April 2016 Newsletter

Welcome to the April 2016 Newsletter from Easterbrook Eaton Limited

Despite his Budget warning of 'storm clouds on the horizon', Chancellor George Osborne could not have predicted the furore that would follow his 2016 Budget Speech.

In the wake of the Budget on 16 March, the Institute for Fiscal Studies (IFS) issued a warning regarding the Chancellor's ability to balance the books by 2019/20. This news was soon followed by the sudden resignation of Iain Duncan Smith over planned cuts to disability benefits, and the subsequent U-turn by the Chancellor, potentially leaving a £4.4 billion hole in the public finances.

Meanwhile, the Chancellor's plans to introduce a new Lifetime ISA have sparked debate amongst industry experts, with some arguing that the measure could have a dramatic effect on the attractiveness of the pension system to savers.

Chancellor's Budget approved after heated debate

Following a U-turn on his planned cuts to disability benefits, Chancellor George Osborne's Budget was finally approved by MPs during a heated Parliamentary debate on the matter.

Concerns had been raised regarding many of the planned changes to legislation, which resulted in the Chancellor having to defend his Budget amidst calls from Labour for it to be withdrawn. 

In the event, the Budget was accepted after the Government secured a majority of 35, with 310 MPs voting in favour and 275 opting to oppose the plans.

The Chancellor's plans to cut Personal Independence Payments (PIPs) in particular, sparked fierce opposition, with the Secretary of State for Work and Pensions, Iain Duncan Smith, resigning in protest over the issue.

Osborne has now backtracked on these cuts which, if implemented, would have potentially saved the Government some £4.4 billion.

Meanwhile, after the Office for Budget Responsibility's (OBR) downgrading of the UK's economic growth forecasts, the Institute for Fiscal Studies (IFS) warned that the Chancellor only has a 50% chance of meeting his budget surplus target.

In his Budget Speech, George Osborne said that the Government was on course to achieve a £10.4 billion surplus by 2019/20.

However, following the Speech, the IFS claimed that Osborne is 'running out of wriggle room' if he is to reach this target by the end of the decade, adding that, if the Budget forecasts are right, 'we should all be worried'.

The OBR has significantly revised down its economic forecasts for the next five years, with UK economic growth predicted to be just 2% in 2016. At the time of the 2015 Autumn Statement, growth had been forecast to reach 2.4% this year.

The IFS warned that if economic growth deteriorates further, Osborne may be required to raise taxes or cut spending levels in order to reach his target of balancing the books by 2020.

The think-tank also said that the revisions to productivity forecasts would lead to a fall in wages and living standards.

IFS Director, Paul Johnson, commented: 'If there was another downgrade in fiscal forecasts of a similar magnitude and the Chancellor did wish to remain on course to deliver a budget surplus in 2019/20 then this would surely require more real policy change.

'His chances of reaching the surplus are only just the right side of 50/50.'

However, following the Budget, George Osborne insisted that his target will be achievable. He also stated that, in order for the books to balance, the economy must keep growing.

The decision to shelve planned cuts to PIPs means that the Government must now find additional savings to the tune of £4.4 billion. However, further plans are not expected to be announced until around the time of the Autumn Statement.    

Please contact us for advice on how the Budget measures may affect you, or view our summary of the 2016 Budget here.

New Lifetime ISA generates pension industry worry

Chancellor George Osborne's plans to introduce a new Lifetime ISA for the under-40s have created waves amongst pension industry experts.

The measure will enable individuals to save up to £4,000 a year and receive a 25% bonus from the Government for every pound they put in, up to the age of 50.

Both the savings and Government bonus can then be used towards a deposit on a first home, worth up to £450,000.

The new ISA accounts, which are set to be introduced from 6 April 2017, are limited to one per person rather than one per home - so two first-time buyers can both receive a bonus when buying together.

Alternatively, Lifetime ISAs can be used to save for retirement. After their 60th birthday savers can withdraw the savings, tax-free, for use in retirement.

Individuals can withdraw money at any time before their 60th birthday for any purpose, but the Government bonus, together with any interest or growth thereon will be lost. A 5% charge will also be payable.

The Treasury has described the scheme as a 'radical new way for the next generation to save'.

However, pension and insurance industry experts have stated that the new Lifetime ISA could have a dramatic effect on the attractiveness of the pension system to savers and could lead to other retirement options being seen in a less favourable light.

Yvonne Braun, director of long-term savings policy at the Association of British Insurers (ABI), declared: 'This must not be a back door to turning the pensions system on its head.

'A test for the success of the Lifetime ISA is whether it means fewer people will save for retirement, which would not be a good outcome.'

However, those in the investment industry have described the change as an 'exciting development' that could help to cultivate a more widespread savings culture.

