November 2015 Newsletter

Welcome to the November 2015 Newsletter from Easterbrook Eaton Limited

Business groups have broadly welcomed this month's announcement by Chancellor George Osborne that councils in England will in future have the right to set their own business rates and to keep the proceeds, in a move designed to increase competition and encourage enterprise.

Meanwhile, a recent survey has revealed that a considerable number of small firms have expressed concerns over the effects that the introduction of the new National Living Wage could potentially have on their businesses. A mere 6% of companies surveyed believe that the wage will have a positive impact on their firm.

With the latest figures revealing that inflation dipped below zero once again in September, business groups await the Chancellor's Statement with interest. Our website will feature special coverage of the Autumn Statement announcements, following the Chancellor's Speech on Wednesday 25 November.

Chancellor confirms devolution of business rates

Both the Confederation of British Industry (CBI) and the Local Government Association (LGA) have welcomed proposals unveiled by Chancellor George Osborne to give councils in England the authority to alter the level of business rates in their area, and the opportunity to keep all of the proceeds of those rates.

Currently, businesses pay a uniform business rate set by the central government, which is calculated by multiplying the rental value of a property by either the standard rate (49.5p) or the lower rate (48p), before subtracting any rate relief. Councils retain 50% of the earnings, with the rest going to the Treasury which then redistributes the revenue to compensate areas with fewer businesses.

The new proposals, announced by the Chancellor at the Conservative Party Conference, will mean that councils can cut these rates and effectively compete with each other to encourage enterprise and attract businesses to their area.

CBI director-general John Cridland said that the change 'could spur councils to take a pro-growth approach, and has the CBI's support,' adding: 'But this must not be a way to increase rates without the consent of the local business community'.

Gary Porter of the LGA commented: 'While this is good news for councils and businesses, local authorities will face almost £10bn of cost pressures by 2020 so we will now seek to work with government about how this proposal can be introduced more quickly.

'We would expect measures to ensure local areas with less ability to generate business rates income do not suffer as a result of these changes and all councils are also given leeway to vary business rates up as well as down.'

However, as some analysts have noted, the proposals are not necessarily as radical as they might first appear. A system of tariffs and top-ups to support areas with lower levels of business activity will be kept in its present state, and the Government also plans to introduce a 'safety net' for any area where business rate receipts fall by 7.5%.

We can advise on all aspects of business taxation. Please contact us for further assistance.

National Living Wage will have a 'negative impact' on hiring, says FSB

A survey released by the Federation of Small Businesses (FSB) has revealed that a significant amount of small firms are concerned about the potential impact that the new National Living Wage (NLW) will have on their businesses.

Of the firms that are likely to be negatively affected, some 50% said they would increase prices, while 52% reported that they would put off hiring new recruits to help offset the wage hike.

According to the FSB's research, wholesale and retail companies, alongside food and accommodation services, are most likely to believe that the NLW will impact negatively on their business.

Additionally, firms located in the South West, Yorkshire, the West Midlands and Wales are amongst those most likely to foresee a negative impact.

Only 6% of companies thought that the policy would have a positive impact on their business when it is implemented next April.

Announced in the Chancellor's July Budget, the NLW of £7.20 an hour comes into effect in April 2016 for workers over the age of 25.

Following the publication of the latest Cost of Employment Index, the FSB predicts that, for a small retail business with six full-time staff members aged 25 or over and earning the current minimum wage, the NLW will cost an additional £5,900 a year.

John Allan, national chairman of the FSB, stated that: 'Over half of our members already pay their staff above the voluntary living wage, but those that don't are often operating in highly competitive sectors with very tight margins.'

He concluded: 'With the economy recovering it is right that employees should be rewarded with a pay rise - but we cannot allow wage changes to become a political football.

'It's important that the independent Low Pay Commission continues to play a central role in setting the minimum wage - and that includes deviating from the Government's plan to raise the National Living Wage to over £9 an hour by 2020, if it becomes apparent that the economy cannot afford it.'

ESSENTIAL TAX DATES FOR NOVEMBER

1 November

£100 penalty if 2015 paper Tax Return not yet filed. Additional penalties may apply  for further delay (no penalties if online return filed by 31 January 2016).

2 November

Submission date of P46 (Car) for quarter to 5 October.

QUOTE OF THE MONTH

'Allowing them instead to share leave with their children will keep thousands more in the workplace, which is good for our economy.'

Chancellor George Osborne commenting on the new scheme allowing grandparents to help care for grandchildren using shared parental leave and pay.

WEBSITE OF THE MONTH

www.ukbusinessforums.co.uk

Online tool for discussing business issues with other UK business people.

ON OUR WEBSITE

Key tax advice for you and your business

The Tax Strategies section of our website provides information on tax planning strategies, including tax and employment and making the most of savings and investments.

