thresholds you should take monthly reports at every month end from your book-keeping system to keep a tally of your sales for the past 12 months.

HMRC powers extended

The government plans to give HMRC the power to recover tax directly from debtors’ bank accounts where they owe more than £1,000 and have previously been contacted ‘multiple times by HMRC to pay’. A single aggregate of £5,000 will be left across all accounts, after the debt is recovered.  The Treasury says the new power will bring the UK tax authorities in line with other countries in Europe, which already have this power.  Let’s just hope that they get their own house in order as we regularly see demands and statements for wrong amounts due to their errors!  More then ever, it’s important not to ignore any demands from HMRC even if they are clearly wrong – it’s also important to ensure that you tell HMRC whenever you move premises so that they can send correspondence to the right address.

Transferable tax allowances

In the Autumn Statement 2013, the government announced its intention to recognise marriage and civil partnership in the income tax system. It was proposed that this would be done by allowing the transfer of a portion of personal allowances between spouses or civil partners.  For 2015/16 a spouse or civil partner, who is not liable to income tax above the basic rate, will be able to transfer up to £1,050 of their personal allowance to their spouse or civil partner, but only if that individual is not liable to income tax above the basic rate.  From 2016/17 the transferable amount will be 10% of the basic personal allowance.   This could be a useful tax planning tool for couples where one spouse has little or no taxable income.

Employment Allowance of £2,000 for National Insurance

From April 2014, most small business will be eligible for a new £2,000 Employment Allowance to set off against their employers’ (secondary) national insurance contributions. Up to 1.25m employers will be affected with 450,000 having their employer NIC fully covered by the allowance.  Sadly, if you are a personal service limited company caught by IR35 you are not eligible for this allowance!  This has the potential to be a real help for smaller businesses, who employ small numbers of staff, to reduce their payroll costs.

Payroll RTI (real time) reporting, payments and penalties

The first year of the new RTI scheme is coming to an end.  May we remind any clients who do their own payrolls that they must submit RTI returns electronically to HMRC for every pay period (week or month) even if no wages have been paid.  They must also complete a year end RTI submission with final year end details and give P60s (pay and tax certificates) to all their staff.  The old end of year reports (P35 and P14s) are no longer required.  There will be penalties for late or non submission of the RTI submissions.  Please be especially vigilant if you no longer currently employ anyone or all your employers are now paid under the PAYE/NIC thresholds as RTI submissions may still be required and the first you’ll know is the thud of the penalty notice through your letterbox!

Statutory Sick Pay

Currently, some of the smallest employers can reclaim some of the statutory sick pay that they must legally pay to their staff on sick leave.  From 6/4/14, this will end and there will be no relief or repayment for any statutory sick pay that any business has to pay to any of their workers.  However, there is a new scheme, the Health and Work Service’s (HWS)  Return To Work Plan which offers support to manage staff sickness and up to £500 of medical treatment tax free if agreed with the HWS.  The emphasis is therefore changing to getting staff back to work rather than supporting their sick pay.

Child care

The Chancellor confirmed, in the March 14 budget, that the Tax-Free Childcare costs cap, against which parents can claim 20% (basic rate tax) support, will be increased to £10,000 per year for each child. This will mean that eligible parents can now benefit from greater support, worth up to £2,000 per child each year. The Tax-Free Childcare Scheme will also be implemented more quickly than previously announced. From autumn 2015, the Scheme will be available to all eligible families with children under 12 within the first year of the scheme’s operation.

Director loans

A loan provided by a company to a director, that is interest free or low cost, is not currently taxed as earnings of employment if it does not exceed £5000. As long as the total outstanding balances on all such loans do not exceed the threshold at any time in a tax year, there is no personal tax benefit-in-kind charge. From 6 April 2014, this threshold will be doubled to £10,000.   However, the company will still have to pay a 25% tax charge on all outstanding loans to directors that remain outstanding 9 months after the company year end, and there are rules to prevent repayment and then it being drawn again shortly after, so these relaxations are only helpful for those wanting a short term loan on an occasional basis, certainly not for long term or semi-permanent loans.

Annual Investment Allowance (Tax relief for business equipment purchases)

Small businesses can claim the full cost of their equipment purchases (including vans etc) against their profits in the year of purchase.  The limits have been going up and down wildly from year to year which isn’t helpful, but the limit increases from £250,000 to £500,000 per annum with effect from April 2014  to December 2015 but will then revert back to £25,000 per annum with effect from January 2016.  So, if you have any plans for spending more than £25,000 p.a. on plant and equipment, then you should do it in 2014 or 2015 whilst the limits are higher.

