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Month: September 2023

Interest rate rises fuelling increased tax take

Written by admin on . Posted in Capital Gains Tax, Income Tax, PAYE. No Comments on Interest rate rises fuelling increased tax take

The Bank of England base rate increase is impacting on the government’s tax takes, with more taxpayers paying tax on savings income due to higher interest rates. Increased mortgage rates are contributing to rocketing capital gains tax (CGT) takings too.

The impact of savings on tax

National Savings & Investment is offering a 5% return on its one-year bonds, and some financial institutions are offering 6% for a similar investment. So, a higher rate taxpayer with £10,000 or more invested will easily exceed their £500 savings allowance. In fact, it is estimated that the number of taxpayers paying tax on their savings income for 2023/24 will be a million more than the previous year.

There are two options to minimise tax liabilities:

  • You could move savings into ISA accounts, up to an annual investment limit of £20,000. This limit could restrict the scope of such planning for some.
  • You could invest in tax-free premium bonds. Although not paying interest as such, the expected annual return for larger investments is 4.65% – equivalent to a gross 7.75% for a higher rate taxpayer.

It’s advisable to keep careful track of your savings income for tax purposes. If tax is owed, it will be paid through self-assessment or via a PAYE coding adjustment.

Why is capital gains tax revenue increasing now?

The substantial increase in CGT receipts reported recently is partly explained by the number of buy-to-let landlords who are selling up. A buy-to-let was a good investment choice when mortgage costs were low, property prices were increasing, and cash savings accounts offered a very poor return in comparison. But all three of these factors are now in reverse, and landlords will often be able to get a better return investing their funds elsewhere.

Uncertainty around possible future increases to CGT is also pushing landlords to sell sooner rather than later.

If selling up, landlords can keep CGT bills as low as possible by:

  • Making sure any qualifying expenditure is claimed, including any enhancement expenditure which hasn’t qualified as a deduction against property income.
  • Disposing of any other investments standing at a loss in the same tax year, because capital losses cannot be carried back to earlier tax years.
  • Putting property into joint ownership with a spouse or civil partner prior to disposal.

These measures can help alleviate some of the seemingly punitive rates of CGT.

HMRC information on the taxation of savings income on can be found here [savings interest] and we are always happy to advise you on your options.

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Finalising tax return figures and filing early

Written by admin on . Posted in Income Tax, self-assessment, Tax. No Comments on Finalising tax return figures and filing early

HMRC is chasing taxpayers who have submitted tax returns for 2021/22 containing unresolved provisional figures, while also extolling the benefits of filing early for 2022/23.

What are provisional figures?

A provisional figure is not the same as an estimated one.

  • An estimated figure is used when it is not possible to provide a more accurate figure – so it is intended to be final. For example, small amounts of income might be estimated, or records could have been lost, making an accurate figure impossible.
  • A provisional figure, on the other hand, is one that is used temporarily, with the intention to submit a more accurate figure later.

On a tax return, a box needs to be checked if a provisional figure has been supplied. HMRC will then be aware that an amended tax return is due.

HMRC is not chasing taxpayers directly, but via letters to tax agents. The strict deadline for amending a 2021/22 tax return is 31 January 2024, but HMRC is pushing for amendments by 30 November (if actual figures are now available), or otherwise by 31 December.

If the missing information is now too old to obtain, it will instead be necessary to confirm the provisional figure as final.

Why filing early is often a good idea

The deadline for submitting 2022/23 tax returns is also 31 January 2024, but there are benefits to earlier filing:

  • Tax liabilities will be established sooner, enabling more accurate financial planning throughout the year.
  • Using HMRC’s budget payment plan, as a taxpayer you can make regular weekly or monthly savings towards your tax bill.
  • Any tax refunds you are owed will be received earlier.
  • It is always advisable to contact HMRC well in advance if it’s not going to be possible to pay a tax bill in full.

If you submit your tax return early, you will avoid the worry of last-minute filing – always a stressful task and especially so if your record-keeping is not all that it should be.