Useful information for businesses

With topics ranging from limited companies to PAYE, NICs and benefits, the Your Business section of our site is all you need to stay in-the-know.

Businesses warned about new 'whaling' email scam

Businesses are being warned about a new email scam - dubbed 'whaling' - which targets the finance departments of SMEs.

Click here for the full story

Grandparents in work to receive shared parental leave and pay 

Working grandparents could be permitted to make use of shared parental leave and pay in order to help care for their grandchildren, under new plans.

Click here for the full story

State 'top-up' scheme permits pensioners to increase retirement savings

Over seven million Britons could potentially boost their state pension through a new 'top-up' scheme.

Click here for the full story

'Delivery is what counts' - business groups react to Prime Minister's conference speech

Business groups including the Confederation of British Industry and the British Chambers of Commerce have stressed the importance of delivering practical reforms to encourage enterprise.

Click here for the full story

New employment laws come into effect

1 October saw the introduction of a raft of new employment legislation, including an increase in the National Minimum Wage and a new law banning smoking in cars in which children are present.

Click here for the full story

October 2015 Newsletter

Welcome to the October 2015 Newsletter from Easterbrook Eaton

In what has proved to be a politically turbulent month, Chancellor George Osborne has announced that he will present the 2015 Autumn Statement in conjunction with the Spending Review, on Wednesday 25 November. All eyes will be on the Chancellor as he presents his Statement opposite the newly elected Labour leader Jeremy Corbyn and shadow Chancellor John McDonnell.

As MPs voted in favour of £4.4bn of tax credits cuts, research from the Institute for Fiscal Studies suggested that the new National Living Wage will not compensate for the tax and benefit changes announced in the July Budget, with many workers likely to be worse off under the new measures. The news followed the recent unveiling of plans to introduce additional penalties for non-payment of the National Minimum Wage and the National Living Wage.

Meanwhile, pensioners are withdrawing £27 million a day from their retirement pots as a result of new pension freedoms, according to new figures from the insurance industry, with around £2.5 billion of payments being made to savers within the first three months.

New penalties for non-payment of the National Minimum Wage and the new National Living Wage to be introduced

The Government has revealed new plans to increase penalties for non-payment of the National Minimum Wage and the new National Living Wage. The National Living Wage was announced in the Summer Budget, with the new payment guidelines coming into effect in April 2016.

Under the new system, workers aged 25 and over will be entitled to receive £7.20 an hour, rising to £9 an hour towards the end of the decade. The current National Minimum Wage will rise from £6.50 to £6.70 with effect from 1 October.

Also, from April 2016, alongside the introduction of the National Living Wage, the Government plans to double the penalty for non-payment from 100% of the amount owed to 200%, unless the arrears are paid within 14 days.

The maximum fine for non-payment will remain at £20,000 per worker, with employers who fail to pay being banned from becoming a company director for up to 15 years.

Prime Minister David Cameron said that the new policy would only prove successful if it were 'properly enforced', adding that the Government would be funding a new unit at HM Revenue and Customs (HMRC) to crack down on those firms found to be disregarding the law.

The introduction of the wage means that some 3.7 million women stand to benefit from a pay rise by 2020, according to new research from the Resolution Foundation. Conor D'Arcy, the think tank's policy analyst, advises that 'because of their concentration among the low paid, women will account for the majority of the winners'.

However, the Institute for Fiscal Studies has warned that even those who enjoy a significant increase in wages as a result of the NLW stand to be worse off as a result of other tax and benefit cuts announced in the Chancellor's July Budget.

The Confederation of British Industry (CBI) has also warned that the introduction of the NLW will have a 'dramatic impact' on companies' profits and recruitment schemes. CBI president Paul Drechsler said: 'I've talked to several chief executives and been surprised by the impact on their profits of the change.'

Please contact us for more information on the National Minimum Wage and the National Living Wage.

Pensioners withdraw £27 million a day under new pension freedoms

Those saving for a pension have been withdrawing around £27 million a day from their pension pots following the implementation of new retirement freedoms, figures from the insurance industry reveal.

The new pension freedoms, announced in last year's Budget by Chancellor George Osborne, mean that people over 55 can utilise their pots however they wish, instead of being required to buy an annuity.

Within the first three months, around £2.5 billion of payments were made to savers after new pension regulations for over-55s were introduced in April, reports the Association of British Insurers (ABI).

The research, taken from figures from April, May and June, reveals that £1.3 billion was paid out in cash lump sums, with average payment sizes of nearly £15,000.

264,000 income drawdown payments contributed to around £1.1 billion being paid out, with the average payment figure reaching £4,200.

The income drawdown scheme allows savers to leave their pension pot invested but still be permitted to take an income directly from it.

For advice on a range of personal financial planning strategies, please get in touch. We would be delighted to assist you.

Changes to Tax Relief on Interest in Respect of Let Domestic Property

The Finance Act 2015 introduced changes to the tax relief available for interest incurred in relation to let domestic property.

