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New tax year planning

Written by admin on . Posted in Budget, Company Director, Employment Tax, High Income Child Benefit Charge. No Comments on New tax year planning

The start of the new tax year warrants as much planning as the end of the old tax year.

While the end of the tax year on 5 April is a major focus of tax planning, it doesn’t end there. The following day may require much less immediate attention, but there is an argument for considering it to be just as important. For example:

  • Personal allowances The personal allowance for 2025/26, the new tax year, remains at £12,570, the same as it has been since 2021/22. Above that level, income tax will normally enter the equation. If you (or your spouse/civil partner) do not have enough income to cover the personal allowance, then you could consider transferring investments between yourselves so that the income generated escapes tax. You should also consider whether or not to claim the marriage allowance if your partner pays no tax and you pay no more than the basic rate (or vice versa).
  • At the opposite end of the income scale, once your income (after certain deductions) exceeds £100,000, you start losing your personal allowance at the rate of £1 for each £2 of excess. In those circumstances, a transfer of investments and the income generated can also make sense – this time by reducing your taxable
  • Other tax allowances and bands Similar principles apply to other allowances, such as the personal savings allowance (up to £1,000), the dividend allowance (£500) and the thresholds of tax bands. It is much easier to shuffle around future income at the start of the tax year than attempt to do so as 5 April looms near.
  • High income child benefit charge (HICBC) If you or your partner (marriage is irrelevant) have income (after certain allowances) of over £60,000 and both claim and receive payments of child benefit, then whichever of you has the higher income is taxed on that benefit. The tax charge is 1% of the child benefit for each £200 of income over the £60,000 threshold, meaning the tax matches the benefit at £80,000. If you have two children, this is equivalent to an extra 11.26% added to your marginal tax rate. Shifting your investment income could therefore save tax, even if you both pay the same marginal rate of tax.

For more details on these and other new tax year opportunities, please talk to us – as with year-end planning, the sooner, the better.

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Heads Up: New Reporting Requirements for Dividend Data

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Starting with the 2025/26 tax year, directors of close companies (owner-managed companies) will need to separate the dividend income received from their companies. This change will have an impact on almost 900,000 directors.

In very broad terms, a close company is a company that is under the control of its directors or five or fewer shareholders.

At present, directors report just the total dividend income figure, which means HMRC can’t tell which dividends a director receives from their own company or from other sources. By separating out dividends, HMRC will be able to see the total remuneration package received by an owner-manager. This helps them to focus their compliance activities.

Disclosure

From 6 April 2025, directors of close companies will have to disclose:

  • name of the company and its registration number;
  • percentage shareholding in the company; and
  • amount of dividend income received from the company for the tax year.

The question on the tax return about whether an individual is a director of a close company will be changed from voluntary to mandatory.

In regard to the percentage shareholding, this will be the highest percentage held during the tax year. For some directors, providing this information will not be straightforward; for example, where a company has different classes of share.

Employee hours data

On a more positive note, the proposal that employers would have to report the actual hours worked by each employee has been shelved. The implementation date had already been put back from April 2025 to April 2026.

The Government has recognised that requesting this information as part of the real-time reporting process would have been unduly complex, costly and burdensome for businesses. The cost of the initial implementation alone was forecast to be nearly £60 million.

The starting point for determining whether a company is ‘close’ or not can be found here.

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New company size thresholds from April 2025

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Thresholds defining company sizes have not changed since 2016, but revised thresholds are now set to be introduced from 6 April 2025. Companies House intends to roll out their new identity verification requirements for directors and people with significant control (PSCs) by late 2025.

Static reporting thresholds, along with a couple of years of relatively high inflation, will have drawn more companies into reporting requirements that may not be appropriate for them.

Threshold sizes

The company size thresholds are expected to increase by approximately 50%, although there will be no change for the average number of employees. The new thresholds – with current thresholds bracketed – will be:

  Micro-entity Small company Medium-sized company
Turnover £1 million (£632,000) £15 million (£10.2 million) £54 million (£36 million)
Balance Sheet £500,000 (£316,000) £7.5 million (£5.1 million) £27 million (£18 million)
Average number of employees 10 50 500

To qualify as a micro-entity, small or medium-sized company, a company must normally not exceed two of the three relevant criteria above.

As a result of the redefinition exercise:

  • The increased thresholds will see more than 100,000 small companies reclassified as micro-entities.
  • Micro-entities benefit from reduced reporting requirements, although lenders may require more detailed information in order to assess a company’s creditworthiness.
  • Small companies may qualify for audit exemption; companies that were in danger of moving to a medium-sized classification might now retain this exemption.

