UK Tax News

Auto-enrolment

Published: 12 Jun 2015

Updated: 16 Sep 2015

Written by Ray Coman

With wide coverage in the media, many people will now have heard the term auto-enrolment. Until now it has affected only larger companies however, it is now becoming a legal requirement for businesses of all sizes. In this guide we cover frequently asked questions.

The automatic enrolment of an employee into a workplace pension will become a consideration for employers of all sizes.

Which businesses are subject to the rules?

The requirement applies to any employer with employees who ordinarily work in the UK. It applies to temporary staff, although there is some facility to postpone for staff who have worked less than three months. The rules apply regardless of any other pension contributions made by, or on behalf of, the employee, such as by contributions by a different employer.

Any employee paid up to £486 a month has a right to join the pension scheme if they wish. An employer must oblige an employee’s request but is not bound to make any contributions.

An employee paid between £486 and £833 a month has a right to opt in. If an employee makes a request to join the pension scheme then the employer must make contributions according to table below.

Any employee who is between 22 and the state retirement age (currently 67) and earning over £833 a month will be automatically enrolled. Regardless of any request made by the employee, each employee is enrolled in the company pension and the pension is funded according to the table below. An employee does not have to give permission to be enrolled.

If an employee who has been auto-enrolled does not wish to be a part of the pension scheme then this person will have to specifically opt out.

From when does auto enrolment apply to small businesses?

The staging date is the date from which an employer must start to comply with auto-enrolment rules. Where applicable, this would be the date from which contributions will be made to the employee’s pension.

For business with 30 employers or fewer, the staging date ranges between 1 June 2015 and 1 April 2017. Newer employer may have a staging date as late as 1 February 2018. If you are an employer, the Pensions Regulator will write to you to let you know the date from which your obligations arise.

It is only possible to auto-enrol from the staging date. However it is possible for a business to make a request for their staging date to be brought forward.

How much will I need to contribute?

Contributions are a percentage of ‘qualifying earnings.’ These are employment earnings between the lower and upper national insurance limit. It is therefore not possible for the minimum contribution alone to exceed the annual allowance for pensions.

The following table sets out the minimum requirements.

The employee’s contribution will be deducted from gross pay. Therefore it is the amount after deduction of employee’s pension contribution that will be subject to tax. 

There are a number of tax advantages to a pension contribution.

It is acceptable to provide employees with more than the minimum requirement.

Defined Contribution or Defined Benefit

A pension is a method of saving for retirement. Unlike usual savings the money cannot be accessed until the pension holder reaches retirement age. A Defined Contribution (or DC) pension fund increases in value when contributions are made. The contributions are invested with the aim of further increasing its value. This contrasts with a defined benefit scheme, where the pension benefit is known in advance. The benefit is based on earnings and length of time in employment. DC schemes are far more common in practice. The value of investments can go up as well as down.

What pension do I provide?

As an employer, it is a requirement to set up a pension scheme for the contributions to be paid into.

Coman & Co. Ltd are not financial advisers and therefore cannot advise on pension schemes. Many ‘household name’ insurers offer workplace pension schemes. However, some pension providers do not offer a service for that can satisfy the requirements of automatic enrolment.

What is a default investment fund?

Most pension providers offer a default investment fund. This is the fund that is chosen by the pension provider for any employees who have not stated the investments to be made with their pension money. It is specifically for employees who are either unwilling or unable to make investment decisions about their pension.

According to government reports more than four in five employees opt for the default fund provider. A typical approach by the insurance company is to invest in the stockmarket for younger pension holders. The aim is to grow the value of the pension. As retirement nears the pension will be invested in lower risk assets, such as bonds and gilts. This is to protect the value of the pension.

What is the alternative to a default provider?

It is possible to invest a pension in a host of funds, shares, bonds and other securities. A Self-Invested Pension Plan (or SIPP) allows its pension holders to take charge of how investments are made. Broadly, SIPPs allow the pension holder greater freedom to choose what, when and how much is invested in the fund.