What has changed?

From APRIL 2017 tax relief on interest will be restricted in a phased pattern so that by 2020 interest will not be deductible when computing the profits of the business but will instead be allowable as a deduction in computing the profits at 20%. In other words, relief for interest will be capped at 20%. This is a move that will affect many including those with single buy to let properties and those with a larger portfolio. The restriction does not affect furnished holiday lettings.

What do the changes look like in practice?

The best way to review the changes is to look at some examples. Obviously, if you are a basic rate taxpayer, then the change will not affect you – the relief at basic rate is the same as if you were able to claim the expense as a full deduction from the profits of the rental property. But people’s income and tax positions are constantly changing so it is worth reviewing.

The change in relief is being phased in over a 4 year period as follows:

	% of interest charge allowed as a full deduction	% of interest charge restricted to 20% relief	Effective % Rate of Relief
2017/18 tax year (commencing 6th April 2017)	75	25	80
2018/19 tax year (commencing 6th April 2018)	50	50	60
2019/20 tax year (commencing 6th April 2019)	25	75	40
2020/21 tax year (commencing 6th April 2020)	0	100	20

So for example, should your loan interest be a straight £2,000 a year, the relief you would be able to claim would be as follows:

Tax year 2017/18 (ending 5th April 2018)	Tax year 2018/19 (ending 5th April 2019)	Tax year 2019/20 (ending 5th April 2020)	Tax year 2020/21 (ending 5th April 2021)
75% in full:          £1,500 in full against profits	50% in full:          £1,000 in full against profits	25% in full:          £500 in full against profits	0% in full:             NIL straight offset against profits
25% at 20%:        £500 at 20%: £100	50% at 20%:        £1,000 at 20%: £200	75% at 20%:        £1,500 at 20%: £300	100% at 20%:      £2,000 at 20%: £400
Relief for Higher Rate Tax payers:	Relief for Higher Rate Tax payers:	Relief for Higher Rate Tax payers:	Relief for Higher Rate Tax payers
£1,500 at 40% = £600 £500 at 20% = £100 Total £700	£1,000 at 40% = £400 £1,000 at 20% = £200 Total £600	£500 at 40% = £200 £1,500 at 20% = £300 Total £500	None in full £2,000 at 20% = £400 Total £400

(Note: For simplicity, assumes 40% higher rate of tax in all years)

We can also see this in longer examples:

Investor with “Small” Rental Property Income

Edwin is a higher rate taxpayer with two properties bought as investment vehicles. The change in the rules are as follows:

2015/16 Tax Year: PRE CHANGE IN RULES

Rental Income (gross)                                    12,000

Repairs and all other costs                               2,000

Mortgage Interest                                             6,000

Net rental profits                                             £4,000

Tax at 40%                                                      £1,600

Compare this with the situation when the rules have fully changed (please refer to the tapering of reliefs as on page 1).

                2020/21 Tax Year: POST CHANGE IN RULES

Rental Income (gross)                                 12,000

Repairs and all other costs                             2,000

Net rental profits                                        £10,000

Tax at 40%                                                   £4,000

Interest Relief at 20%:

Mortgage Interest £6,000 x 20%                   1,200

Tax due                                                        £2,800

The change is the £6,000 at 20% = £1,200.

Large Investors with Substantial Rental Property Income

Using the example before of Edwin, what if he had established a significant property portfolio on the basis of considerable borrowing, and was thus a higher rate taxpayer with multiple properties bought as investment vehicles? For the ease of the calculation I will assume he has income that uses his basic rate band of tax. The change in the rules would affect him considerably, as follows:

2015/16 Tax Year: PRE CHANGE IN RULES

Rental Income (gross)                                  250,000

Repairs and all other costs                             20,000

Mortgage Interest                                         150,000

Net rental profits                                          £80,000

Tax at 40%                                                   £32,000

Again, let us compare this with the situation when the rules have fully changed (please refer to the tapering of reliefs as on page 1).

                2020/21 Tax Year: POST CHANGE IN RULES

Rental Income (gross)                                  250,000

Repairs and all other costs                             20,000

Net rental profits                                        £230,000

Tax at 40%                                                   £92,000

Interest Relief at 20%:

Mortgage Interest £150,000 x 20%                30,000

Tax due                                                         £62,000

If you consider this in cash terms, after paying the mortgage, Edwin would go from having £80,000 less £32,000 tax due = £48,000 as income, to £18,000 (£80,000 less £62,000 tax in 2020/21). After paying the mortgage, in this example, you could view the tax liability at 77.5% (£62,000 on £80,000 “profit”).

