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Dividend allowance cut doubles taxpayers

Written by admin on . Posted in benefit-in-Kind, Company Director, Dividends, self-assessment. No Comments on Dividend allowance cut doubles taxpayers

With the dividend allowance now cut to just £500, the number of taxpayers paying tax on dividend income for 2024/25 is expected to be double what it was three years ago.

Previously set at £2,000, the dividend allowance was reduced to £1,000 for 2023/24, and to £500 from 2024/25 onwards. This reduction has had the biggest impact on basic rate taxpayers. Just under 700,000 basic rate taxpayers paid tax on dividend income for 2022/23, but this number will leap to nearly 1.7 million for the current tax year.

Tax liability

A modest share portfolio of just over £10,000 yielding 5% will now use up the dividend allowance, leaving the investor with a tax liability notifiable to HMRC. Consider this:

  • Notification requires either contacting the HMRC helpline, asking HMRC to collect tax through a tax coding change (if employed), or completing a self-assessment tax return.
  • With a basic rate of 8.75% on dividend income, the amount of tax due will often be frustratingly low given the inconvenience involved.

The average amount of tax due from basic rate taxpayers is estimated to be £385 for the current tax year; down from £780 three years ago.

Even worse will be where an investor opts for script dividends. These are still taxable despite no cash being received, so tax will have to be funded from other sources.

At the same time as the dividend allowance has been cut, the level of dividend payouts by companies has generally recovered to pre-Covid levels.

Mitigation

If dividend income exceeds the £500 allowance, some mitigating steps might be possible. The obvious move is to make full use of Independent Savings Account allowances for some current, and all future, share investments. Another approach would be to invest for capital growth rather than dividend income. Making use of the dividend allowance of a spouse, partner or an adult child by spreading a share portfolio across the family is another possibility.

HMRC’s guide to tax on dividends can be found here.

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Updated tax guidance for electric company car charging

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HMRC has updated its guidance to clarify that there is no taxable benefit when an employer reimburses employees who charge their electric company cars at home. Previously, HMRC maintained that the relevant exemption did not apply.

There is a general rule that no income tax liability arises where an employee is reimbursed for expenses incurred in connection with a company car – such as repairs, insurance and car tax. Although this exemption does not apply to car fuel, electricity is not treated as fuel for tax purposes.

Exemption

The exemption applies whether a company car is used solely for business mileage, solely for private mileage or where there is mixed use.

  • Although HMRC’s guidance has been updated, at the time of writing their tool to check if you need to pay tax for charging an employee’s electric car is still giving incorrect answers, unless a company car is used solely for business mileage.
  • National insurance contribution (NIC) guidance is in line with the income tax guidance, so there are no class 1 or class 1A NICs on reimbursements for charging an electric company car at home.

Employers do, however, need to ensure that the cost of electricity reimbursed is solely for the company car.

Employers, directors and employees who have previously followed HMRC’s incorrect guidance should be entitled to a refund of the tax and NICs that have been overpaid.

Other charging situations

There is no taxable benefit if an electric company car is charged at work, if a charge card is provided so that public charging points can be used, or if the employer pays for a charging point to be installed at an employee’s home.

If the employer does not reimburse for charging an electric company car at home, the employee can claim a deduction from earnings for the electricity cost of business mileage.

The relevant section of HMRC’s employment income manual can be found here.

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Handy hints ahead of self-assessment

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The 31 January 2024 deadline for submitting a 2022/23 self-assessment tax return is not far off, especially for those not yet registered.

Anyone who has not previously registered for self-assessment – but needs to submit a tax return for 2022-23 – should do so as soon as possible.

  • A self-assessment activation code can take a week to arrive (three weeks if overseas); and
  • It can take two weeks (again, three weeks if overseas) to obtain a unique taxpayer reference, although using a personal tax account or the HMRC app can speed things up.

For anyone who has not previously submitted a tax return, the deadline for informing HMRC of the need to do so for 2022/23 has already passed. Individuals who have missed the deadline might face a fine.

First-time registration

There are a number of reasons why a taxpayer might fall into the self-assessment system for the first time. For example, anyone who has:

  • Started part-time self-employment, including work in the gig economy, trading on eBay and similar websites, or earning money as an influencer (although the first £1,000 of self-employed income is exempt);
  • Disposed of cryptoassets (any profits are subject to capital gains tax); or
  • Rented out property for the first time, possibly through sites such as Airbnb (again, the first £1,000 of rental income is exempt).
  • Become liable to the High Income Child Benefit Charge as a result of their income exceeding £50,000.