Even if you are self-employed or a one-person company owner a SIPP or other pension may be suitable. SIPPS can even be used to purchase the commercial premises from which your business operates.

My employee does not wish to auto-enrol

If an employer has enrolled an employee in the scheme, it is a requirement that the employee remains a member of the workplace pension. However, it is possible for the employee to opt out of making any contribution to the pension.

Providing a workplace pension is costly to the employer. Nevertheless, an employer is not allowed to offer any incentive to prevent staff from joining the scheme. Employers are obliged to explain auto-enrolment to staff. The Pension Regulator has provided a template for this purpose. The benefit of employer contributions must be explained.

Notwithstanding, an employee may choose to opt out. Employees may, for instance, prefer greater take home pay, even if this means foregoing the extra amount paid into their pension by their employer.

If an employee opts out within one moth of joining the scheme a full refund for the employee’s contributions must be made.

I am a one person company, or a company where everyone is a director.

Provided no more than one of the directors has an employment contract is not necessary to operate a workplace pension. Unless the director specifically wrote an employment contract it is unlikely to exist. A letter from the Pension Regulator regarding any requirement to auto-enrol can be cancelled by following this link:

http://www.thepensionsregulator.gov.uk/employers/What-if-I-dont-have-any-staff.aspx

I have my own company, but have not received a letter from the Pension Regulator.

Correspondence would probably not be sent by the Pension Regulator to businesses that have indicated they will not be operating a workplace pension. This can be specified on the application to register as an employer.

Therefore no further action is necessary.

I am not required to operate a workplace pension, but appreciate the retirement planning implication of not having any pension.

Consider the benefits (helped by the tax system) of making pension contributions. The most tax efficient method as a one-person-company is to make contributions as an employer.

How is auto-enrolment operated via the payroll?

The deductions from an employee’s pay and total pension contributions are included on the payslip. Most payroll software will automatically link to the pension provider. The contribution information is transferred to the pension fund and the employer settles the contribution into the pension fund accordingly.

Coman & Co Ltd. operate a payroll service for small businesses. As part of payroll we will assist with generating the electronic file sent to your pension provider to meet the compliance requirements. We can ensure that the submission made by the software follows the format acceptable to your pension provider.

After the staging date

Once auto-enrolment has started, there are further requirements.

The employer is required to explain to staff the relevant implications of auto enrolment and the pension fund that the employer has selected on behalf of the company. The Pension Regulator provide a template for this purpose.

The pension regulator has stipulated that employers file a compliance declaration within five months of the staging date.

It is a requirement to keep auto-enrolment records for six years, and opt out requests for four years.

Fines apply for non-compliance.

Tax implications

Employer contributions can be deducted from profits chargeable to corporation tax.

The amount contributed by the employer is not a taxable benefit. Contributions by the employee are deducted from earnings subject to tax and national insurance. More information can be found here.

Up to £150 incurred on pension advice provided to an employee is a tax free benefit.  The additional costs of employer contributions will be partly offset by the recent employment allowance, a benefit mainly for small businesses.

2015 Budget

Published: 20 Mar 2015

Updated: 21 Mar 2015

Written by Ray Coman

With just 50 days before the election, the Chancellor's announcements included a number of tax-saving proposals. The Budget statements are made in the context of a strengthening British economy, helped (as Mr Osborne grants) "by falling world oil and food prices."  His speech declared a national "comeback", with:

• A growth in the UK economy of 2.6% in 2014, the fastest in the G7 group of nations.
• The number of people in work at a historical high.
• Britain measuring its lowest recorded level of inflation.

ISA

Starting 6 April 2015, the limit on the yearly amount that can be invested in an ISA increases by £240 to £15,240.  The annual limit for a junior ISA also increases to £4,080 up £80 from 2014/15.

ISA rules will be more flexible from 2015/16.  Previously the limit was measured with regard only to the amount paid into the ISA.  However, under new rules the limit will be measured by net contributions in the year.  It will be possible to draw funds out the ISA and re-invest them, provided the difference between what is invested and what is withdrawn, the same tax year, does not exceed the limit.

