UK Tax News

2020 Budget

Published: 11 Mar 2020

Updated: 03 May 2020

Written by Ray Coman

With a new government, now comfortable in its majority, new Chancellor, an outgoing Bank of England governor and its first since leaving the EU, the 2020 Budget was bound for the limelight. Rishi Sunak, boasted the largest fiscal boost for 30 years with substantial allocations for infrastructure, roads, housing and education. It was billed as a plan for prosperity.

Pension allowance threshold increase

Entrepreneur's relief

Lower tax for certain gains on life insurance products

Structures and buildings allowance to increase

National insurance threshold to rise

Employment allowance up by £1,000

Notable exceptions

Research and development credit rises

Non-resident companies owning property

Corporation tax unchanged

Capital gains tax

Restriction on use of carry forward losses for large companies

Other measures

Summary

Pension allowance threshold increase

The pension allowance is the annual amount that a taxpayer can invest in a pension and obtain tax relief.  It is currently £40,000.  However once net adjusted income exceeds a threshold, the allowance reduces from £40,000 to a minimum amount.  The amount of the reduction is £1 for every £2 that income exceeds the annual allowance.  The threshold is currently £150,000 for net adjusted income.  Net adjusted income is income plus employers’ pension contribution.  The threshold for income (i.e. after deduction of employer’s pension contribution) is currently £100,000.  More information can be found in the guidance on pension allowance.

Both thresholds are due to increase by £90,000.  The adjusted income threshold will increase to £240,000 from 6 April 2020.  The floor has been lowered from £10,000 to £4,000.  The amount below which the allowance cannot be tapered has reduced to £4,000.  The difference between the £40,000 maximum and £4,000 minimum is £36,000.  Applying the £2 for every £1 formula, tapering will stop at £240,000 plus (£36,000 x 2) or £312,000.

The allowance effects 2020-21 and future years only.  Tapering of allowance in previous years will be subject to the old rates for pension allowance of £150,000 adjusted income and £10,000 minimum threshold.  In his speech, the chancellor spoke about the increase in the allowance as a measure that would help health professionals.  He explained that 98% or consultants and 96% of GPs would no longer have pension allowance tapered.  On account of above average income, the measure will help medical professionals, but the reform is applicable to all higher income taxpayers.

Entrepreneur’s relief

This concession applies to gains made by business owners and more detail can be found in the rates table for capital gains.  Broadly, the relief allows business owners to dispose of their interests and suffer tax on any gain at a flat rate of 10%.  The rate otherwise applicable to gains is 20% to the extent that an individual is a higher rate taxpayer.  The rate is even higher for gains on disposal of residential property that is not the owner’s home.  The more generous rate applies only to gain made below an annual lifetime limit.  This limit was previously set at £10 million.  From 2020-21 the lifetime limit is reduced to £1 million.

The limit was £1million when entrepreneur’s relief was first introduced.  The lifetime limit is therefore returning to its 2008-09 threshold when the relief was brought in (to replaced business asset taper relief.)  It is not expected to impact many individuals.  An owner must have at least a 5% stake in the investment and the average shareholder will remain unaffected by the cut.  Most proprietary businesses will not be disposed of for over £1 million.

The lifetime limit also applies to shares in Enterprise Management Incentives.  The new measure takes effect from today, 11 March 2020.  Gains above the threshold will be subject to the higher rate capital gains tax that applies to disposals of shares and business assets of 20%.

Lower tax for certain gains on life insurance products

Gains made on certain life insurance products are subject to income tax.  The way that tax is calculated on these gains is referred to as top-slicing.  The calculation of top slicing relief has changed so that personal allowance is reinstated in the calculation.  Personal allowance is abated for individuals earning over £100,000 and foregone by non-domiciled individuals claiming the remittance basis.  The new calculation applies to any gains made with effect from today, i.e., 11 March.

