The new rules on dividends

The rules on the taxation of dividends are set to change substantially from 6 April 2016, which could have a significant impact on the amount of tax you pay. The draft legislation has been issued and here we outline the facts and figures which will form the basis of the reforms.

The existing rules

Under existing legislation, the taxation of dividends is made complicated due to a 10% tax credit being added to the cash amount of the dividend, with the tax credit then satisfying all or part of the income tax liability on the dividend.

The practical effect of the system is that basic rate taxpayers have no further tax to pay on dividend income and a higher rate taxpayer will pay an effective 25% on the cash amount of the dividend receipt. However, this is soon to change: from 6 April 2016 this tax credit will cease, and all dividend income will be taxed as gross.

Changes from April 2016

From April 2016, the dividend tax credit will be replaced by a new tax-free Dividend Allowance. This means that for the 2016/17 tax year you will have the first £5,000 of dividend income taxed at 0%, regardless of the level of non-dividend income.

Headline rates of dividend tax are also changing, with tax charged on dividends received over £5,000 at the following rates:

• 7.5% on dividend income within the basic rate band (ordinary rate)
• 32.5% on dividend income within the higher rate band (upper rate)
• 38.1% on dividend income within the additional rate band (additional rate)

If your dividend income moves you from one tax band to another, then you will pay the higher dividend rate on that amount. Investors with modest income from shares will see either a tax cut or no change in the amount of tax owing.

The Dividend Allowance will not reduce total income for tax purposes, and dividends within the allowance will still count towards the appropriate basic or higher rate bands. They may therefore affect the rate of tax payable on dividends received in excess of the £5,000 allowance.

Dividend changes: a comparison

The following table shows a comparison between the current and prospective tax rates:

Example

Andy has non-dividend income of £6,500 and a dividend income of £12,000 outside of an ISA.

In the current tax year, Andy will have no tax to pay on his dividend - some of the dividend falls into the basic rate band but the effective tax rate is nil.

Next tax year, Andy’s personal income tax allowance of £11,000 covers his non-dividend income plus £4,500 of his dividends. With the £5,000 dividend allowance, he will pay tax on £2,500, which is at 7.5% as he is a basic rate taxpayer.

Winners and losers

Depending on your overall income and dividends you expect, this change may have a greater or lesser impact on your finances.

An example of a winner is a higher rate taxpayer who has dividend income of £5,000. In the current tax year he will have a tax liability of £1,250 (25% of £5,000). Next year he will have no tax liability.

An example of a loser under the regime will be the sole shareholder of a company who takes a small salary and then dividends up to the threshold at which higher rate tax is payable. In the current tax year he has no income tax on the salary (as the salary is below the personal allowance) and no tax on the dividend. Next year only £5,000 of the dividend will not be taxable.

Points to consider

Be sure to make the most of your tax-efficient savings and pension options. Married couples could consider spreading their investment portfolios in order to maximise the dividend tax allowance, and also make use of their personal income tax allowances.

Other points to note:

Trading as a limited company

If you are currently trading as a limited company most individuals still benefit in tax terms. The tax saved by incorporation has, however, been reduced.

Salary or dividend

A director-shareholder is still likely to benefit from taking a dividend over a salary, although the amount of tax saved will be reduced.

Taking dividends before April 2016

It may be worth increasing dividends before 6 April 2016. However, there may be other tax issues to consider, such as loss of the personal tax allowance if your total ‘adjusted net income’ exceeds £100,000.

Please note that this is based on our current understanding of the new regime. However planning at this stage can help save you money in the future, so please contact us for advice tailored to your particular circumstances.

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. 

Claiming tax relief on refurbishment

The oncoming summer can allow businesses the time and opportunity to renovate their premises, but consideration should be given to the financial implications – especially if you want to maximise the available tax reliefs. Here we outline some tax relief basics…and the potential pitfalls…

Claiming relief

You can claim a full tax deduction for all expenditure on repairs to your building that are incurred in an accounting period.

Alterations to a building will be treated as ‘capital expenditure’. This means that the expenditure does not qualify for a tax deduction against profits but may eventually get tax relief for capital gains tax as an ‘improvement’ to the property.

