Tag Archives: Income Tax

national minimum wage increase October 2016

National Minimum Wage increases from 1st October 2016

As they do every year, the National Minimum Wage (NMW) rates will increase on 1st October 2016. If you run a business and employ staff, you need to be aware of the changes and introduce them in your first payroll period following the introduction.

The Government regularly name and shame employers paying less than the minimum wage. Worse still that the potential bad press for your business is the penalty for non-compliance – up to £20,000 per worker.

 

National Minimum Wage Rates from October 2016

From next month the new rates of NMW will be:

  • 21-24 year-olds – £6.95/hr (up from £6.70/hr)
  • 18-20 year-olds – £5.55/hr (up from £5.30/hr)
  • 16-17 year-olds – £4.00/hr (up from £3.87/hr)
  • Apprentices – £3.40/hr (up from £3.30/hr)

The recently introduced National Living Wage for workers aged 25 and over, remains at £7.20 per hour. The Low Pay Commission will be making a recommendation to Government in the Autumn on the rate which should apply from April 2017.

As well an increase in employees net pay, you’ll see an increase in your monthly PAYE bill. The overall cost increase to employ a full time worker aged between 21-24, will go up by around £590 extra per employee per year (£520 in gross wages and another £70 on Employers National Insurance Contributions).

 

Did You Know You Can Make Over £37k A Year Without Paying Tax

Did you know you can make over £37k a year without paying tax?

Up until 5th April when the Government abolished the 10% tax credit on dividends in favour of a new £5,000 allowance, it was easy to earn £37,000 a year without paying tax. However, you typically needed to own your own (profitable) company. The mechanism in this instance was to take a salary equivalent to you personal allowance and then gross dividends equal to the rest of your basic rate band and you could come away with £37-38k and only pay a small amount of National Insurance on the lot. Now however, dividends in excess of £5,000 are to be taxed at 7.5% for basic rate tax payers.

However, it is still possible to make around £37,000 a year without incurring any tax at all.

I should state that while it is possible, it may not be entirely practical. But I think it’s worth looking at the multitude of tax allowances that have become available in recent years as the Government have gradually restructured the tax system.

In short, the reliefs available to everyone are:

  • Personal Allowance – £11,000
  • CGT Annual Exemption – £11,100
  • Dividend Allowance – £5,000
  • Savings Allowance – £1,000
  • Rent-A-Room Relief – £7,500
  • Trading Micro-Enterprise – £1,000 (from April 2017)
  • Property Micro-Enterprise – £1,000 (from April 2017)

On top of these, you also have an exemption from any interest earned in ISA’s plus tax relief for pension contributions.

The Usual Suspects

The main allowance that people will be familiar with is the Personal Allowance. In the current tax year this allows you to earn £11,000 before you pay tax (around £917/month or £212/week).

On top of that, everyone has an annual exemption for Capital Gains Tax. This comes in to effect if you sell shares, land, property (except you main residence) or other valuable items such as paintings. At the minute this allowance is £11,100. So you can make £11,100 profit on the sale of these items without having to pay any tax.

The “Makeover” Reliefs

A number of existing tax reliefs have been spruced up in recent years. The main one of interest to any small business owners is the £5,000 dividend allowance. Whilst not as generous in tax terms as its predecessor – the 10% tax credit – it’s still a valuable allowance. If you and your spouse are the only shareholders in your small company, that’s an extra £10k in to the household every year with no further tax cost.

Another allowances that has been modernised is the Rent-a-Room relief. For years this relief stood at £4,250, meaning you could rent out a furnished bedroom of your house for up to £4,250 a year and pay no tax. Now however, this relief has been raised to £7,500. As soon as this was announced, my first thought went straight to Air BNB. This platform has really grown in popularity in recent years and some people were doing very well out of this. However, one of the fears that people had was how this income left them in terms of their tax compliance. This increase should mean that the vast majority of users will fall below the limit and, as such, not fall foul of the legislation.

The Newcomers

Aside from the above allowances, which have either always been around or have just had a face lift, 3 new allowances have come in to effect recently.

For basic rate tax payers, there is now a £1,000 savings allowance – so the first £1,000 of bank interest (excluding interest on ISA’s which is still exempt) will be tax free. Those paying tax at the higher 40% rate still get a £500 allowance.

The two most progressive allowances to come from the recent budget make me very happy as they really aim to take a lot of burden off those earning small amounts from “side-projects”. There are two £1,000 allowances for micro enterprises – one for trading income and one for property income. These two allowances are due to come in to effect in April 2017 so are still subject to change.

