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Universal Credit eligibility expands to higher rate taxpayers

Written by admin on . Posted in COVID-19, Income Tax, self-assessment, Self-Employed, Tax. No Comments on Universal Credit eligibility expands to higher rate taxpayers

Autumn Budget reforms have created a surprising clash of benefits and income tax.

The Covid-19 pandemic was the first time many people utilised Universal Credit (UC) for the first time – between February and May 2020, the number of households claiming UC rose by 1.7 million to 4.2 million. In March 2020, the UC standard allowance was temporarily increased by the equivalent of £1,000 a year, but in October 2021, that extra payment came to an end. In its place, the Budget contained announcements of two UC improvements that are now in effect:

  • All working elements were increased by £500 a year, meaning that an extra £500 of net income can be earned before any clawback of UC started; and
  • The rate of clawback was reduced from 63% to 55%. As a result, if an extra £100 of net income is received and this leads to a reduction in UC payments, the loss of UC will be £55 rather than the previous £63.

So what?

The Institute for Fiscal Studies (IFS) has looked at this question and produced a surprising answer. The lower taper rate, applying to a higher starting point, now means that it is possible for higher rate taxpayers to be eligible for UC, a situation that once only applied in Scotland, where the higher rate threshold is £6,608 lower than in the rest of the UK.

One example the IFS gave is that a single earner couple with two children and monthly rent of £750 could have earnings of up to £58,900 a year in 2020/21 before losing all their UC entitlement – £9,600 more than before the Budget announcement. Not only is that ceiling well into the higher rate tax band, it is also above the £50,000 level at which the notorious High Income Child Benefit Tax Charge begins to take effect.

There are many assumptions underlying that IFS calculation, not the least of which is that the couple are not disqualified from any UC entitlement by having savings of above £16,000. In practice, the IFS calculates that 26% of all families will be entitled to UC, a proportion that rises to 84% for lone parents.

The interaction of the tapering of UC, higher rate tax and child benefit tax is complex. If you think you might be caught by that trio, make sure you understand the ramifications – you might find an extra £100 of gross earnings are worth less than £10 net.

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Changes afoot for Basis period tax rules

Written by admin on . Posted in Income Tax, MTD, National Insurance Contributions, Pensions, self-assessment, Self-Employed. No Comments on Changes afoot for Basis period tax rules

Although it looks like the next Budget will be pushed back to spring 2022, several tax changes are already on the cards, some more certain than others. The government’s fast progress with reform of the basis period rules for unincorporated businesses has taken some by surprise.

Basis period rules

The basis of taxation for sole traders and partnerships looks like it will change to a tax year basis from 2023/24 onwards. The government’s plan is to simplify the rules by the time MTD for income tax becomes mandatory.

This will not impact on you if you already draw up accounts to 5 April (or 31 March), but for others 2022/23 will be the transition year.

Example

A partnership prepares accounts to 30 June. The profits assessed for 2022/23 will be those from 1 July 2021 to 5 April 2023 (or 31 March 2023), less any unused overlap profits. For 2023/24, profits assessed will be from 6 April 2023 to 5 April 2024 (or 1 April 2023 to 31 March 2024). Profits for the years ended 30 June 2023 and 2024 will have to be apportioned.

Any unused overlap profits can be offset in 2022/23, although some will find themselves taxed on up to 23 months of profits with little overlap profits to offset. In this case, an election will be possible so that the additional profits are spread over five tax years.

The need to apportion profits in future will mean having to estimate figures (with a subsequent amendment) where the second set of accounts is not prepared in time for the 31 January self- assessment deadline.

The simplest solution will be to change to a 5 April (or 31 March) accounting date. Making that change in 2021/22 could be a good option if current profits are low due to Covid-19.

Another change already on the cards is the increase to the normal retirement age for registered pensions from 55 to 57 in April 2028, which will be legislated in the Finance Act 2021/22. Less certain is a proposed 1% increase in NICs for the employed and self-employed to fund social care.

The Government’s policy paper on basis period reform can be found here.

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Some ‘new’ tax year opportunities

Written by admin on . Posted in Budget, Capital Gains Tax, Employment Tax, self-assessment, Self-Employed. No Comments on Some ‘new’ tax year opportunities

“A bit late in the day, Femi” I hear you thinking. But is it? Some tax planning should happen before the end of the tax year; but the start of a new tax year also presents opportunities. With many people experiencing a drastic change to their circumstances due to the pandemic, it is more important than ever to keep on top of your tax affairs.

