November 2017 Budget

Published: 22 Nov 2017

Updated: 22 Nov 2017

 

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.’

 

2017 Budget

Published: 08 Mar 2017

Updated: 22 Nov 2017

 

Written by Ray Coman

 

imgur 5 w600The March 2017 Budget delivered by Chancellor Hammond this afternoon added further tax pressure to the self-employed and owner manager business sector. The speech descended into Pantomime at one stage with Hammond retorting 'oh yes we will!' to a heckle from the opposing benches. If it was a Pantomime Budget, the accountant was yet again cast as villain.

 

Increase in national insurance rate for the self-employed.

Cut to dividend allowance

VAT

Making tax digital

Promoter of Tax Avoidance

Cash basis

Recap on previous announcements

 

Increase in national insurance rate for the self-employed.

 

A self-employed individual is subject to a rate of (Class 4) national insurance of 9% on any profits over the small profits limit, currently £8,060 per annum. Announced in the Budget was a rise in this rate to 10% from April 2018 and again to 11% in 2019.

 

Cut to dividend allowance

 

A dividend allowance was announced by the preceding Chancellor, when the rate of income tax on dividends was hiked. Its effect is to treat as tax exempt the first part of any dividend received. The allowance, currently £5,000 will be decreased to £2,000 from 6 April 2018. This will affect self-employed people who conduct business through a company.

 

VAT

 

The Value Added Tax (VAT) registration threshold is set to rise to £85,000 from £83,000 in April; The de-registration threshold to also increase from £81,000 to £83,000.

 

Making tax digital

 

The government is introducing policy for businesses and landlords to report profits to HMRC once every three months. In today’s announcement, this requirement will be delayed by a year, to April 2019, for landlords, sole traders and partners with a turnover below the VAT threshold. Companies will be required to report profits once every three months from April 2018.

 

Promoter of Tax Avoidance

 

As previously announced in the 2016 Autumn Statement, a financial penalty will be imposed on any person involved in the promotion of a scheme which is defeated by HM Revenue & Customs.

 

Cash basis

 

Certain unincorporated business can account to HMRC for profits on the basis of cash paid and received.  This contrasts with the accruals basis used for other entities, where profits would be determined to a greater extent by invoice date.  The government has increased the threshold for accounting for profits on the cash basis to £150,000. Once the basis is applied it can continued to be used until profits reach £300,000.  The threshold is currently £83,000 and the proposal is due to be effective 6 April 2017.

 

Recap on previous announcements

 

The list below summarises forthcoming changes announced prior to the Budget:

  • Personal allowance to increase by £500 to £11,500 on 6 April 2017.
  • A £2,000 increase to the higher rate threshold
  • Class 2 NICs to be abolished from April 2018.
  • A cut in the rate of corporation tax to 19% on 1 April 2017 and again to 17% in 2020.

 

Autumn Statement 2016

Published: 24 Nov 2016

Updated: 24 Nov 2016

 

Written by

 

Autumn Statment 2016The newly appointed chancellor’s speech yesterday included many confirmations about the tax changes announced by his predecessor, Mr Osbourne.  However, the full report introduced an alteration to the flat rate scheme that will have a significant impact for contractors and other self-employed individuals.

 

Flat rate scheme to end for most contractors

Corporation tax

National Insurance

Personal allowance and higher rate tax

Salary sacrifice

Savings

Switching of Autumn and Spring announcements

 

Flat rate scheme to end for most contractors

 

The Autumn Statement brought an increase in the flat rate scheme to 16.8%.  The new percentage will apply to most contractors, regardless of their business activity.  Since the percentage is applied to VAT inclusive turnover, a flat rate scheme trader will now pay 19.8% of the 20% VAT collected.  This 0.2% benefit will effectively cancel the tax benefit of using the scheme.

 

The new percentages take effect from 1 April 2017.  At that point, most traders will be better off using standard VAT accounting, and recovering VAT on expenses.  For many, the accounting cost and hassle of being VAT registered will not outweigh any VAT recovery on expenses.  Traders registered voluntarily should consider VAT deregistration.

 

The flat rate scheme currently ranges between 11% and 14.5% for most businesses.  The highest percentage a trader can currently pay is 14.5%.  However, a contractor providing services typically has has relatively 'low costs' relative to providing services.  Only business that are not ‘low cost traders’ will be exempt from the new rules.  To continue to use the lower flat rate percentage, a business has to spend at least 2% of turnover on goods.  Goods in this case exclude:

 

  • Any services (such as telephone, rent, professional fees, insurance and sub-contractor costs.)
  • Capital items, (such as computer equipment and office furniture.)
  • Vehicles, vans and other motor expenses.
  • Food and drink consumed by the business. 

 

Even where the 2% test is met, a trader will not be excepted unless total expenditure on goods exceeds £1,000 per year.