Structures and buildings allowance to increase

Construction work on buildings that are used for trading or investment purposes (but not for residential or furnished holiday let purposes) are eligible for a capital allowance.  The building cannot have been a dwelling the first time it was used or during the period the allowance is claimed.  The capital allowance is a ‘straight line’ calculation.  This means that the percentage that can be deducted from profits is a fixed percentage of the original construction cost.  The percentage was 2% from the time the allowance was introduced on 29 October 2018.  However, following the announcement from today, it will increase to 3% from the start of the next financial year, on 1 April 2020.

Investment in “Enterprise Zones”, which are specific locations in the UK will continue to enjoy Enhanced Capital Allowances until March 2021.

National insurance threshold to rise

The national insurance threshold will increase in 2020-21 to £9,500.  The new limit will reduce tax for sole traders and employees.  In recent years, the threshold for employers and employees has been the same.  However, the national insurance limit for employers is only increasing to £8,788.  The upper threshold will remain at £50,000.  The most tax efficient salary paid from a contractor company in 2020-21 will be £732.

Employment allowance up by £1,000

This tax relief exempts employers’, or secondary, national insurance.  It is not available to companies with only one director.  From 6 April 2020, the allowance will increase from £3,000 to £4,000.  There is a further national insurance concession for employers hiring army veterans.

Notable exceptions

• The personal allowance and higher rate tax threshold have not been changed from their 2019-20 levels of £12,500 and £50,000 respectively.
• The process by which the value of a tax threshold is eroded by inflation is referred to a fiscal drag.
• It has been highlighted as an issue for nil rate band for inheritance tax which has been fixed at £325,000 since 6 April 2009.
• The additional tax rate of 45% still begins at £150,000.
• The personal allowance abatement threshold is also unchanged at £100,000.

Research and development credit rises

For qualifying expenditure on research, a company can claim an enhanced deduction from profits chargeable to corporation tax.  As an alternative to the enhanced deduction, the company can claim a credit.  The credit is a government payment equal to a percentage of the amount spent on R&D.  During the initial, loss making phase, the credit offers a more attractive cash flow alternative to enhanced expenditure.  The rate will increase from 12% to 13% on 1 April 2020.  A hike in the credit is aimed at promoting innovation and growth within the UK.

Non-resident companies owning property

Previously, a non-resident landlord company was subject to income tax.  However, from 6 April 2020 an overseas entity owning UK property will be subject to the same rules as a UK company.  In practice, the ruling removes overseas investors from the requirement to join the non-resident landlord scheme.  This scheme requires letting agents to withhold basic rate tax at source, unless HMRC approves an application to join the NRL scheme.  There is no tax incentive for new landlords to operate via a non-resident company.  Any foreign tax has been suffered on income will be available as a credit to reduce UK tax on the equivalent income.

Corporation tax unchanged

Corporation tax had previously been scheduled to reduce to 17% on 1 April 2020.  This was announced in the 2016 Budget.  However, as confirmed by the Budget today, the rate will remain at 19% for 2020-21.  The rate applied to Financial Year 2021, i.e. starting 1 April 2021, will also be 19%. 

Capital gains tax rate

The capital gains tax allowance will increase from £12,000 to £12,300 from 6 April 2020.  The rate is set to increase by the Consumer Price Index (CPI) rounded up to the nearest £100.  The rate applicable to trustees is half, i.e. £6,150.

Restriction on use of carry forward losses for large companies

Where a company makes a loss on an asset, this loss can be carried forward and set against future capital gains.  Announced in today’s Budget was a restriction which will allow only 50% of the allowable loss to be set against future gains of a company.  The new restriction applies to gains made on or after 1 April 2020.  The loss only applies to profits over £5 million.  It will not impact the small business sector directly.  Losses suffered by individuals are not affected by the proposal.

Other measures

• Introduction of a stamp duty surcharge from April 2021, of 2% to non-residents.
• Abolition of VAT on digital publication and sanitary products.
• No planned increase in alcohol duty.
• Cut interest rates on social housing by 1%.
• A 100% discount on business rates for a wide range of retailers and entertainment venues.
• Statutory sick pay is available for all self-isolated patients from day one, even if not displaying symptoms of coronavirus.