But consider again the position if Edwin has even greater borrowings, or the interest rate increases, and in 2020/21 perhaps the repairs in the property were high. The situation here could be that the tax due is in excess of the “profits” computed before the change in the interest relief:

2020/21 Tax Year: POST CHANGE IN RULES

Rental Income (gross)                                    300,000

Repairs and all other costs                               40,000

Net rental profits                                          £260,000

Tax at 40%                                                   £104,000

Interest Relief at 20%:

Mortgage Interest £200,000 x 20%                  40,000

Tax due   

                                                                       £64,000

In cash terms, Edwin has profits of £260,000 less £200,000 mortgage interest, so has £60,000 cash surplus. However, the tax due now is £64,000, so in cash terms, he is paying out £4,000 for the year from his rental income of £300,000!

Please note that I have not adjusted the higher rate of tax which will be partly at 45% for the additional higher rate – potentially making the example even worse.

What Can You Do?

As Chartered Accountants we are not authorised to give financial advice, but can provide you with potential solutions to the situation. These would be on a case by case basis and therefore the following should be seen only as examples. The potential tax planning might be one of the following:

• Full incorporation – this would involve moving properties and associated loans into a Limited Company.  This will involve professional fees for setting the company up and legal fees for transfer of deeds into the Limited company and ongoing, there would be advice required with regards to extracting the profits from the company to the owners/directors. Stamp Duty land tax would ordinarily be available, but relief might be available if the incorporation is of a partnership (i.e. the incorporation is of a partnership not of property owned by individuals). Specialist advice is sought here.
• Pay down borrowings – this would only be feasible in some circumstances, and again, would be on a case by case basis.
• Sell properties – this would remove the issue but might incur capital gains tax – some of which might be at 28%. Consideration as to the market would be needed and what to do with the proceeds to replace the potential loss of income.
• Incur the extra tax – a simple solution but for many higher rate taxpayers they might obviously be disappointed to pay the additional tax but may be in a position where the deemed (potential) increase in the property value and the lack of desirable alternatives means they will pay the additional tax incurred by the loss of the interest relief.
• Review the ownership of the properties – is there a spouse with an unused basic rate band of income tax who you could transfer the property into joint names? This has implications outside of potential tax savings of course.

Other Considerations

What will your income position be like in 2020/21 when the relief is fully implemented at the basic rate only? Will this affect your decisions now?

Availability of finance – if you wished to move into a Limited company, is the lending available?

Change in interest rates – if the tax burden will increase with the current low interest rates, what would your situation be if the interest rate increased?

How much of your mortgage will be repaid by 2020/21? Will this affect your tax planning.

We can help

This leaflet should be used as a general guide and appropriate advice should be sought in all cases when considering the future of any investments in properties. We offer a free initial consultation and would be more than happy to meet with you to discuss matters in general before then giving appropriate advice. To arrange this please call: 01395 516658 or email advice@easterbrooks.co.uk.

The is a general guide and Easterbrook Eaton Limited, neither owes nor accepts any duty to any party and shall not be liable for any loss, damage or expense of whatsoever nature which is caused by their reliance on the information contained herein. 

September 2015 Newsletter

Welcome to the September 2015 Newsletter from Easterbrook Eaton Limited

A leading trade body has this month warned that changes to the taxation of cash machines outside shops could result in smaller retailers being hit with bills running into tens of thousands of pounds. The Association of Convenience Stores is calling on the Government to remove the business rates charge imposed on ATMs, amid fears that the tax charge could result in the demise of free ATMs for shoppers.

Meanwhile, new data from the Taxpayers' Alliance has revealed that the average UK family will pay nearly three-quarters of a million pounds in tax over the course of their lifetime. Lowering your tax bill should form a key part of your financial planning, so contact us today for advice on how we can help you keep more of what you earn.

Small shops could face 'huge bills' after ATM business rate changes

The Association of Convenience Stores (ACS) has called on the Government to exempt ATMs from business rates, as changes to the way they are taxed could leave small shopkeepers facing significant bills.

In 2013 the Valuation Office Agency (VOA) ruled that cash machines situated outside the front of a shop should have a separate rates bill to the main business.

Business rates can cost convenience stores up to £15,000 per year, per machine. It is thought that more than 10,000 ATMs are liable to the charge, which will vary according to how often the machine is used and how much cash is withdrawn.

With the charges set to be backdated to 2010, the ACS has warned that the service is becoming too expensive and financially unviable for an increasing number of smaller shops.

Around 60% of convenience stores currently offer ATMs for their customers to use, but the ACS says changes to the way rates are calculated could lead to more shops having to introduce charges for using cash machines.

In a letter to the Government, the ACS, which represents thousands of independent retailers, called on ministers to scrap the charge on free ATMs, arguing that they offer customers access to their money at a time when many banks in town are closing.

A spokesperson for the trade body said: 'We believe ATMs are a high street enabler providing shared benefits to a range of traders, allowing consumers to access their cash and spend it within their local communities.