 

Retailers, restaurants and other business with high cost of sales will, by and large, meet the test.  For IT contractors, management consultants and other service providers, the flat rate scheme is unlikely to be of any practical use.  For instance, it is remote that stationery and office consumables will comprise 2% of turnover.

 

Corporation tax

 

The Chancellor confirmed plans to lower corporation tax to 19% in April 2017 and eventually to 17% by April 2020.  The rate by 2020 is expected to give Britain the lowest company tax in the G20.

 

National Insurance

 

The employer’s (or secondary) national insurance limit will be slightly increased so that it is the same as the employees’ (or primary) national insurance limit.  The two thresholds will be aligned at £157 a week with effect from April 2017.  The change would not result in any extra tax liability for an employee.  The extra liability for an employer would be no more than £7.18 a week per employee.  The alignment is intended to simplify national insurance.

 

As announced in the 2016 Budget, Class 2 National Insurance Contributions, payable by self-employed people, will be abolished from April 2018.  A further Budget announcement confirmed is the liability of termination payments over £30,000 to national insurance.  The measure also takes effect in April 2018.

 

Personal allowance and higher rate tax

 

The government confirmed the previous announcement that the personal allowance will rise to £11,500 in 2017-18 and again to £12,500 by April 2020.  The higher rate tax threshold is also set to increase from £42,000 (in 2016/17) to £45,000 next tax year and eventually to £50,000 by 2020.  Following this, the personal allowance threshold will rise in line with the CPI measure of inflation.

 

Salary sacrifice

 

Salary sacrifice scheme describe an arrangement where an employee foregoes pay in order to receive some benefit.  Employee do not have to pay national insurance o benefits and therefore the scheme can bring a tax advantage.  Depending on the rate of an employee’s national insurance, a benefit could be as much as 12% cheaper if paid by salary sacrifice than out of take home pay.

 

The Autumn statement announced an axing of perks, such as gym and private healthcare memberships and smartphones from salary sacrifice.  Nonetheless, a tax benefit will still arise from sacrificing pay in favour of:

 

 

Therefore pension and childcare, which are the most common, benefit will not be affected by the new rules.

 

Savings

 

Further reiterations of the measures to be introduced in April 2017 included:

Increase ISA limit from £15,240 to £20,000 in April 2017.

Savings starting rate of £5,000 to remain in 2017/18

A new allowance of £1,000 each for trading and for property income.

 

Switching of Autumn and Spring announcements

 

The major fiscal announcements have until now been made in the Spring.  The Spring Budget will be replaced with an Autumn Budget, with the effect that 2017 will contain two Budget dates.  The reasoning behind the change is to announce tax changes further ahead of their implementation on 5 April.

 

The Autumn Statement will be replaced with a Spring Statement, the first of which will be in 2018.  The statements are presented as less major, although the impact of changes will vary from one taxpayer to the next.

 

2016-17 Contract company changes illustrated

Published: 17 Mar 2016

Updated: 12 Oct 2016

Written by

 

The emergency Budget of 2015 introduced rates of tax for dividends which had repercussions for contractors trading via a company and other owner-managed businesses.

 

Prior to 2016-17 there was often a clear tax benefit to forming a company compared with invoicing as a sole trader. This is because, unlike a sole trader, a company owner could take profits as dividend and thereby avoid national insurance.

 

The example below takes a company with profits after deduction of director’s salary of £90,000. Using the corporation tax rate for 2015-16 and 2016-17 which is 20%, profits available as dividend would be £72,000. In this case, the director receives a salary up to the national insurance threshold of £8,060 and withdraws all remaining profit as dividend.

 

Limited company calculation

 

 Income 2015-16

 

2016-17

 

 

£        

£                £        £             
Director’s salary   8,060   8,060
Gross dividend*   80,000   72,000
Personal allowance   (10,600)  

(11,000)

Dividend allowance       (5,000)
Taxable income   77,460   64,060
  Income Tax Income Tax
2015-16 @ 10% basic rate 31,785 3,178.50    
2016-17 @ 7.5% basic rate     32,000 2,400.00
2015-16 @ 32.5% higher rate 45,675 14,844.38    
2016-17 @ 32.5% higher rate     32,060 10,419.50
Tax credit   (7,746.00)    
Totals 77,460 10,276.88 64,060 12,819.50

 

Note in 2015/16 the dividend is grossed up by 100/90. Grossing up does not occur under the new rules.

 

Adding the corporation tax payable of £18,000, the overall tax burden increases from £28,276.88, to £30,819.50.  This tax is calculated on a profit, before salary of £98,060.