Sooner rather than later

Leaving registration to the last moment will mean there is no time to deal with any unforeseen problems. You might need to consult HMRC’s self-assessment helpline, which is now available again after its summer closure.

There will also be little time before the related tax bill is due for payment, and this could be an issue if the amount payable is higher than expected.

More information about whether you need to submit a self-assessment tax return can be found here.

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Potential benefits from directors’ loans

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Business owners could seek to earn interest on directors’ loans with little-to-no tax implications, although only patient directors willing to meet the reporting requirements will benefit.

Even though the rate of interest charged by HMRC on late tax payments is currently 6.75%, the rate charged on a beneficial loan for 2023/24 is much lower at 2.25%. Therefore, taking a company loan could be an attractive option for directors.

There will be no taxable benefit for 2023/24 if a director’s beneficial loans do not exceed £10,000 at any point throughout the year.

Company charge

The tax treatment of a director’s loan is complicated because there is also a company tax charge if the director is (very basically) also a shareholder and their company is a close company. For owner-managed companies, this will generally be the case.

  • The tax charge is at the rate of 33.75% on the amount of loan should the loan still be outstanding nine months and a day after the end of the company’s accounting period in which the loan is made.
  • However, this tax charge is refunded to the company if the loan is subsequently repaid by the director.


An opportunity

Given that high street banks are currently offering one-year fixed rate ISAs with an interest rate of around 4.2%, opportunistic directors could therefore:

  • Take a £20,000 interest-free loan from their company;
  • Invest this for one year, receiving tax-free interest of £840; and
  • Repay the £20,000 company loan.

Depending on the timing and the company’s accounting period, there might not be a tax charge on the company. Even if the tax charge is payable, it will be repaid once the company loan is refunded. The director will have a taxable benefit of £20,000 at 2.25% = £450 (pro-rata according to the days outstanding during the tax year). Even for an additional rate taxpayer, the tax cost will just be a little over £200.

The downside will be the various reporting requirements for both the director(s) and the company.

HEALTH WARNING: Please do not take the above as advice. These are the mere meandering thoughts of a sad old man. If anything you’ve read is of interest then please seek professional guidance from your accountant or tax adviser (you’ve been warned!!!!).

HMRC guidance on director’s loans can be found here.

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Pay attention to tax codes

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Most directors and employees will already have been issued a tax code for the 2023/24 tax year, and it is important to check the figures as a very large proportion of codes will be incorrect. If you’ve been subject to an error, this could mean a future corrective tax bill.

Common errors

A tax code will typically take into account allowances, allowable expenses, taxable benefits (those not payrolled) and untaxed income, so there is plenty of scope for error.

  • Allowances: The code can often assume the incorrect level of income when it comes to the amount of available personal allowance.
  • Allowable expenses: Deductions for subscriptions and professional fees will be based on what was claimed previously, yet these will invariably increase annually.
  • Taxable benefits: For most benefits, HMRC will be unaware of any changes from the previous year.
  • Untaxed income: Figures for bank and building society interest can be too high where, for example, an account has been closed.


Emergency codes

A particular problem can be the use of an emergency code. These can be applied if there is a change in circumstances, such as:

  • A new job;
  • Taking on an additional part-time job; or
  • Starting employment after being self-employed.

The emergency code is used because HMRC will often not receive the employee’s income details in time after the change. Although use of the code is temporary, it can cause a cashflow problem for the employee.

Those starting a new job should give the new employer their P45 as soon as possible. Those moving from self-employment should complete the starter checklist.

Checking and correcting codes

The easiest way a person can check and correct a tax code is by logging onto their personal tax account using their Government Gateway user ID and password. HMRC can be notified of any changes that affect the tax code, and employer details can be updated.

The starting point for checking or correcting a 2023/24 tax code can be found here.

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Company cars: not-so-free fuel

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If your employer pays for the fuel in your company car, it may cost you more than you expected.

As the Autumn Statement was not a Budget, detailed publications that would normally emerge as the Chancellor sat down have taken time to appear. For example, the HMRC projections of how many more capital gains tax (CGT) payers there would be because of the much-reduced annual exemption (another 570,000 by 2024/25) did not appear until the Monday after the Autumn Statement, missing the weekend personal finance pages.

One even later arrival – three weeks after the Autumn Statement – was an HMRC bulletin on the fuel benefit charge for company cars in 2023/24. For some years the basis has been an increase in line with September annual CPI inflation (published in mid-October), so there was no explicit reason for HMRC’s procrastination. The number that was eventually revealed was the current figure, increased by 10.1%, as had been expected.