The announcement comes after the Chancellor abandoned his plans to implement a radical reform of the tax relief system for pension contributions.

ESSENTIAL TAX DATES FOR APRIL
5 April
Last day of 2015/16 tax year.
Deadline for 2015/16 ISA investments.  
Last day to make disposals using the 2015/16 CGT exemption.        

14 April
Due date for income tax for the CT61 period to 31 March 2016.

19/22 April
Quarter 4 2015/16 PAYE remittance due.

30 April
Normal annual adjustment for VAT partial exemption calculations (monthly returns).

QUOTE OF THE MONTH
'A great many savers will have no idea that, from April, they may for the first time have to check whether they need to report or pay tax on interest they have received, rather than have their bank deduct the tax they owe.'

Chairman of the House of Lords' Economic Affairs Committee, Lord Hollick, commenting on HMRC's 'inadequate' communication strategy that has rendered taxpayers 'unaware' of key changes to the taxation of savings and dividends.

WEBSITE OF THE MONTH
uk.reuters.com/business

All the latest business news and announcements.

ON OUR WEBSITE
Updated 2016/17 tax rates
For the latest tax rates and allowances, view the Tax Information section of our website.

Useful information for individuals
Our informative guides include useful tips and strategies to help minimise your tax bill and maximise your wealth. Visit the Your Money section of our website today.

SNP says that Scotland would not adopt new 40p threshold rate
Scottish First Minister and SNP leader Nicola Sturgeon has said that Scotland will not adopt the UK Government’s plans to increase the starting point at which workers pay the 40p tax rate, if her party wins the Holyrood election on 5 May.
Click here for the full story

Prime Minister announces National Minimum Wage increases
Prime Minister David Cameron has announced increases in the National Minimum Wage rates from October 2016.
Click here for the full story

MPs reject proposed changes to Sunday trading laws
Government plans to radically overhaul Sunday trading laws have been abandoned after they were rejected by MPs during a House of Commons vote on the matter.
Click here for the full story

Taxpayers 'unaware' of key tax changes, House of Lords committee reveals
Many taxpayers are oblivious to the 'important' and 'complex' changes to the taxation of savings and dividends, a House of Lords report has suggested.
Click here for the full story

Women have 'half' the occupational pension savings of men, reports TUC
A report commissioned by the Trades Union Congress has found that women have barely half the occupational pension savings of men.
Click here for the full story

March 2016 Newsletter

Welcome to the March 2016 Newsletter from Easterbrook Eaton Limited

With Chancellor George Osborne's 2016 Budget Speech just around the corner, predictions and demands from business groups are growing. The Confederation of British Industry (CBI) has urged the Government to put business rates reform at the forefront of its Business Tax Roadmap in the forthcoming Budget, while the annual Green Budget from the Institute for Fiscal Studies suggests that the Chancellor's budget surplus target could require him to raise taxes or make significant additional spending cuts.

Meanwhile, Sunday trading powers are set to be devolved to local councils in England and Wales, despite opposition from business groups, in a move announced by the Business Secretary Sajid Javid. Under the plans, authorities will be given the power to 'zone' any relaxation, and retailers will be permitted to extend Sunday trading hours if they choose to do so.

Business group calls for business rates reform to be 'top priority' at 2016 Budget

The Confederation of British Industry (CBI) has urged the Government to reform the current business rates system, amid concerns that it is 'outdated' and 'undermines' both retailers and manufacturers.  

In a new briefing released ahead of the Chancellor's Budget, the CBI warns that the existing model is unable to cater for any changes in the UK's economic circumstances. The lobby group also claims that the existing business rates system is increasing taxes for UK firms.

According to the CBI, over the last seven years the rate of tax revenue growth from business rates has risen by 28%, far exceeding other types of tax and growing at a quicker rate than the Government's overall tax take.

With the Government due to report back on its business rates review in March, the CBI has set out its recommendations for a 'simpler, fairer and more competitive' system.

It argues that business rates could be made simpler by removing firms with a 'rateable' property value of less than £12,000 from the system completely, while carrying out more regular valuations would help to make the system fairer.

In addition, the CBI suggests that moving from RPI to CPI indexation for annual increases will result in 'a more stable business rates multiplier'.

Commenting on the organisation's proposal, CBI Economics Director, Rain Newton-Smith, stated: 'The current business rates system is from another era and proving an ever-increasing problem for firms, hitting our high streets and manufacturers across the country. And devolving business rates does not tackle the significant problems that this distortive tax is causing for businesses.

'The Government cannot put business rates reform off forever and we want to see urgent action taken at the Budget. Business wants to see the smallest firms completely removed from the system, more frequent valuations and ensure the system is tied to the Consumer Price Index to make it fairer and more competitive.' 