Summary

In response to the economic impact of coronavirus and a rate cut of 50 basis points in the morning, the Budget was aimed at reassuring markets with a package of fiscal stimuluses.  Policy was aimed as a reward to voters in the North and much called upon relief to the struggling high-street.  The UK still carries the highest tax rates of personal tax in the world.  It remains to be seen whether the spending plan can be sustainable in the context of an increasing mobile population.

Optimal contractor salary for 2019-20

Published: 10 Mar 2020

Updated: 11 Mar 2020

Written by Ray Coman

As the end of the tax year approaches, the following calculations explain the optimal salary payments for companies with a sole director.

Employer's national insurance

Employment allowance

Tax planning

Employer's national insurance

A salary which is equal to the national insurance threshold of £719 is the most tax efficient.  A higher salary would give rise to 13.8% national insurance.

For instance, if a salary were paid up to the personal allowance threshold for 2019-20, the additional salary would be £12,500 minus £8,628, or £3,872.

• Corporation tax saving on additional salary @19% = £735.68
• Employers’ national insurance @13.8% = -£534.36
• Corporation tax saving on employer’s NI as calculated above @ 19% = £101.52
• Employee’s national insurance at 12% = - £464.64

(There is a slight increase in dividend which is as follows:

• The reduction in corporation tax on salary would now be treated as dividend: £735.68
• The reduction in corporation tax on employers’ national insurance would now be treated as dividend: £101.53
• The employer’s NI would otherwise be treated as dividend: £534.34)

Net increase in income tax of £302.87 @ 7.5% or £22.72

Net tax cost = £184.52

The lower salary also spares the hassle (and exposure to late payment penalty) of having to make monthly PAYE payments.

Tax saving if paid as dividend rather than salary is £184.52.

Employment allowance

For contractors who subsequently hire staff, a higher salary could be beneficial.

Further information about this scenario can be found in point 14 of the guidance below:

https://www.gov.uk/government/publications/employment-allowance-more-detailed-guidance/single-director-companies-and-employment-allowance-further-employer-guidance

Provided the £3,000 employment allowance is still intact (and not used up with salary payments to the employees) the tax savings are as follows:

• The additional salary would be £12,500 minus £8,628, or £3,872.
• Corporation tax saving on additional salary @19% = £735.68
• Employee’s national insurance at 12% = - £464.64
• (There is a slight increase in dividend which is as follows:
• The reduction in corporation tax on salary would now be treated as dividend: £735.68)
• Net increase in income tax of £735.68 @ 7.5% or £55.18

Net tax saving = £215.86

Tax planning

Careful director’s remuneration planning should consider:

• Optimal salary payments;
• Timing of dividend extraction;
• Use of proposed dividend to bring total income up to higher rate tax threshold;
• Pension contribution;
• Accumulation of retained profit for extraction as capital on eventual dissolution or sale of the business;
• Addition of family members with whom the owner shares household bills; and
• Investment in capital.

2018-Budget

Published: 29 Oct 2018

Updated: 30 Oct 2018

Written by Ray Coman

Philip Hammond spoke for over an hour earlier this afternoon delivering his last Budget before the UK exits the EU.  The UK is set to officially leave the EU on the Brexit Day of 29 March 2019.

Hammond was able to deliver positive figures relating to UK growth and a reduction in government borrowing.  He spoke about the age of austerity coming to an end.  A round up of the key changes announced which will affect personal taxation are offered below:

Raise in personal allowance and higher rate tax threshold

Off-payroll rules to extend to private companies

HMRC to become preferred creditor following insolvency

Extension to minimum holding period to qualify for entrepreneur’s relief

Annual Investment allowance increase

Non-residential building allowance

Digital Services Tax

Letting relief to be narrowed

Restriction on Principal Private Residence relief

R&D tax credit to be limited

VAT threshold frozen

Other changes

Raise in personal allowance and higher rate tax threshold

The Chancellor delivered the most significant measure in his speech as a last item. The personal allowance will increase to £12,500 and the higher rate tax threshold to £50,000 with effect from 5 April 2019.