Some capital expenditure will qualify for relief. Expenditure on fixtures may qualify for relief under the capital allowances system. This may mean that your expenditure on fixtures gets immediate tax relief due to the Annual Investment Allowance (AIA) but this will depend on how much other expenditure qualifying for plant capital allowances you have incurred in the accounting period. The current limit for expenditure relieved by the AIA is £500,000 but this figure is currently up for review, and further information is expected at Autumn Statement 2015. Please contact us if you are planning significant expenditure on fixtures and other plant and machinery.

Not all fixtures qualify for capital allowances but many do. Expenditure on fixtures covers a wide variety of items, from lights and boilers, to toilets and other sanitary ware. Different types of business will require different fixtures and you should check whether your chosen items qualify for capital allowances. Contact us for more information and to find out how this can impact your business.

Potential pitfalls

It may seem that both repair expenditure and expenditure on fixtures are equally valid ways of receiving a 100% tax break on your investment.

However, note the tax treatment for fixtures if you should decide to sell your business premises. Someone acquiring a property may be able to claim capital allowances on the fixtures which were put in place by the previous owner. When the transaction takes place both parties should agree on a price for the fixtures. The price can be any amount between the original costs of the fixtures when they were installed in the building down to £1. If the price is the original cost of the fixtures the capital allowances claimed by the previous owner are effectively clawed back (but the purchaser can claim on this amount). If the price is £1 the capital allowances claimed by the previous owner are effectively retained (but the purchaser can only claim on £1).

The dividing line between what is a repair rather than an alteration, and what does or does not qualify for capital allowances, can be difficult to ascertain. Careful planning can help you maximise the relief available, and help your new-look business to succeed.

In addition the rules that apply on the sale of a building which has fixtures which have qualified for capital allowances can be complex. Please contact us for further advice for your business.

To view our full archive of articles, please click here.

The new Marriage Allowance

On 6 April a new Marriage Allowance comes into effect, offering tax benefits for eligible couples - those married or in a civil partnership.

For 2015/16 the personal income tax allowance will rise to £10,600. In situations where one partner's earnings are less than this (including pensions, savings or investment income) they may be entitled to the Marriage Allowance. The scheme allows the transfer of 10% of unused personal allowance to a partner.

The partner making the transfer, which could be up to £1,060, must themselves have earnings within the basic income tax threshold - which is increasing to £42,385 for 2015/16. Making full use of this relief could save couples up to £212 per year. If one partner earns over the basic rate then the couple will not be eligible for the new allowance.

Prime Minister David Cameron said: 'I made a clear commitment to the British people that I would recognise marriage in the tax system. We can afford to do it because of the growing strength of the British economy. And as a result, it means families up and down the country can get a little bit of extra support and more financial security.

'This policy is about far more than pounds and pence. It's about valuing commitment.'

Chancellor George Osborne added that the measure means 'saving £212 on your tax bill couldn't be simpler or more straightforward'.

However the new Marriage Allowance received some criticism from both Labour and Liberal Democrat MPs when the measure was first announced in the Autumn Statement 2013.

Stephen Williams, former Treasury spokesman, said: 'You don't build a fairer society by using the tax system to favour one type of family over another'.

The Government estimates that over four million married couples and 15,000 civil partnerships will benefit from the new measure. You can register and make your application online here.

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.

Saving tax on seasonal gifts

With the season of gift-giving fast approaching, it's important to be sure that you're up to date on the rules around gifts for clients and staff - and making the most of any tax-free opportunities!

In general, HMRC advises that businesses treat gifts in the same way that they treat entertainment. This means that, with a few key exceptions, gifts are not tax deductible. But what are those exceptions and how can you make the most of them?

The office Christmas party is of course a tradition, but did you know it is also tax deductible? Staff annual functions can be tax-free where the total cost per person attending is not more than £150 per year (including VAT).

This will apply to everyone attending the party, including employees and their guests. It can also be used for other expenditure which is part of the event, such as taxis or accommodation for the attendees.

