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Six-fold increase on late payment interest rates

Written by admin on . Posted in Income Tax, self-assessment, Tax. No Comments on Six-fold increase on late payment interest rates

HMRC late payment interest rates have now been raised six times during 2022 – from 2.6% at the start of the year to a current rate of 4.25%. However, at least there’s some good news, with an uplift to the tax repayment rate.

The charge for late payment is set at base plus 2.5%. So, with the Bank of England base rate going up from 1.25% to 1.75%, HMRC’s late payment rate has correspondingly gone up from 3.75% to 4.25%. The increased rate applies from 23 August and covers almost all taxes and duties – the exception being quarterly instalment payments of corporation tax, for which the rate has risen from 2.25% to 2.75% since 15 August.

Unfortunately, current predictions have the base rate peaking at 2.25% or 2.5% by the end of 2022, so further late payment interest rate hikes should be expected.

Get up to date

The latest late payment rate increase will hit taxpayers who are not up to date with their tax payments. Many will be struggling to pay outstanding taxes -–particularly the latest self-assessment payment on account due on 31 July – against the backdrop of rising living costs.

  • Banks and building societies have generally not passed on the latest 0.5% base rate increase to savers, so it makes sense to use savings to repay, or at least reduce, tax debt.
  • For a tax liability of, say, £15,000, the annual late payment interest cost has already risen by nearly £250 to almost £650 during 2022.


Repayment rate

The one piece of good news is that the repayment rate on overpaid tax has gone up by 0.25% to 0.75%, being the first increase in over a decade.

However, the still meagre repayment rate means there is little incentive for HMRC to make prompt repayments, with taxpayers often encountering significant delays.

HMRC interest rates for late and early payment can be found here.

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Pension top-ups for lower-paid employees

Written by admin on . Posted in Income Tax, Pensioners, Pensions. No Comments on Pension top-ups for lower-paid employees

Employees who contribute to an occupational pension scheme under a net pay arrangement do not currently benefit from any tax relief if their earnings are below the personal allowance. This anomaly will be rectified from 6 April 2024 when HMRC will start making top-up payments.

A net pay arrangement is where pension contributions are deducted from pay before tax is calculated. The anomaly arises because someone in a similar situation, but making contributions with relief given at source, benefits from 20% relief. The change will mean low earners benefiting from the same tax relief regardless of earnings.

Top-up payments

HMRC’s top-up payments will be introduced from tax year 2024/25 onwards, with the top up not paid until after the end of the tax year. The implementation delay is due to the significant HMRC system changes required.

  • The intention is that HMRC will notify those who are eligible and invite them to provide the necessary details for the top-up to be paid direct to their bank account. The requirement to claim the top-up, however, runs the risk of non-take up.
  • As an example, someone qualifying with savings of £500 into an occupational pension scheme for a tax year should receive a subsequent top-up from HMRC of £500 at 20% = £100. The same rate will apply for Scottish taxpayers.
  • If part of a person’s pension savings already benefits from tax relief due to earnings exceeding the personal allowance, a top-up payment can still be given for the proportion not benefiting.
  • Top-ups will be taxable, although this will not mean any additional income tax for many recipients given their level of earnings.

Although top-ups are only estimated to be an average of just over £50 a year, more than a million employees should benefit – the vast majority of them women.

The government’s policy paper explaining the change can be found here.

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Setting new taxpayer records

Written by admin on . Posted in Employment Tax, High Income Child Benefit Charge, Income Tax, Inheritance Tax, Lasting Will & Testaments, self-assessment. No Comments on Setting new taxpayer records

New data from HMRC reveals there are now over six million people paying higher or additional rate tax in the UK.

In recent years, the end of June has been the time for HMRC to issue its annual statistics on taxpayer numbers. This series is more up to date than some of HMRC’s releases and includes a projection for the current tax year.

The latest set of data received more press attention than usual for several reasons:

  • The number of income tax payers jumped by 1.3 million (4%) for 2022/23, the largest increase since 2004/05.
  • Higher rate taxpayer numbers rose by 750,000 (16%), an increase unmatched in over 30 years of HMRC data.
  • The population of additional rate taxpayers grew by 66,000 (12%). When the additional rate of tax was introduced in 2010/11, only 0.75% of taxpayers were in this lofty band, a proportion that has since grown to 1.75%.
  • Add together higher and additional rate taxpayers and the total exceeds 6.1 million, over one in six of all income taxpayers.

This means there are more taxpayers than ever before and more of them are paying higher and additional rates due to a combination of two main factors:

  1. The then Chancellor Rishi Sunak’s decision in March 2021 to freeze the personal allowance, higher rate and additional rate thresholds from 2021/22 through to 2025/26. In fact, the additional rate threshold has never moved from its initial £150,000.
  2. Inflation has been vastly higher than anticipated back in March 2021, when the CPI rate was running at 0.7% (a year, not a month) and the Office for Budget Responsibility (OBR) was projecting that it would not reach 2% until 2025. The OBR’s projection for total inflation over the four years from the start of 2022 to the end of 2025 was 7.7%, a figure that is almost certain to be below what 2022 alone will deliver.

