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Archive for the ‘Tax’ Category

March 2016 budget

Full details of the March 2016 budget are available on the governments Website .

Here’s our summary of the main points.

Dividend Tax

The new dividend tax is confirmed; you can read more about it here.

Personal Allowance

From 6th April 2016 the will increase by £500 further to £11,500 in April 2017.

Tax Higher Rate

From 6th April 2016 40% tax will kick in £2,000 later at £45,000.

Corporation Tax

The rate will reduce 17% by 2020.

Director’s Loan Accounts

From 6th April 2016 loans to directors not repaid within 9 months will be taxed at 32.5%.

Savings

A new allowance is being introduced for the 2016/17 tax year which means basic rate taxpayers won’t have any tax charged on the first £1,000 of savings interest. Higher rate taxpayers have £500.

Employment Allowance

This is increases to £3,000.

National Insurance Contributions

Class 2 National Insurance Contributions will be abolished from April 2018.

Entrepreneurs

The rules on closing a company using a Members Voluntary Liquidation are changing. It will not be possible to pay tax at 10% on company assets.

But, the rate of Capital Gains Tax for basic rate taxpayers has been reduced from 18% to 10%. For higher rate taxpayers the Capital Gains Tax rate will reduce from 28% to 20%.

Administration

The Government is looking to introduce “pay-as-you-go” tax accounts with flexible payment rules,. This means you can pay tax as soon as the income is received. More details will be released during the year.

Year end tax planning

The UK national debt is growing at over £5,000 a second and tax revenues are the only way for the government to stop this growing and pay it off.

Starting April 2016 the government is committed to denying people basic tax reliefs. This will divert personal and business cashflow into the Treasury.

We have highlighted three issues which will have a significant impact:

  • Private landlords
  • Higher rate tax payers
  • Owners of small limited companies

 

Private landlords
Owners of furnished, residential property will pay more tax because the 10% wear and tear allowance is replaced by a more restrictive replacement cost relief.

Stamp duty is also going up for landlords and next year sees tax relief on loan interest being restricted to the basic rate. This last change could seriously impact the ability of landlords with high debt to property values to maintain their property holdings.

Landlords considering buying a new property should think about bringing the completion date forward to before 1 April 2016.

If you need to replace furniture in a rented property then wait until after 5 April 2016. In this way you can claim for the full wear and tear allowance 2015-16 and next tax year you can claim the new replacement furniture relief.

Higher rate taxpayers
The governments focus here is the reduction of tax relief that can be claimed for pension contributions.

The law is already in place to reduce the amount of pension relief for additional rate (45%) tax payers to just £10,000 a year. Now, there is speculation that 40% or 45% tax relief will be scrapped altogether and a lower threshold set.

Consider maximising your pension contributions before the end of the tax year.

Limited company owners
From 6 April 2016, the first £5,000 of dividend income is tax free, but any additional dividends, will be taxed at:

  • 7.5% if the dividends form part of your basic rate band
  • 32.5% if the dividend forms part of your higher rate band, and
  • 38.1% if the dividend forms part of your additional rate band.

 

If you use dividends to take out profits from your company, consider stripping out any available company reserves to 5 April 2016 as dividends.

If this can be done without pushing your overall income into the higher rates you will have no additional income tax to pay. Even if the distribution pushes you into the higher rates there may still be overall savings to be made.

Taxing the sharing economy

The sharing economy began to appear in the early 2000s as people looked for extra cash driven by the impact of the recession.

This new economy (worth an estimated £15n) has been on the radar of the tax office (HMRC) for a while. A consultation document issued by HMRC with the title “Tackling the hidden economy: Extension of data gathering powers” is a clear warning for 2016 onwards for everyone to ensure they declare income from places like AirBNB.

HMRC plan to collect data from third parties and estimates it will raise £285m by the end of 2021. Companies like Apple, PayPal, Amazon, AirBNB and Etsy are high on the target list.