Growing companies may find it preferable to maintain their current reporting requirements, even if increased thresholds hold out the offer of a temporary step down to a lower regime. This is to avoid disrupting their current reporting systems for a change taking place over one or two years.

Identity verification

The plan is that by autumn 2025, directors and PSCs will have to verify their identities at the point a new company is incorporated. Verification for existing companies will then take place over the following 12 months when a company’s confirmation statement is filed. This transition could be quite burdensome for many companies.

Compliance activity against those who have failed to verify their identity is expected to commence by the end of 2026.

Companies House accounts guidance can be found here.

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Dividend allowance cut doubles taxpayers

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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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The onward march of the higher rate taxpayer

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New calculations issued alongside the Spring Budget show just how higher rate taxpaying status is becoming ever more common.

The Office for Budget Responsibility (OBR) received plenty of attention leading up to the Budget. It was widely portrayed in the media as the body that placed constraints on the Chancellor’s tax-cutting options ahead of the coming election.

That portrayal of the OBR’s powers is an over-simplification. While the OBR does calculate whether the Chancellor can meet his fiscal rules, it neither sets those rules nor, crucially, the assumptions underlying the calculations. For example, in projecting how much tax revenue the government will receive from 2025/26 onwards, the OBR is obliged to follow the Treasury’s assumption that the ‘temporary’ 5p cut in fuel duty will be scrapped and duty itself will rise in line with the Retail Price Index (RPI) inflation. Nobody, least of all the OBR, believes this will happen. Fuel duty rates last rose in 2010.

Despite these limitations, or perhaps because of them, the OBR has paid increasing attention to the impact of planned tax changes (or lack thereof), highlighting facts that the Chancellor might prefer not to discuss.

A good example, which the OBR has regularly highlighted in its reports, is the consequences of freezing the personal allowance and higher rate income tax threshold until April 2028. The impact of this freeze on the population of higher rate taxpayers is demonstrated in the graph below. By 2028/29, the OBR estimates that there will be 7.3 million falling into this category, 2.7 million (59%) more than if indexation had applied to the higher rate threshold.

That is not the entire story – the near-£25,000 cut to the additional rate threshold in 2023, followed by an indeterminate freeze, will result in 0.6 million more additional rate taxpayers. Overall, the OBR estimates that about two in nine income taxpayers will be paying more than the basic rate by 2028/29.

Source: OBR EFO March 2024

The increasing cost of incorporating a company

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Perhaps not as widely known as the much publicised changes to company law is the fact that due to an increase in charges levied by Companies House, fees associated with incorporating and maintaining a company will rise from 1 May 2024.

Companies House has explained that fees are set on a cost recovery basis – meaning that the increases are intended to solely cover the cost of the services they deliver without making a profit.

Incorporation

Currently, the cost of registering a company with Companies House ranges from £10 to £40, depending on the channel used ie postal or online application. with fees increasing across-the-board from registration to exit, The increase in costs will include the following fees:

  • Online registration for a business or limited liability partnership: this is normally completed within 24 hours at the cost of £12. However, online registration fees will rise to £50, an uplift of 300%.
  • Same-day incorporation: the fee for this service is going up from £30 to £78.
  • Voluntary striking off: When a company is no longer required, voluntary striking off will now incur a fee of £33; it is currently £8.
  • Overseas entities: the largest increases apply to overseas entities who need to register with Companies House. The registration fee goes up from £100 to £234, with the removal fee increasing to £706 from £400.

Many people set up a new company through a company formation agent. Their most basic offerings only add a small margin to the Companies House charge. This means the fees charged by agents are going to see similar increases come 1 May.

Confirmation statements

Every company, including dormant companies, must file a confirmation statement at least once a year. The cost is currently £13 and rising to £34. This fee, at least, covers a 12-month period. It’s paid with the first filing during the period with no further charge for any subsequent filings during the same period.

For a full list of Companies House’s current fees visit the government website and for an update on price increases.

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HMRC ramps up its checks and investigations

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There’s no respite for HMRC with inheritance tax (IHT) accounts, undeclared dividend income and gains from share disposals to scrutinise.

HMRC is currently busy with several ongoing checks. They are looking at IHT accounts, targeting undeclared dividend income, and making sure any gains from share disposals have been correctly declared.