'Even within the current system, local authorities have powers to grant discretionary rate relief, and our guidance to local authorities written for the Future High Streets Forum says ATMs should get discretionary relief because they support all local businesses by making cash available.'

In response, a representative of the VOA said: 'We are currently reviewing ATM sites to ensure all sites that should be assessed are correctly rated. This treats all businesses equally, and ensures they pay their fair share of the overall business rates bill.

'We will continue to consult with the machine operators who will be affected by this exercise.'

In March 2015 the Government pledged the most 'ambitious' and 'wide-ranging review' of business rates for a generation, paving the way for a major overhaul of the existing system.

The review will examine how businesses use property, what the UK can learn from other countries about local business taxes, and how the system can be modernised so it better reflects changes in the value of property. It is set to report its findings by the 2016 Budget.

We can advise on a range of business issues, from managing your cash flow and boosting your profitability, to lowering your tax bill. Please contact us today to find out more.

Lifetime tax liability for average family climbs to £734,240

The average British family will pay almost three-quarters of a million pounds in tax over the course of a lifetime, new research suggests.

According to the Taxpayers' Alliance (TPA), an average household will pay £734,240 (in 2013/14 prices) in direct and indirect taxes during their lifetime.

The figure, which is based on data obtained from the Office for National Statistics, equates to a 2.3% increase on the amount calculated for 2012/13 (£717,650).

The TPA claims that over a lifetime, the average household pays £253,040 in income tax, some £146,775 in VAT, £92,795 in employee national insurance contributions, and a further £59,955 in council tax.

Commenting on the findings, TPA chief executive, Jonathan Isaby, said: 'This new analysis shows just how heavy the burden of taxation falls on each and every family across Britain, pushing up the cost of living.'

'Every arm of local and central government must redouble its efforts to root out unnecessary spending and inefficiency in everything they do, so that not a penny of this extraordinary bill is wasted. Britain's tax bill is too high - it must come down, and that means cutting out wasteful spending.'

The UK tax system is notoriously complicated, but with sensible tax planning it is possible to minimise your tax liability whilst remaining compliant with government legislation.

To find out more about how we can help you to reduce your tax bill, please get in touch. We would be delighted to assist you.

August 2015 Newsletter

Welcome to the August 2015 Newsletter from Easterbrook Eaton Limited

This month saw Chancellor George Osborne deliver his Summer Budget, during which he unveiled a raft of tax, business and welfare changes. Many of the headline measures have sparked fierce debate in the subsequent weeks, but concerns have also been raised over the proposed new apprenticeship levy, with the Confederation of British Industry (CBI) warning that the measure may fall short of solving the skills shortage facing many firms.

Meanwhile, a new study suggests that take up of annuities has fallen in recent months, with more people favouring income drawdown. The findings come in the wake of radical changes to the pension rules, which came into effect in April 2015.

Forward planning is always advisable, but in times of economic, financial and political change it is even more important. Our website covers a range of tax and financial planning issues designed to help you plan for a more prosperous future. Visit the Tax Strategies section to read more.

New apprenticeship levy 'may not solve skills shortage', warns CBI

The proposed apprenticeship levy on big businesses has been met with criticism by business groups who say the measures will not be enough to solve the 'skills crisis'.

The levy was announced by the Chancellor in his Summer Budget on 8 July and is intended to help the Government keep its Budget promise of delivering three million more apprenticeships over the next five years.

However, the Confederation of British Industry (CBI) has warned that the plans will not meet the needs of businesses for highly skilled individuals.

In a recent CBI/Pearson Education and Skills survey, 68% of the companies questioned said they expect their need for staff with higher level skills to grow in the years ahead, while 55% reported that they are not confident there will be enough people available in the future with the necessary skills to fill their high-skilled jobs.

The survey also showed that in all parts of the UK, 40% of businesses have provided remedial training in basic skills for adult employees, with 31% having to organise remedial training for school-leavers and 22% providing remedial support for graduates.

Some 310 companies took part in the survey, which together employ around 1.2 million people in the UK.

Commenting, CBI Deputy Director, Katja Hall, said: 'The new levy announced in the Budget may guarantee funding for more apprenticeships, but it's unlikely to equate to higher quality or deliver the skills that industry needs. Levies on training already exist in the construction sector where two-thirds of employers are already reporting skills shortages.

She added: 'Employers have a critical role in upskilling the workforce, but part of the deal must be for real business control of apprenticeships to meet their needs on the ground.

Worryingly, it's those high-growth, high-value sectors with the most potential which are the ones under most pressure.'

Meanwhile, latest figures from the Office for National Statistics (ONS) have revealed that unemployment increased substantially in mid-2015, with thousands more individuals out of work between March and May.

Unemployment rose by 15,000 during this period, taking the total figure to 1.85 million nationally, while the number of benefits claimants rose by 7,000 to 804,200. It is the first rise in the unemployment total for two years.