 

Sole trader illustration

 

The following table illustrates the tax implications of the same individual trading as an unincorporated business

 

 

 Income 2015-16

 

2016-17

 

 

£        

£                £        £             
Profits   98,060   98,060
Personal allowance   (10,600)  

(11,000)

Taxable income   87,460  

87,060

  Income Tax Income Tax
Income tax @ 20% basic rate 31,785 6,357.00 32,000 6,400.00 
Income tax @ 40% higher rate 55,675  22,270.00 55,060 22,024.00
Subtotal 87,460   87,060   
National insurance @ 0% 8,060   8,060   
National insurance @ 9% 34,325 3,089.25  34,000 3,060.00 
National insurance @ 2% 55,675 

1,113.50 

56,000 1,120.00
Totals 98,060 32,829.75 98,060 32,604.00

 

It can therefore be noted form the above that while a sole trader tax liability has not changed considerably in 2016-17, a company contractor now has a burden about the same as that of a sole trader.

 

Personal allowance abatement

 

 

Income over £100,000 would normally result in abatement of personal allowance. A sole traderdreach this abatementold with lower income than a contractor company. This is because corporation tax is deducted from income subject to income tax.

 

The tax benefit of a company compared with a sole trader will be significant if the profits in the above example were increased by say £10,000.

 

 

Benefits a limited company

 

 

Where the shareholder pays another person from their income a shareholder could be added so as to effectively double the £5,000 dividend allowance. A typical situation would be where household costs are shared with a spouse, who has no other dividend income.

 

 

The rate of corporation tax drops to 19% on March 2017 and again to 17% in March 2019. Therefore, the tax benefit of company compared with sole trader will become clearer.

 

 

It is not necessary to withdraw all remaining profit as dividend. Alternative could be to accumulate profits in the company and extract these as capital gains on eventual disposal of the company.

 

 

In the approach to the 2016-17 Budget the government entered a consultation on the abolition of entrepreneur’s relief for contractor companies. However this capital gains tax relief has remained intact.

 

 

The protection of limited liability which derives from using a separate entity through which to contract often suits both sides of the arrangement for non-tax benefits.

 

 

On account of the above, it can be maintained that a company pulls more credibility.

2016 Budget

Published: 16 Mar 2016

Updated: 18 Mar 2016

 

Written by

 

2016_BudgetMr Osborne delivered his eighth Budget as Chancellor at round 12.30pm today.  The Budget was announced against a backdrop of slowing global growth, recent interest rate cuts by central banks into negative territory and the forthcoming EU referendum in Britain.  The first two Budgets of our current government have been far reaching and full of surprises. This contrasts with the Budgets of the preceding coalition government which tended to alter very little.

 

The overviews below follow the chronological order in which the announcements were made, with some supporting explanation.

 

Loans to participators

Termination payments

Diverted Profits Tax (Large companies)

Corporation tax fall

Tax relief for ‘micro-entrepreneurs’

Business rates drop

Stamp duty on commercial property

Indirect taxes mixed

Class 2 NICs

Capital gains tax cut

Entrepreneur’s relief for investment in small companies

Chancellor silent on entrepreneur’s relief restriction for contractor companies

Lifetime ISA of £4,000 a year for the under 40s.

Personal allowance and tax threshold up next year

Author’s note

 

Loans to participators

 

From 6 April 2016, the charge for a loan to a participator will increase from its current rate of 25% to a new rate of 32.5%.  A participator is typically a shareholder or director of a company with five or fewer owners.  Directors of a one-person or ‘contractor company’ and family owned business will usually be participators.

 

A full summary of the rules can be read here in the article about overdrawn director’s loan accounts.  In brief, where a contractor has not retained sufficient funds in the company at the year end to cover corporation tax, it will be a requirement to lend money as a director.  This loan gives rise to a tax charge.

 

Company funds are usually represented by the company bank account, however amounts owed from clients and equipment and other assets brought into the business can also be used as a buffer.

 

If the bank account is brought back into balance in future years, the charge can be repaid by HMRC.  However there is a cash flow drawback and an administrative burden of borrowing money from the company.

 

Termination payments

 

Payments on termination of an employment contract receive preferential tax treatment, provided the payments are not an entitlement under the employment contract.  Under current legislation a termination payment is not subject to employer’s national insurance and the first £30,000 will not be subject to income tax in the hands of the employee.

 

From 6 April 2018, many termination payments over £30,000 will be subject to employer’s National Insurance.

 

This measure has the purpose of an anti-avoidance provision.

 

Diverted Profits Tax (Large companies)

 

A series of new rules are scheduled to be introduced to bring profits derived from the UK into the charge of UK corporation tax.  The measures are aimed at companies with profits of over £5 million.

 

The rules will have most impact on multi-national organisations with that particular scope to structure finances so group profits are taxed in jurisdictions with lower than average rates.

 

For most companies, the deduction from profits chargeable to corporation tax for interest payments will be restricted to 30% of UK income.

 

Only 50% of current year profits can be reduced by losses brought forward from previous years.

 

The tightening of rules on withholding tax for royalty payments and other measures will also be presented.

 

Corporation tax fall

 

Following previous announcements, the corporation tax, which is currently 20%, was due to fall to 19% in April 2017 and to 18% in April 2020.  The Chancellor announced that the rate will now be reduced further to 16% in 2020.