Help to Buy ISA

A new type of ISA will be available for first time buyers from Autumn this year.  Under the Help-to-Buy scheme, the government will add £50 to the ISA for every £200 contributed by the saver.  An investment can be made up to an overall yearly limit of £15,000.  The maximum is therefore £12,000 contributed by the saver and £3,000 contributed by the government.  The limit is 10% of £150,000 which is the Treasury estimate of about the average UK property price.

Savings

The chancellor announced that from 6 April 2016, there will be no tax payable on the first £1,000 of interest income. Currently, 20% tax is deducted at source from most interest, and 40% taxpayers are therefore required to pay back an additional 20% in tax.  The limit is reduced to £500 for higher rate taxpayers so that the relief is no greater for those on higher income.  The measure is expected to relieve 95% of taxpayers from the burden of tax on their interest.

Pensions

There is a lifetime allowance on the amount that can be invested, tax free, in a pension.  The value of the pension is measured against this limit when it vests.  A pension usually vests when the pension holder starts drawing on the pension. There is a tax charge on the value of the pension over the lifetime allowance on the vesting date.  The government proposes to reduce the annual limit from £1,250,000 to £1,000,000 from April 2016.

A pensioner will also no longer be forced to buy annuity from next April.  In other words, a pensioner will no longer have to receive a fixed annual payment, calculated partly by reference to life expectancy.  Instead pension holders will be able to access their pension funds as cash withdrawals.

Under the current rules, a taxpayer would have to pay tax at a rate of 55% when they sell their annuity.  This will be altered so that a taxpayer will pay tax at their marginal rate (for instance, at 20% if a basic rate taxpayer.)

Personal allowance

The personal allowance, or the amount of income that a person can receive tax free, is set to increase over the next three years.  With effect from 6 April 2016, the personal allowance will rise to £10,800, a £200 increase from 2015-16.  The personal allowance is also set to rise again to £11,000 on 6 April 2017.

Basic rate

So that higher rate taxpayers are no worse off following the personal allowance, an increase the basic rate threshold is also due to rise.  Starting 6 April 2015, an individual must earn £42,385 before paying tax at the higher rate of 40%.  This basic rate tax threshold will rise by £315 in 2016-17, and by £600 in 2017-18.  The basic rate band will therefore be £43,300 in 2017-18.  The escalation in the limit is above inflation and therefore prevents us paying more in real terms, an effect known as fiscal drag.

Married couples' allowance

Where a spouse has income less than the personal allowance, they can transfer some of their allowance to their married partner.  Consequently, the married partner can benefit from a higher tax free amount that their spouse is not using.  From 6 April 2015, the amount of allowance that can be transferred will rise to £1,100.

Class 2 NICs

Class 2 national insurance is a fixed amount payable by self-employed individuals.  The government has announced that it will abolish this tax from the next Parliament.

Under 21 NICs

From next April, there will be no employers' national insurance liability arising from salary paid to an employee under twenty one.

Company cars

Where an employer provides a company car, the employee is taxed on this benefit in kind.  The higher the Carbon Dioxide emissions of the car the more benefit the employee is deemed to have received.  This is to encourage companies to provide more fuel efficient work vehicles.  The government announced, that in 2019/20 the rate applicable to low-emission vehicles will be lower than previously announced.  On the other hand, the rate for other vehicles will increase 3%.

Tax returns

From early 2016, the government plans to scrap the Tax return, and instead introduce digital tax accounts.  Further details are awaited.

Annual investment allowance

There is currently an annual allowance in place to enable business to immediately deduct the cost of purchasing assets, such as computer equipment, from taxable profits.  The rate is currently £500,000 but due to fall to £25,000 at the end of this year.  In his speech the chancellor confirmed that this considerable drop will not occur.

Corporation tax

As part of a previously announced measure the rate of corporation tax will lower again to 20% from 1 April 2015.  Britain will have one of the lowest company tax rates of any major economy in the world.