A big caveat is that if you overspend the amount per head then the whole cost of the party is subject to tax, not just the proportion that exceeds the limit. This will need to be paid by reporting the benefit on the employee's P11D form, or the grossed up tax can be settled through a PAYE Settlement Agreement (PSA). A further national insurance bill will also be payable - so be sure to get the sums right!

Seasonal treats for clients and staff may also be deductible, but in order to qualify they must be seen as promotional gifts. This means displaying a ‘conspicuous advertisement' in the form of your company logo. But with many options available for personalisation, it's incredibly easy to give meaningful gifts while staying tax free. These could be anything from calendars and diaries to stress balls and festive snow globes.

Promotional gifts can be given to staff tax-free providing the overall cost does not exceed £50 per person per year. It's important to note that gifts of food, drink, tobacco and vouchers are specifically excluded from this scheme.

Tax efficient charitable donations can be made through Gift Aid, or in cash, stock or investments. There are various tax efficient schemes and incentives for individuals, sole traders and companies so it pays to make sure that your gifts are deductible depending on your business size. Detailed HMRC rules on the subject can be found here.

Third party gifts, which employers may receive from third parties such as business associates or clients, are exempt from tax providing their total value is less than £250. It is very important to be aware of anti-bribery rules when dealing with such gifts. In many cases simple ‘common sense' can be applied to tell when a gift should be accepted. Anti-bribery rules now mean that even those aware but not directly involved may be found culpable should such an illegal transaction take place.

Your Home and Capital Gains Tax

The Government seems to have a policy of whittling away at the traditional capital gains tax exemption for a homeowner’s own ‘principal private residence’. In April 2014, the rule that the last three years of ownership qualified for exemption, even if the homeowner no longer lived in the property, was amended to halve the qualifying period to eighteen months. And from April next year, the homeowner’s right to elect which, of two (or more) properties he owns, shall be treated as his ‘principal private residence’ is to be abolished. Instead, there will be a factual test - which property really was his main home? - but quite how this will work is not yet clear.

A homeowner should therefore bear in mind that circumstances may arise in which there will be a chargeable gain on what he now considers to be his main, or indeed only, home. That gain may be minimised by ensuring that records are kept of all allowable expenditure. For example, the base cost for capital gains tax purposes includes not only the price paid for the house, etc, but also the stamp duty, legal costs and survey fee. If the house was bought in a dilapidated condition, the cost of putting it right will also qualify, as ‘improvement expenditure’. Building an extension or a conservatory would also be an ‘improvement’; refreshing a tired kitchen or bathroom can be a grey area, but it doesn’t cost anything to keep the invoices in case they come in useful later.

Expenditure which enhances the owner’s legal interest in his home also qualifies - the most common example is where a leaseholder pays a capital sum to extend his lease.

Finally, additional relief from capital gains tax may be due if the house, etc, was at any time let to a tenant, so a record should be kept of the dates of any letting(s). This relief may seem paradoxical, but was originally introduced to encourage homeowners to rent out their properties, rather than let them stand empty.

Tax free childcare

The Government has announced further details of the ‘Tax Free Childcare’ scheme, first announced in the March 2013 Budget and due to be launched in Autumn 2015. The current childcare tax reliefs - for workplace nurseries and for childcare vouchers - apply only to childcare provided, or partly paid for, by an employer. What is new about ‘Tax Free Childcare’ is that it will provide direct help with childcare costs, without involving the employer. Accordingly, it will be available without the co-operation of the employer, and to self-employed people on equal terms with employees.

How will Tax Free Childcare work?

Shortly put, the concept is that the parent(s) will open a special account with National Savings & Investments. If there is more than one qualifying child in the family, a separate account may be opened for each. Children will qualify until their twelfth birthday, or until their seventeenth, if they are disabled. It is possible that the scheme will be phased in - applying first to nurseries and playschools for very young children, and then being extended to after-school clubs, etc, for older children.

The parent(s) may pay up to £8,000 a year into each account, and for every £8 paid in, the Government will add another £2, so the overall effect is identical to giving tax relief at 20%. The parent(s) will then use the money in the account to pay their childcare provider. All payments into and out of the account will be made electronically.