Increases in the personal allowance and tax threshold have been one of the most popular of the Conservatives Manifesto pledges.  In April 2019, the personal allowance was increased to £11,850 and the higher rate tax threshold to £46,350.  The increase to £12,500 and £50,000 respectively had been planned for April 2020.  The Budget announcement made this afternoon brought forward that rise by one year.

The rates and allowances from 2020-21 will be raised in line with indexation.  Increasing tax thresholds with inflation is intended to prevent so called ‘fiscal drag.’

Off-payroll rules to extend to private companies

The ‘IR35’ rules seek to tax an individual as an employee who would be an employee but for a company.  The rules are designed to prevent people from forming companies solely to save tax, mainly in the form of employer’s national insurance.  Until now, the onus has been on the company owner to demonstrate that they are actually self-employed, to avoid the application of IR35.  However, the government will now place responsibility with the hiring company to demonstrate that workers operating through companies are being taxed appropriately.

The tax savings of operating via a limited company are substantially in the form of savings in employer’s national insurance.  The new regulations will place the onus of proof on hiring companies to ensure compliance of contractors with IR35.

Announced in the Budget is a delay in the new rules until April 2020.  The regulation will not affect small entities but only large and medium sized employers and their intermediaries, such as hiring agents.  It should come as a relief to one-person company owners who will have less pressure to prove the status of working arrangements from which their client often stands to benefit the most.  The regulation could pave the way for the cut in corporation tax scheduled for April 2020 to proceed without an accompanying sleu of personal service companies as witnessed in the past.

HMRC to become preferred creditor in insolvency

Since 2003, amounts due to HMRC in VAT and PAYE have not payable ahead of other creditors in the event of a business folding.  A change to this regulation will mean that from 6 April 2020, in an insolvency, HMRC will be preferred for the payment of VAT, PAYE and CIS deductions.  The rules on corporation tax and income tax remain unchanged.  Therefore, amounts paid to the business for VAT from its buyers, or withheld from employees in income tax, national insurance and CIS will be payable to HMRC ahead of trade creditors.

Extension to minimum holding period to qualify for entrepreneur’s relief

Hammond spoke about various calls to abolish or significantly reform entrepreneur’s relief.  This is a valuable relief for owner managed businesses and contractors which allows for a business disposal to be taxed at a significantly lower rate of tax than a profits extraction by dividend.  The relief also benefits senior employees who are awarded share in their employers’ company through the Enterprise management Incentive Scheme.

Following today’s announcements, the conditions required to qualify for Entrepreneur’s Relief must be met throughout a two-year period. This tighter requirement is an increase from the current condition which is just one year, and will be introduced from 2019-20. It is unlikely to affect the majority of business owners who hold their shares for well over a year in any case.

Annual Investment allowance increase

The Annual Investment Allowance will increase from £200,000 to £1 million for a period of one year starting 1 January 2019 and ending 31 December 2020.  This will benefit mainly larger businesses.

Non-residential building allowance

With immediate effect for contracts entered into on 29 October 2019, a capital allowance will be available on new non-residential structures.  Reminiscent of industrial buildings allowance which has been scrapped for many years, this will provide a tax form of depreciation for investment into commercial buildings.

Digital Services Tax

The Chancellor spoke about the slow pace of progress about implementing an international tax on digital businesses.  The current system of corporation tax extends to business which are incorporated in the UK or have central management and control exercised in the UK.

With effect from 1 April 2020 the government plans to charge a 2% tax on business with UK generated revenues.  The new tax will apply to technology companies with more than £500 million of annual profits. The tax is therefore targeted at the likes of Facebook, Apple, Amazon, Netflix and Google (FAANG.) While 2% is a modest target when compared to comparable rates affecting other corporations, it should at least result in some UK revenue from the tech giants.