Those likely to benefit from this will be those selling small amounts of products/services online or renting out sheds, storage units or driveways. But in reality, any trade with receipts of less than £1k qualify for the relief so musicians, market traders and artists could all benefit. If your total income is less that £1,000 you have nothing to declare. Above this limit and you can either deduct your expenses before calculating the tax or just deduct £1,000.

It should be noted that the Rent-A-Room relief and the £1,000 micro enterprise allowance can’t be added together for the same purpose. But they can be used separately. So if you are getting the use of the Rent-A-Room relief, you will need to rent out your driveway or storage unit to use the £1,000 micro enterprise property relief.

Conclusion

As previously stated, whilst it is possible to use all these reliefs together, it may not be particularly practical. To do so you would need to have quite a lot wealth to begin with. For example to earn £1,000 of interest in a single year would require around £40-50k in savings. But be aware of all of the above – particularly the micro-enterprise reliefs – and cherry pick those that apply to your circumstances. Tax alone on £37,000 of income would normally be over £5,000 so some real savings are available by using the above.

As always, speak to your accountant about how best to maximise your tax savings as the advice given will greatly depend on your own circumstances.

Tax return submitted? Time to start planning for next year’s.

So another 31st January deadline has been and passed. Your tax return is filed and the whole subject of tax can be ignored for another year.

Well, not quite. There are quite a few changes to Income Tax being introduced from 6th April 2016. Leaving everything until then means that you’re at the mercy of these new rules. If you act now however, you should be able to do some pretty minimal tax planning that could save you quite a lot of money.

If you have income from dividends, rental property or interest then these rules will affect you.

Dividends

For basic rate taxpayers, dividends were always a tax efficient type of income as they didn’t attract any further income tax (the thinking being that, as dividends came from the profits of a company, they had already been taxed before being paid). However, from 6th April, this changes.

Rather than attracting a notional 10% tax credit, dividends will instead have a £5,000 nil rate band, so the first £5,000 will be tax free). The excess will then be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for those in the additional rate band.

With just over two months to go until the new tax year, and the new rules, you are best to bring forward any dividends and utilise all of your basic rate band. Be careful though – there had been talk of the Chancellor introducing anti-avoidance legislation in anticipation of this. If you are considering bringing forward dividends, make sure you prepare all the necessary paperwork – minutes of the meeting, management accounts etc.

And don’t forget to look at dividends in the context of your total income. Dividends are always the last “slice” of income to be taxed so will attract the highest rate if there are other earning in the mix.

Rental Income

HMRC appear to have a particular grudge against landlords at the minute. A number of new changes to the rules around rental income mean one thing – more tax to pay!

Firstly, the 10% Wear & Tear allowance is to be abolished. This allowance allowed landlords to take 10% of their rental income off their profits as a deduction for the wear and tear of furnishings regardless of whether or not the actually incurred any expense in this respect (or even if they incurred more than the allowance).

From 6th April this will be replaced with 100% relief for the full replacement cost of furnishings. It is still the case that there is no relief for the first furnishing of a rental property.

So, it would follow that, if you are a landlord and are considering replacing any furnishings in your property, hold off until 6th April. You will still get the 10% W&T allowance in the current year and then get full tax relief on the full replacement cost in the 2016/17 tax year.

If you are a landlord who pays tax at the higher 40% rate, then there is more bad news for you. From 7th April 2017 your tax relief in respect of mortgage interest is going to be restricted to 20% tax relief whereas at the minute you will be getting 40% or possibly even 45% relief. This is being introduced on a phased basis between 2017/18 and 2020/21 tax years. Taken together with an expected increase in interest rates in 2017, landlords are certainly going to find themselves more out of pocket than before.

Rent A Room Relief

This tax relief has been around for ages and hasn’t changed in ages either. In fact, it has been 18 years since it has been increased. At present, you can rent a (furnished) bedroom in the house you live in for up to £4,250 per year and no income tax is payable. From 6th April 2016, this increases to £7,500. So income up to this level, whether from a lodger or via something like Airbnb is tax free.

Personal Savings Allowance

From 6th April you may notice that your bank will stop deducting tax from the interest it pays you on your savings. This is because of the introduction of a new £1,000 Personal Savings Allowance. This means that essentially the first £1,000 of interest you earn is tax free. The £1,000 allowance is available to everyone with income below £42,700. If you income is above this but below £150,000 you still get a £500 allowance.

This allowance may well go unused by the vast majority of us given that to earn £1,000 of interest at current rates you would need to have around £30-50k stashed away. However, if your income is mainly derived from interest this allowance coupled with the £15,000 ISA allowance and the 0% tax rate on savings income up to £5,000 you have plenty of options to spread your savings and not suffer any tax.

