End of year 2017/18

Kevin McDaid, Chartered Tax Adviser (ATT, CTA), Ex HMRC, 30 years + experience

52 Albert St, Thornton, Bradford, BD13 3ER

kevmcd@cta.org.uk, Tel 01274 214979, Mob 07939 222437

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19 March 2018

Final few weeks of 2017/18 tax year

 

The 2018/19 tax year starts on 1 April 2018 for companies and 6 April 2018 for individuals.

 

In last week’s Spring Statement there were no new tax measures announced, as the Chancellor reiterated his view that any such changes are for the Autumn Budget. However, he did announce a series of consultations. These will be dealt with in a separate newsletter.

 

Below, I highlight, what I believe will be, the most significant tax rates and thresholds for the coming tax year, likely to impact on the majority of individuals and businesses.

 

 Income tax

 

·          The personal allowance will increase from £11,500 in 2017/18 to £11,850 in 2018/19. This is the amount you can earn without paying any income tax.

 

You will then pay at 20% on the next £34,500 of taxable income (up from £33,500 in 2017/18), 40% income tax up to £150,000 and 45% thereafter.

 

If you (or your partner) are in receipt of child benefit and have taxable income exceeding £50,000, you will be hit by the child benefit tax charge. This reclaims in tax 1% of benefit for each £100 of income in excess of £50,000 until, at £60,000, child benefit has been completely wiped out.

 

Along similar lines, if your taxable income exceeds £100,000, you start to lose personal allowances at the rate of £1 for every £2 that £100,000 is exceeded. For instance, if your taxable income is £105,000, personal allowances will be reduced by £2,500 to £9,350 for 2018/19.

 

This is the equivalent of a 60% tax rate (significantly higher than the tax payable by those with income exceeding £150,000).

 

·          Tip - Whenever your income is close to a tax threshold (of which there are many), it is important to consider your options because payment of, say, a pension contribution or gift aid could have a major impact in reducing your tax liability.

 

Income tax on investments

 

Dividends - If you receive dividends, the first £5,000 per annum (P/A) is tax free until 05/04/2018. This is regardless of whether you have taxable income of £10K, £100K or £1m.

 

From 06/04/18 tax free dividends reduce down to £2,000 P/A. Thereafter, income tax will be payable at:

 

·          7.5% - basic rate taxpayers (if you are a 20% income tax payer on your non investment income);

·          32.5% - higher rate taxpayer (if you are a 40% income tax payer on your non investment income);

·          38.1% - additional rate taxpayer (45% income tax payer on your non investment income).

 

·          Comment - If you have a significant share portfolio, expect to pay more income tax on dividends from next month. Make sure that use your ISA effectively and discuss your options with an IFA.

 

·          Tip – if you have your own company and have sufficient profits to declare a dividend, don’t miss the opportunity to get out £5K free of personal tax before 06/04/18. Consider making adult family members shareholders. Unlike wages, dividends to family members do not need to be justified by input into the company.

 

Savings – The Government wants us to save for a rainy day. This is one of the reasons why they stopped deducting income tax on most forms of interest from 06/04/2016.

 

You will not be liable to pay any income tax on interest if:

 

·          It does not exceed £1,000 and you are a basic rate taxpayer.

·          It does not exceed £500 and you are a higher rate taxpayer.

 

45% taxpayers (those with taxable income above £150,000) cannot receive any interest without incurring tax.

 

If you earn in excess of the tax free amounts, you will owe tax.

 

For instance, if you have earnings of £20,000, making you a 20% taxpayer, and you receive interest of £1,200 P/A, the first £1,000 will be tax free with £200 being liable to 20% income tax (creating a liability of £40).

 

Similarly, if you have earnings of £60,000, making you a 40% taxpayer, and you receive interest of £800 P/A, the first £500 will be tax free with £300 being liable to 40% income tax (creating a liability of £120).