Inheritance tax accounts

The complexities of IHT can catch out even seasoned observers and there are many pitfalls, including:

  • Business property: 100% relief from IHT may be available, so it is important to make sure claims are correct. It is worth noting that relief may not be available if a business has a large amount of cash or assets held as investments.
  • Valuations: HMRC might contest valuations submitted in respect of unquoted shares, property or jointly owned assets. To avoid problems, obtain formal IHT valuations from experts.
  • Payment deadline: IHT on an estate must be paid within six months after the end of the month in which death occurred; this is a much tighter deadline than for most other major taxes.

Dividend income

HMRC is writing to company owners who may have undeclared dividend income. Its approach is to compare a company’s reported profits with the movement in reserves. Where a difference is identified, this could be an indication of dividends being paid to shareholders.

Anyone receiving a letter should contact HMRC within 30 days of its receipt, even if there is no dividend income to declare, or risk facing a compliance check.

Share disposals

Letters are also being sent to taxpayers who have disposed of shares but are suspected of omitting the details from their tax returns.

HMRC has looked for discrepancies by checking the information it has on share disposals against details declared on self-assessment tax returns. Anyone receiving a letter will have 60 days to amend their return.

If no capital gains tax is due on the disposal identified by HMRC, the taxpayer needs to explain why in writing.

HMRC’s guide to valuing an estate for IHT purposes can be found here.

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Mitigating rising corporation tax rates

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New HMRC statistics have shed some light on how many companies are affected by the recent hike in corporation tax rates. Just over 1.5 million companies paid corporation tax for the financial year to 31 March 2022, but only 7% fell above the £50,000 small profits threshold.

Although fewer than 100,000 companies are likely to be facing the 26.5% marginal rate of corporation tax where profits fall between £50,000 and £250,000, they will be mainly owner-managed companies with owners keen to mitigate the tax increase.

For a company with a 31 March year end and profits of £200,000, this year’s corporation tax bill is going to be £11,250 higher than last year.

Director’s self-invested personal pension (SIPP)

Even if a director has not previously been in favour of making sizable pension contributions, there can now be a compelling case for doing so.

  • With a marginal tax rate of 26.5%, investing the maximum £60,000 into a SIPP will save corporation tax of £15,900.
  • Once the director reaches 55, 25% of the pension fund can be withdrawn tax free, but virtually immediately if a director is already 55.
  • There will be an overall tax saving if the tax rate eventually paid on pension withdrawals – taking into account the tax-free element – is less than 26.5%.

Even if there is no overall tax advantage as such, there will still be a timing benefit. The current year’s corporation tax bill is cut, but the tax cost does not apply until the director receives their pension income.

Mitigating cost and risk

By choosing a low-cost provider, the annual cost of maintaining a SIPP can be kept to a minimum.

If there are only a few years until retirement, a director might not want to be exposed to stock market volatility. This risk can be avoided by investing in fixed-term cash deposit accounts.

A basic guide to SIPPs can be found here.

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Debt evading directors face new Insolvency Service powers

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Directors who abuse the company dissolution process in order to evade debts, including the repayment of government-backed Covid-19 business loans, will be subject to stronger powers given to the Insolvency Service.

These new powers were included in the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act enacted on 15 December last year. Previously, the Insolvency Service could only investigate directors of companies entering insolvency but can now also look at directors of dissolved companies.

Phoenixism

Complaints regarding dissolved companies often relate to new companies that have taken over the business of the dissolved company. The new company will invariably have the same directors, take over assets – such as vehicles – but with creditors left unpaid. In some cases, this happens multiple times.

Sanctions

If misconduct is found, a director of a dissolved company can be disqualified as a company director for up to 15 years. In more serious cases, the director could be prosecuted.

It is also possible for a court order to be made requiring a former director of a dissolved company, who has been disqualified, to pay compensation to creditors who have lost out due to their fraudulent behaviour. This aspect applies retrospectively, so former directors can be held liable to creditors despite the fraudulent conduct taking place prior to the Act’s commencement.

Business rates

Along with the changes aimed at former directors, the Act has a business rates aspect. The Act makes it clear that Covid-related changes cannot be used as grounds for a business rates appeal on the basis of “material change of circumstances”.

Businesses that have seen their operations severely curtailed as a result of Covid-19 restrictions will likely be disapproving of this response; they are expected to keep paying business rates on the basis of rateable values set in a different world before the current Coronavirus pandemic.

The only consolation is the £1.5 billion provided for business rates relief to sectors that have suffered the most economically but are not eligible for existing support.

The government’s original press release for the Bill and more detailed information can be found here.

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