Letting relief to be narrowed

Currently, letting relief is a generous tax break which exempts up to £40,000 of gains per owner.  The relief reduces the gains subject to tax where a property is let by its owner and former resident.  It was designed to discourage properties being left empty.

The reform announced today will restrict this relief so that it is only available to live-in landlords.  The new rules, which will take affect from 6 April 2020, could significantly affect any landlord letting out properties that were once his or her home.

Restriction on Principal Private Residence relief

The amount of gain which is subject to capital gains tax is reduced by period of occupation. So much of the gain which relates to a period that it was a person’s home is exempt from tax. In addition to actual periods of occupation, tax relief is available certain deemed period of occupation. This includes the final months of ownership.  Announced this afternoon, the final period of ownership will be halved from 18 months to 9 months.

R&D tax credit to be limited

It is possible for a business to claim a credit if it suffers a loss from research and development activity. The tax credit available to SME from 1 April 2020 will be restricted to three times the PAYE liability for that year.  This is an anti-avoidance provision designed to tackle an increase in the number of supposedly fraudulent claims.

VAT threshold frozen

Mr Hammond acknowledged a shortcoming in the current VAT registration threshold which obliges business to register as soon as the threshold is exceeded.  Apparently, EU regulation currently prevents the Chancellor from phasing in the effect of VAT for smaller traders.  He stated his intention to freeze the VAT registration threshold for a further two years until April 2022.  He indicated an intention to smooth the suddenness of the effect of the threshold for smaller businesses in the future.

Other tax changes

• Business rates will be cut by one third over the next two years.  The tax break for smaller retailers is an attempt to relieve recent hardship on the high street.
• The contribution required by smaller firms towards the apprenticeship levy will be halved from 10% to 5%.
• Consultation will be launched to make the granting of certain license from public bodies dependent on the applicant demonstrating tax registration.

Author's note: The Chancellor expressed hopes of a 'double deal dividend' following the EU exit.  One gain in the form of unlocking a buffer he is holding in reserve pending the exact outcome of negotiations.  The other benefit deriving from the end of uncertainty.  The expectation is therefor set for a more relaxed fiscal policy ahead, which could include the much-anticipated cut in corporation tax scheduled for 2020.

Spring Statement 2018

Published: 13 Mar 2018

Updated: 13 Mar 2018

Written by Ray Coman

The first budget that follows a new Parliament is traditionally the most punitive and, having got over that hump, regulatory reform seems to be calming. In this, the first Statement to occur in spring rather than autumn, there were no major announcements.

Against a background of increasing regulatory and tax burden for higher income and owner managed business and contractor sectors, the Statement content should come as some relief.

The chancellor announced a review of VAT. The consultation will include a proposal for graduating small businesses with a turnover between £85,000 and £115,000 into the 20% rate. The implementation may therefore be effective ahead of the making tax digital for VAT deadline scheduled for 1 April 2019.

In the light of recent announcements, the most that can be concluded from the statement at this stage is that no news is good news.

November 2017 Budget

Published: 22 Nov 2017

Updated: 01 Feb 2018

Written by Ray Coman

The 2017 Budget was delivered in the context of slowing economic growth.

The main headline from the Budget came from a reduction in stamp duty for first time buyers. For the purchases under £300,000 which is reckoned to apply to about 80% of buyers there will be no duty to pay. For homes worth between £300 thousand and half a million, there will be no tax on the first £300,000. First time buyers purchasing a home worth over £500,000 will pay stamp duty at the normal rate. The rules take effect immediately.

Various rates increased with effect from April 2018. The personal allowance is up to £11,850, higher rate tax threshold to £34,500, capital gains tax exemption to £11,700 and national living wage to £7.50 per hour. Until 31 March 2020, the VAT registration threshold of £85,000 is to be frozen.

The government intends to make the granting of certain licenses conditional upon proof of tax registration. This is to tackle the so call ‘hidden economy.’