Taxable value for 2023/24

That means for 2023/24 if you have ‘free’ fuel, its taxable value will be assessed by multiplying £27,800 by your car’s percentage scale charge. For example, if you have a petrol-engine car with CO2 emissions of 130–134 g/km, your scale charge is 31% and £8,618 (£27,800 x 31%) will be added to your income for tax purposes. In terms of hard cash, that is an extra £3,447 going to the Exchequer if you are a 40% taxpayer.

At this point you are probably wondering how far £3,447 of petrol would take you. Assume a price of £1.60 a litre and 40 miles a gallon and the answer is about 19,000 miles. In 2019, before the pandemic disrupted travel, the average car covered 7,400 miles a year. If that figure still applies – and it is probably less because of increased working from home – then the ‘free’ fuel break-even point is more than 250% of typical use.

Not all benefits are so harshly taxed – electric cars can be an attractive option – but the large cost of ‘free’ fuel is a reminder that when it comes to anything financial, ‘free’ is a word to be treated with great caution.

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Planes, trains and automobiles – managing employees’ transport challenges

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With strikes and cancellations affecting trains, the underground and flights, employers need to decide how they are going to treat employees who cannot get into work or are stuck overseas.

Commuting

Although inconvenient, there is generally plenty of notice when it comes to train, tube and tram strikes, and therefore the chance to make contingency plans. With hybrid and homeworking now commonplace for many offices, this will be the simple and obvious answer to discuss with employees on affected days.

Employees who are required to attend work in person may face a longer and/or more expensive journeys than normal – especially if an alternative mode of transport is required. So employers should consider offering help with some financial assistance. Some absences may be avoided by rearranging work patterns or promoting car-pooling for instance.

Stuck overseas

The treatment of employees who cannot return to work after a holiday because they are stuck overseas due to a cancelled flight is somewhat more problematic.

  • If an employee can resume work as usual while abroad then they should obviously be paid as normal. It is unrealistic, however, to expect most employees – especially if not in a senior position – to have travelled with their work laptops.
  • Assuming sufficient annual leave is available, extending a holiday may be an answer where an employee is unable to work remotely. Or the employee may be happy to take unpaid leave.
  • Although there is no requirement to otherwise pay an employee who is stranded overseas, the employer might consider treating it the same as an emergency situation and remunerating on a similar basis to other emergencies, especially if the employee is taking all reasonable steps to return home.

Employees may not be able to leave the UK for their holiday in the first place and so need to rearrange their dates. Employers do not have to agree to this, especially given short notice, but a flexible approach is advisable where possible.

The Government’s guide to holiday entitlement for employers and employees can be found here.

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HMRC Official rate of interest, beneficial Loans et al

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HMRC’s official rate of interest has been cut from 2.25% to 2% from 6 April 2021. This will affect any directors or employees who have a beneficial loan from their employer, as well as directors who have an overdrawn current account with their company. The official rate is also used in some other tax calculations.

Beneficial loans

Assuming no change to the official rate throughout 2021/22, the cut will reduce the tax payable by a higher rate taxpayer with an employer-provided interest-free loan, of, say, £50,000 from £450 to £400. Alternatively, the director or employee will need to pay interest of £1,000 rather than £1,125 for 2021/22 to avoid the tax charge.

Where an employer-provided loan is cheap rather than interest-free, the benefit charge is based on the difference between the official rate and the amount of interest actually paid. There will be no benefit if:

  • The balance of beneficial loans provided to a director or employee throughout 2021/22 does not exceed £10,000.
  • The loan is for a qualifying purpose, such as buying shares in a close company.

Directors should be particularly careful to not let an overdrawn current account go just over £10,000 at any point during the tax year.

Other uses

The official rate is also used in regard to employer-provided living accommodation and pre-owned assets tax (POAT).

  • Living accommodation – There is an additional benefit charge on the excess of the cost of the accommodation over £75,000. For example, if living accommodation cost £250,000, then the additional benefit charge for 2021/22 will be (£250,000 – £75,000) at 2% = £3,500.
  • Pre Owned Asset Tax (POAT) – There is an income tax charge on certain inheritance tax planning arrangements. Where chattels and intangible assets are concerned, the amount of deemed income subject to tax is the value of the asset multiplied by the official rate.

More detail on beneficial loans from an employer’s perspective can be found here.

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