Private residence relief for Capital Gains Tax on sale of your home

As announced in the Autumn Statement 2013, the government will legislate to reduce the final period exemption from 36 months to 18 months in most cases from 6 April 2014.  This reduces the generous capital gains tax relief  and will affect those who have two “homes” temporarily when moving out of one and into another and will also affect those who have previously lived in a home which was then rented out.

Corporation tax

The small profits rate of corporation tax will remain at 20% from April 2014.  As announced previously, the main rate of corporation tax will be reduced to 21% from April 2014 and 20% from April 2015.

IR35

There was no mention of IR35 or any more detail about the government’s plans to reduce tax avoidance by clamping down on so-called “artificial employment”.

ISA changes

There has been a major change to the ISA limits applicable from 30 June 2014 with transitional measures from 6 April 2014. If you are planning to put money into an ISA, there have been changes to the cash limits and to the flexibility of ISAs.

SEIS (Small Enterprise Investment Scheme)

The Scheme was not permanent, but ran from 6 April 2012 to 5 April 2017. Finance Act 2014 will make the Scheme permanent. The investment limit for a qualifying individual in a fiscal year is £100,000 and cannot claim tax relief until the company has spent at least 70% of the money invested.

Simplifying self-employed National Insurance Contributions (NICs)  

Following a consultation announced at Budget 2013, from April 2016 class 2 NICs for self-employed will be collected through self-assessment.

Pensions

The March 14 Budget announced fundamental changes to the pensions regime.  From 27 March 2014 to April 2015 measures are being introduced to make withdrawing benefits during this period more flexible. These changes cover the following:

  • capped drawdown increasing basis amount from 120% to 150%
  • flexible drawdown, minimum income threshold reduced from £20,000 to £12,000
  • trivial commutation limit increased from £18,000 to £30,000
  • relaxation of rules relating to small pension pots.

Currently people who choose to withdraw all of their defined contribution pension savings at the point of retirement are charged 55% on the amount withdrawn (other than the 25% tax free amount).   From April 2015 an individual will be able to withdraw their savings at a time of their choosing subject to their marginal rate of income tax, which for a basic rate tax payer will be 20%.  Also from April 2015 the government will introduce a new guarantee that everyone who retires with a defined contribution pension will be offered free and impartial face-to-face guidance on their choices at the point of retirement.

Together with the changes to ISAs, we strongly recommend that everyone reconsider their savings for retirement plans as these announcements of fundamental changes have the potential to be “game changers” for a lot of people!

Upfront payment of tax associated to avoidance schemes

Budget 2014 announced a new measure that will require taxpayers to pay upfront tax disputed under schemes that fall within the Disclosure of Tax Avoidance Schemes (DOTAS) rules or are counteracted under the General Anti-Abuse Rule (GAAR).

Legislation will be introduced in Finance Bill 2014 that will enable HMRC to issue a ‘Notice to Pay’ to any taxpayer for whom there is an open enquiry, or the matter is under appeal, and who has received a cash flow tax advantage by the use of arrangements that fall to be disclosed under DOTAS.  The notice will require the taxpayer to pay the tax in dispute within 90 days. If the taxpayer requests HMRC to reconsider the amount of the payment notice a further 30 days will be granted. In the case of a matter under appeal, the new rules will remove the postponement of the disputed tax.

The intended effect of the new rules is that of removing the cashflow advantage enjoyed by the taxpayer of holding onto the disputed tax during an avoidance dispute. There will be no change to the tax liability owed.

Summary

Overall a relatively benign budget for our typical small business client.  The national insurance relief for small employers is welcomed, but offset against the loss of being able to reclaim some statutory sick pay that has to be paid to ill staff.  Good news that the limit for tax relief on capital purchases is increased, but most small businesses need to spend far less anyway so the old limits were usually adequate.  The increases in the personal allowance is good, but not the fiscal-drag of more people being sucked into the higher rate tax bands.  The changes to pensions and ISAs has the potential to be a game-changer for people planning for their retirement and I think that there’ll now be more emphasis on paying contributions into pensions due to the promised flexibility.

tax-planning

Personal Tax Planning

Its always good to think about personal tax planning, whilst there is still time to do something about it!

Individual Savings Accounts

Use your ISA allowance each year.  For 14/15, each person can invest £15,000 (£15,000 in cash) in an ISA.  Over a number of years, this builds up into a very tidy sum of money generating tax free returns – even better if the returns are re-invested within the ISA wrapper! You can invest in cash, insurance, stocks and shares.