 

Tax relief for ‘micro-entrepreneurs’

 

Traders and landlords with less than £1,000 will not need to declare this income on a Tax Return.  The income will be tax free.  This will particularly benefit vendors with a side-line on websites such as E-Bay and AirBnB.  Traders bringing in more than £1,000 income can deduct the allowance from their income profits, instead of actual expenses.  A total of £2,000 can be exempted from tax, one allowance for property income and the other for trading.

 

Business rates drop

 

From April 2017, small business rate relief will be increase.  The relief currently exempts businesses with a rateable value of £6,000, however this is set to increase to £12,000 from next year.  The higher rate threshold will also increase at the same time from £18,000 to £51,000.

 

Stamp duty on commercial property

 

With effect from midnight, the chancellor has brought the stamp duty system for commercial property in line with that for residential property.  The tiered system will mean that no stamp duty is payable on a property worth £150,000 or less, 2% is paid on consideration between £150,000 and £250,000 and 5% is levied on the value of the property which exceeds £250,000.

 

With the stated aim of helping “small firms”, the new duty will benefit all but purchasers of the highest value property.

 

Indirect taxes mixed

 

  • Levy on sugary drinks
  • Fuel duty freeze (despite lower petrol prices on account of the recent oil glut.)
  • Tobacco duty rise.
  • Freeze on beer, cider, whisky and other spirits duty with other alcohol taxes rising.

 

Class 2 NICs

 

Class 2 is a flat rate of national insurance which is payable by sole traders and partners.  The contribution secures a year towards the number required to qualify for a basic state pension.  This tax will now be abolished in 2018.  A social security and state pension entitlement will accrue to self-employed people via the Class 4 National Insurance.  This is payable at the same time as income tax.

 

Capital gains tax cut

 

With effect from 6 April 2016, the basic rate of capital gains tax will be cut from 18% to 10% and the higher rate of capital gains tax will be cut from 28% to 20%.

 

The rate at which an individual pays capital gains tax depends on their total income.  Gains below the annual allowance are not taxable.  Taxable gains are added to an individual’s yearly income.  To the extent that total income and gains are above the higher rate tax threshold, gains are taxed at the higher rate.  Otherwise gains are taxed at the basic rate.

 

Gains made on residential property will continue to be charged at the existing rate of 18% basic and 28% higher rate tax.

 

Entrepreneur’s relief for investment in small companies

 

Entrepreneur’s relief will reduce capital gains tax for the subscription of shares in an unlisted company and held for the longer term.  The new rules will apply to any purchase in new shares made from tomorrow.  The requirement will be for the shares to be held for at least three years from 6 April 2016 or date of purchase, whichever date is the later.

 

In effect the rate of tax will be 10% and subject to a life time limit of £10 million.  The new rules extend relief currently available for shares purchased under the enterprise investment scheme.

 

Chancellor silent on entrepreneur’s relief restriction for contractor companies

 

The government had consulted on the abolition of entrepreneur’s relief on disposal of a business.  However, there were no announcements in the Budget about this relief being withdrawn.

 

There remains an opportunity for company owners to accumulate profits in the company and withdraw this on eventual disposal.  The accumulated funds in the business, usually represented by monies in the bank account, can be withdrawn as capital on eventual disposal.  The implication is that the funds will be taxed at just 10%, rather than the much higher rates for dividends or salary.

 

Nonetheless, holding funds in a company in order to save tax carries the risk that the rules about entrepreneur’s relief will be scrapped.

 

Lifetime ISA of £4,000 a year for the under 40s

 

From April 2017, the government will introduce a new ISA.  Savers who are under 40 on 5 April 2017, will be able to contribute up to £4,000 a year into an ISA.  For every £4 contributed by the taxpayer, the government will add £1 to the ISA account.  The government contributions will continue until the ISA holder reaches 50.

 

Some or all of the capital can be invested in an ISA for purchasing a property after just one year.  However the property must be the first home owned by the taxpayer and have a value of £450,000 or less.

 

Alternatively, savers can wait until 60 to use the capital as pension income.  Unlike pensions however there is no tax to pay on withdrawing the funds.  The tax relief on investment is equal to the current basic rate of tax.  To this extent the new ISAs will be more attractive to basic rate taxpayers.

 

If the ISA fund is not used to buy a home or for a pension on reaching 60, any withdrawals would be subject to a 5% charge and loss of the government bonus.  The measure is intended to assist young people saving towards a deposit on their first property.

From 6 April 2017, all savers will be able to contribute up to £20,000 a year into their ISA.

 

Personal allowance and tax threshold up next year

 

The Chancellor announced an increase in the personal allowance from 6 April 2017 to £11,500.  The higher rate tax threshold will also increase in 2017-18 to £45,000.

 

Author’s note

 

The Budget introduced some expensive tax breaks, with a particular focus on easing the burden for small business.  However, with a stated policy of national deficit reduction, it remains to be seen whether this trend of fiscal policy can be upheld.