 

In both these instances, it will be necessary to make HMRC aware of the taxable sources of income by 5 October following the year of receipt. If there were no other reasons for completing a tax return, it is unlikely that such small liabilities would bring you within the annual Self-Assessment tax return regime.

 

·          Tip – If you have just £1 of income that pushes you into the next tax bracket, whether this is 40% or 45%, this will result in £500 of savings allowance being wiped out. Try to avoid this by a gift aid donation or make sure that if you have joint savings, these are efficiently allocated.

 

·          Take a married couple with one spouse being a 40% taxpayer, the other a 20% taxpayer. They earn £1,500 in interest P/A into a joint account. The spouse paying 40% tax has £250 interest liable to tax at 40% = £100. This can be avoided if they have two individual accounts; the first one in the name of the 40% tax paying spouse should receive interest of no more than £500. The second account should be in the sole name of the 20% tax paying spouse. £1,000 of interest could be obtained without creating a tax liability.

 

 

If you have non savings income (i.e. earnings/pension) below £11,850 (2018/19), you qualify for the full £5,000 0% starting rate band. This allows you to earn £5,000 interest P/A without paying a penny in income tax. This is in addition to the £1,000 savings allowance.

 

If you have non savings income above £11,850 (2018/19), but below £16,850 you qualify for part of the £5,000 0% starting rate band. For instance, if you have a state pension and occupational pension totalling £14,000, this is £2,150 above £11,850, meaning that you qualify for £2,850 of the 0% starting rate band.

 

·          Comment - Obviously, not that many people will be able to take advantage of the full £5,000 tax break, with the current low rates on offer by the High St banks. However, if you have your own company with significant capital wrapped up in it, you can charge it a commercial interest rate of up to 8%, which, combined with a low salary, balance of remuneration via dividends, could take advantage of a good chunk of this tax break.

 

This link offers details of a new government savings initiative which may be of interest:

https://www.gov.uk/government/publications/help-to-save-what-it-is-and-who-its-for/the-help-to-save-scheme

 

There is a separate fact sheet about the taxation of savings income, if you would like further details.

 

Recognising marriage in the tax system

Since April 2015, a spouse or civil partner who is not using the whole of his/her personal allowances (£11,850 for 2018/19) can transfer 10% of personal allowances to their partner so long as the transferee is not liable to Income Tax at 40% or above.

£11,850 at 10% = £1,185. In monetary terms this converts into £237 tax saving for 2018/19.

It is believed that tens of thousands of couples would benefit from this tax break but the vast majority of them have not taken advantage of it. To see whether you qualify go to:

https://www.gov.uk/apply-marriage-allowance.

·          Tip – if you and your partner have qualified since April 2015 but have just not claimed, a backdated claim could produce tax savings of over £800 (2015-16 to 2018-19 inclusive).

 

National Insurance Contributions (NIC)   

 

If you are under 16 or above the state retirement age (at the beginning of the tax year), NICs are NOT payable.

 

Employment

Class 1 (primary) NIC will be payable at the rate of 12% by employees on a salary between £162 per week & £892 per week from 6 April 2018. Once salary exceeds £892 p/w, 2% NIC is payable. 

Employers will also pay Class 1 (secondary) at the rate of 13.8% on salary exceeding £162 per week. There is no upper limit at which employer NICs are reduced.

Class 1A & 1B NIC at 13.8% is payable by employers on benefits in kind such as a company car/medical health insurance.

Note re Employment NICs

There is another significant threshold that is relevant and that is the lower earnings limit (LEL). This will be £116 per week from 06/04/18. No NIC is payable at this threshold but a NIC credit accrues to the employee once earnings from an individual employment exceed this amount. The credit entitles the employee to state benefits, like the State Pension, Maternity Allowance and Bereavement Benefit.

Note that if you had two unconnected employments earning, say, £100 per week at each, you would be below the lower earnings limit in each employment and so would NOT PAY ANY NIC. However, the downside is that you would not be entitled to any NIC credit either.

You should also be aware that if you are employed and self-employed, you will be liable to pay both employee NIC and self-employment NIC but this should not exceed the maximum NIC you would pay as an employee.