2014 Budget

Published: 19 Mar 2014

Updated: 03 Apr 2014

Written by Ray Coman

Delivered at 12.30 today, the chancellor's fifth budget contains a number of tax incentives for so called 'doers, makers and savers.' A round up of the main changes is explained below.

Stamp duty on property worth over £500,000

The threshold for stamp duty on residential property purchased via a company will lower from £2 million to £500,000. The new threshold takes effect from midnight (19 March 2014.) The measure provides a further disincentive to owning a property via a company.

Up to £2,000 state help with childcare costs

From September 2015, families where both parents work will be able to obtain government support for the cost of childcare on any of their children aged 11 or younger. Eligible couples will be able to open an online 'tax-free childcare' account which will be administered by HMRC in conjunction with NS&I. The government will contribute 20 pence for every 80 pence paid into an account. Under new proposals, up to £8,000 can be contributed by parents into the fund. Where the maximum is contributed, £2,000 of childcare subsidy would be obtained.

The scheme is open to all parents, except where both parents are earning over £150,000.

Parents using a childcare voucher scheme can continue to use the scheme as an alternative until their child reaches 15 years old. This will be particularly beneficially for parents with children between 12 and 15 who have not moved employer.

Premium bond limit lifted to £50,000

The cap on amounts that can be invested in a premium bond will be raised in June from the current threshold of £30,000 to £40,000. A further increase in the limit to £50,000 will be introduced from 2015/16. Premium bond pay-outs are tax free, but the limit of £30,000 has been in place since 2003.

ISAs limit increase to £15,000

From 1 July 2014, the limit that can be invested in an ISA will increase from to £11,520 to £15,000 and the full amount can be invested in cash. The previous rules restricted the amount that could be invested in cash (to £5,760 for 2013/14.)

Pension annuities to be abolished

From 5 April 2015, pensioners will no longer be required to convert their pension into an annuity. Previously, pensioners had to purchase of an annuity from their pension pot on reaching age 75. An annuity is a guaranteed income for life which is based mainly on the value of the pension fund, prevailing interest rates and life expectancy. It is hoped that greater choice for pensioners will improve the competitiveness of annuity products.

The alternatives of fixed term annuities or income draw-down may leave surplus funds in the pension to be transferred on death.

Most pensioners will have a cap placed on the amount that can be withdrawn. A few pensioners, which sufficient other income, will be able to drawdown unlimited amounts from their pension.

10 pence savings rate to be scrapped

The budget contained welcome news for low income savers, with the abolition of the 10% tax rate.

Where a person's total income is less than the personal allowance and the starting rate, savings income has been taxed at 10%. For 2013/14 the personal allowance was £9,440 and the starting rate was £2,790. Therefore in 2013/14, an individual with total income of £12,230 of which £2,790 was bank interest, would have a tax liability of £279.

Following the budget announcement, a new starting rate of 0% will be introduced for savers and will apply to the first £5,000 of taxable income. This is almost double the current limit.

Further rises to the personal allowance

The chancellor announced that the personal allowance will increase again to £10,500 on 6 April 2015. However unlike previous increases in the personal allowance there is no corresponding decrease in the amount taxed at the basic rate. Therefore all taxpayers with an income up to £100,000 will benefit. The personal allowance is clawed back when income exceeds £100,000.

Social investment and film tax relief

From 6 April a 30% tax relief will be available for investment into social enterprise, such as charities and community interest companies. There are increases to film tax relief and tax relief for theatre productions.

Annual investment allowance to double

The annual investment allowance (AIA) will be increased from £250,000 to £500,000 with immediate effect and until the end of 2015. The AIA determined the amount that can be invested in capital assets and deducted from profits in the year of investment. All but the very largest business will therefore be able to obtain immediate tax relief for capital investment.

Abolishing class 2

The flat rate of national insurance payable by sole traders and partners will be abolished. The change will reduce an administrative burden on the self-employed.

Employment allowance

As previously announced the government will be introducing the employment allowance of particular benefit to small business employing staff.

With experience in dealing with a range of tax issues, Coman & Co. would be pleased to assist with your tax compliance or tax advice requirements. Please contact us for an initial consultation.