Responding to the rise in joblessness, Employment Minister Priti Patel said: 'We have to look at the figures not just on the quarter but over the last year, where employment actually rose by over a quarter of a million, so this is also a reflection of the strength of our economy, the fact that our economic recovery is well on track'.

The Government was also keen to point out that over the second quarter of 2015, total pay including bonuses grew by 3.2% compared to the previous quarter. While this fell short of the ONS predictions of 3.3%, it was the fastest improvement in real wages since before the financial crisis.

We can advise on a range of business issues - contact a member of the team to find out more.

Annuities take up falls as pension freedoms prove popular

Figures from the Association of British Insurers (ABI) show that the over-55s are increasingly favouring pension income drawdown policies over annuities.

Its research shows that 53% of those buying a retirement income chose an income drawdown policy, while 46% opted for an annuity.

Three years ago, annuities made up 90% of the total policies purchased, but since the pension freedom reforms came into effect in April the demand for drawdown policies has increased significantly, despite some providers failing to offer customers the option to withdraw partial cash sums as the Government intended.

The ABI said that in the two months after 6 April, 65,000 people exercised their new right to withdraw cash - taking out a total of more than £1bn. 

It seems that the general trend is for those with smaller pension pots to cash them out, while those with larger pots are using them to buy a regular income. The average cash pot taken was worth £15,500 - however, the average annuity purchase was for £55,750, while the average drawdown policy was for £69,900.

ABI director Dr Yvonne Braun said: 'Tens of thousands of people are successfully accessing the pension freedoms as intended, and on the whole, the industry has risen to the challenge of giving customers what they want'.

April 2015 saw the most radical changes to the pension rules for almost a generation. The reforms change the way in which savers can access and manage their pension pot, and include giving people access to their entire pension pot from age 55 onwards.

We can help you plan for a more prosperous future for you and your family - the Your Money section of our website offers a wealth of tips and information.

July Newsletter

TAX EFFICIENT EXTRACTION OF PROFITS

In his Summer 2015 Budget, the Chancellor announced far-reaching reforms to the way in which dividends are taxed. If you are the director of a personal or family company and extract profits in the form of dividends, this will affect you.

Under the rules as they currently stand, it is preferable from a tax and National Insurance perspective to operate as a limited company and to take a small salary to preserve entitlement to the state pension and certain contributory benefits and to withdraw additional profits in the form of dividends. Although dividends must be paid out of after-tax profits (once corporation tax has been paid), withdrawing profits as dividends has a number of advantages:

• no National Insurance contributions are payable on dividends; and

• the availability of the 10 per cent tax credit attaching to dividends means that there is no further tax to pay until taxable income reaches the threshold at which higher rate tax becomes payable (£42,385 for 2015/16). Thereafter, the effective rate of tax on the net dividend is 25% for a higher rate taxpayer and 30.6% for an additional rate taxpayer.

What is changing? From 6 April 2016 the 10% tax credit on dividends in being abolished. This means that it will no longer be necessary to gross up the amount of dividend actually paid to take account of this tax credit or to deduct the tax credit from the tax that you owe – the amount paid by your company will from 6 April 2016 be the gross amount of the dividend.

To compensate for this loss of tax credit, a new tax-free allowance of £5,000 will be available for dividends. Once this allowance has been used up, dividend income will be taxed at the appropriate dividend tax rate, which will be 7.5% for a basic rate taxpayer, 32.5% for a higher rate taxpayer and 38.1% for and additional rate taxpayer.

This means that anyone who currently has dividend income of more than £5,000 a year will pay more tax on their dividends from April 2016. It will no longer be possible to pay a small salary (covered by the personal allowance) and to then pay dividends until the higher rate threshold is reached without having to pay any further tax on those dividends. It will also be necessary to ensure funds are available to pay the additional tax that will be due on the dividends.

It is advisable to speak to your tax adviser as to how these changes will affect you and to discuss your optimal profit extraction strategy going forward. Although the new dividend rules do not come into force until 2016/17, it is also advisable to review your dividend extraction strategy for 2015/16 as it may be beneficial to accelerate dividend payments to before 6 April 2016 to take advantage of the more favourable dividend tax rates applying before that date. 

One-man companies to lose employment allowance It should also be noted that the National Insurance employment allowance will not be available to companies where the director is the sole employee from 6 April 2016 onwards. For personal companies this will affect the optimal salary level and impact on the profit extraction strategy. Speak to your tax adviser well in advance of 6 April 2016 to find out how these changes will affect you to allow time to plan ahead.