When a person runs their own business as a limited company they may extract profits from the company in the form of salary (as an employee/director) or via dividends (in the capacity as a shareholder).

NIC is not payable on dividends.

An effective tax planning strategy is for sufficient salary to be paid to ensure that a NIC credit is received (but no NIC actually paid), i.e. above the LEL of £116 but below the threshold of £162 at which employees and employers begin to pay NIC.

The post tax company profit can be extracted as dividends (avoiding NIC).

Whilst there are overall tax and NIC savings to be made via operating as a limited company and adopting such a remuneration strategy, there are more rules to be complied with, making administrative costs significantly greater.

One of the main reasons for the reduction in the dividend tax free allowance from £5,000 to £2,000 from 06/04/18 is because the Government is seeking to equalise the total tax and NIC that would be paid by an individual operating as a sole trader compared to via a limited company.

As a result, the tax savings to be made for a sole trader with taxable profits of £40K would fall from £961 to £722 (a decrease of £239) from 2017/18 to 2018/19, operating as a limited company and adopting the above strategy. Most, if not all of this, would be eaten up by additional administrative costs.

Consequently, I would suggest, that taxable profits should be exceeding £40K P/A for operating as a company to be beneficial, from a tax perspective.

Employment Allowance

The first £3,000 of Employer NIC is not payable for most employers. However, from April 2016 this is no longer available to companies whose only employee is the director.

·          Tip – can a justifiable wage be paid to a family member or to, say, a cleaner that will ensure that the one man band company becomes ‘one man and his employee band’? This will enable employment allowance to be utilised.

·          This may offer an alternative remuneration strategy to paying a salary to the £162 P/W (£8,424 P/A) NIC threshold, with balance as a dividend. Instead, a salary to the £11,850 personal allowance level (£411 employee NIC payable for the year) and balance as dividend, will prove slightly tax more efficient in light of tax free dividends reducing to £2K P/A from 04/18.        

 

Self-Employment

Class 2 NIC will be payable at a flat rate of £2.95 per week on profits exceeding £6,205. This is payable as a lump sum (£153.40) by 31/01/2020 alongside any tax owing following the submission of the 2018/19 Self-Assessment tax return.

Class 4 NIC will be payable at the rate of 9% on annual taxable profits exceeding £8,424. Once profits exceed £46,350, Class 4 NICs are payable at the rate of 2%.

 

Note re Self-Employment NICs

Class 2 contributions count towards certain benefits, mentioned above, like State Pension. If profits are below £6,205 in 2018/19 you will not need to pay Class 2 NIC, although it may remain beneficial to do so in order to retain entitlement to benefits.

 

Currently, Class 4 NICs do not entitle you to any state benefits. However, once Class 2 NICs are abolished (originally planned to be from 04/18 but now delayed until at least 04/19), the payment of Class 4 NIC (probably at a higher rate than the current 9%) will attract entitlement to state benefits.

 

It seems likely that there will a lower earnings threshold for the self-employed at around £116 P/W from 06/04/19. This corresponds with the treatment of employees.

 

If you have self-employed profits at this level, you will receive NIC credit but not have to pay any NIC. But if you earn less than this, just like an employee, you will not receive any NIC credit.

 

·          Tip - Unless you already have a full new state pension lined up (35 years worth of contributions - https://www.gov.uk/state-pension/eligibility) I would recommend voluntary Class 2 NICs are paid.

 

·          This is particularly relevant because it is likely that 2018/19 will be that the final year of these low rate Class 2 NICs.

 

 

Tax and NIC rates can be changed via the Budget/Finance Bill, so check out the latest rates on the HMRC website at http://www.hmrc.gov.uk/rates/taxes-ni.htm

 

 

Capital Gains Tax (CGT)

 

Annual Exempt Amount

 

It will be £11,700 per individual from 6 April 2018. The trust exemption is half that of an individual at £5,850.