There will be no additional relief for higher-rate taxpayers. Also, there will be no reduction in National Insurance contributions.

Will everyone be entitled to Tax Free Childcare?

Three groups will be excluded from the scheme:

• Tax Credit and Universal Credit claimants, who will continue to receive help with childcare costs as part of their Tax Credit claim. Universal Credit will cover 85% of childcare costs, compared with 70% for Tax Credit.
• Families which include a parent who is not earning (at least) an amount equal to eight hours a week at the National Minimum Wage (about £50 a week, at present).
• Families which include a parent with an annual income of £150,000 or more.

Once Tax Free Childcare is launched, parents already receiving childcare vouchers from their employer will be able to choose either to continue doing so, or to claim Tax Free Childcare. But the voucher scheme will close to new entrants.

However employers will be able, if they wish, to continue to operate a workplace nursery and their subsidy to the nursery will continue to be disregarded for both income tax and National Insurance purposes.

The Cycle to Work Scheme

Although it has been running for a number of years, the Cycle To Work scheme still confuses Employers and Employees alike.

What does the scheme do?

An attempt to encourage greener transport to and from work, the Cycle to Work Scheme was introduced by the government to encourage the use of a bicycle as a transportation.

How does it work?

The scheme works where the Employer purchases the bicycle and the employee gets the use of the bicycle by sacrificing salary to the equivalent value over an initial 12 months.

The maximum cost of the bike is £1000 on the scheme, and can be used for road or mountain bikes, and qualifying accessories – helmets, lights etc.

It is worth noting that if your employer is VAT registered, they can claim the VAT back on the purchase, and the repayments the employee makes are then for the net amount (so for a £600 bike, that would be £500 net - £41.67 a month).

What happens at the end of the 12 months of rental/salary sacrifice?

At the end of the initial 12 month rental, the scheme administrator usually provides the employee with a choice – to extend the rental period, for which there would be a peppercorn (or even a nil) rental amount, or otherwise the employee can buy the bike at the fixed market value rate that HM Revenue and Customs provides. This is a sliding scale – the longer you rent the bike, the  less the deemed “market value is”. The full table of rates can be seen here and runs from 25% for bikes over £500 purchased by the employee at 12 months through to a negligible value (i.e. nil) for a bike under £500 original cost and held for 5 years. As an example, a bike that cost £500 and was held for 3 years, would have an 8% value and would therefore cost the employee £40 to purchase outright at the end of the third year of the scheme.

How much can you save?

Despite HM Revenue and Customs increasing the rates of “market value” on the scheme, there are still significant savings to be made for the employee. Why not have a browse for some bikes online and then input the cost of the bike onto a calculator, for example: http://www.cyclescheme.co.uk/calculator

For a £600 bike, a basic rate tax payer would save £120 income tax and £72 employee National Insurance. That means the bike for the 12 months, would cost £408 – a saving of 32%.

This calculation does not consider the cost at the end of the 12 months, but the most expensive option would be to purchase at market value from the employer at this stage – which would cost 18% of the original costs £600 x 18% = £108. This would still mean a cost of the bike of £516, a saving of £84 or 14%. The saving would be greater if the hire period was longer as the market value was longer.

How do you start a scheme?

It’s pretty simple. If you are employed – ask your employer to sign up using one of the many scheme administrators, or ask your nearest bicycle shop – most now offer the scheme. The UK’s biggest scheme administrator is http://www.cyclescheme.co.uk/ and other popular scheme administrators include On Your Bike: http://www.bicyclebenefits.co.uk/employee_zone/welcome.php .

If you require further advice please contact Easterbrook Eaton on 01395 516658 or advice@easterbrooks.co.uk .

Please note this article has been produced for guidance only and you should speak to Easterbrook Eaton or a scheme administrator before proceeding with setting up a scheme.

CIS Tax and Sage

Despite the influx of online accounting software such as Clearbooks and Xero, many of our clients still like to use offline programmes such as Sage and QuickBooks. We are competent with most programmes, and are happy to deal with whichever our clients are most comfortable with.