Autumn statement 2015

Published: 26 Nov 2015

Updated: 26 Nov 2015

 

Written by

 

A round-up of the Chancellor’s Autumn Statement made yesterday:

 

  • From 1 April 2016, a stamp duty land tax rate of 3% will be introduced on the second property a person owns. This would include secondary residences and buy-to-let investments. The rate will not apply to property developer using a company to make a purchase.
  • From 2019, any capital gains on disposal of a property will need to be reported within 30 days of the completion date.
  • The Small business rate relief has been extended for a further year.
  • The state pension will increase to £119.30 a week from April 2016.
  • There were no announcements about the leaked proposal for Personal Service Companies.
  • ‘Help to Buy’ and Shared Ownership’ schemes were outlined.
  • A digital tax account which is schedule to be introduced by 2020 is intended to replace the existing Tax Return system.

Summer Budget impact on Contractor companies

Published: 05 Aug 2015

Updated: 05 Aug 2015

 

Written by

 

A new dividend tax rate was announced on 8 July 2015 in the Chancellor’s Budget.  The implication is that no tax will be payable on the first £5,000 of dividends.  Thereafter, income tax will be charged on dividends at a rate of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional tax payers.

 

The implications for Contractors have been summarised in the article on 2016-17 Contractor companies.  The introduction of the new dividend tax will significantly reduce any tax savings currently enjoyed by operating via a company.  From 6 April 2016, contractors will probably pay more income tax on dividends (in addition to the corporation tax.)

 

The saving in national insurance (NI) will remain. However the NI saving of being a company may marginally outweigh the extra income tax (when compared with being a sole trader.)  As a broad measure, once profits exceed £65,000, if all profits are withdrawn as dividends there will no longer be an overall tax benefit to being a company.

 

Advantages of continuing via a company

 

  • Unlike employees, businesses can register for VAT. Particularly for flat rate scheme users, VAT registration is a considerable tax benefit, and unchanged by the Budget.
  • The paymaster will save in employer’s national insurance compared with hiring a contractor as an employee.  This is a considerable saving equal to 13.8% on earnings (above about £8,000 a year.)  There may be other non-tax benefits to the contract arrangement.
  • Paying a shareholder on a lower rate of tax (such as a spouse) will continue to have a tax benefit.

 

Outlook over the next five years

 

  • Corporation tax is reducing to 19% in 2017 and to 18% in 2020. This will reduce the overall tax payable by company owners compared with employees and sole traders.
  • Tax rules change frequently. This guidance applies to the 2016-17 tax year.

 

Tax planning

 

  • The new rules take effect on 6 April 2016. Therefore, the tax benefit of having a company up to this point will remain.
  • Consider taking as much dividend as possible before 6 April 2016.
  • Consider dissolving the company and withdrawing accumulated profits as capital gain on disposal of the business.

 

Dissolving the company

 

It is possible to extend an accounting period up to 18 months.  Accounting costs could be saved by extending the final period of account.

 

There is also the option of extracting some accumulated profit as capital on dissolving the company.  Up to £25,000 can be withdrawn without a requirement to involve an insolvency practitioner.

2016/17. Contractor companies

Published: 09 Jul 2015

Updated: 10 Jul 2015

 

Written by

 

Yesterday’s Budget announcement Budget on the taxation of dividends has significant tax implications for company owners.

 

The current system for contractors

 

Currently, contractors providing their services via a company are liable to corporation tax on profits.  To the extent that dividends increase total income into higher rates of tax there is additional tax to pay.

 

In a typical scenario where a person has little or no income from outside the company, it is tax efficient to pay a salary up to the national insurance threshold.  This is £8,060 for 2015/16.  Provided the director has no other income, the salary results in no income tax and is deducted from corporation tax profits.  The taxpayer is effectively in the same position as an employee or sole trader who can also have income up to the personal allowance (of £10,600 for 2014/15) tax free.

 

The remainder of profits are treated as dividends.  The basic rate tax threshold is £31,785 for 2015/16.  Given the first £8,060 is paid in salary, the most net dividend that can be paid to an individual without making that person a higher rate taxpayer is £30,892 in 2015/16.

 

In a typical scenario a company owner will receive a salary, so that the first £8,000 of profits are effectively tax free, provided there is no other income, the next £30,000 or so of profits taken out of the company also result in no income tax.  To the extent that dividends increase total income into higher rate of tax an effective rate of 25% is payable. Since dividends are paid out of after tax profits, for a higher rate taxpayer, the combined effect of corporation tax (20%) and income tax (80% of 25%) is 40%.

 

The new regime

 

From April 2016, the tax payable by a contractor will likely increase.  Profits will be calculated after deduction of director’s salary and corporation tax will be applied to profits.

 

Any contractor, with personal allowance fully used and, with a dividend of more than £5,000 will be paying more tax than before.