Is a limited company still the best option? You may also wish to consider whether operating through a limited company remains the best option for you. However, before making a decision you may wish to see what the Chancellor does to Class 4 National Insurance contributions, which are payable by the self-employed on their profits. At the time of the March 2015 Budget the Chancellor announced his intention to consult on the abolition of Class 2 National Insurance contributions and the reform of Class 4 contributions to provide benefit entitlement. The consultation is expected later in the year. However, it should be noted that as things currently stand, disincorporation relief, which allows a company to transfer assets to its shareholders without triggering a tax charge, is only available where the transfer of assets occurs before 31 March 2018. If you are thinking of disincorporating, you may wish to do so before that date. Speak to your advisor to see if this is for you.

RETIREMENT PROVISION

As people live longer it becomes increasingly important to ensure that you have made adequate financial provision for your retirement. However, the rules are constantly changing and this makes planning ahead with any degree of certainty somewhat difficult. 

State pension changes The state pension currently comprises the basic state pension and the earnings-related second state pension (also known as S2P). This two-tier state pension is payable to anyone who reaches state pension age before 6 April 2016, provided that their contributions record is sufficient. A person who reaches state pension age before 6 April 2016 will need 30 qualifying years in order to qualify for the full basic state pension.

Your state pension age depends on your date of birth and your gender. 

The current two-tier state pension is being replaced with a single-tier state pension for people who reach state pension age on or after 6 April 2016. If you reach state pension age before this date you will continue to receive the current two-tier state pension. The introduction of the new single-tier state pension will not affect you. Under the new single-tier state pension, a person will need at least 35 qualifying years for the full single-tier state pension. Anyone with less than 35 qualifying years will receive a reduced pension depending on the number of qualifying years that they have built up. However, a single-tier state pension will only be payable if a person has a minimum of 10 qualifying years.

Topping up your pension If you are unlikely to have enough qualifying years to earn a full state pension by the time that you reach state pension age, you may wish to pay contributions voluntarily to top up your record. Class 3 contributions are designed for this purpose. However, at £14.10 per week (2015/16 rate) they are quite expensive. If you have small earnings from self-employment (less than £5,965 for 2015/16) you may wish to pay Class 2 contributions voluntarily instead. At £2.80 a week, this is a much cheaper option.

If you are due to reach state pension age before 6 April 2015, from 12 October 2015 you will also have the option to make a Class 3A contribution to boost your pension. The amount of the contribution depends on how old you are when you pay it. Speak to your adviser to discuss whether making such a contribution is likely to be cost effective.

End of contracting out The changes to the state pension mean that from 6 April 2016 it will no longer be possible to build up entitlement to the second state pension. The second state pension is only paid to those who reach state pension age before 6 April 2016 and who have earned entitlement to it. As a result, the ability to contract out will end on 5 April 2016. If you are currently in a contracted-out salary-related pension you will need to pay full rate National Insurance contributions from 6 April 2016. Your adviser will be able to explain how this will affect you.

Pensions tax-relief Individuals are able to make tax-relieved pension savings to registered pension schemes. However, contributions only attract tax relief to the extent that they do not exceed the annual allowance. The allowance can be carried forward for up to three years if it is not used up. The allowance was set at £40,000 for 2015/16 and at £50,000 for 2014/15 and 2015/16.

The Chancellor announced various changes which affect the annual allowance in his Summer 2015 Budget.

Pension contributions are measured against a pension input period to check that the annual allowance has not been exceeded. This does not currently have to correspond with the tax year. However, from April 2016 the pension input period will be the tax year. For 2015/16 only, the pension annual allowance is increased to £80,000, but this is subject to an allowance of £40,000 for the period from 9 July 2015 to 5 April 2015. The rules are quite complicated so speak to an advisor to find out how you can make the best use of your available allowance for 2015/16.

Reduced annual allowance for high earners From 2016/17, the annual allowance for those with incomes (including pension contributions) of over £150,000 is reduced by £1 for every £2 by which their income exceeds £150,000. The maximum reduction is £30,000 so that an individual with income of £210,000 or above will have an annual allowance of £10,000 for 2015/16.

Reduced lifetime allowance The maximum amount of tax-relieved pension savings that a person can build up over a lifetime is capped by the lifetime allowance. This is to be reduced from the current level of £1.25 million to £1 million from 6 April 2016. If your pension benefits are approaching this limit, speak to your adviser about protecting the benefits you have built up from future tax charges.

HELP WITH CHILDCARE COSTS

Childcare costs are expensive and any help towards those costs is welcomed. Under the current system, tax exemption provides a measure of relief for those who receive childcare vouchers or childcare support from their employers. In most instances, the relief is now worth £11 a week to those lucky enough to benefit.

This system is to be replaced with a new system under which the Government will top up contributions made into an online account at the rate of 20p for every 80p paid into the account, up to a maximum top-up of £2,000. This top-up is tax-free and as it is not provided by the employer it is available to working parents (including the self-employed) as long as they earn an average of £50 per week and not more than £150,000 a year.

The new system was originally intended to be introduced from Autumn 2015. However following a legal challenge, the start date has now been delayed until 2017.

