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Month: April 2022

A new breed of digital nomad

Written by admin on . Posted in Income Tax, self-assessment, Self-Employed, Tax. No Comments on A new breed of digital nomad

The pandemic has freed many workers from the confines of the office, leading to the emergence of a new breed of digital nomad – people who can take their laptop, jump on a plane and set up a remote ‘office’ somewhere exotic.

Some countries have responded with schemes to assist long-term workcations. For example, with the Barbados Welcome Stamp, digital nomads can stay in Barbados for up to 12 months with no tax implications – the fee is $2,000 for an individual. But before packing your bags there are some practicalities that cannot be overlooked.

The self-employed should not have any insurmountable problems, but employees will need to consult with their employer to see if they are going to be supportive of a move away, potentially to a different time zone.

UK property

There might not be much of a problem if currently renting in the UK, but home ownership comes with more issues. Simply leaving a home empty – even if affordable – could be in breach of the mortgage agreement and may invalidate household insurance. Property rental is a solution but means meeting serious requirements; a good letting agency should be able to advise. Some remedial work may be necessary, such as the installation of fire alarms.

You should definitely retain your UK bank account, but also look at online options for holding currency and transferring funds overseas.

Tax status

It’s all very well having tax-exempt status where you are based, but it is of limited benefit if you remain subject to UK tax. It is important to remember that UK residence status is determined separately for each tax year. The rules can be quite complicated, but you can be classed as non-resident if you:

  • Spend fewer than 16 days in the UK during a tax year. Unfortunately, it’s probably too late now to meet this requirement for the current year;
  • Work full-time overseas, whether self-employed or employed – and you are allowed to visit the UK for up to 90 days each tax year; or
  • Balance your visits and ties to the UK. For example, if you just make use of a UK home, UK visits will need to be restricted to no more than 90 days.

A good starting point for establishing residence status is HMRC’s guidance on the statutory residence test. This can be found here.

Photo by Peggy Anke on Unsplash

Student loan rule changes from 2023

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Around three quarters of those students who started full-time undergraduate degrees in 2020/21 are not expected to fully repay their student loans. However, changes starting with the 2023 student cohort will see many paying more, and over half of new student loans are likely to be repaid in full.

Current rules

English and Welsh students don’t make student loan repayments until their annual income exceeds £27,295, with repayment at the rate of 9% on the excess. After 30 years, any remaining debt is cleared.

The 30-year limit means that even someone with a good income may not make full repayment given the relatively high rate of interest that can be charged. This means it is often not worthwhile paying off a student loan any earlier than required.

New rules

The changes will come in for students starting their university courses from September 2023:

  • The most contentious change is the extension of the repayment term from 30 to 40 years. This, in what has been described as a ‘lifelong graduate tax’, will see many students paying for their degree until retirement.
  • Students will also start making repayments at a reduced income level of £25,000.
  • The interest rate charged – it can currently be as high as the Retail Prices Index (RPI) + 3% – will be cut to just RPI for new borrowers.

The first two measures will increase the cost of student loans, especially for those lower earners who just earn sufficient to make repayments. There will be little difference for the lowest earners, but the interest rate cut will mean gains for higher earners who would have paid off their loans in any case.

If you have children leaving school this year, they might want to rethink any plans for a gap year. Starting at university this year will mean their student loan being repaid under the existing rules.

Changes in Scotland

Student loans will not change for Scottish students, although they already have a £25,000 income threshold following a large increase in 2021. New Scottish students have a 30-year repayment term, with the interest rate currently set at 1.5%.

A detailed analysis of the changes to the student loan system can be found here.

Photo by Brooke Cagle on Unsplash

Can the child benefit charge be fixed?

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A critical review of how the government taxes child benefits has raised a major question mark over HMRC’s approach to collecting payments.

Child benefit tax, or the High-Income Child Benefit Charge (HICBC) to use its legal name, is a case study in how not to introduce and operate a tax. It was designed as a quick fix to political pressure for the withdrawal of child benefit from high earners during a period of austerity.

When the HICBC was introduced in January 2013 – not even the start of a tax year – broadly speaking, it applied if either parent had ‘adjusted net income’ of over £50,000. At the time, the higher rate income tax threshold throughout the UK was £42,475, meaning the ‘high income’ label had some meaning. The threshold has remained at £50,000 ever since, with the result that, outside Scotland, it has now been overtaken by the higher rate threshold (£50,270 in 2022/23). A corollary is that the proportion of families affected has increased over the period from one in eight to one in five, according to the Institute for Fiscal Studies.

In a recent review, the OTS has been highly critical of HICBC and the convoluted way in which HMRC collects the tax. The OTS notes that in 2019/20, HMRC opened over 125,000 compliance checks on ‘customers’ who it suspected had not paid the correct amount of HICBC. The OTS report also noted that HMRC had written to 94,000 potentially affected people in 2020/21, many of whom could face shock tax bills in the near future.

The HICBC is structured as a tax charge equal to 1% of child benefit received for each £100 of income above the £50,000 threshold. So, for example, if you have:

  • two children and are entitled to child benefit of £36.25 a week (£1,865 a year); and
  • your ‘adjusted net income’ is £54,000; then
  • you face a tax charge of £754 (£1,865 @ 40%).

At £60,000 or more of income, the tax charge matches the child benefit, making it sensible to opt for non-payment of the benefit. However, you or your partner should still register for child benefit because it gives entitlement to national insurance credits.

