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Childcare support extended to children over nine months

Written by admin on . Posted in Benefits, Employment Tax, High Income Child Benefit Charge, self-assessment. No Comments on Childcare support extended to children over nine months

The government is extending the provision of 30 hours of free childcare for 38 weeks to now include all pre-school children over the age of nine months.

Phased introduction

The extended childcare provision will be of benefit to parents with newborns ­– or those planning a family – but parents with children currently aged one or two years old will not see the full benefit of the changes because of the phased introduction of the support:

From Free childcare extended to Amount of childcare
April 2024 Children aged two years 15 hours
September 2024 Children aged nine months to two years 15 hours
September 2025 30 hours

Children can take up their childcare place in the term after they meet the age requirement (subject to having received a code to give to the childcare provider), with terms typically beginning on 1 January, 1 April and 1 September.

To be eligible, both parents must work at least 16 hours a week at the National Minimum/Living Wage, and neither can earn more than £100,000 a year.

Challenges and shortfalls

Government-funded childcare entitlement is currently only available for a total of 1,140 hours a year, which works out to 30 hours over 38 weeks, so the new rules may spur some adjustments by children providers.

  • Providers may simply offer fewer hours a week to stretch the funded hours over the whole year; or
  • They may provide 30 hours for the whole year with parents paying for the shortfall of unfunded hours.

In theory, the changes will help parents who want to go back to work but finding an available childcare space will likely continue to be problematic, even with the September 2023 child-to-staff ratio increase from four to five. Many nurseries are encountering financial difficulties, and the childcare extension will mean providers cannot make up shortfalls by charging more for younger children.

There are different schemes in Scotland, Wales and Northern Ireland.

Government guidance on help with paying for childcare can be found here.

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The demise of paper tax returns

Written by admin on . Posted in Benefits, Capital Gains Tax, Making Tax Digital, self-assessment. No Comments on The demise of paper tax returns

More than 12 million taxpayers file self-assessment tax returns, but less than 3% do so using a paper return. Given this low demand, HMRC is reviewing the current paper filing service.

HMRC stopped sending out paper tax returns three years ago, with any taxpayer wishing to file by paper required to download a blank version of the form. That move brought a further 3% of taxpayers to the online service. HMRC has now announced that self-assessment tax returns will not be available to download for the 2022/23 tax year.

Alternatives

Subject to a limited exception, anyone who still wants to file offline will have to obtain a tax return form by phoning HMRC.

  • The limited exception is for visually impaired taxpayers and those aged 70 or over who have not previously submitted online. HMRC will continue sending them paper returns to complete.
  • As an alternative to contacting HMRC, a blank tax return can be printed using commercial software.

There are some taxpayers who, because of the complex tax calculations involved, simply cannot file online. This is the case even if commercial software is used, which means they will have to print their completed tax return and file it by post.

Online filing

HMRC has written to some 135,000 taxpayers who file on paper to encourage them to complete returns online in the future. In many cases, this may now be the most sensible option, and there is a wide range of commercial low-cost software available if anyone does not wish to use HMRC’s offering.

Filing online has two distinct advantages:

  • Not having to use the postal system when a return might be lost; HMRC will sometimes deny having received a mailed return even when there is a record of delivery.
  • An additional three months to file each year – the online filing deadline being 31 January following the tax year, rather than 31 October.


Capital gains tax (CGT)

Going somewhat in the opposite direction, HMRC has made a downloadable version of its CGT UK property return available on a four-month trial basis. The intention is that the downloadable form can be used by those taxpayers who cannot report and pay tax using the online service.

HMRC guidance on self-assessment tax returns 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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21st century Revenue – HMRC’s app and new texting service

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HMRC’s app was launched a year ago and is gaining in popularity as it is being used to pay self-assessment tax bills. A more recent HMRC innovation is a new service for texting replies to taxpayers who make contact by mobile phone.

Using the app

The HMRC app can be downloaded from either the App Store (Apple devices) or the Google Play Store (Android devices). It is then just a matter of:

  • Following the instructions to complete the app settings; and
  • Signing in using your Government Gateway (only required for first-time use).

In addition to paying self-assessment tax bills, the HMRC app can be used to claim a refund if too much tax has been paid. Other uses include:

  • Tax credits: Changes can be reported, and the annual renewal completed. The app shows the amount of tax credit payments and when they will be made.
  • References: You can check your tax code and easily find your national insurance (NI) number and unique taxpayer reference (UTR).
  • Update: You can let HMRC know if you change address.
  • Tax details: You can get an estimate of tax payable and use HMRC’s tax calculator to work out take-home pay after income tax and national insurance contributions.

Despite some negative reviews, the HMRC app currently has a 4.5 rating on the App Store, and a 4.7 rating on the Google Play Store.