Tax rates for 2014-15

Published: 06 Apr 2014

Updated: 06 Apr 2014

Written by Ray Coman

With a general election fixed for 7 May 2015, this will be the last full tax year of the current coalition. Many of the changes to take effect from today were announced in the 2014 Budget, although some had been scheduled from much earlier. The main changes effective 2014-15 include:

• A fall in the full rate of corporation tax from 23% to 21%
• An increase in the personal allowance from £9,440 to £10,000, but a reduction in the basic rate band of tax by only £145.
• A rise in the VAT registration threshold from £79,000 to £81,000.
• An increase in ISA limit (on 1 July) to £15,000, all of which can be invested in cash.
• Reduction in lifetime allowance for pension funds to £1,250,000 from £1,500,000.
• A drop in annual allowance for pension contributions from £50,000 to £40,000.
• Relaxation about the rules governing withdrawal of pension income.
• The final period of deemed occupation of a principal private residence reduces to 18 months.
• The annual allowance for the purchase of capital assets by a business increases from £250,000 to £500,000.

The changes include good news for savers and people with pensions and further stimulus for business. However, at a time where property and assets values in certain areas have risen sharply, the lack of change in the tax thresholds creates risk for investors.

• There has been only a nominal increase in the annual allowance for capital gains tax from £10,900 to £11,000.
• The change to stamp duties has been a lowering of the threshold by which company owned property is subject to tax at 15%.
• The fixing of the inheritance tax threshold has been extended to 2017/18.

In summary, the freeze on capital taxes will expose greater numbers to an increased burden of tax on wealth and property.
 

Coman & co are pleased to offer a summary of the new rates and allowances, which are key references for tax planning in the coming year.  Please contact us for a further discussion about your upcoming tax requirements.

Capital gains tax on property sale

Published: 28 Feb 2014

Updated: 06 Apr 2014

Written by Ray Coman

With the London property market soaring, exposure to capital gains tax is sharply on the rise. Tax accountant, Ray Coman replies to the questions this raises.

When I sell my property will I have to pay tax?

You will only pay tax on the sale of property that has not been your home.

How much could my tax liability be?

A gain for tax purposes is the increase in value between buying your house and selling it. This taxable gain can be reduced by costs of purchase, of sale and improvement to the property. Any losses you have made previously, and your annual allowance, currently £10,900, could further reduce the taxable gain. Most of the gain would probably be taxed at 28%.

How is my tax reduced if the property used to be my home?

The proportion of gain during which a property was your Principal Private Residence (PPR) will be exempt from tax.

You will be treated for tax purposes as living in the property during certain periods of absence, such as when required to temporarily relocate for work. However, you can only have one PPR at any time. For a final period, you are deemed to live a property, even if you actually lived elsewhere, and did not return to live in it. For properties exchanged before 6 April 2014 the final period is 36 months, however it then reduces to 18 months.

If you let a property that was once your home any gain is further reduced by up to £40,000, per owner.

Would I save tax owning a property through a company?

There is rarely any tax benefit to owning a property in a company. Any gains are subject to corporation tax, and when taking gains out of the company, further tax liability is likely to arise on dividends. A company is not eligible for PPR relief or an annual exemption.

Should I transfer the property into joint names with my husband or wife before selling it?

An acquiring spouse 'inherits' the actual and deemed periods of occupation of the transferring spouse. Transferring a property can, therefore, save a couple tax. However, a person, or a married couple, can only have one PPR at any time. Therefore, if the transferee spouse was previously a homeowner, the transfer could create a significant tax liability.

Transfers between spouses are exempt from capital gains tax.

I had two homes, what happens if I sell one of them.

The fortunate few who have two homes at the same time could benefit by nominating one of the properties as a PPR.

How is my tax position affected if the property market does not increase?

If price stagnate, the effectiveness of PPR will diminish. If you sell your home for less than you bought it for, the loss cannot be used to reduce any taxable gains you make in the future.

Coman & Co can advise on the tax implications of your property investment plans. Please contact us for a free consultation.