The law supports HMRC. The Finance Act 2013 section 228 gave new powers to HMRC collect data from businesses that process credit and debit card transactions. These powers will now be broadened to data held by electronic payment providers (not necessarily in relation to credit and debit cards), and business intermediaries. Intermediaries are businesses/Websites that allow customers to place orders, buy or reserve goods, services and/or digital products.

According to the ACA, a leading professional body in the accounting world, HMRC are under extreme pressure to increase the tax take. They will turn up armed with data and look to penalise you if they think you are withholding information.

As we move to online reporting the tax net is drawing closer. If you’d like any help dealing with these matters get in touch and remember, our fees are usually tax allowable.

Quarterly reporting for the self employed

The Chancellors recent announcement revealed a little more about the new Digital Tax Account. It looks as if the self-employed will need to report their figures and pay tax quarterly.

More details will be revealed early next year but this could force most self employed on to the cash accounting rules. This is a simplified option for self employed to complete their tax return where tax is paid on the difference between Money In and Money Out with the option of flat rate expenses.

If a self employed person doesn’t opt for cash accounting they will need to complete full business accounts using standard accounting rules.

The key will be using software to make life easier and Sackmans will be keeping a close eye on developments.

Giving to save tax

Inheritance Tax (IHT) is something that affects more people than ever and is expected to double by 2020. In 2015/15 the tax office collected over £3.4 billion.

One way to defeat IHT is to make gifts before you die. Here are some ideas how to gift effectively.

Make use of the annual transfer’s allowance of £3,000 which can be carried forward one year. Small gifts of £250 per person a year is also exempt. You can also make gifts up to £5,000 if you are the parent of a child getting married. Grandparents and the other person getting married can give £2,500 – everyone else can give £1,000.

Make sure you give away your money before it is too late. If you survive seven years the gift is outside your estate. Bear in mind that you can insurance against IHT on an early death – just make sure the insurance proceeds go into trust, not your estate otherwise there will be tax on that.

One way around the seven year rule is to claim the gift is normal expenditure out of income. For the tax office to agree, you need to be able to show a pattern of expenditure. So, it can be better to do regular (perhaps monthly or quarterly) gifts rather than one large one.

No gain mean no pain

Married couples and civil partners can reduce Capital Gains Tax (CGT) by making use of a special rule which allows them to transfer assets between them at a value that means there is no gain or loss for tax purposes.

This rule can be used with assets help in one person’s name or for assets held in joint names.

An example would be Simon and Jane who are married. Simon bought a painting for £1,000 which is now worth £10,000 that he wants to sell. But, he is a higher rate tax payer and has already used is CGT allowance so would pay 28% tax on £9,000.

But, if he transfers the painting to Jane (who is a lower rate tax payer), she can sell it and not pay any tax because the gain is below her CGT allowance. She will be treated as buying the painting on the same date and at the same price that Simon did.

If in the following year, Simon wanted to sell a house he owned with a gain of £33,000, he could transfer 33% and use Jane’s CGT allowance. Or, he could transfer 66% and use both their allowance and her lower rates of tax.

Make sure you use the no gain rule if want to sell assets which have a CGT liability.

Common VAT Traps

Here are some VAT traps to be aware of:

Avoiding VAT registration by business splitting
There are rules to prevent people avoiding VAT registration by splitting sales between different people.

It’s important to keep in mind that a “business” is not registered for VAT -a person is. The person can be an individual, partnership or company. The classic example is a pub where the pub with accommodation – the husband’s name and the accommodation is in the wife’s name.

If you have more than one business that you treat separately fro VAT be careful.

Not applying to use VAT flat rate scheme
Unlike other VAT schemes like Cash Accounting, you need to get the permission of the tax office to use the Flat VAT Rate Scheme.

It’s important you get their agreement to use the scheme because applications cannot be back-dated. This could cost you thousands of pounds.

Reclaiming VAT on parking meters
You need a valid VAT invoice to reclaim VAT and on-street parking meters are not subject to VAT so there will not be a VAT number on the receipt.

This maybe a very small thing but if the tax office spots this it could encourage them to look closer at your business and assume there are other errors, like not declaring all your income.

