What's new for the new tax year?

If you are a director or employee, this will be a year to pay particular attention to your PAYE code. The standard tax code for 2015/16 will be 1060L. This gives £10,600 tax free pay, so if your tax code is different, make sure you know why. As your tax adviser is no longer sent a copy of the notice of coding, if you think it may be wrong, let us know.

Two of many reasons why a tax code could be different from the standard 1060L are:

The new Marriage Allowance 

If you have a spouse or civil partner who is not a taxpayer, or who has savings income, the new ‘Marriage Allowance’ means that you may be able to save tax by transferring 10% of his or her personal allowance (£1,060) to the partner with the higher income. 

There are two main conditions:

• Neither of you must be liable to pay tax at 40% or 45%
• You are both under the age of 80 on 5 April 2015

Some publicity has said that the lower income spouse must have income of under £10,600 a year for the Marriage Allowance to be ‘claimed’, but this is misleading. From 6 April 2015, the first £5,000 of savings income is taxed at 0%, so the lower income partner could have significant savings income and still not be a taxpayer. ‘Savings income’ includes bank and building society interest, but not dividends paid by PLCs or private companies.

The timescale for this allowance is not completely straightforward. Although there has been a lot of advance publicity about the allowance, the online system will probably launch about the time you receive this newsletter and it is unlikely to be fully functional before the summer.

Owing money to HMRC 

HMRC has long had a power to collect money owing to it by changing PAYE tax codes. This can be a useful way of paying smaller tax bills, but from 6 April 2015, the limits increase. HMRC will be able to recover much larger debts through PAYE: up to £17,000 a year for those on incomes of £90,000 or over. Make sure you know what you owe HMRC and how you are paying it.

LOOKING AFTER THE CHILDREN

Most of us have got used to the topsy-turvy rules for Child Benefit and higher earners, where one member of a couple receives Child Benefit in full, and the other may have to pay part of it back to the Government through self-assessment, if earnings are over £50,000 a year. This is called the ‘High Income Child Benefit Charge’. It works like this: 

Jean and Ken have one child. Jean is the main carer and gets child benefit of £20.50 a week (in 2014/15). Ken earns just over £52,000 a year and has to pay back £213 of the Child Benefit through self assessment. But it is still possible for the detailed rules to catch people out.

Are you missing out?

The basic principles are clear enough. Where a single parent, or a member of a couple, has income of over £50,000 a year, there will be a High Income Child Benefit Charge.

The charge is 1% of the Child Benefit due, for every £100 of income over £50,000. This means, mathematically, that all the Child Benefit will have been clawed back where income reaches £60,000. In consequence, where earnings are over £60,000 a year, it simplifies the administration if the person entitled to the Child Benefit (who may not be the higher earner of the couple), makes an election to forgo the Child Benefit.

But now for the surprises. Income here means ‘adjusted net income’. This is a technical term meaning that you deduct the gross equivalent of pension contributions which have received basic rate tax relief at source, and Gift Aid payments. So if the ‘high earner’ makes significant pension contributions or Gift Aid payments during the year, you may find that you have a net Child Benefit entitlement after all.

If this happens, you are allowed to restart your Child Benefit claim, but the high earner will now be liable to pay the Child Benefit charge through self assessment. You can ‘change your mind’ within two years of the end of the tax year in which you would have been entitled to Child Benefit. Unfortunately, if you delay, this could mean changes to your self assessment return and possible interest and late payment penalties.

Who pays the piper?

Another hazard for couples is where both members of the couple earn close to the £50,000 or £60,000 limits. It may seem like a technicality, but HMRC doesn’t just want the money, it wants the money from the right person.

For example Jack and Jill have two children. Their Child Benefit entitlement in 2014/15 is £20.50 a week for the elder child and £13.55 a week for the younger child (£1,770.60 a year in total). Jack paid the High Income Child Benefit Charge in 2013/14. In 2014/15, Jill earns £52,000 as an employee and is not registered for self assessment. Jack is self-employed. He usually earns about £55,000 a year, but in 2014/15 he invested in a new computer system for the business and his taxable profit falls to £51,000. As Jill is the higher earner for 2014/15, she will need to register for self assessment (before 5 October 2015) and pay the High Income Child Benefit Charge by 31 January 2016. The rules apply to all couples whether married, civil partners, or simply living together. Exceptionally, the High Income Child Benefit Charge can even apply where the child is living with someone else, but you are supporting them and claiming Child Benefit. All in all, whoever is looking after the children, if someone is claiming Child Benefit and you are connected with that person, it’s time to talk to your tax adviser.