In the 2015 Autumn Statement, the Chancellor revealed plans to allow local government to keep the rates they collect from business, and to give councils the power to cut business rates to boost growth. Osborne also outlined proposals to give elected city-wide mayors the power to levy a business rates premium for local infrastructure projects, provided they have the support of the local business community.

Furthermore, in its Budget 2016 submission the CBI revealed that new measures such as the National Living Wage and the Apprenticeship Levy could potentially result in a £9 billion-a-year burden for businesses by the year 2020. The group is calling on the Chancellor not to further increase the 'cumulative burden' and to support investment and innovation by increasing the scope of capital allowances and broadening access to research and development.

The Chancellor will present the 2016 Budget on Wednesday 16 March. Coverage of the key announcements will be available on our website, so please visit regularly.

Sunday trading powers to be granted to local councils

The Government is set to devolve Sunday trading laws to local councils in England and Wales, it has emerged. The move, announced by Business Secretary Sajid Javid, is expected to benefit high streets and city centres.

The Department for Business, Innovation and Skills revealed that authorities will have the power to 'zone' any relaxation, effectively aiding struggling high streets by permitting them to stay open for longer.

Under the current laws, large shops are only permitted to trade for up to six hours between 10am and 6pm, while small shops are unrestricted.

Sunday trading is already devolved in Scotland, where retailers do not face such limits.

The new powers are set to be brought forward within the Enterprise Bill, which is currently being finalised by the Government. These amendments are expected to be introduced to enable any changes to Sunday trading to be made this Autumn.   

Additionally, the plans include extra freedoms for shop workers: those working in England, Scotland and Wales will be given more flexibility to 'opt out' of working on Sundays if they so choose.

However, unions and some Government backbenchers remain opposed to the proposals.

John Hannett, General Secretary of shop workers' union Usdaw, stated: 'What the Government is proposing is undesirable and unworkable. Their claims to be offering additional protection for shop workers amounts to nothing more than has existed for the last 20 years.'

Conservative backbencher David Burrowes also criticised the proposals, saying: 'The Government should still listen to the significant opposition to this unnecessary and unwanted plan. Otherwise, I look forward to leading an unholy cross-party alliance in defeating a measure which is anti-family, anti-small business and anti-workers.'

Although online shopping has increased considerably in popularity, Sunday trading laws have not been changed in over 20 years, significantly reducing retailers' ability to compete with their online rivals.

The Government has emphasised the fact that local councils will be able to weigh up the economic needs of their area, taking into consideration the impact it could have within the community.

The Business Secretary stated: 'These new powers are about giving local areas the choice to extend Sunday trading hours to meet the needs of their local businesses and communities. It is local people who will make the decision.

'Extending Sunday trading hours has the potential to help businesses and high streets across the UK better compete as our shopping habits change'.

ESSENTIAL TAX DATES FOR MARCH

1 March
New advisory fuel rates for users of company cars effective from today.
Last day to pay any balance of 2014/15 tax and Class 4 NICs to avoid an automatic 5% late payment penalty.

31 March
End of Corporation Tax financial year.
End of CT61 quarterly period.    
Filing date for Company Tax Return Form CT600 for period ended 31 March 2015.

QUOTE OF THE MONTH

'Untidy family members and hungry pets are very unlikely to be accepted as a legitimate excuse for completing your tax return late.'

Ruth Owen, HMRC Director General for personal tax, commenting on the Revenue's list of worst late tax return excuses.

WEBSITE OF THE MONTH

www.smallbiztrends.com

News and features for small business owners

ON OUR WEBSITE

Key tax advice for you and your business
For effective tax planning advice for both you and your business, visit the Tax Strategies section of our website.

Useful information for individuals
Our informative guides provide useful tips and strategies on minimising your tax bill, as well as managing your wealth. Visit the Your Money section of our website today.

New report suggests the self-employed require 'more support'
Self-employed individuals should receive more help and support in the running of their business, a new Government-commissioned report has suggested.
Click here for the full story

New fraud taskforce launched by Home Secretary 
Home Secretary Theresa May has announced a new joint taskforce designed to combat fraud in the UK.
Click here for the full story

UK could face tax rises as a result of Chancellor's 'inflexible' budget target, warns IFS
Chancellor George Osborne’s budget targets could require him to raise taxes or make additional spending cuts, according to the Institute for Fiscal Studies.
Click here for the full story

Help to Buy ISAs taken out 'every 30 seconds' in UK
A quarter of a million homebuyers have opened a Help to Buy ISA since their introduction in December of last year. 
Click here for the full story

'Leftovers' from apprenticeship levy to be given to small firms
Small businesses will receive remnants left over from the apprenticeship levy once larger firms have made use of the funds, Skills Minister Nick Boles has confirmed.
Click here for the full story

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.

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.