The winner in all of this is the Treasury, so much so that there is now talk of tax cuts being announced in the Autumn Budget, if not sooner. As with July’s ‘tax cut’ in National Insurance contributions, any new income tax cut will be a reduction in the size of the previously planned increase.

Meanwhile, if you have become a higher rate taxpayer this year, you should make sure you are using all available reliefs and allowances to the full. The one piece of good news is that tax relief on your pension contributions has potentially doubled.

Source: HMRC.

Has a 60% income tax rate reappeared?

Written by admin on . Posted in Employment Tax, Gift Aid, High Income Child Benefit Charge, Income Tax. No Comments on Has a 60% income tax rate reappeared?

The high marginal tax rates created by phasing out the personal allowance are back in the news.

‘A million to pay 60% income tax within years,’ ran a recent headline in The Sunday Telegraph. The next day The Times picked up on the same story with the article ‘Inflation may leave million more workers paying 60% tax’.

How the 60% tax rate happens

In 2022/23, Yasmin expects to have an income of £100,000 and is therefore entitled to a personal allowance of £12,570. If she receives an unexpected bonus of £10,000, her total income will be £110,000 and her personal allowance will be reduced by half of the amount by which her total income exceeds £100,000 – i.e. £5,000. As a result, she will not only pay tax of £4,000 on her bonus (at 40% outside Scotland), but she will also have to pay £2,000 of tax on the £5,000 of her income no longer covered by the personal allowance. The result is:

   Total extra tax          =    £4,000 + £2,000 x 100% = 60%
Total extra income                £10,000

If Yasmin received a bonus of over £25,140, she would lose all her personal allowance.

Whether either article counts as ‘news’ is debatable. The 60% income tax rate (or 61.5% on earnings in Scotland) has been around, in one form or another, since 2010/11. It is not, as The Times suggested, the result of ‘a glitch in the personal allowance regime’ but was the product of a carefully crafted piece of legislation. At the time, the aim was to raise extra revenue while keeping the threshold for the newly introduced 50% additional rate tax at £150,000.

The newspaper articles indirectly highlighted that:

  • The £100,000 threshold at which the personal allowance is tapered has been unchanged since 2010; and
  • The personal allowance has almost doubled since 2010, resulting in a £25,140 band of income in which the 60% rate can bite.

Both factors mean that more taxpayers are being caught as incomes rise over time.

The one piece of good news is that if you are hit by 60% income tax you may also be able to claim 60% tax relief on pension contributions or gift aid.

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Tax implications of no fault divorce

Written by admin on . Posted in Capital Gains Tax, Income Tax, Litigation & Dispute Resolution, Wealth. No Comments on Tax implications of no fault divorce

No fault divorce became a reality in April this year. Although it brought no associated changes to the tax rules, divorcing couples should now be in a better position to focus on financial issues – particularly important if not using a lawyer or solicitor.

Capital gains tax

For most couples, the main tax issue will be the capital gains tax (CGT) consequences of transferring assets as part of the divorce settlement.

The basic rule is that transfers only escape CGT (on a ‘no gain, no loss’ basis) if made by the end of the tax year in which the couple are no longer living together – the year of separation.

After the end of the year of separation, but before the divorce is finalised, any transfers of assets will be treated as made at market value, so CGT can be payable – but with no proceeds to fund the tax liability.

Couples dissolving a civil partnership can now also do so on the same no fault basis.

Private residence relief will generally mean there are no – or few – CGT implications if transferring the family home, but someone with a portfolio of property and investments could face a large, unnecessary, CGT bill without careful planning.

Timing

With a no fault divorce, the applicant is required to wait 20 weeks from the start of the divorce proceedings until a Conditional Order (previously the Decree Nisi) is made. This is the time for reaching a financial agreement on how assets are to be divided. There is then a further wait of six weeks until the Final Order (previously the Decree Absolute) can be made.

This is a minimum of six months. Add on possible paperwork processing delays, and a separation in the second half of the tax year means a straightforward transfer of assets will not be possible until the next tax year, making CGT an issue.

HMRC has provided an updated help-sheet on the CGT implications of divorce, dissolution and separation here. During such a stressful process, it’s more important than ever to ensure you have the right expert guidance, so let us know if we can help.

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Charitable giving pitfalls

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Many individuals donate to charity simply for altruistic reasons, but this doesn’t mean the tax benefit should be ignored. With Gift Aid donations saving tax at an individual’s marginal rate, donors need to watch out for any pitfalls that might preclude relief.

If a Gift Aid donation helps to preserve a person’s entitlement to the personal allowance, the tax saving is 60%. For example, a gross donation of £1,000 costs just £400.

Benefit received

Any benefit received in return for making a donation must be minor. An acknowledgement of the donor’s generosity – such as a plaque – is permitted but should not take the form of business advertisement or sponsorship.

When it comes to right of admission, such as a National Trust membership fee, the donation must be at least 10% more than the normal admission cost. For example, £11 would need to be paid for entrance that would otherwise cost £10. Alternatively, admission rights can be for at least 12 months during public opening hours.