BEATING THE SYSTEM

In a world where there are penalties for everything, people can be tempted to try and beat the system. Some employers have attempted to avoid late filing penalties for PAYE RTI returns by all sorts of ruses: asking for employee hours earlier in the month; carrying overtime forward to the next month; or otherwise using approximate figures. Figures tweaked like this can lead to inaccuracies in the payroll, increased National Insurance costs and lower benefit entitlement for some lower paid workers. Remember:

It is possible to send an Earlier Period Update without incurring a penalty. Paying a worker for fewer hours than they actually worked one month, and adding the hours onto the following month, could mean that the employee is paid below the Lower Earnings Limit one month and so misses out on National Insurance credits. It also means that the National Insurance cost in the following month will be higher than if earnings had been spread evenly. Tweaking the figures is inadvisable and can have a sting in the tail

HAVE YOU BEEN TURNED INTO AN INTERMEDIARY ?

How many UK businesses would think they were affected by new rules for ‘offshore employment intermediaries’? Or, for that matter, ‘onshore’ employment intermediaries?

After the dust has settled on the Government consultation, new rules are here for ‘employment intermediaries’, and you may unwittingly, be one. Owner-managed businesses which are run as limited companies or as partnerships can be affected. This is because the rules now treat anyone who is a link in the chain between an ‘end user client’ and a worker as an ‘intermediary’. If your business structure involves an ‘employment intermediary’, there are two sets of rules to watch out for:

• Agency rules which could make you an employee of your own business, or challenge your remuneration split
• Reporting rules which would require you to make quarterly reports to HMRC of people who work for you and who are not treated as employees

As we have come to expect, there are penalties for failure to make returns, or to apply PAYE as required.

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.

The reporting rules apply from 6 April 2015. The rules are complex, so it is worth taking advice if you think the rules could apply to you. The reporting rules require you to make returns to HMRC if you are an ‘employment intermediary’ as described above and you supply more than one worker to an end client. How this works is best seen by looking at two examples:

How you could be taxed as an employee

William Wallace is a partner in a restaurant business, ‘Haggis and Neeps’. However, he also worked for two weeks in another restaurant business, ‘The Bruce and Spider’, to provide holiday cover. If William is under ‘supervision, direction or control’ when he provides holiday cover at ‘The Bruce and Spider’, he is caught by the revised Agency rules, and is taxed as an employee. His own partnership, ‘Haggis and Neeps’, would become his employer for the holiday cover work and it would be liable to deduct PAYE from his earnings from ‘The Bruce and Spider’. Such income would then become William’s personal income for tax purposes, and not that of the ‘Haggis and Neeps’ partnership.

On the other hand, if William provides holiday cover as head chef, he might not be subject to ‘supervision, direction or control’. In this case, earnings from ‘The Bruce and Spider’ would be partnership income of ‘Haggis and Neeps’. The dividing line can be very fine, and the consequences of getting it wrong could be substantial.

When you might need to make returns

Malcolm trades via his own limited company, Malcolm IV Ltd. He supplies his services to Daylight Holdings plc. He is not subject to ‘supervision, direction or control’.

In May 2015, David joins the team at Malcolm IV Ltd, and assists on the contract with Daylight Holdings plc. As Malcolm IV Ltd now supplies two workers, it needs to consider the new reporting requirements.

If you work through your own partnership, such as a farming partnership carrying out contract work for other farms, the reporting rules could also apply.

There are exceptions to these rules, but these are narrowly drawn. As the PAYE deductions and reporting requirements apply now, this cannot wait until your usual year end accounts.

As so much depends on the detail of the arrangement, we would recommend that anyone concerned about these issues gets in touch.

Saving tax before the 5 April year end

Proper financial planning is always important, but as the end of the tax year approaches, now is the time to ensure that your business and personal finances are as tax-efficient as possible. Here we consider some of the planning strategies that are available to you before 6 April 2015, and outline some key tax measures planned for 2015/16.