In some circumstances, it is possible to use tax planning to limit or even sidestep the HICBC completely, but given the charges’ complexities, doing so requires professional advice.

The next step for Making Tax Digital

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Making Tax Digital (MTD) for VAT has been in place for three years, but this first phase excluded voluntarily registered businesses beneath the registration threshold. From 1 April 2022, all VAT-registered businesses must implement MTD regardless of turnover.

The vast majority of businesses registered voluntarily under the scheme will have done so because they can recover input VAT without suffering any, or much, in the way of output VAT   – typically where customers are VAT registered or sales are zero-rated. Most new entrants will therefore not be using the flat rate scheme and will have to keep full digital records.

There are limited exceptions from MTD, but voluntarily registered businesses can simply deregister if the amount of VAT recovered doesn’t warrant the time and/or cost involved with MTD compliance.

Signing up

Those businesses now coming into the scope of MTD must use it for their first VAT return starting on or after 1 April 2022. There could therefore be quite a delay if submitting returns annually. For example, with an annual accounting period to 31 December, MTD will not need to be used until the year beginning 1 January 2023.

Businesses need to sign up for MTD, but this should be done only after the final non-MTD return has been submitted. If paying by direct debit, sign up needs to be at least a week before the first MTD return is due.

Software

Compatible software has to be in place for the start of the first MTD VAT return period. The easiest option will be if records are currently kept on a spreadsheet. Free bridging software can then be used to pick up relevant details and submit VAT returns to HMRC. Bridging software is necessary because any transfer of data must be done using a digital link; cutting and pasting is not a digital link.

Even if full VAT record-keeping software is required, there are some free versions available.

Smaller businesses will invariably be wary of change, but MTD should improve accuracy. HMRC figures show that for 2019/20, a reduction in errors brought in some £195 million in extra VAT revenue.

Details of MTD software that has been through HMRC’s recognition process can be found here.

 

NICs boost for the self-employed

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Prior to the March Spring Statement, most self-employed individuals were facing increased national insurance contribution (NIC) bills this year. However, those with profits up to and just over £28,000 will now see a fall in the amount they pay compared to last year. What’s more, low earners can benefit from deemed contributions.

Class 4 NICs

The introduction of the 1.25% health and social care levy from 6 April put up the rates of profit-related class 4 NICs to 10.25% and 3.25%. However, the rate increase has been mitigated by a substantial uplift to the starting threshold. It was going to be set at £9,880 but will now be £11,908 across the 2022/23 tax year. For 2023/24, the threshold will be fully aligned with the income tax personal allowance of £12,570.

Although the freezing of the upper threshold at £50,270 is pushing more people into higher rate income tax, it is actually beneficial for NIC purposes. Extra profits are subject to NICs at 3.25% instead of 10.25%.

Class 2 NICs

The threshold at which fixed-rate class 2 NICs become payable was due to increase from £6,515 to £6,725. However, this threshold has also now been set at £11,908, and will be aligned with the personal allowance for 2023/24.

The £6,725 threshold has not, however, been discarded. In a big change for class 2 NICs, self-employed people with profits between £6,725 and £11,908 for 2022/23 are deemed to have made contributions without actually having to pay them. They will therefore continue to build up their contribution record. This is particularly important for State pension purposes where 35 qualifying years are required to obtain the maximum.

The deemed contribution threshold might mean a useful tax planning opportunity. For example, if profits for 2022/23 are set to be £12,000, spending £200 on, say, a new telephone before the year end will avoid the cost of class 2 NICs, and also save some income tax and class 4 NICs.

Overall impact

The table shows the overall impact of the Spring Statement changes at different profit levels:

Profit 2021/22 2022/23 (Original) 2022/23 (Now)
£10,000 £197 £176 Nil
£15,000 £647 £689 £481
£20,000 £1,097 £1,201 £923
£30,000 £1,997 £2,226 £2,018

The Spring Statement factsheet explaining the changes can be found here.

Protecting the normal minimum pension age

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The normal minimum pension age (NMPA) will increase from 55 to 57 on 6 April 2028, although a protected pension age regime will be introduced. This will allow those who meet the rules to take benefits based on their existing normal minimum pension age.

Protected pension age

Protection will apply to members of registered pension schemes who before 4 November 2021 had the right to take their pension entitlement earlier than 57.

  • There will be no need to apply to HMRC for protected pension age.
  • The regime will apply to all types of UK-registered pension scheme.
  • A person with protected pension age will be able to take benefits in stages without losing protection.
  • Moving jobs, a change of pension scheme, making a transfer to a new scheme or taking benefits could all have an impact on the NMPA that will apply.

The age was previously increased from 50 to 55 in 2010, and anyone who has protected pension age from that transition will see no change when the threshold increases to 57.

No protected pension age

The impact of the higher NMPA will depend on when a person was born:

Born before 7 April 1971 Will be 57 by 6 April 2028, so not affected by the change.
Born between 7 April 1971 and 5 April 1973 Will be 55 by 5 April 2028, so not affected if pension benefits fully taken by then. However, if a person still has benefits to take at 6 April 2028, they will have to wait until 57 before the remaining benefits can be taken.
Born on or after 6 April 1973 Will not be 55 by 5 April 2028, so will have an NMPA of 57.

The new protected pension age regime is wide-ranging and complex, providing both opportunities and risks. Professional advice is therefore essential.

HMRC’s policy paper on increasing normal minimum pension age can be found here.

Photo by Alan Billyeald on Unsplash