 

In total, transfers from the company bank account to the director’s personal bank account of more than £13,060 (in salary and dividend) will result in more tax.  In 2016/17 a person can receive total income of £43,000 before being a higher rate taxpayer.  Therefore, a contractor will be taxed at 7.5% on income between £13,060 and £43,000.

 

In 2016/17, a shareholder with dividends of £34,940 (and salary of £8,060) will be taxed at 7.5% on £29,940 of dividends.  An increase in tax of approximately £2,246, compared with the same situation in 2015/16.

 

The national insurance rates are scheduled to alter in line with the income tax rates.  For the purposes of example, I will base 2016/17 rates on the 2015/16 levels.  An employee with earnings of £43,000 a year would pay approximately £4,200 a year in national insurance.  A self-employed person with £43,000 profit, would pay approximately £3,150 a year in national insurance.

 

There will still be a tax benefit for a basic rate taxpayer from using a company, although significantly reduced from April 2016.

 

For self-employed individuals, the increase in accounting costs only justify the saving in national insurance when income reaches about £15,000 to £20,000.  For a person self-employed, with profits between £15,000 and £43,000 there is still tax efficiency achieved by operating via a company.

 

For a higher rate taxpayer, the new dividend rate is 32.5% compared with 25% previously.  If all company profits are taken as dividend, the combined income tax and corporation tax rate for a higher rate taxpayer is 20% plus (80% of 32.5%), or 46%.  This is higher than the income tax and national insurance paid by higher rate taxpayers who are either employed, sole traders or partners, where the marginal rate is effectively 42%, i.e. 40% income tax and 2% national insurance.

 

In the example above an employee on £43,000 would save £1,954 (i.e. £4,200 less £2,246) by providing services via a company.  A sole trader would save £904 providing services through a company.  The extra 4% payable by higher rate taxpayers will gradually erode this tax advantage.  A sole trader would be no better off using a company when total income reaches £65,600, and thereafter worse off.  This calculation compares saving in national insurance with increase in income tax only.

 

The comparison with an employee is less relevant since an individual who would be employed ‘but for’ the company should be taxed under the old ‘IR35’ rules.  However, for illustration purposes only, an employee may need to earn as much as £91,850 a year to be no worse off than if operating via a company.

 

Notwithstanding, there are other tax benefits to the corporate structure.  An employer saves considerable national insurance by using contactor.  Employer’s national insurance is currently 13.8% on earnings over the primary threshold of approximately £8,000 a year.  The flat rate scheme will remain available to sole traders and company owners with total turnover of less than £150,000.  A considerable potential tax advantage over employees who cannot be VAT registered.

 

Moreover, there is some respite for contractors in the form of a drop in corporation tax, falling to 19% in 2017 and 18% in 2020.  This saving in corporation tax from 2017/18 and thereafter will help to mitigate the tax increase explained above.

 

A suitable tax plan is to consider withdrawing dividends prior to 5 April 2016.  The following article outlines other methods for withdrawing company profits.  A further consideration may be to revert to employment which has a number of advantages compared with being self-employed.

Emergency budget 2015

Published: 08 Jul 2015

Updated: 20 Mar 2016

 

Written by

 

It is characteristic for the first budget of a new government to be tough, and the announcements today made this budget no exception.  In the first conservative only budget since 1996, "Britain still spends too much, borrows too much" Mr Osborne stated.  Through a range of measures, the chancellor set our proposals designed to reduce welfare spending by £35 billion and gain tax revenues of' £47 billion by 2020.

 

National minimum wage hike

 

The minimum wage, which is currently £6.50 an hour for over 21s, is set to increase.  For workers aged over 25 the wage will rise to £7.20 from April 2016 and in stages to £9 per hour by 2020. For Under 25s the minimum way will be set by the Low Pay Commission.  The minimum wage is intended to partly offset the cut in working tax credit for those on the lowest income.

 

Personal allowance to rise

 

The income at which a person starts to pay tax, or the personal allowance, is set to increase from its current level of £10,600 to £11,000 from April 2016.  When Mr. Osborne took office as chancellor in 2010/11 the allowance was £6,475, and it has increased every year since.

 

The allowance is set to further increase to £12,500 by 2020, in keeping with the Conservative election promise.  The previous intention was to raise the allowance to £10,800 in 2016/17 and £11,000 by 2016/17 and therefor this announcement brings forward the tax relief.

 

Basic rate tax threshold up

 

In April 2016, the income level at which a person starts to pay tax at 40 percent will also go up, from £42,385 to £43,000.  Due to previous cuts this threshold is still lower than where it stood at £43,875 in 2010/11.  The election promise is to raise the threshold to £50,000 by 2020/21.

 

Tax credits fall

 

Tax credits are a government payment for people on low incomes. Where the household income is low, a working person can be eligible for working tax credit.  A household is eligible for child tax credit where income is low and it has children to support.

 

Child tax credits, and universal credits, will only be paid for the first two children.  This will take effect for children born after April 2017.