New texting service

Only launched 19 January, HMRC is trialling the sending of text messages to taxpayers who call their helplines about a routine matter that could be better resolved using HMRC’s digital services.

Although some callers will be given the choice of holding for an adviser, other calls will be automatically disconnected after a message explaining a text message has been sent. The message might point towards information on the gov.uk website, which can help with the enquiry, or to the webchat service.

The HMRC app can be found here for Apple users and here for Android users.

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Tax warnings for online sellers, influencers and content creators

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HMRC’s latest wave of ‘nudge letters’ ­– used to prompt a response from the recipient – has been targeted at online sellers, influencers and content creators warning them that they may not have paid enough tax.

It is likely HMRC has obtained information from various online platforms and is using this as the basis for the nudge exercise. The wide range of recipients illustrates the scope of HMRC’s data analytics capabilities, as they have managed to identify people running blogs or social media accounts that include sponsorship.

Although any profit from online activity is taxable, there is an exemption if annual gross trading income does not exceed £1,000.

Certificate of tax position

Any online seller who receives a nudge letter is asked to complete a certificate of tax position within 30 days.

If the seller has undeclared income, HMRC recommends making a voluntary disclosure using its online Digital Disclosure Facility. Once HMRC is informed of the intended disclosure, they will send an acknowledgement letter. Outstanding tax must be paid within 90 days from the date of this letter.

If the seller does not need to inform HMRC of any additional income, they either have to declare that all income from online marketplace sales has been correctly declared or explain the reason why income need not be declared. This could be because of the de minimis £1,000 exemption, or if income is less than the personal allowance of £12,570.

Tax position alternatives

Unlike the self-assessment tax return, there is no legal requirement to complete and return the certificate of tax position. However, non-completion will inevitably attract more attention from HMRC.

If an online seller’s tax affairs are not straightforward, it will probably be better to respond by letter instead. A more detailed explanation of the seller’s tax affairs can then be given. Professional tax advice, is, of course, essential.

A step-by-step guide for any online sellers, influencers and content creators who need to set themselves up as self-employed 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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High Income Child Benefit Charge: penalties and defaults

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New data reveals that penalties issued by HMRC for not paying the High-Income Child Benefit Charge (HICBC), or paying the incorrect amount, have fallen significantly. However, the number of individuals still in default is estimated at more than 60,000.

If the HICBC is payable, an individual is required to submit a self-assessment tax return each year even if all of their income is taxed through PAYE.

  • Such individuals are unlikely to receive professional advice, so there is a lack of awareness.
  • Salary increases can lead to someone becoming subject to the charge, especially as the income limit has remained at £50,000 since the charge was introduced.

Complications

The HICBC can apply if either partner has income over £50,000. The definition of a partnership for this purpose includes people living together.

The charge falls on the partner with the higher income, and in many cases, one partner will not know what the other partner’s income is, especially if they have separated.

Although child benefit is normally paid to the person the child is living with, it is possible for the other partner to make the claim if they are contributing at least as much as the amount of the child benefit towards the child’s upkeep.

Moving in or out

Where a partner (B) moves in or out (with partner A) the position is:

  • Partner B moves in: Partner A could become liable to the HICBC, but only from when partner B moved in. Partner B will take over partner A’s HICBC if they have the higher income.
  • Partner B moves out: If partner A has the higher income, they will only be liable for the HICBC up to the date partner B moves out.

Self-assessment

Given the 31 January deadline for filing the 2021/22 tax return, individuals should urgently review their situation to ensure any HICBC is correctly declared. This is also the deadline for amending the 2020/21 return without the need to write to HMRC.

Failure to pay the HICBC, or paying the incorrect amount, will mean backdated assessments, often for considerable sums, plus, if no reasonable excuse, late notification penalties.

HMRC’s basic guide to the HICBC can be found here.

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The effects of fiscal drag on your tax position

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Fiscal drag is the stealthy way in which governments pull more and more taxpayers into higher tax brackets without the backlash that comes with increased tax rates. This is something taxpayers can probably live with when inflation is negligible, but it’s another matter entirely with inflation at over 11%.

Inheritance tax

One of the starkest examples of fiscal drag is the freezing of the inheritance tax (IHT) nil rate band that has been set at £325,000 since April 2009. Combined with soaring property prices, it is no surprise the government’s IHT receipts have nearly doubled in the ten years to 2021/22, with current year receipts set to see a further significant increase.

The nil rate band had previously been frozen at £325,000 until 2026, but the Autumn Statement has now extended the freeze until 2028.

IHT bills can sometimes be mitigated with careful lifetime planning, although people should be careful not to leave themselves short of funds later in life.

Income tax thresholds

The personal allowance (£12,570) and the basic rate tax threshold (£37,700) are unchanged since 2021/22, and, like the IHT nil rate band, are now set to remain frozen until 2028. Other thresholds are subject to fiscal drag because the government simply ignores them from year to year.

