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Registered to carry out audit work Association of Chartered Certified Accountants.

www.auditregister.org.uk under number 8011438

Member of the Association of Chartered Certified Accountants
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01332 202660

Blog

Abatement of the personal allowance

Adrian Mooy - Monday, April 01, 2019
 
Not all taxpayers are able to benefit from the personal allowance – once income exceeds £100,000 the allowance is gradually reduced until it is eliminated in full. However, there are steps which can be taken to reduce income and preserve entitlement to the personal allowance.
 
The personal allowance is set at £11,850 for 2018/19, rising to £12,500 for 2019/20.
 
When is it abated?

 

Once an individual’s ‘adjusted net income’ exceeds £100,000, their personal allowance is reduced by £1 for every £2 by which ‘adjusted net income’ exceeds £100,000.

 

The measure of income for these purposes is ‘adjusted net income’. This is an individual’s total taxable income before personal allowances and after deducting certain reliefs, such as:
 
 • relief for trading losses;
 
 • donations to charity through the Gift Aid scheme (deduct the grossed-up amount of the donation); and
 
 • pension contributions (deduct the gross amount).
 
Example
 
Polly has taxable income for 2018/19 of £120,000. She makes pension contributions paid gross of £5,000.
 
Polly’s adjusted net income for £2018/19 is £115,000 (£1250,000 - £5,000).
 
As her income is more than £100,000, her personal allowance is reduced. The personal allowance for the year of £11,850 is reduced by £1 for every £2 by which her income exceeds £100,000.

 

The reduction in her personal allowance is therefore £7,500 (1/2(£115,000 - £100,000).

 

Her personal allowance for 2019/20 is therefore £4,350.

 

Assuming her income remains the same for 2019/20 and she continues to make gross pension contributions of £5,000, she will receive a personal allowance of £5,000 for 2019/20.

 

When is the personal allowance lost?

 

With a personal allowance of £11,850 for 2018/19, individuals with income in excess of £123,700 do not receive a personal allowance for that year. For 2019/20, the personal allowance is £12,500, and the personal allowance is lost once adjusted net income exceeds £125,000.
 
Beware 60% tax in the abatement zone

 

Where adjusted net income falls within the zone in which the personal allowance is reducing – from £100,000 to £100,000 plus twice the personal allowance – the marginal rate of tax is 60%. This is the combined effect of the application of the higher rate of tax and the reduction in the personal allowance.
 
Reduce the 60% band and preserve the allowance

 

To reduce the income falling in the abatement zone (taxed at a marginal rate of 60%) and to preserve as much as the personal allowance as possible, it is necessary to reduce adjusted net income.
 
There are various ways in which this can be achieved.
 
The first point to consider is the timing of income – can income be deferred to the next tax year, or, if income for the current tax year is less than £100,000 but is expected to be above £100,000 in the following year, can income be brought forward to the current tax year. In a family company scenario, it may be possible to achieve this by adjusting the timing of dividends and bonuses.
 
Consideration could also be given to putting income earning assets into the name of a spouse or civil partner to reduce income and preserve the allowance.
 
Adjusted net income is income after pension contributions. Making pension contributions is tax effective, both in terms of benefitting from the relief available and reducing net income to preserve personal allowances.
 
Alternatively, a person can make charitable donations under gift aid to reduce their adjusted net income. Although they will lose the benefit of their income, the cost will be offset slightly by the preserved personal allowance, and their chosen charity will be benefit from the donation plus the associated gift aid.

 

Year-end tax planning tips

Adrian Mooy - Friday, March 29, 2019

 

As the end of the 2018/19 tax year approaches, it is worthwhile taking time for some last-minute tax planning. Here are some simple tips that may save you money.

 

1. Preserve your personal allowance: the personal allowance is reduced by £1 for every £2 by which income exceeds £100,000. For 2018/19, the personal tax allowance is £11,850, meaning that it is lost entirely once income exceeds £123,700. Where income falls between £100,000 and £123,700, the effect of the taper means that the marginal rate of tax is a whopping 60%. Where income is over £100,000, consider making pension contributions or charitable donations to reduce income and preserve the personal allowance. Where this is an option, consider also deferring income until after 6 April 2019 to reduce 2018/19 income.