Additionally, with banks now not deducting interest, it makes the comparing the true interest rate of savings accounts with ISA’s much simpler as before you would have needed to factor in the tax deducted.

Conclusion

So, lots changing at the minute in tax and the outlook for the years ahead is the same. The governments online tax account project has begun rolling out. The planned result for this scheme is to do away with annual tax returns and, instead, update HMRC on your earnings as you go along and pay the tax as you go along. Developers are already working on integration with bookkeeping software to make it easy for you to send across your up to date profit and loss, VAT and PAYE details and square them up sooner rather than later.

So, whilst you may still have 12 months to sort out your 2015/16 tax return, you should be planning to out the next three months to make it as tax efficient as possible. On the bright side, you may not have many tax returns left to complete.

 

The above is general commentary on the changes is tax rules and should not be taken as advice. The application of the above rules will be determined by the specific circumstances of the individual. I accept no responsibility for any loss incurred by action or inaction based on the above article.

Changes to taxation of savings income can benefit owner-managed businesses

From the 6th April 2015, individuals deriving their income from interest on savings will notice a marked reduction in the amount of tax they are likely to suffer on this income. The Chancellor announced in his Budget 2014 speech back in March that the starting rate of tax for savings would be reduced to 0% for the first £5,000 of savings income over and above the personal allowance (PA).

As has always been the case with the starting rate for savings, if there is other income falling above the PA the reduced rate of tax is ignored and the income is taxed at the basic rate (20%).

When the 0% rate kicks in from 2015-16, the standard personal allowance will be at £10,500. Add to this the savings rate threshold of £5,000 and an individual earning £15,500 from savings (and notably nothing else) will have no tax bill. A husband and wife with joint savings will be able to earn £31k of interest without a penny going to the taxman.

Anyone whose main source of income is in fact savings and are having tax deducted at source by the bank can apply to receive the interest gross if the changes mentioned above are likely to mean you won’t have any tax to pay. To do this you will need to fill out form R85.

However, given typical savings rates are currently around 2-3%, to earn £15k in interest per annum, you need £500,000 – £750,000 sitting on deposit. So it’s not necessarily going to affect most people while interest rates remain low.

However, there is a distinct opportunity here for owner managed businesses to save tax on both their own earnings and the income of their owners.

Charging Interest on Directors Loan Credit Balances

If the company owners invested personal funds into the company for which they are still to be reimbursed, they are entitled to charge interest on this balance. The interest is deductible for the company and is taxed at 0% if no other income is earned in the hands of the business owners.

Previously, directors would have taken a salary equal to the personal allowance and then declared dividends to keep their income within the basic rate band of tax and therefore avoided any further charge to tax. Whilst this is still the most efficient manner of getting circa £40k a year from the company, it is certainly worth considering looking at charging interest on directors loan credit balances; especially in years of poor earnings or perhaps when accounting losses deplete reserves to the point where dividends are not an option.

The Tax Savings

The advantage here is for, say, a husband and wife who own and run their own company. They can pull an extra £10k from the company in the year, pay no income tax and save an extra £2,000 in Corporation Tax, not to mention the Employers NIC saving.

If we compare a salary of £15,500 to an interest charge of £15,500, the effect is the company is better off by £814 and the owner by £1,885. So overall almost £2,700 more stays with the company and its owners for each individual who is charging interest.

The trade-off then is the restriction of earnings. If you choose to take dividends as well you lose the 0% bracket but still get the CT deduction and NIC saving.

The key to this though is having sufficient funds owed by the company to its owners and being consistent and reasonable in the rate of interest you charge. Scenarios I’ve seen in the past that lead to this mechanism being utilised are typically when business owners secure funds personally to buy premises or high value assets for the company. In this instance, further savings can be made by claiming Qualifying Loan Interest relief on the interest charged to the owner. This effectively recharges the interest to the company (assuming similar interest rates) but this will counteract the utlisation of the savings rate band.

Summary

So while the above mechanism may have limited uses, it can still provide significant savings when the conditions are right. The relief for Qualifying Loan Interest, whilst it can counteract the usability of the savings rate band, can also help. The relief is given regardless of the type of income so if owners do wish to take dividends for their tax efficiency, the relief on the interest being suffered can help increase the amount of dividend that can be taken before hitting the higher rate threshold.

Engineering the above scenario simply to get the tax deduction would be inefficient. However, if the circumstances are in place, or the owners are considering transactions that might put them in place such as providing finance for the purchase of premises, then this interest income offers some flexibility to owners wishing to extract funds from their company in a tax efficient manner.