If your income is now at a different level than pre-pandemic, you need to re-evaluate any previous tax planning. For example:

  • Child benefit – A claim may now be worthwhile if income is below £60,000. Act soon to benefit from a full claim for 2021/22.
  • Marriage allowance – A claim may now be possible if neither you nor your spouse/civil partner is a higher rate taxpayer. You can claim for 2021/22 or backdate a claim for three years.
  • Working from home – Employees can claim a £26 per month deduction if required to work from home. Claim for 2021/22 or backdate a claim to 2020/21. Although the tax year 2020/21 has ended, some carry backs are possible. Gift Aid donations and SEIS/EIS investments made during the current tax year can all be carried back.

Investments

Savings rates hit record lows last year, and many companies cut their dividend payments. You may also have used up savings to replace lost income. Therefore, make sure you and your partner are making the best use of the savings and dividend allowances, and decide whether any ISA saving is still the best option.

You might also have had to realise investments during 2020/21. If you are now facing a CGT bill, it might be possible to crystallise some capital losses to offset against the gains. This is done by making a negligible value claim for assets that have become virtually worthless.

Tax payments

Some simple procedural checks can make a difference:

  • Employees – Check your PAYE codes for 2021/22. Your allowance might be too low if deductions have increased (such as professional subscriptions) or taxable investment income has fallen.
  • Self-employed – If profits have fallen, you might be able to reduce payments on account. This will reduce the payment coming up in July, as well as obtain a refund from this January’s payment.

A good starting point when reviewing your tax affairs is HMRC’s income tax webpage. This contains many useful links and can be found here.

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HMRC’s April interest rate cut

Written by admin on . Posted in Benefits, Employment Tax, Self-Employed, Tax, VAT. No Comments on HMRC’s April interest rate cut

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.
  • 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.

 Photo by M. B. M. on Unsplash

Missing out on tax-free childcare?

Written by admin on . Posted in Benefits, Law, self-assessment, Self-Employed, Tax. No Comments on Missing out on tax-free childcare?

By setting up an online childcare account, you can get a government top-up to help with the costs of childcare. However, thousands are missing out on this payment.

Tax-free childcare is worth up to £500 every three months (£2,000 a year) for each of your children, which doubles if a child has disabilities. Despite the impact of lockdowns, nearly 250,000 families saved money using the scheme in December 2020, an increase of more than 40,000 compared to a year earlier.

How tax-free childcare works

Your child must be aged under 12, with eligibility ceasing on 1 September after their 11th birthday (under 17 if a child has disabilities).

For every £8 you pay into your childcare account, the government will pay £2. These amounts can then be used to pay for approved childcare, such as:

  • childminders, nurseries and nannies;
  • after school clubs and play schemes; and
  • home care agencies.

The childcare provider must also be signed up to the scheme, but there is no other reason why childcare cannot be provided by a relative.

You can only get help paying for care outside of normal school hours, so, for example, private music lessons during school hours don’t count. Money can be saved during term time, earning the government top-up, and then used for summer camps or play schemes during school holidays.

Restrictions

There are certain restrictions on eligibility:

  • Other benefits – You cannot have tax-free childcare and also receive universal credit, tax credits or childcare vouchers, so it is worth checking if tax-free childcare is the right option.
  • Minimum income – Both parents must normally earn at least the national minimum/living wage. However, you may still be entitled if temporarily earning less as a result of Covid-19.
  • Maximum income – Both parents must earn less than £100,000. If previously ineligible, you might now qualify if income has fallen, for example due to being furloughed.

You can check if you’re eligible for tax-free childcare, find out how to apply and how to pay your childcare provider here.

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Brain teaser: should you incorporate?

Written by admin on . Posted in self-assessment, Self-Employed, Tax, VAT. No Comments on Brain teaser: should you incorporate?

The planned increase in corporation tax has changed some of the mathematics on incorporation.

The Budget announced a significant change to corporation tax from 2023:

  • Small companies, with profits of up to £50,000, would continue to pay the tax at the current rate of 19%, subject to adjustments for associated companies and financial periods of other than 12 months.
  • Large companies with profits of over £250,000 will pay corporation tax at a rate of 25%.
  • For companies whose profits fall between £50,000 and £250,000 HMRC have said that there will be “marginal relief provisions”, which have now been set out in the Finance Bill. As under previous corporation tax regimes, the marginal relief is given by applying the lower rate up to the small companies limit and then applying a higher than standard marginal rate to profits above that threshold. With the new rates from 2023, the £200,000 band of profits above £50,000 will suffer a marginal tax rate of 26.5%.

At present, from a tax viewpoint, it can be better to run a business via a company rather than on a self-employed basis. This is mainly because a company will allow the bulk of earnings to be received as dividends, thereby avoiding national insurance contributions (NICs). While this approach will still work for businesses with profits that would attract only the 19% small companies’ rate, it is a different picture for higher profits, as the example below shows.