Tax-Free Interest

If your total taxable income is below the annual personal tax-free allowance, then make sure that you register with your bank or building society to receive your interest tax-free by completing and giving them an R85 form.

Claim Your Tax Credits

A large number of people are entitle to either child tax credit or working tax credit (or both).  Eligibility can easily be checked by going to the HMRC website.  Tax credits can be worth thousands of pounds each year for low income families.  Even if your income is over the threshold and you aren’t currently entitled to tax credits, you should make a “protective” claim, resulting in zero tax credits, just in case your actual income turns out less than you expect in the coming year – this is because you can’t back-date new tax credit claims by more than a month, but an existing claim can be increased from zero for the entire period, several months earlier!

Registering Your Rental Loss

If you make a loss on renting out a property, you should report it to HMRC even if you don’t have to according to HMRC rules.  Without reporting rental losses, you are losing out on being able to set these losses against future income from property, meaning you pay more tax that you needed to.  If you register losses each year, they’re there for you to set against future profits.

Utilise Rent A Room Relief

If you rent out a room to a lodger within your own home, you can claim rent-a-room relief of £4,250 p.a.  This means that you don’t need to declare the actual income and can avoid the complicated matter of working out the proportions of household bills that you can claim for against the income.

Keeping Child Benefit Entitlement

If you or your partner have total taxable income of over £50,000, you lose child benefits, whereas if each of you earn just under, say £49,000 each, you keep them.

So, if part of your total income comprises property or investment income, such as buy to let or dividends, then consider giving some of your investments to your partner, to reduce your taxable income and increase your partner’s income, hopefully so that you both have incomes under £50,000!

NB transfers of assets to a spouse or civil partner have no tax consequences upon the transfer, but beware, there is no such exemption for transfers between co-habitees who aren’t married or in civil partnerships!

Alternatively, consider making a personal pension contribution which reduces your taxable income so you could bring your income down below the magical £50,000 threshold and keep all your child benefit!

Capital Gains Tax

Every individual has an annual exempt amount for CGT, currently, £11,000 p.a.  This means the first £11,000 of capital gains in any tax year is tax free.  This is a “use it or lose it” allowance, so if you don’t use it, it’s lost forever.  So, if you have any assets, such as shares or property, that you can sell or partially sell, it may be worth doing so if it triggers a gain of £11,000 or less.  If, say, you had a share portfolio with a capital gain of £50,000, you’d pay around £11,000 in capital gains tax if you sold all the shares in the same year, but if you sold one fifth of the shares in each of the next five tax years, you’d pay no CGT – a saving of £11,000 just by timing your sales more carefully.  Of course, this ignores the potential rises or falls in the value of your portfolio so, as always, don’t let the tax tail wag the dog!

tax

Income Tax Table

 

Income tax rates 2014-2015 2013-2014
10% starting rate for savings * £2,880 £2,790
20% on income up to £31,865 £32,010
40% on income over £31,865 £32,010
45% on income over £150,000 £150,000
Dividends for basic rate taxpayers 10% 10%
Dividends for higher rate taxpayers up to £150,000 32.5% 32.5%
Dividends for income over £150,000 37.5% 37.5%
Trusts within relevant property regime ** 45% 45%
Dividends for trusts within relevant property regime 37.5% 37.5%

*  Restricted to savings income and not available if non-savings income exceeds starting rate limit.
** A standard rate band of £1,000 applies, below this level income will be taxed at no more than 20%.

Main income tax reliefs 2014-2015 2013-2014
Personal allowance (for income up to £100,000) * £10,000 £9,440
Personal allowance (born 6/4/1938 to 5/4/1948) ** £10,500 £10,500
Personal allowance (born before 6/4/1938) ** £10,660 £10,660
Married couple’s allowance (born before 6/4/1935) *** £8,165 £7,915
Income limit for age-related allowances £27,000 £26,100
Blind person’s allowance £2,230 £2,160
Enterprise Investment Scheme at 30% **** £1,000,000 £1,000,000
Seed Enterprise Investment Scheme at 50% **** £100,000 £100,000
Venture Capital Trust at 30% £200,000 £200,000
Social Investment Tax Relief at 30% **** £1,000,000 -
Rent-a-room tax-free income £4,250 £4,250

*    The allowance is reduced by £1 for every £2 income above £100,000 irrespective of age.
**   The allowance is reduced by £1 for every £2 income above the limit subject to a minimum allowance of £10,000 for 2014-15 unless income exceeds £100,000.
***  The allowance may be reduced subject to income levels (minimum allowance £3,140 for 2014-15). Relief is given at 10%.
**** Capital gains tax reliefs may also be available.