Capitalising on personal allowances

Every individual has their own tax-free personal allowance for income tax purposes, which for 2014/15 is £10,000 for those born after 5 April 1948.

Those with an income over £100,000 could be at risk of paying an effective rate of 60% on a proportion of their income. Higher rate income tax is payable at 40% on taxable income over £31,865 (that is income after personal allowances), but once 'adjusted net income' exceeds £100,000 the personal allowance is clawed back at a rate of £1 for every £2 by which adjusted net income exceeds £100,000. This means that taxpayers could effectively be paying tax at 60% on up to £20,000 of their income.

Future changes

Chancellor George Osborne announced in the 2014 Autumn Statement that the personal allowance will rise to £10,600 from 6 April 2015, a higher increase than was originally planned at the time of the 2014 Budget. The basic rate band will increase to £31,785 and thus, for many taxpayers, higher rate taxes will start to be paid when total income exceeds £42,385.

From April 2015, up to £1,000 of an individual's personal allowance may be transferred by eligible spouses and civil partners to their partner, where neither pays tax at the higher or additional rate.

Making tax-efficient savings and investments

While low interest rates continue to pose a challenge to savers, the ISA has maintained its status as a popular tax-free savings vehicle. On 1 July 2014, Individual Savings Accounts (ISAs) were replaced by the New ISA, or NISA.

Under the new system, adult savers can now invest in any combination of cash or shares, up to a total of £15,000 per annum. There are still two types of ISAs – cash NISAs and stocks and shares NISAs. The £15,000 can only be invested in a maximum of one cash NISA and one stocks and shares NISA so, if investments have been made earlier in the tax year to a cash ISA, further contributions into a cash NISA must be made into the same ISA. Another change this year is that money that is held in stocks and shares ISAs opened during any tax year can be transferred into a cash NISA. Transfers from cash to stocks and shares ISAs was already allowed and so transfers either way can be made as many times as the account holder wishes.

Savers aged between 16 and 18 can pay up to £15,000 into a cash NISA.

In addition, Junior ISAs remain an option for those aged under 18 who were not entitled to open a Child Trust Fund account. Up to £4,000 can be invested in a JISA during 2014/15 and this can be a cash ISA, a stocks and shares ISA or both. On reaching 18, the JISA becomes a normal adult NISA.

Future changes

Contribution limits for NISAs, the Junior ISA and Child Trust Funds are set to be uprated in line with the Consumer Price Index for 2015/16, bringing the NISA limit to £15,240 and the JISA and Child Trust Fund limit to £4,080.

As announced in the 2014 Autumn Statement, for deaths from 3 December 2014 surviving spouses or civil partners are able to inherit the NISA tax advantages by means of an additional NISA allowance equal to the value of that saver's holdings on their death. This will be able to be used from 6 April 2015 onwards.

Tax-efficient pension planning

Making contributions into a pension scheme offers tax relief at an individual's marginal rate of tax (potentially worth up to 60%), subject to limits. Relief on annual contributions is limited to the greater of £3,600 (gross) or the amount of UK relevant earnings, and subject to the annual allowance, which from 6 April 2014 has been reduced from £50,000 to £40,000.

Future changes

The Government has implemented a number of measures aimed at affording individuals greater flexibility over their pension pots. From April 2015 members of defined contribution pension schemes will be able to take their retirement savings without needing to buy an annuity. The taxation consequences of taking advantage of this flexibility will be a significant factor in deciding when to access the pension fund.

From April 2015, beneficiaries of individuals who die under the age of 75 with remaining uncrystallised or drawdown defined contribution pension funds, or with a joint life or guaranteed term annuity, will be able to receive any future payments from such policies tax-free where no payments have been made to the beneficiary before 6 April 2015. The rules will also be changed to allow joint life annuities to be paid to any beneficiary. Where the individual was over 75, the beneficiary will pay the marginal rate of income tax, or 45% if the funds are taken as a lump sum payment. Lump sum payments will be charged at the beneficiary's marginal rate from 2016/17.

Extracting profits – tax-efficiently

When it comes to extracting profit from your company, it is important to consider both the tax and business implications of the various options available.