 

Tax credit will start to reduce when families are earning just £3,850.  This is a steep cut from the existing threshold of £6,420.

 

Benefits cut

 

The cap on housing benefits that a person can receive will be set at £20,000 outside London, and £23,000 for Londoners.  This is reduction from the current level of £26,000.  Housing benefit will no longer be available to the under 25s.

 

The TV license will be free for over 75s.

 

Currently students from a family with a household income of less than £25,000 can apply for a grant.  However from the 2016/17 academic year, university grants will no longer be available, although loans available to students will increase.  All benefits for people of working age are to be frozen for the next four years.

 

People on incomes of over £30,000 outside the capital, or £40,000 in London will have to pay the market rate for rent in social housing.

 

Child care

 

From 2016, for working parents with three and four year olds, free, state childcare will be provided for up to 30 hours a week.  This is an increase in the current 15 hour a week provision.


The child care fund, which was due to be introduced from September this year will now be delayed until September 2017.

 

Inheritance tax rising to £1 million

 

From April 2017, the government will reduce inheritance tax via a family home allowance.  The rate will be phased in over four years, in 2019/20 reaching £175,000 per person.  The current nil rate band is £325,000 per person and therefore £650,000 per married couple.  An individual can therefore pass on their home to their children or grandchildren and the first £500,000 will be free of inheritance tax.  For a married couple, the allowance is effectively increased to £1 million on the family home.


The family home allowance will be gradually tapered for estates valued at more than £2 million.  The additional family home allowance will be withdrawn at a rate of £1 for every £2 that the estate exceeds £2 million.

 

The nil rate band has not changed since 6 April 2009.  With rises in property prices since 2009 this had led to a greater number of families exposed to inheritance tax.  The rate of £325,000 is expected to stay fixed until 2021.

 

In order to keep the tax liability as low as possible the £325,000 allowance should be allocated firstly to assets in the estate which are not the family home.  For instance, an individual passing on a home worth £175,000 and other assets worth £325,000 will pay no inheritance tax under the new rules.  By comparison, an individual passing on £500,000 of assets none of which qualify for the family home allowance would pay tax at 40% on £175,000 of the estate, or £70,000.

 

A nuance of the rule will allow an individual or couple to keep an ‘inheritance tax credit’ if they downsize.  This credit is designed so that the rules do not discourage grandparents from passing on a property which could more suitably accommodate the larger family of their children.

 

Non-domiciled status phased out

 

Under the current system a UK resident can be domiciled elsewhere.  Domicile is usually determined by the place in which a person is born.  From April 2017, a person who has been living in the UK for 15 years out of the last 20 years will no longer keep their non-domiciled status.  The ruling mainly benefits the most wealthy of foreign born residents, who can pay a ‘remittance basis charge’ to reduce liability to UK tax.  A person will no longer be able to choose to be non-domiciled if person born in the UK to UK domiciled parents.

 

 The non-domcilied rules will also apply for inheritance tax purposes.  A person who is not UK domiciled will no longer be able to exclude UK assets from liability to UK inheritance tax.

 

Bank levy changes

 

The current bank levy, introduced in 2011, is based on the balance sheets of banks.  The rate of this levy will be reduced over the next six years.  The levy will be replaced by an additional 8 per cent tax on the bank’s profits from UK earnings.

 

Drop in corporation tax

 

The rate of corporation tax, currently 20%, will be cut to 19% in 2017 and to 18% in 2020.  The main rate of corporation tax was 28% when the conserve rates came to power as a coalition in 2010/11, and has gradually reduced since then.

 

Employers’ annual allowance

 

Under current rules, the first £2,000 of employers’ national insurance that an employer would otherwise have to pay is exempted by an employment allowance.  From next year, the allowance will increase to £3,000 from 2016.  A business could employ four employees on the minimum wage without having to pay national insurance.

 

A director of his or her own limited company will no longer be able to benefit from the employment allowance.

 

The annual allowance

 

The annual investment allowance will stay at £200,000 from January 2016.  The allowance enables the deduction of capital expenditure (such as on computer equipment) from taxable profits in the same period in which the expenditure is incurred.

 

Tax relief on pensions to be lowered

 

Pension contributions are a tax efficient method of saving for retirement.  Employee pension contributions are deducted from taxable pay and employer contributions are deducted from company profits (and are not treated as taxable income for the employee.)  The most which can be contributed to a pension is the amount of earnings, although this is capped at £40,000.  This cap is due to gradually tapering from £40,000 to £10,000 for people with incomes of over £150,000. The tapering will be introduced from April next year.

 

The lifetime allowance is the total value of the pension fund which will be free from tax.  Currently the allowance is £1.25 million.  However this is set to be reduced to £1 million, also from April 2016.

 

A consultation will also begin as to whether pensions should be treated like ISAs. Pension contributions will instead be made from after tax pay. However, pension income will not be subject to tax.