Higher corporation tax rate bites

Phil’s business generates £100,000 of profit. If he has no other income, the tax situation as self-employed or as a company now and in 2023/24 is:

Self-employed Company 2021/22 Company 2023/24
Gross profit £100,000  £100,000  £100,000
Salary N/A £8,840 £8,840
Taxable profit £100,000 £ 91,160 £ 91,160
Corporation tax (£17,320) (£20,407)
Dividend  £73,840  £70,753
Income tax (£27,432) (£13,211) (£12,207)
NICs (£ 4,816)    
Net income 67,752 £69,469 £67,386

If Phil decides to incorporate, then the tax savings will turn into a tax loss after two years.

The decision on business structure should never be made based on tax alone as there are many other factors involved. However, the deferred tax changes announced in the Budget may tip the scales for some. As ever, advice based on your personal – and business – circumstances is essential.

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Covid-19 relief measures extended again

Written by admin on . Posted in Budget, COVID-19, Self-Employed, Tax. No Comments on Covid-19 relief measures extended again

The latest, and hopefully last, lockdown is not due to be completely lifted until at least 21 June, so it was no surprise to see Covid-19 relief measures extended in the Budget on 3 March. The furlough scheme will now run until 30 September and there will be two more self-employed grants, plus various other measures.

Furlough (CJRS)

Furloughed employees can continue to receive 80% of their wages for hours not worked, up to a cap of £2,500 per month, until 30 September. By continuing for a few months after restrictions end, the scheme will help businesses slowly recover from the disruption they have faced.

The current level of support will continue until 30 June. In July, the scheme will then only cover 70% of wages for the hours not worked, up to a cap of £2,187.50. This will reduce to 60% for August and September, with a cap of £1,875. Employers will need to pay national insurance contributions and pension contributions throughout.

Self-employed grants (SEISS)

There are to be two more grants; a fourth grant in late April, and a fifth grant in late July. However, extra conditions will apply for the fifth grant.

  • The fourth grant will again be worth 80% of three months’ average profits (now including results reported for 2019/20 but capped at £7,500.
  • The fifth grant will be similar if a business’ turnover has dropped by 30% or more. However, if less, the grant will only be worth 30% of average profits (capped at £2,850).

 

Other measures

A range of additional loans and grants were also extended to provide ongoing relief ahead of the gradual easing of lockdown measures:

  • VAT: The temporary reduced rate of 5% for businesses in the tourism and hospitality sectors has been extended until 30 September 2021, with a rate of 12.5% then applying until 31 March 2022.
  • Recovery loan scheme: The government will guarantee 80% of loans between £25,000 and £10 million.
  • Restart grant: Hospitality and leisure businesses in England will receive a grant of up to £18,000 per premise; up to £6,000 for non-essential retail businesses.
  • Business rates relief: The 100% relief for eligible retail, hospitality and leisure properties in England will continue to 30 June 2021, followed by 66% relief until 31 March 2022.

Details of the levels of CJRS support can be found here or get in touch with us for further guidance.

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Get Ready for 2021-2022

Written by admin on . Posted in Budget, self-assessment, Self-Employed, Tax. No Comments on Get Ready for 2021-2022

Taking some time to start planning for the 2021/22 tax year might be worth the effort. 

While there is often a focus on planning for the end of the tax year, much less attention is paid to the start of the tax year. The lack of an obvious deadline is probably one reason – deadlines tend to concentrate the mind. Nevertheless, some planning at the beginning of the new tax year can be a rewarding exercise.

  • Estimate your total income for 2021/22 – If you have a rough estimate of what your income will be, it will give you an idea of what to watch out for and what each extra £1 of gross income will be worth. For example, if your estimate is around £50,000, that means you are on the borders of higher rate tax (or well into the 41% band if you are resident in Scotland). £50,000 is also the threshold at which the child benefit tax charge comes into play.
  • Check whether you will cover your allowances – The allowances to which you are entitled often depend upon your income, although the £2,000 dividend allowance applies universally. Couples have the opportunity to cover two sets of allowances, possibly by transferring investments between each other or changing from single ownership to joint ownership.
  • Check your PAYE code – If you have received a 2021/22 PAYE coding, check that it is correct. The wrong code could mean you pay too much tax during the year.
  • Top up your ISA – If it makes tax sense for you to invest in an ISA because of the potential income and capital gains tax savings, then the time to do so is as soon as possible, not just as the tax year end approaches.
  • Consider making pension contributions – The sooner your contribution is invested, the longer it benefits from a tax-favoured environment and the less likely it is to be ‘lost’ in other expenditure.

For more 2021/22 tax planning, get in touch now, and get ahead of the curve.