STRUGGLING TO PAY YOUR TAX

Anyone struggling to pay their tax bill may be able to agree a time to pay agreement with HMRC. This should be agreed with HMRC before date on which the tax is due to be paid. 

Although HMRC have always preferred to set up a direct debit arrangement when agreeing a time to pay arrangement, this will be mandatory from 3 August 2015. However, HMRC will not revisit existing arrangements where a direct debit mandate is not in place.

If you are likely to struggle to pay a tax bill, speak to your tax advisor who can help you come to an agreement with HMRC.

This newsletter deals with a number of topics which, it is hoped, will be of general interest to clients. However, in the space available it is impossible to mention all the points which may be relevant in individual cases, so please contact us for personal advice on your own affairs.

Pensions auto-enrolment: are you up-to-date?

With effect from 1 June 2015, small businesses employing fewer than 30 staff became bound by the requirements of the new pensions auto-enrolment regime, obliging them to automatically enrol all eligible employees into a qualifying pension scheme and to make a minimum contribution to that scheme.

The Pensions Regulator recently warned that even those who employ a single care worker, such as a carer or nanny, must comply with the auto-enrolment regulations, with very few exceptions.

Under auto-enrolment, employees over the age of 22 and earning more than £10,000 per annum now have the right to belong to a workplace pension scheme, unless they choose to opt out.

6 April 2015 saw an increase in some of the thresholds and limits for auto-enrolment. While the earnings trigger remains at £10,000 for 2015/16, the lower limit of the qualifying earnings band has risen to £5,824 and the upper limit of the qualifying earnings band is now £42,385.

Over five million workers in larger companies are already in the scheme, and an estimated 3.8 million workers are expected to be enrolled by smaller employers between now and 2018.

According to recent research, one in four small businesses is as yet unprepared for auto-enrolment. Business owners are being urged to ensure that they are prepared for the new regulations. Employers who fail to comply could be liable to enforcement action and/or a penalty.

We have produced a handy checklist to help employers with the auto-enrolment process.

Employer checklist

Nominate a point of contact

The Pensions Regulator will be writing to you with important updates as you prepare for automatic enrolment. It is therefore advisable to nominate a main contact within your firm who will take responsibility for managing all such correspondence.

Know your staging date and develop a plan

Your staging date is determined by the total number of people in your largest PAYE scheme, based on HMRC’s records as at 1 April 2012. You can find out your staging date by visiting www.thepensionsregulator.gov.uk/staging.

Assess your workforce

Under auto-enrolment, you will need to identify any eligible jobholders working for you. You will also need to consider whether you have an employer duty in relation to other types of workers including non-eligible jobholders and entitled workers.

Review your pension arrangements

Decide on the type of pension scheme you will offer. Do you have an existing scheme that meets (or can be changed to meet) the Government’s requirements, or will you need to set up a new one? You may also want to consider whether the new NEST scheme would suit your needs.

Communicate the changes

Employers are required by law to write to all workers (except those aged under 16, or 75 and over) explaining what automatic enrolment into a workplace pension means for them. It is worth noting that the communication requirements for the different categories of worker were recently simplified in a bid to ease the burden on employers.

Make sure you have a strategy in place for briefing employees and plan how you will manage any queries that arise. A range of letter templates are available on the Pensions Regulator website to help employers fulfil their legal obligations.

Automatically enrol eligible jobholders

Under the new regulations, employers are required to: provide information to the pension scheme about the eligible jobholder; give enrolment information to the eligible jobholder; and make arrangements to achieve active membership for the eligible jobholder. This should be carried out within the ‘joining window’ (the six week period from the eligible jobholder’s automatic enrolment date).

Register with the Pensions Regulator and keep records

All employers will need to register with the Pensions Regulator within five months of their staging date. Registration can be completed online. Employers must also keep specific records about their workers and their pension scheme(s).

Contribute to your workers’ pensions

From October 2018 all businesses will need to contribute at least 3% on the qualifying pensionable earnings for eligible jobholders. Employers are also required to make contributions for non-eligible jobholders who choose to opt in to the pension scheme.

And don’t forget to…

Budget for the cost increase

The changes will undoubtedly have financial implications for employers. Make sure you factor in the additional costs of contribution and administration into your budgets.

Review your systems

How will you adapt your existing administration and payroll systems to accommodate the changes? What are the time and cost implications?

Keep track of age and earnings

It is important for employers to keep track of their employees’ ages and earnings as some members of staff may move between the different categories of worker. This is especially important for workers who earn below the qualifying earnings threshold, or who are under 22 years of age.

For more information on pension auto-enrolment visit the Pension Regulator’s website at: www.thepensionsregulator.gov.uk. From reviewing your payroll needs to cash flow forecasting and budgeting, we can advise on a wide range of business and personal planning issues. Please contact us for further details.