We are often asked how to treat certain accounting elements using various software. One such problem we have recently been asked is how to deal with CIS tax deductions for subcontractors using Sage Accounts. Our client had received payment of some invoices minus the normal 20% deduction of CIS tax on the labour element of the invoice.

There are many solutions to this problem, however, we are firm believers of making matters as simple as possible, and therefore for this client we recommended the following solution. As with most bookkeeping issues, there is rarely a “one size fits all” solution in these areas, so please contact us if you would like to know if this is suitable for your needs.

For our client we wanted to make matters as simple as possible to ensure aged debtors are cleared properly when invoices are paid (removing the CIS element that remains “unpaid”) and ensuring that the bank is correct showing the banking net of CIS tax. Out solution was as follows:

1) Set up a nominal code for CIS deductions in the profit and loss codes (say 5005 – it makes no real difference).

2) When a receipt is made for the payment of the invoice which has suffered CIS tax – treat it as paid in full. Ignore the CIS tax deducted. This will then show as clearing the debtor, and a full receipt to the bank.

3) Make a journal for the CIS tax deduction. For this you will need to debit the CIS tax deductions nominal set up in (1), and to credit the bank. This reduces the amount which was actually banked to the correct level (i.e. net of CIS tax). Make a reference as invoice number/name so it can be tied up when preparing the accounts as CIS deductions are very important in the accounts and tax return preparation.

4) When you reconcile the bank beware that it will require you to look at a banking which doesn’t exist (i.e. gross) and a bank payment which won’t be on the bank statement (i.e. the journal for the CIS deduction). However, if both are dated the same date, it should be pretty clear/obvious especially if you keep on top of matters!

5) Marvel at your work showing the correct bank and debtor reconciled and make yourself a congratulatory cup of tea. Eat a biscuit or two.

Easterbrook Eaton Limited are members of the Sage Accountant’s Club, have the first two Certified Clearbooks Trainers in the South West and have over a decade of experience with QuickBooks. Please contact us on any software questions on 01395 516658 or visit our website at www.easterbrooks.co.uk.  

'tis the season to be jolly!

With Christmas drawing closer party time is just around the corner.  Whilst this is good news and an excellent opportunity to reward hard working staff you don't want to receive any unexpected gifts (bills) from HM Revenue & Customs so it is a good idea to consider the tax treatment of any gifts made to staff and of course the staff Christmas party.

The Staff Party

Entertaining for employees is usually an allowable expense and you can also claim input VAT on the costs where a VAT invoice is provided.  There is a limit of £150 per head providing the entertainment is available to all staff.  This limit covers all events during the year (combined) and it's best not to go over it as if the costs amount to £151 per head the whole benefit is taxable on the employee, they may not thank you for this!

There are complications where non-staff attend events as you cannot deduct VAT on the costs relating to non-employees.  These costs are also not allowable for corporation tax.

The time for giving

Whilst there is no tax relief on gifts to customers you can give away samples advertising your business as long as it isn't tobacco, food or drink.  If your gift has no advertising on it then as long as it's below £50 it will be allowable.

Gifts to employees do attract tax relief although if it anything more than what HMRC considers 'trivial' it may be treated as a taxable benefit on the employee.

The gifts do need to be non-cash (that includes vouchers) otherwise it will be taxable on the employee as earnings and subject to PAYE and NI.

Remember

Christmas is a time for joy and not a time for unexpected tax liabilities!

Reducing Inheritance Tax

Nobody wants to pay inheritance tax (IHT).  If your estate is worth more than the Inheritance Tax threshold (£325,000 for the 2015-16 tax year) there are some important Inheritance Tax exemptions that allow you to make gifts to others and not have to pay tax on them when you die.

Transferring an unused Inheritance Tax threshold

Since October 2007, you can transfer any unused Inheritance Tax threshold from a late spouse or civil partner to the second spouse or civil partner when they die. This can increase the Inheritance Tax threshold of the second partner - from £325,000 to as much as £650,000 in 2015-16, depending on the circumstances.