Taking a dividend rather than a salary or bonus could reduce the national insurance bill. While a dividend is paid free of NICs, a salary or bonus can carry up to 25.8% in combined employer and employee contributions. However, a salary or bonus is usually tax deductible to the company. The last date for paying a 2014/15 dividend is 5 April 2015. Any related higher or additional rate tax on the dividend may not be due until 31 January 2016. However you may have already paid some of the tax through the payments on account system. The rules can be complex – please talk to us about the implications of paying a dividend.

Timing may also be an important consideration – it may be helpful to delay the timing of bonuses and dividends if taxable income is likely to exceed £100,000 or £150,000, especially if income in 2015/16 will be less.

Future changes

From April 2015, employer NICs up to £42,385 p.a. for employees aged under 21 will be 0%. Employers will be liable to 13.8% NIC beyond this limit. Also from April 2015, employer NICs up to £42,385 p.a for apprentices aged under 25 will be abolished, with the aim of further encouraging employers to take on apprentices.

Considering your company car

The company car remains a key part of the remuneration package for many employees, but it is important to consider the tax and national insurance implications of your company car arrangements.

Employees and directors pay tax on the provision of the car and on the provision of fuel by employers for private mileage. Employers pay Class 1A NICs at 13.8% on the same amount. The amount on which tax and NICs is paid is calculated by multiplying the list price of the car by an 'appropriate percentage'.

It may be worth considering paying your employees for business mileage in their own vehicle, at the statutory rates. We can review your company car policy and discuss the options available to you.

Future changes

The maximum taxable percentage is set to rise from 35% to 37% in April 2015. From April 2015 the five-year exemption for zero carbon and the lower rate for ultra low carbon emission cars will come to an end. Two new bands will be introduced for ultra-low emission vehicles. The diesel supplement will also be removed in April 2016, making diesel cars subject to the same level of tax as petrol cars.

With robust planning and expert advice, you can minimise the tax bill and maximise your business and personal wealth now and in the coming years. Please contact us for further assistance.

A comfortable retirement

A financially secure future

Recent years have witnessed growing concerns over the number of individuals who are failing to save sufficiently to be able to retire when they would like to. Changes proposed from 6 April 2015 intend to bring flexibility to the options available at retirement. However, with the UK facing ongoing economic challenges, and many pension schemes remaining underfunded, it is essential to ensure that you take appropriate action ahead of time.

While retirement may not currently be high on your priority list, you should take steps now to ensure that you will have the freedom and the means to achieve a comfortable retirement when the time comes. You could spend a third of your life as a retired person, and by taking action now, you can help to make this period as financially secure as possible.

A strategy for retirement

Your retirement planning strategy will be determined by a number of factors, including your age and the number of years before retirement. However, there are some other key issues to consider:

• Do you have a company pension scheme?
• Are you self-employed?
• How much can you invest for your retirement?
• How much state pension will you receive?

You can request a State Pension statement (formerly known as a State Pension forecast) by logging on to the Gov UK website: www.gov.uk/browse/working/state-pension.

The basic state pension is worth £5,881 a year for a single person in 2014/15 and double this amount if you're married, and both you and your partner have built up State Pension.

The overall lifetime limit on tax-advantaged pension funds is £1.25m. There is a tax charge for fund values in excess of the 'lifetime allowance' at retirement, and for excess contributions or increases (set at £40,000 in a pension input period (PIP) ending in 2014/15).

Company pension schemes

There are two kinds of company pension scheme, into which you and your employer may make contributions. A defined benefit scheme pays a retirement income related to the amount of your earnings, while a defined contribution scheme instead reflects the amount invested and the underlying investment fund performance. In both cases, you will have access to tax-free cash as well as to the actual pension.

The impact of the early-noughties stock market downturn was one key factor that resulted in many final salary schemes being underfunded and a decision was taken by many firms to close such defined benefit schemes. Many experts consider that this type of scheme will cease to exist over the next few years, as a result of the current situation. Where companies do provide company pensions these are now almost always defined contribution schemes.

The amount of personal contributions that can qualify for tax relief is limited to the greater of £3,600 and total UK relevant earnings, subject to scheme rules.

The new pensions auto-enrolment regime

In order to encourage more people to save for their retirement, the Government is introducing compulsory workplace pensions for eligible workers. The changes are being phased in.