 

2. Claim the marriage allowance: the marriage allowance can save a couple tax of £238 in 2018/19. Where an individual is unable to utilise their personal allowance, they can make use of the marriage allowance to transfer 10% of their personal allowance (rounded up to the nearest £10) to their spouse or civil partner, as long as neither pay tax at the higher or additional rate. The marriage allowance must be claimed.

 

3. Pay dividends to use up the dividend allowance: family and personal companies with sufficient retained profits should consider paying dividends to shareholders who have not yet used up their dividend allowance for 2018/19. The dividend allowance is set at £2,000 and is available to all individuals, regardless of the rate at which they pay tax. The use of an alphabet share structure enables individuals to tailor dividend payments according to the individual’s circumstances.

 

4. Make pension contributions: tax relieved pension contributions can be made up to 100% of earnings, capped at the level of the annual allowance. The annual allowance is set at £40,000 for 2018/19 (subject to the reduction for high earners). Where the annual allowance is not used up in year, it can be carried forward for up to three years.

 

5. Transfer income-earning assets to a spouse or civil partner: where one spouse or civil partner has unused personal allowances or has not fully utilised their basic rate band, considering transferring income earning assets into their name to reduce the combined tax liability (but non-tax considerations such as loss of ownership should be taken into account).

 

6. Put assets in joint name prior to sale: spouses and civil partners can transfer assets between them at a value that gives rise to neither a gain nor a loss. This can be useful prior to selling an asset which will realise a gain in order to take advantage of both partners’ annual exempt amount for capital gains tax purposes.

 

7. Make gifts for inheritance tax purposes: individuals have an annual exemption for inheritance tax of £3,000, allowing them to make gifts free of inheritance tax each year. Where the allowance is not used, it can be carried forward to the next year, but is then lost.

Salary v dividend for 2019/20

Adrian Mooy - Thursday, March 28, 2019
 
A popular profits extraction strategy for personal and family companies is to extract a small salary, taking further profits as dividends. Where this strategy is pursued for 2019/20, what level should be the salary be set at to ensure the strategy remain tax efficient?

 

Salary

 

As well as being tax effective, taking a small salary is also advantageous in that it allows the individual to secure a qualifying year for State Pension and contributory benefits purposes.

 

Assuming the personal allowance has not been used elsewhere and is available to set against the salary, the optimal salary level for 2019/20 depends on whether the employment allowance is available and whether the employee is under the age of 21. The employment allowance is set at £3,000 for 2019/20 but is not available to companies where the sole employee is also a director (meaning that personal companies do not generally benefit).
 
In the absence of the employment allowance and where the individual is aged 21 or over, the optimal salary for 2019/20 is equal to the primary threshold, i.e. £8,632 a year (equivalent to £719 per month). At this level, no employee’s or employer’s National Insurance or tax is due. The salary is also deductible for corporation tax purposes. A bonus is that a salary at this level means that the year is a qualifying year for state pension and contributory benefits purposes – for zero contribution cost. Beyond this level, it is better to take dividends than pay a higher salary as the combined National Insurance hit (25.8%) is higher than the corporation tax deduction for salary payments.

 

Where the employment allowance is available, or the employee is under 21, it is tax-efficient to pay a higher salary equal to the personal allowance of £12,500. As long as the personal allowance is available, the salary will be tax free. It will also be free of employer’s National Insurance, either because the liability is offset by the employment allowance or, if the individual is under 21, because earnings are below the upper secondary threshold for under 21s (set at £50,000 for 2019/20). The salary paid in excess of the primary threshold (£3,868) will attract primary contributions of £464.16, but this is outweighed by the corporation tax saving on the additional salary of £734.92 – a net saving of £279.76. Once a salary equal to the personal allowance is reached, the benefit of the corporation tax deduction is lost as any further salary is taxable. It is tax efficient to extract further profits as dividends.
 
Dividends

 

Dividends can only be paid if the company has sufficient retained profits available. Unlike salary payments, dividends are not tax-deductible and are paid out of profits on which corporation tax (at 19%) has already been paid.