Exempt beneficiaries or 'donees'

You can make gifts to certain people and organisations without having to pay any Inheritance Tax. These gifts are exempt whether you make them during your life or as part of your will.

You can make exempt gifts to:

• your husband, wife or civil partner, as long as they have a permanent home in the UK
• a 'qualifying' charity established in the EU or another specified country 
• some national institutions such as museums, universities and the National Trust
• any UK political party that has at least two members elected to the House of Commons or has one elected member, but the party received at least 150,000 votes

Gifts that you give to your unmarried partner, or a partner that you're not in a registered civil partnership with, are not exempt.

Annual exemption

You can give away gifts worth up to £3,000 in total in each tax year and these gifts will be exempt from Inheritance Tax when you die. You can carry forward any unused part of the £3,000 exemption to the following year, but if you don't use it in that year, the carried-over exemption expires.

In addition to the annual exemption there are other exemptions for certain types of gifts. These are explained below.

Exempt gifts

Some gifts made during your lifetime are exempt from Inheritance Tax because of the type of gift or the reason for making it.

Wedding gifts/civil partnership ceremony gifts

Wedding or civil partnership ceremony gifts are exempt from Inheritance Tax, subject to certain limits:

• parents can each give cash or gifts worth £5,000
• grandparents and great grandparents can each give cash or gifts worth £2,500
• anyone else can give cash or gifts worth £1,000

You have to make the gift - or promise to make it - on or shortly before the date of the wedding or civil partnership ceremony. If the ceremony is called off and you still make the gift - or if you make the gift after the ceremony without having promised it first - this exemption won't apply.

Small gifts

You can make small gifts up to the value of £250 to as many individuals as you like in any one tax year. However, you can't give more than £250 and claim that the first £250 is a small gift. If you give an amount greater than £250 the exemption is lost altogether.

You also can't use your small gifts allowance together with any other exemption when giving to the same person.

Regular gifts or payments that are part of your normal expenditure

Any regular gifts you make out of your after-tax income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle.

These include:

• monthly or other regular payments to someone
• regular gifts for Christmas and birthdays, or wedding/civil partnership anniversaries
• regular premiums on a life insurance policy - for you or someone else

You can also make exempt maintenance payments to:

• your husband, wife or civil partner
• your ex-spouse or former civil partner
• relatives who are dependent on you because of old age or infirmity
• your children, including adopted children and step-children, who are under 18 or in full-time education

The seven-year rule - 'potentially exempt transfers'

Any gifts you make to individuals will be exempt from Inheritance Tax as long as you live for seven years after making the gift. These sorts of gifts are known as 'Potentially Exempt Transfers' (PETs).

However if you give an asset away at any time, but keep an interest in it - for example you give your house away but continue to live in it rent-free - this gift will not be a potentially exempt transfer. 

If you die within seven years and the total value of gifts you made is less than the Inheritance Tax threshold, then the value of the gifts is added to your estate and any tax due is paid out of the estate.

However, if you die within seven years of making a gift and the gift is valued at more than the Inheritance Tax threshold, Inheritance Tax will need to be paid on its value, either by the person receiving the gift or by the representatives of the estate.

If you die between three and seven years after making a gift, and the total value of gifts that you made is over the threshold, any Inheritance Tax due on the gift is reduced on a sliding scale. This is known as 'Taper Relief'.

Reducing your Inheritance Tax bill by giving to charity

From 6 April 2012 if you leave 10 per cent or more of your net estate to a 'qualifying charity' your estate may qualify to pay Inheritance Tax at a reduced rate of 36 per cent.

There are different ways that you can own assets such as money, land or buildings and the way that you own the assets and with who affects the way they're treated when deciding whether the reduced rate of tax can apply.

Set up a trust

If you put some of your cash, property or investments into a trust (which you, your spouse and none of your children under 18 years can benefit from), they are no longer part of your estate.

You could set up a trust to pay for your grandchildren's education or support a family member with a disability. You can set up a trust right away or you can establish one in your will. The rules around trusts are complicated so you must take advice from an expert. Bear in mind that some types of trust might have to pay Inheritance Tax themselves.