All employers will have to enrol automatically all eligible workers into a qualifying pension scheme or NEST (National Employment Savings Trust), a simple low-cost, opt-out pension scheme that is being introduced by the Government.

There will ultimately be a minimum overall contribution rate of 8% of each employee's qualifying earnings, of which at least 3% must come from the employer. The balance is made up of employees' contributions and associated tax relief.

Those employees with, or considering, lifetime allowance protection may wish to think about opting out of auto-enrolment to avoid the protection being invalidated by further pension contributions.

Private options

If you are not in a company scheme, you should make your own arrangements, since relying on the state pension is already questionable and will become more so with each passing year.

SIPPs

In response to poor performances from pension fund managers, some retirement savers have switched their pension savings into Self Invested Personal Pension policies (SIPPs) - a form of personal pension plan which gives the investor more control over how the funds are invested.

Personal pensions

To qualify for income tax relief, investments in personal pensions are limited to the greater of £3,600 and the amount of your UK relevant earnings, but subject also to the annual allowance (£40,000 for 2014/15) in all years. The annual allowance was £50,000 for 2013/14 and earlier years.

Where pension savings in any of the last three years' PIPs were less than £50,000, the 'unused relief' is brought forward, but you must have been a pension scheme member during a tax year to bring forward unused relief from that year. The unused relief for any particular year must be used within three years.

Case Study 1

Steve invested £20,000 in his pension policy in the PIP ending in 2011/12, £45,000 in the 2012/13 PIP and £20,000 in the 2013/14 PIP.

He can carry forward to 2014/15 £30,000 of unused relief from 2011/12, £5,000 from 2012/13 and £30,000 from 2013/14 (total £65,000).

Steve's maximum pension investment is therefore set at £105,000 (£40,000 plus £65,000) for his 2014/15 PIP. He needs to make a pension contribution of £70,000 (current year allowance £40,000 and £30,000 unused relief from 2011/12) in order to avoid the loss of the relief brought forward from 2011/12.

Note that the effect of the annual allowance charge will claw back all tax relief on premiums in excess of the maximum. Where the charge exceeds £2,000, arrangements can be made for the charge to be paid by the pension trustees and recovered by adjustment to policy benefits.

Where pension savings exceed the £1.25m lifetime allowance at retirement (and fixed, primary or enhanced protection is not available) a tax charge arises:

• Tax charge (excess paid as annuity) - 25% on excess value, then up to 45% on annuity
• Tax charge (excess paid as lump sum) - 55% on excess value

Premiums on personal pension policies and stakeholder pensions are payable net of basic rate tax relief at source, with any appropriate higher or additional rate relief usually being claimed via the PAYE code or self assessment Tax Return.

Case Study 2

Becky will earn £60,000 in 2014/15. She will invest £12,500 into her personal pension policy. She is entitled to the basic personal allowance and has no other income.

Becky will pay her pension provider a premium, net of basic rate tax relief of £10,000. She is also entitled to higher rate tax relief on the gross premium, amounting to £2,500.

As Becky is an employee, we can ask HMRC to give the relief through her PAYE code. Otherwise, we would claim in Becky's 2015 Tax Return. Thus the net cost to Becky of a £12,500 contribution to her pension policy is just £7,500.

Stakeholder pensions

Stakeholder pension policy providers are required to accept premiums of a minimum of £20 per month, although some will accept less.

Providers must meet a number of 'standards', including a cap on charges - for new policies of 1.5% per annum for the first ten years, then 1%. Additional premiums are subject to the same rules as for personal pension policies. Stakeholder premiums can be paid on behalf of another person - for example, by a grandparent for an infant grandchild.

Retirement annuities

Unlike personal pension providers, most retirement annuity providers - personal pension schemes set up before July 1988 - do not offer a 'relief at source' scheme and they claim back tax at the basic rate.

Instead we claim the tax relief you are due through your self assessment Tax Return, or if you do not complete a Tax Return by contacting HMRC on your behalf.

Some alternative options

Although they might not suit everyone, there are at least two ways to boost your retirement finances, through your home. The first option is down-sizing - selling your current home and buying something cheaper, to release value tied up in your property for other purposes. 'Equity release' might be an alternative approach. However, you should discuss all of the implications with us and your other financial advisers before deciding whether this is a suitable avenue to take.