 

However, dividends benefit from their own allowance – set at £2,000 for 2019/20 and payable to all individuals regardless of the rate at which they pay tax – and once the allowance has been used, dividends are taxed at lower rates than salary payments (7.5%, 32.5% and 38.1% rather than 20%, 40% and 45%).
Once the optimal salary has been paid, dividends should be paid to use up the dividend allowance. If further profits are to be extracted, there will be tax to pay, but the combined tax and National Insurance hit for dividends is less than for salary payments, making them the preferred option.

 

Delay in issuing Self-Assessment penalty notifications

Adrian Mooy - Wednesday, March 27, 2019

 

While 93.68 per cent of the 11.5 million taxpayers who were required to file their Self-Assessment Tax Returns by midnight on 31 January did so on time, 731,186 missed the deadline.

 

Those who missed the deadline will have to wait longer than in previous years to receive penalty notifications from HM Revenue & Customs (HMRC).

 

The notifications of £100 penalties are usually sent in February but may be sent as late as the end of April this year as part of HMRC’s Brexit plans.

 

However, payment of the penalties will still be due within three months and additional penalties will still apply from beyond the end of April.

Are you making full use of the R&D relief scheme?

Adrian Mooy - Monday, March 25, 2019

 

 
Hundreds of businesses across the UK enjoy tax relief totalling millions of pounds thanks to the Government’s generous R&D relief scheme.

 

Last year nearly 40,000 claims were made for Research and Development (R&D) tax credits in the UK, almost double the amount made in the previous year.

 

Businesses both large and small benefited from £3.5 billion in tax relief during the same period in 2018 from the often-neglected tax credit, which helped contribute towards £24.9 billion of R&D expenditure across the nation.

 

However, many more businesses are potentially missing out.

 

Many smaller businesses can benefit from the small and medium-sized enterprise (SME) R&D relief, which is available to businesses with fewer than 500 staff or a turnover below £87 million.

 

This allows small businesses to deduct an extra 130 per cent of their qualifying R&D costs from their yearly profits, as well as the normal 100 per cent deduction, to make a total 230 per cent deduction – which equates to an additional 33p for every £1 spent on R&D.

 

However, businesses that want to take advantage of this need to meet certain eligibility criteria.

 

In order for a project to be eligible for R&D relief, it must have involved a search for an advance in science and technology or tried to overcome uncertainty using a method or procedure which couldn’t be easily worked out by a professional in the field.

 

Larger businesses can also benefit from Research and Development Expenditure Credit, which is worth 12 per cent of a company’s qualifying R&D expenditure and is offset against a person’s tax liability or, in some circumstances, is payable in cash.

 

The credit is taxable at the normal Corporation Tax rate, which effectively means the benefit is worth 10p for every £1 you spend on qualifying R&D.

 

The rules surrounding all types of R&D tax credits are complex and some businesses may find the criteria governing what is and is not eligible confusing.

 

It is always wise for firms to seek specialist advice, as it may be possible to obtain confirmation of the relief prior to major investment in a project.

 

Spring Statement 2019

Adrian Mooy - Monday, March 18, 2019

 

The little speculation there was in the days before the Chancellor’s Spring Statement focused more on whether Mr Hammond would find anything of interest to say at all, than on what he would say.

 

The purpose of the Spring Statement is to respond to forecasts from the Office for Budget Responsibility (OBR), although that has not always prevented Mr Hammond from making significant announcements.

 

While arguing that the “economy itself is remarkably robust”, Mr Hammond said that growth projections for 2019 have been revised down by the OBR from 1.6 per cent to 1.2 per cent.

 

Mr Hammond expects 600,000 new jobs to be created by 2023 and he said the OBR has revised wage growth up to around three per cent each year.

 

He announced £100 million to help the police fight knife crime and a commitment to end ‘period poverty’ by providing free sanitary products in secondary schools and colleges.

 

Mr Hammond said that he wanted to “build on the UK’s fundamental strengths”, announcing a £37 billion productivity fund, focusing on improving skills throughout the workforce.

 

He then said that the Government would respond later in the year to a recommendation in an independent review of competition in the digital economy, that rules should be updated for the digital age.

 

Saying that “we need to tackle the scourge of late payments”, he said that listed companies would have to report on their payment practices within their company accounts.

 

Mr Hammond devoted a significant part of his speech to housing and the environment, announcing £3 billion for the Affordable Homes Guarantee Scheme.