 

Tax Rates

 

Gains relating to the disposal of interests in residential properties:

 

Individuals:

 

·          To Income Tax basic rate limit (£34,500)              18%

·          Above Income Tax basic rate limit (£34,500)        28%

 

Other gains:

 

Individuals:

 

·          To Income Tax basic rate limit (£34,500)              10%

·          Above Income Tax basic rate limit (£34,500)        20%

 

Trusts and personal representatives are taxable at the highest rate applicable to individuals, i.e. 28% on disposal of a residence and/or 20% on any other type of gain.

 

·          Tip - CGT does not apply on transfers between spouses/civil partners. This means that you could be seeking to dispose of an asset, say shares, at a gain of £23,500 in the 2018/19 tax year. Assuming the gain is liable to tax at the top rate (20%) this would result in a tax bill of £2,360. By transferring half of the shares to your spouse/civil partner, before each disposing of your 50% share, the tax bill drops to just £20. 

·          SDLT must be considered in the case of the transfer of a property.

 

Company CGT

 

Normally, a company will be liable to CGT at the Corporation Tax rate applicable on their trading profits (19% in the tax year commencing 01/04/2019).

 

However, a 28% tax charge will apply in respect of a gain made by a company on the disposal of a residential property falling within the Annual Tax on Enveloped Dwellings (ATED) regime. This applies where a dwelling is owned by a company and it has a value exceeding £500,000 (from 01/04/17 onwards).

 

There are exemptions to ATED; the main ones being for property traders and investors. 

 

Companies do not have annual exemptions.

 

Instead, until 31/12/2017, companies benefited from indexation relief to reduce or extinguish a gain (it was never available to create or increase a loss).

 

Indexation relief is frozen from 01/01/18.

 

This means that assets purchased from 31/12/2017 will receive no indexation relief, whilst assets purchased before then will only receive relief up to 31/12/2017.

 

The impact of this is probably best illustrated by way of an example:

 

A company disposes of a commercial property in December 2017 which it purchased for £500,000 in December 2012. It has increased in value at 5% P/A and sold for £625,000. Ignoring associated costs, the gain of £125,000 would be reduced by 0.127 indexation relief of £15,875, meaning that the CT payable would be £20,734.

 

That same property purchased today and held for 5 years would create a tax liability of £23,750, all other things being equal, i.e. an increase in tax of over £3,000.       

 

Non residents and UK residential property

From 6 April 2015 non resident individuals/trustees/personal representatives and companies are liable to Capital Gains Tax on gains made on the disposal of UK residential property.

Only the gains arising after 06/04/15 are chargeable.

Tax rates are 18% and 28% for unincorporated persons and 20% for corporates. For a company within the ATED regime (dwelling value exceeding £500,000 and not covered by an exemption, say, used solely by a company director and his/her family), only the part of the gain not covered by ATED will be taxable under the lower 20% tax rate applying to non resident companies.  

Company tax (CT)

The CT rate remains at 19% for the tax year commencing 01/04/18.

It is due to drop down to 17% from 01/04/2020.

VAT

The VAT threshold is to remain at £85,000 until 01/04/2020. If your turnover is above this over a 12 month period, you must register for VAT, unless your turnover for the next 12 month period is not expected to exceed £83,000.

 

This is the first time in a number of years that the VAT threshold has not been increased. For businesses that have traditionally traded just below the VAT threshold, this freeze may mean that they will be pushed into mandatory VAT registration even with just a slight increase in turnover.

 

Obviously, Brexit will have a huge impact on VAT, seeing as it is a European tax rather than a UK one but, if one considers that all the other Euro countries have VAT registration thresholds way below that of the UK (i.e. Germany 17,500 Euros, Netherlands 1,345 Euros) it would come as no surprise to me if the freeze in the registration threshold is not the precursor to a significant reduction in years to come.

 

All businesses, other than the very smallest, would then be required to register, which some traders (particularly EBay and Amazon importers) claim will create an even playing field which some traders illegally manage to circumnavigate. Measures are to be put in place to make such organisations more responsible for ensuring that their customers are adhering to the VAT rules.    