We are always ready to assist you with your self-assessment filing, so don’t leave it too late to file your 2022/23 tax return

HMRC’s guidance on self-assessment tax returns can be found here.

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Behind the numbers on income tax

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New income tax statistics from HMRC appear to be good news, but the numbers are not what they seem.

Taxpayer’s marginal rate Basic Rate Higher Rate Additional Rate
2020/21 Average tax rate 9.5% 21.8% 38.3%
2023/24 Average tax rate 9.9% 20.8% 38.0%

Source: HMRC.

This table, recently released by HMRC, shows the average income tax rate for the three main categories of taxpayer. For example, in 2020/21, on average, basic rate taxpayers paid 9.5% of their income in tax and in the current tax year are expected to pay a slightly larger share, 9.9%. At first sight, higher rate and additional rate taxpayers seem to be doing better, as their average income tax rate drops.

HMRC offers no real explanation for the difference, other than a statement that says, “Average rates of income tax vary over time depending on the number of overall income tax payers and the number in each marginal rate band, as well as growth in incomes and changes to income tax thresholds and allowances.”

The story behind the changing numbers may be why HMRC is less than fulsome in setting out what has happened:

  • For basic rate taxpayers, the average rate has increased because the personal allowance has only risen by £70 (0.56%) since 2020/21, whereas average weekly earnings increased by 23% between April 2020 and April 2023. So a greater share of income is taxable in 2023/24 than in 2020/21 and the proportionate tax rate rises.
  • The backdrop for higher rate taxpayers is the same, so why the falling average rate? What HMRC forgot to mention is that in 2020/21, the higher rate tax band ended at £150,000, whereas in 2023/24 it stops at £125,140. Many higher rate taxpayers towards the top of the band three years ago have now migrated into the additional rate band. The overall result is the lower average rate for higher rate taxpayers.
  • The picture for additional rate taxpayers is almost a mirror image of the higher rate scenario. The near £25,000 lower starting point for additional rate in 2023/24 than 2020/21 means there are just about double the number of additional rate taxpayers in 2023/24 than in 2020/21. That extra, lower income population in the additional rate band drags down the average rate.

All of which should make you check what tax band you fall into for 2023/24 and seek professional advice if you have questions or concerns about how the changing rates might affect you.

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Abolishing the pensions lifetime allowance

Written by admin on . Posted in Pensioners, Pensions. No Comments on Abolishing the pensions lifetime allowance

Although the lifetime allowance was effectively abolished from April 2023 as the lifetime allowance charge was removed, it has been retained on statute for a year to allow time for the intricacies to be ironed out. Draft legislation, to take effect from 6 April 2024, has now been published.

With the lifetime allowance abolished, the problem faced by the legislators was how to tax lump sums and death benefits in its absence. They have overcome this by introducing a new lump sum and death benefit allowance, which, not surprisingly, is the same amount as the old lifetime allowance – £1,073,100.

If the draft legislation is enacted, the most significant changes will be in the way death benefits are taxed when a pension saver dies before age 75.

Death benefits – lump sum

A beneficiary can generally receive lump sum death benefits tax free if the pension hasn’t been accessed (uncrystallised).

  • Previously, any excess over the lifetime allowance was taxed at the rate of 55%.
  • From 2024/25, the excess over the new lump sum and death benefit allowance will be taxed at the beneficiary’s marginal rate of tax.

This is as intended when the changes were announced.

Death benefits – Income

What was not announced alongside the initial abolition news is the proposed approach to taxing uncrystallised death benefits taken as income – either by drawdown or an annuity. Previously, the pension income was exempt from tax. From 2024/25, the proposed legislation will see pension income taxed in full at the beneficiary’s marginal rate of tax.

The new rules are broadly neutral if a pension saver dies after reaching age 75, but the tax treatment could be potentially worse from 6 April 2024 for those that die younger.

Given the more advantageous tax treatment if uncrystallised funds are taken as a lump sum (completely exempt if less than the new lump sum and death benefit allowance), this could push more beneficiaries into taking a lump sum even where income would be more suitable for their needs.

HMRC’s policy paper on the abolition of the lifetime allowance can be found here.

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