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Update on Covid-19 support for businesses

Written by admin on . Posted in Business Rates, COVID-19, Self-Employed, Tax. No Comments on Update on Covid-19 support for businesses

More support is available to help businesses in this latest lockdown, expected to last until at least 8 March. Keep up to date with, and claim, any support that your business is entitled to so you can plan cash flow and take remedial action as necessary.

Council grants

The Closed Businesses Lockdown Payment of up to £9,000 supports businesses required to close due to the latest national lockdown. It should be paid automatically if you have previously received a grant, but visit your local council’s website to check. Your business must:

  • be based in England;
  • pay business rates;
  • be required to close because of the national lockdown (closure for any other reason doesn’t count); and
  • be unable to provide the usual in-person customer service (even if a takeaway service is provided).

Fourth SEISS grant postponed

The fourth SEISS grant, promised by the Chancellor in October 2020, will not be paid until after the Budget on 3 March, with no details announced until then. Claims for the third grant opened on 30 November 2020, so the fourth grant will be later than expected. The delay of the payment into March has met with dismay, with some left with no income at all in February. However, it is likely that profits reported for 2019/20 will be taken into account, and this will help anyone who commenced trading after 5 April 2019.

Kickstart Scheme

The Kickstart Scheme, designed to create jobs for 16- to 24-year-olds, commenced last September. The scheme covers the minimum wage for six months, along with the associated employer NICs and pension contributions. The scheme has now been simplified with the removal of the 30-vacancy requirement where an employer applies directly.

Annually paid directors

Many small company directors have not been able to benefit from the furlough scheme if they pay themselves annually. Directors may qualify under the latest version of the scheme, and HMRC has recently published examples outlining how claims should be calculated.

Government support for businesses keeps evolving. Visit business support to find out what support is available.

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Lockdown 3.0 – What To Expect

Written by admin on . Posted in COVID-19, Employment Law, Employment Tax, Self-Employed, Tax. No Comments on Lockdown 3.0 – What To Expect

As the third Covid-19 lockdown took effect on 5 January 2021, the Chancellor announced a further £4.6 billion in grants to the retail, hospitality and leisure sectors. This new round of support follows extensions to the job retention and loan schemes revealed on 17 December 2020. There may be more to come with the Budget on Wednesday 3 March 2021.

New lockdown 3.0 grants

An extra £4.6 billion in lockdown grants has been directed at the worst affected sectors.

New one-off grants for closed retail, hospitality and leisure businesses have been announced. The new grants are in addition to all other forms of support, such as the Lockdown Restrictions Support Grant (LRSG (Closed) Addendum) which applied to businesses that were forced to close between 5 November  and 2 December 2020.

The new grants in England will be:

  • £4,000 for businesses with a rateable value of £15,000 or under;
  • £6,000 for businesses with a rateable value between £15,000 and £51,000; and
  • £9,000 for businesses with a rateable value of over £51,000.

In addition, £594 million is being made available for Local Authorities and the Devolved Administrations to support other businesses not eligible for the above grants, that might be affected by the latest restrictions. Businesses should apply to their Local Authorities.

The Devolved Administrations will be receiving additional funding in line with the English measures, with £375 million for Scotland, £227 million for Wales and £127 million for Northern Ireland.

The announcement of the new grants talks of helping business “through to the Spring”, with the Chancellor hinting that additional support measures are to come in the Budget on 3 March 2021.

Coronavirus Job Retention Scheme (CJRS)

The CJRS furlough scheme is now running through to April 2021.

On 17 December 2020, the Chancellor announced a further one-month extension of financial support under the Coronavirus Job Retention Scheme (CJRS) to the end of April 2021. As currently, the government will pay 80% of the salary of employees for hours not worked up to a maximum of £2,500. Employers will only be required to pay wages. National Insurance Contributions (NICs) and pensions for hours worked, and NICs and pensions for hours not worked.

Claims for furloughed employees can only be made for those who were employed and on payroll on 30 October 2020. The employer must have made a PAYE RTI submission to HMRC between 20 March and 30 October 2020, notifying a payment of earnings for that employee. This may differ where an employee has been made redundant, or they stopped working on or after 23 September 2020 and have subsequently been re-employed.

Self-employed Income Support Scheme (SEISS)

No change.

No changes to the SEISS were announced alongside the CJRS extension, as the SEISS already runs through to the end of April 2021. Details of the fourth SEISS grant that will cover the three months from February to April have not yet been released.

Loan schemes

Most schemes extended to 31 March 2021.

On 17 December the Chancellor extended access to the Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS), and the Coronavirus Large Business Interruption Loan Scheme (CLBILS) until the end of March.

Additional support measures

In November 2020 the Financial Conduct Authority (FCA) published fresh guidance across a range of issues including mortgages and consumer credit and loans. The thrust of these was to limit the maximum payment holiday to six months, which had to be agreed three months at a time.

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