 

It is important to note that the VAT turnover must be considered for any 12 months past turnover; it does not correspond with the accounting period. This means that at the end of, say, September, you need to consider your turnover from October of the previous year even if your accounts are prepared to, say, 31 March or 31 December. 

 

Do I need to complete a tax return?

The criteria for tax return completion can be viewed at https://www.gov.uk/self-assessment-tax-returns/who-must-send-a-tax-return

Interestingly, HMRC’s assertion that if ‘you were a company director - unless it was for a non-profit organisation (such as a charity) and you didn’t get any pay or benefits, like a company car’ you should be completing a tax return, has recently been successfully challenged in the courts on a couple of occasions.  The Taxes Management Acts determine the circumstances under which tax returns should be submitted. If there is no tax payable, as a result being a director, a tax return need not be filled in.

Significant other tax matters

Property & Trading Allowances- offer an opportunity to obtain up to £1,000 a year in tax free income from property investment and/or trading activities from April 2017.

Further details can be viewed at https://www.gov.uk/guidance/tax-free-allowances-on-property-and-trading-income.

If you earn less than £1,000, say, from EBay trading (this was the original source of self-employment that the legislation was suggested to be appropriate for) you do not pay tax (or NIC) on these profits. You don’t even need to report it to HMRC or complete a tax return.

This is fine, say, for instance if you are an employee but (at this stage) if you are self-employed in another capacity, say, as a builder, earning £20,000 p/a, your EBay earnings would be added on to this to give a grand taxable total; i.e. you do not benefit from the allowance.

If you earn more than £1,000 from self-employment, the trading allowance could still be beneficial as you can either deduct actual expenses or the £1,000 trading allowance from your turnover. Consequently, earning £2,400 with expenses of £700 would result in a tax liability of £340 for a 20% taxpayer opting for the regular tax treatment of income less expenses. This compares to £280 for the individual opting for the trading allowance. Plus, there will be no record keeping requirements for expenses.

·          Tip – the property allowance can be taken advantage of by a couple who transfer just sufficient rental income (via a deed of trust) to a partner. Stamp Duty Land Tax (SDLT) and CGT must be considered, but seem unlikely to be applicable at such low levels. Savings of £400 P/A would be applicable for 40% taxpaying landlord. 

The property allowance cannot be claimed in conjunction with Rent-a-Room relief (currently £7,500).

The Worldwide Disclosure Facility (WWDF) – is available until 30 September 2018 to any individual who has not paid ‘the right amount’ of UK tax in relation to an offshore issue - https://www.gov.uk/guidance/worldwide-disclosure-facility-make-a-disclosure.

Under the WWDF, the tax owing will be payable for 4, 6 or 20  years, in accordance with Taxes Management Act 1970, depending on the reason for the original error or failure. Penalties of up to 100% will also be payable:

·          Reasonable care taken (4 year disclosure) – no penalty.

·          Careless behaviour (6 year disclosure) - minimum 15% penalty, but up to 30%, if disclosure prompted by HMRC.

·          Deliberate (20 years disclosure) – minimum 35% penalty, but up to 70% if after a HMRC prompt.

·          Deliberate & concealed (20 years disclosure) – minimum 70% penalty, but up to 100% if after a HMRC prompt.

If HMRC discover an overseas income source that may create a UK tax liability that is not reported under the WWDF, the maximum penalty will rise to 200%, i.e. double the amount payable under the current penalty regime.

·          How likely are HMRC going to find out about an overseas bank account? 

The launch of the WWDF in September 2016 was linked with common reporting standard (CRS), which is a global standard for the automatic exchange of bank data from around the world and registers of beneficial ownership. With over 100 counties initially signing up and the list still growing, there is a more than reasonable chance that HMRC may automatically be provided with such details.