  • The £100,000 income limit at which the personal allowance starts to be withdrawn is unchanged since withdrawal was introduced in 2010. Personal allowance withdrawal leads to a 60% marginal tax rate, and an estimated one million more taxpayers could be caught if nothing changes over the next five years.
  • The High Income Child Benefit Charge income limit of £50,000 is unchanged since the charge was introduced in 2013. Around one in five families are now affected by the limit, compared to one in eight when the charge was first introduced.

To mitigate the impact of these frozen thresholds, some income tax planning may be possible for spouses and civil partners. Pension contributions can also reduce the amount of income counting towards the various income limits.

Details of income tax rates and personal allowances for the current tax year can be found here.

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Meandering thoughts on Capital gains chop in Autumn Statement

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It should have come as no real surprise that the Chancellor took the axe to relief on capital gains tax (CGT) in the government’s Autumn Statement. The changes are expected to raise some £1.6 billion over the next five years by cutting the annual exempt amount (AEA) to £6,000 for 2023/24, and following this by a further, drop down to £3,000 from 2024/25.

The AEA is currently £12,300, so someone with, for example, gains of £20,000 to £25,000 from the sale of shares will have been advised to spread the disposals over two tax years to benefit from two AEAs. With an AEA of just £3,000 from 2024/25 onwards, a disposal would need to be spread over seven or eight years to fully eliminate the gain.

Instead, many investors may prefer to take the full tax hit from an early disposal, especially if they have concerns that CGT rates could be the next target. For a higher or additional rate taxpayer disposing of a buy-to-let property, for example, the reduction of the AEA to £3,000 will mean an additional £2,604 in CGT.

The AEA available to trustees is half the normal level, so for 2023/24 they will have an AEA of £3,000, with £1,500 available from 2024/25.

Reporting requirements

With a lower AEA, more individuals and trusts will find themselves having to report gains to HMRC. The estimate is that by 2024/25, an additional 260,000 people will be brought into the scope of CGT for the first time.

This will mean filing a self-assessment tax return or making use of HMRC’s real-time CGT service. Dealing with CGT can be a challenge given the complex computational rules and reliefs, plus the one-off nature of the tax.

CGT planning

The reductions to the AEA make planning around capital gains more important than ever.

  • Consider utilising the current, more generous, AEA by 5 April 2023.
  • Make use of ISAs to shelter gains from CGT.
  • Ensure the best use is made of any capital losses – these can be wasted if crystalised in a later tax year to gains.
  • Spouses and civil partners can transfer assets between themselves to make the best use of exemptions and capital losses.
  • Look at whether holding buy-to-let property in a company structure is beneficial.

HMRC’s guide to reporting and paying CGT can be found here. For detailed guidance on your options, please get in touch.

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Dividends vs remuneration: the corporation tax quandary

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For owner-managed companies, bonuses, dividends and remuneration will become yet more complex in the new tax year.

With the corporation tax increase and dividend rates now confirmed by the Government, the dividend vs remuneration decision for owner-managed companies is likely to become more complicated in 2023/24, particularly when it comes to bonuses.

Historically, it was preferable to extract company profits through dividends rather than through director’s remuneration. This is because of the national insurance contribution (NIC) cost attached to remuneration.

However, from 1 April 2023, there will be a substantial increase to the rate of corporation tax once profits hit £50,000. On profits between £50,000 and £250,000 the rate will be 26.5%, with the 19% rate only available for the first £50,000 of profits.

The bonus decision

The tax position will differ in each case, but let’s take a situation where a higher rate taxpayer wants to take a bonus of £40,000 from their company, which is in the 26.5% corporation tax bracket. The director has already used their tax free dividend allowance.

Dividend
After allowing for corporation tax, a dividend of £29,400 can be taken. Income tax on this will be £9,923, so the net income is £19,477.

Remuneration
After allowing for employer NICs (assuming the rate does not increase next year), the gross remuneration would be £35,149. After income tax and employee NICs are applied, the net income is £20,386.

In this case, remuneration is the beneficial option (and would be better still if some or all of the employment allowance was available). Without the corporation tax increase, the situation would have been reversed.

Of course, the situation could change if the Government decides to reinstate the additional 1.25% percentage points to NIC rates (albeit, in this particular example, the remuneration option would still be marginally better).

Other factors to consider

There are several other advantages to paying remuneration rather than dividends to consider too:

  • Dividends must be paid to all shareholders.
  • A dividend has to be covered by a company’s profits.
  • Dividends do not always count as income when applying for a mortgage.

As these examples illustrate, the corporation tax landscape has become more complicated. Although a Government guide clarifies things somewhat, it’s always best to seek professional advice rather than risk losing valuable income.

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