Note – all parking tickets should be checked carefully as council parking generally does not have VAT.

Claiming VAT on business entertaining
VAT is not recoverable on any entertaining – that includes lunches with clients unless they are overseas customers.

However, you can claim the VAT on your annual party if it is below £150 per head. And, you can have two parties at £75 a head.

Failing to repay VAT on unpaid invoices
If a business has not paid a supplier bill for over six months (and they originally reclaimed the VAT under the accruals basis) they need to repay the VAT to the tax office.

Saving for children

If a parent saves money in the child’s name in a standard savings account then if the interest is over £100 it will be taxed in the parent’s name.

So, you can only save a few thousand for a child before the interest is taxed. However, grandparents can save for grandchildren without the same problem. And, a child has a tax free allowance of £10,600. So, a child could have a couple of hundred thousands of pounds of savings from grandparents and not pay tax.

This is why it can be worth families discussing arrangements and possibly gifts skipping generations.

But, parents can save for their children in a tax free environment called Trust Funds (CTFs) and Junior Savings Accounts (JSAs).

From April 2015 parents can transfer savings held in a Child Trust Fund (CTF) to a Junior Savings Account (JSA), which can pay better rates and may have lower charges.

Money held in a CTF or JSA is locked away until the child reaches 18.  But, the income is tax free. A JSA operates in the same way as an Individual Savings Account (ISA). The maximum investment is £4,800 so there is scope to make tax free investments for children.

 

Avoiding 60% tax

You effectively pay tax at 60% on income over £100,000 because you pay tax at 40%, plus you start to lose your personal allowance, which also increases your tax.

Your personal allowance is £10,600 for the current tax year. The rule is that you lose £1 of allowance for every £2 of income over £100,000. So, if your income is £101,000 then the tax of the £1,000 over £100,000 is 40% of £1000 (£400) plus £200 (40% of £500 being the reduction in the personal allowance). This is a tax rate of £600 on £1,000 = 60%.

This tax rate applies between £100,000 and £121,200 because at this level there is no personal allowance left. So, it can be useful to look to reduce your income below £100,000.

Here are three ways to reduce your income below £100,000 and save tax at 60%.

Pension
Contributing to a pension scheme will reduce your taxable income. So, for example, if you had income of £121,200 and contributed £21,200 you would save tax of £12,720. This would make the cost of the pension contribution £8,480.

Keep in mind that you can get 25% out tax free which is £5,300 which would leave £15,900 in your pension at a cost of £3,180.

Transfer income
It is possible to transfer assets that generate income to your spouse or civil partner. This can reduce your personal income for tax.

Your spouse or partner may have to pay tax at 40% but you won’t lose your personal allowance, so you save tax of 20% on the income.

Timing
If you have a company you can delay or bring forward income by paying dividends at different times. It is possible to let profit roll-up in a limited company and pay out dividends over many years when you wind down or retire. In effect, you use your company as a pension fund.

Another option is to let profit roll up in a limited company and pay out profits as a capital distribution when you close the company.

New Dividend Tax

This month’s budget contained a bit of a shock, a new way of taxing dividends.

No all the details are available yet so I won’t go into the ins and outs but this is likely to cost the typical owner of a small limited company over £2,000 a year, perhaps more when we know the full details.

That’s the equivalent of £175 a month and to put that into perspective, if you paid that off your mortgage every month you could repay it 7-8 years earlier. If you are new our young business, this could be a significant chunk out of your pension pot.

We are advising clients to do two things:

Action 1 – Profit Improvement Plan

One way to respond to the new tax of dividends is to review your business for ways to increase profit.

The idea is that you make more profit so that after tax you are no worse off. You may even be better off!

Use this calculator and see what potential your business has https://www.sackmans.co.uk/profit-improver/

Action 2 – Carry out a financial planning review

Any change in taxation like this should trigger you to look at your financial plans. You may want to tweaks a few things in response.

Now is the perfect time to have a review before the new tax kicks in April next year. I can either do this with you, for you or let you create your own plans using a simple but powerful software package.

For more information email me malcolm@sackmans.co.uk