I am aware from the work that I undertake with Tax Help for Older People http://www.taxvol.org.uk/ that a number of low income taxpayers have been approached by HMRC seeking details of overseas bank accounts where the UK tax liability is negligible. It seems apparent that HMRC are currently pursuing all potential tax liabilities, even if the tax at stake is outweighed by the costs in so doing.

·          Tip – from April 2016, basic rate taxpayers are able to earn £1,000 in interest without being liable to tax. This applies to overseas bank accounts as well as to UK accounts. 40% taxpayers can earn £500 interest without being liable to tax.      

Planning Points

 

Anybody who has income just above any of the thresholds indicated should consider seeking to reduce their income so that they fall just below the particular threshold. This may result in you dropping from being a 40% taxpayer to a 20% payer or from being entitled to reduced Child Benefit to being entitled in full.

 

The savings allowance thresholds are particularly harsh in that, if you have just £1 of income falling into the next tax bracket, this means that £500 of additional interest is liable to tax that would not have been if, for instance, you had made a £1 gift aid donation.

    

Pension contributions are an obvious way to reduce your taxable income. However, the following may also be considered:

 

·          You and your partner might be able to reorganise your financial affairs to avoid exceeding one of these limits. However, there might be capital gains tax (CGT) to pay on switching ownership of an investment if you are not married or in a civil partnership.

·          Redistribution of investment capital to a spouse with a lower income so that the income generated is taxed on them instead.

·          Reallocation of dividend income for couples/families who run their business through a company.

·          Reinvestment in tax-free investments, such as an ISA, so that taxable income is replaced with tax-free income.

·          Reinvestment in tax-efficient investments that generate no income and so will not impact on the loss of the personal allowance.

 

·          If you are in business, you could pay a non-tax paying partner a justifiable salary on which the business should receive tax relief.

 

·          If this is self-employment income in the hands of your partner, it could well be (partially) covered by trading allowance.

 

·          If your spouse’s income still falls short of the personal allowances, he/she will be able to transfer 10% of these allowances over to you, so long as you are not a 40% taxpayer.

 

 

·          As well as salary, if you employ family members in your business, you can pay an employer’s contribution to their personal pension plan. There is no tax or NICs on the payment itself, and it should be an allowable business expense.

 

·          Unlike a personal pension contribution, which is limited to the individual’s ‘net relevant earnings’ or £3,600 gross (whichever of the two is the higher), an employer contribution is only limited by the annual allowance of £40,000. Unused annual allowances of the three previous years may also be available.

 

·          Be aware that the total value of any salary, benefits and pension contributions must be justifiable in relation to the work performed.

 

·          Alternatively, you could make tax savings by sharing the profits of your business by operating as a partnership. You and your partner(s) need to be genuinely involved as business partners, though not necessarily equally.

 

·          HMRC should be made aware of new sources of income by 5 October following the end of a tax year (so 05/10/18 for a new source for the current 2017/18 tax year just ending). However, even if this deadline is not met, so long as the 2017/18 tax return and tax due is dealt with by the due date of 31/01/19, no penalties will arise.

Next Action

If there is an issue that you feel is relevant to you that is not mentioned here please do not hesitate to contact me to discuss. It is simply not possible to cover all bases in such a limited space.

                                              

If you do wish to discuss any of the points raised in this factsheet  please do not hesitate to contact me.

Kind Regards

 

KEVIN McDAID

For & on behalf of Tax Facts Ltd.

This communication is for general guidance only, and professional advice should be sought before any decision is made. Individual circumstances can vary and therefore no responsibility can be accepted by Tax Facts Ltd or Kevin McDaid, for any action taken, or any decision made to refrain from action, by any readers of this communication. All rights reserved. No part of this communication may be reproduced or transmitted in any form or by any means without prior agreement. To the fullest extent permitted by law, Tax Facts Ltd. /Kevin McDaid do not accept liability for any direct, indirect, special, consequential or other losses or damages of whatsoever kind arising from use of this communication.

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Kevin McDaid,
19 Mar 2018, 13:24
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