Other pitfalls to be aware of include:

  • Gifts: Tax relief is not available for an individual membership or subscription gifted to someone else, such as a spouse or parent. However, this restriction doesn’t apply where a donor’s minor child is the recipient.
  • Double counting: Where charitable giving is via a Charities Aid Foundation account, tax relief is given on donations to the account – not when donations are made from the account to charities. Therefore, be careful not to double count when claiming relief. The advantage of using a centralised charity account like this is that only one Gift Aid declaration need be completed.

Tax planning

If a donor’s income varies from year to year, donations can be made in the tax years when the tax saving is greatest.

  • The ability to treat donations as being made in the previous tax year is a great help here because – unlike pensions – tax planning can be done retrospectively once the donor’s tax position is established.
  • The same approach should be followed for spouses or partners. If a donation comes from a joint bank account, the donor who will benefit the most should make the Gift Aid declaration.

Detailed guidance from HMRC on Gift Aid for individuals and companies can be found here.

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Off-payroll mistakes now penalised

Written by admin on . Posted in Employment Law, Employment Tax, Income Tax, IR35, Litigation & Dispute Resolution. No Comments on Off-payroll mistakes now penalised

The private sector off-payroll working rules have been in place since April 2021, but for the first 12 months businesses have benefitted from HMRC’s relaxed stance on penalties. HMRC will now, however, penalise mistakes made in applying the rules.

HMRC will charge penalties for any inaccuracies relating to the operation of the off-payroll working rules that occur from 6 April 2022 onwards.

Medium and large-sized private sector contracting companies are responsible for determining the employment status for any contractors they use.

Size check

Small private sector contractor companies are not subject to the new off-payroll working rules. Size classification is based on the Companies Act definition and should be checked each year.

  • This is particularly the case if a business has grown in size or been bought by another organisation.
  • It is good idea to confirm small company status with contractors as they will be responsible for determining their employment status.

Compliance

There would be no problem complying with the rules if there was a clear definition of employment as opposed to self-employment. Unfortunately, HMRC’s Check Employment Status for Tax (CEST) tool falls well short of what is required, and even government departments have found themselves liable for millions in additional tax after erroneously relying on the CEST tool.

Two recent Court of Appeal cases (both pre-dating the change in rules) show how difficult determining employment status can be:

  • Paul Hawksbee, a regular presenter for TalkSport Radio, prevailed at the First-Tier Tribunal, but HMRC was successful at the Upper Tribunal. This has been confirmed by the Court of Appeal, resulting in a tax cost of over £140,000.
  • Kaye Adams, a presenter for BBC Radio Scotland, was successful at both the First-Tier Tribunal and Upper Tribunal, but the Court of Appeal felt the Upper Tribunal had erred in making its decision. The case has therefore been sent back to the Upper Tribunal to be reheard. Tax of over £124,000 is at stake, with Adams’s legal costs outweighing this amount.

Guidance on the off-payroll working rules for contractor companies, along with some useful links, can be found here.

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Sharp rise in higher rate taxpayer numbers…….

Written by admin on . Posted in Employment Tax, Income Tax, IR35, self-assessment, Self-Employed, Tax, Wealth. No Comments on Sharp rise in higher rate taxpayer numbers…….

……and if that’s you, then advice is now more important than ever.

There was once a time when paying tax at more than the basic rate made you a member of a somewhat select club. In 2010/11, the first year in which additional rate tax was introduced, the proportion of taxpayers who were taxed at more than the basic rate was 10.4%.

Five years later, a dose of austerity pushed the figure close to 16%. Then it began to drop as higher rate thresholds were raised, so that by 2019/20 it was down to 13.6%. From that low, the upward path was resumed.

Alongside the Chancellor’s Spring Statement in March, the Office for Budget Responsibility (OBR) issued estimates that the freeze in the personal allowance and, outside Scotland, and basic rate bands through to 2025/26 will mean by that year almost 19% of taxpayers will be liable for higher rate tax.

The number of taxpayers will also be increasing too because of the personal allowance staying at £12,570. The rising taxpayer numbers explain why the Chancellor could announce a 1p cut in basic rate tax in 2024/25 at the same time as the OBR calculated that income tax revenue for the year would increase by £12 billion. Scotland already has a starter rate of 19%.

If your head is spinning from all the numbers, there is a simple message you: you are likely to pass more of your income to HMRC in the coming years. To limit just how much extra the Exchequer gains and you lose, there are plenty of actions to consider wherever you are in the UK:

  • If you are married or in a civil partnership, make sure you are maximising the benefits of independent tax and, if you are eligible, claiming the transferable marriage allowance.
  • Check your PAYE code – it could be wrong.
  • Ensure you are claiming full tax relief on the pension contributions you make. Do not assume this will be given automatically, especially if you pay higher rate tax.
  • Consider an ISA first for any investment as it is free from UK income tax and capital gains tax.
  • Choose any employee perks with care. Some are highly tax efficient, while others carry a heavy tax burden.

Remember that if you are or likely to become a member of the ever-expanding higher rate taxpayer club, the value of taking independent financial advice rises with your tax rate.

Source: ONS data, OBR projections.

A new breed of digital nomad

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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.

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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.