 

Tax deduction restricted for interest paid for rental property

 

A landlord is able to deduct the cost of providing accommodation from rental profits.  The largest type of expense is usually interest on mortgage used to finance the property.

However, the chancellor announced that the tax relief on interest payments will be restricted to basic rate only.  The current basic rate of tax 20%.  This will raise the tax liability of landlords who are also higher rate taxpayers.  The measure will be brought in gradually over four years starting in April 2017.

 

Landlords will no longer be able to claim the wear and tear allowance.  Currently landlords can deduct 10% of rents received from taxable profits if the property is let furnished.  From 2016/17 only the actual costs incurred on furniture can be deducted from profits.

 

Mr Osborne maintained to be addressing an unfairness in the current system which allows tax relief on interest for landlords but not for homeowners.  The forthcoming restrictions on landlords is likely to cool house price inflation.

 

There is no indication that the restriction on interest relief would apply to companies.  This may increase the appeal of a moving a property to a company as a method for saving tax.  However the change to the taxation of dividends, explained below, could also eliminate the tax saved through company ownership.

 

Rent-a-room-relief

 

A live–in landlord has two options for calculating taxable profits.  The first is to deduct a proportion of expenses, say based on floor area occupied by their lodger.  The second is to deduct a flat rate from their rent in calculating taxable income.  The rent-a-room scheme has been at the same level of £4,250 since 1997.  It is due to increase to £7,500 from April 2016.

 

Dividend tax credit abolished

 

The tax credit on dividends will be replaced from April 2016 with a £5,000 tax free dividend allowance.  As a consequence many investors who pay tax at a higher rate and shareholders of their own companies could face a higher tax liability.

 

Under the current system, a credit is given for dividends which are paid out of after tax profits. Therefore, there is no tax to pay on dividends for basic rate taxpayers, the rate is effectively 25% for higher rate taxpayers and 30.5% for those with income over £150,000.  Following the proposal, the first £5,000 of dividend income will be tax free. Thereafter basic rate taxpayers will pay 7.5%, higher rate taxpayers 32.5% and additional tax payers 38.1%.

 

Tax relief for amortisation to be abolished

 

Tax relief will no longer be available for goodwill on company acquisitions.  Until now a company has been able to deduct the cost of buying a business from its company profits.  The cost is usually spread out over a number of years, depending on the useful economic life of the business which has been acquired.  The deduction from yearly, tax-adjusted profits, known as amortisation, was at least 4% a year.  However for acquisitions made on or after 8 July 2015, this tax relief will be abolished.  In view of the forthcoming changes, a share purchase (rather than an assets purchase) may be a more beneficial for a company considering an acquisition.

South London accountants

Published: 05 Jul 2015

Updated: 05 Jul 2015

 

Written by

 

From shop fronted premises in East Dulwich, we offer a convenient and accessible method for people to visit us from nearby areas.

 

Transport links

 

The main office in Dulwich can be accessed via train with an average journey time of twelve minutes to London Bridge and via various bus routes, the P13, 40, 197, 185 and 12, 37, 363 and 63.  Buses towards central London mainly to go via Demark Hill and Elephant and Castle. Nearby Peckham Rye runs trains to London Bridge, Victoria and Blackfriars.  A short bus ride away is Forest Hill which is part of the new East London tube line.  Car parking is free outside the office.

 

International business

 

Our specialism in UK tax, and extensive experience on the practicalities of dealing with HMRC, gives us the ability to advise and assist people from anywhere in the world.

 

Through our IT system it is possible to view and sign key documents via an online portal.  This keeps our service available regardless of our visitor’s whereabouts.
For clients that come via referral, or where it is not convenient to reach our office, an initial meeting by telephone or Skype is practical alternative.  Our initial meeting is free.

 

Local clientele

 

By appointment, we can be reached easily for a face to face meeting.  Consequently, we are accountants and tax advisers in Dulwich, but also the surrounding areas of Sydenham, Camberwell, Forest Hill, Herne Hill, Peckham, Honor Oak and West Dulwich. By postcode, our business is concentrated in the areas of SE21, SE22, SE15, SE26, SE23 and SE24.

 

Areas of specialism

 

Our clients typically include:

 

 

We would be please to assist with your query. Please contact us to arrange an initial meeting.

Auto-enrolment

Published: 12 Jun 2015

Updated: 16 Sep 2015

 

Written by

 

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.


  Until 1 October 2017 Between 1 October 2017 and 30 September 2018 From 1 October 2018
Employer contributions 1% 2% 3%
Employee contributions 1% 3% 5%
Total contributions 2% 5% 8%

 

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.

2014 Budget

Published: 19 Mar 2014

Updated: 03 Apr 2014

 

Written by

 

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.

2015 Budget

Published: 20 Mar 2015

Updated: 21 Mar 2015

 

Written by

 

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.

 

 

 

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:

 

 

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.

 

 

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.