 

To allow time for the Commons to consider Brexit, Mr Hammond said that he would make some announcements in a Written Ministerial Statement, published at the end of his speech. This included preventing the abuse of R&D tax relief for small or medium-sized enterprises, draft regulations on the National Insurance Contributions (NIC) Employment Allowance that would restrict the allowance to businesses with an employer NIC bill below £100,000 and a call for evidence on lettings relief and the final period exemption, which extends private residence relief in capital gains tax.

National Living Wage to rise next month

Adrian Mooy - Friday, March 08, 2019

 

 
From 1 April 2019, employers will be required by law to pay their employees a higher minimum wage rate.

 

The increase in the UK’s statutory wage requirements will benefit around 2.4 million workers and means that the annual earnings of a full-time minimum wage worker will have increased by over £2,750 since April 2016.

 

The new rates for National Living Wage are:
           
Year  25 and over    21 to 24     18 to 20     Under 18       App. 
Current        £7.83      £7.38       £5.90       £4.20    £3.70 
April 2019        £8.21       £7.70       £6.15        £4.35    £3.90 

 

For businesses though, the increase in the wage will not only affected their wage bill but will also come at a time when they are required to increase their workplace pension contributions for staff.

 

These contributions are set to rise yet again next month to a minimum of three per cent for employers, and a combined minimum contribution of eight per cent between employers and employees.

 

Those who are unprepared for these changes are likely to be the worst affected by this sudden change in costs, so it is important that they take immediate action if they are not yet prepared.

 

HMRC warns households of rise in landline tax scams

Adrian Mooy - Thursday, March 07, 2019

 

HMRC has urged UK households with a landline number to be vigilant following a significant rise in landline tax scams.

 

HMRC recently moved to crack down on email and SMS phishing scams. As a result, many criminals are now turning to the more traditional method of cold-calling publicly available phone numbers, including landline numbers.

 

The Revenue recently revealed that, in the six months to January 2019, it received more than 60,000 reports of phone scams – an increase of 360% when compared to the previous six months. According to HMRC, phone scams are typically targeted at the elderly and the vulnerable. Criminals often pose as HMRC to 'add credibility' and convince their victims.

 

HMRC has been working with phone networks and regulator Ofcom to close nearly 450 phone lines that have been used by criminals. Ofcom estimates that 26 million homes have a landline, many of which could be at risk from scams.

 

Commenting on the issue, Mel Stride, Financial Secretary to the Treasury, said: 'If you receive a suspicious call to your landline from someone purporting to be from HMRC which threatens legal action, to put you in jail, or payment using vouchers: hang up and report it to HMRC, who can work to take them off the network.' Any suspicious emails, phone calls or text messages received should be reported to HMRC or Action Fraud.

Payroll sector prepares for changes in 2019/20

Adrian Mooy - Wednesday, March 06, 2019

 

 
The next 12 months will see a number of new changes to payroll policy that could have an impact on a wide range of businesses.
 
To give an overview of how businesses could be affected by these changes, below are some of the highlights that employers will need to prepare for.
 
Private Sector IR35 - From April 2020, where an individual is engaged by a medium or large-sized business in the private sector and works through a company, the employer will be responsible for assessing the individual’s employment status under the off-payroll working rules (IR35).
 
Where the rules apply, the business or agency will be responsible for deducting income tax and National Insurance contributions (NICs) via PAYE and will be required to pay employer NICs.
 
Businesses will be able to use the Check Employment Status for Tax (CEST) service, which is available to help businesses determine whether the off-payroll working rules apply. These new rules will not affect small businesses.

 

Postgraduate Loans (PGL) - From April 2019, taxpayers will be required to start repaying PGLs if they meet the threshold of £21,000 (England and Wales only). If they do meet the threshold, a deduction of six per cent will be taken from their wages.
 
The existing starter checklist provided by the Government will be updated to include a section for PGL. Employees’ P60 forms will also be changed to include a new box for PGL deductions, however, the existing P45 form will remain the same.

 

Parental Bereavement Leave and Pay - Employers will have to get to grips with a new workplace right to Parental Bereavement Leave and Pay for parents who lose a child under the age of 18.
 
This new right will include parents who have suffered a stillbirth after 24 weeks of pregnancy.
 
Those who qualify for the new right, which will commence from 6 April 2020, will be entitled to two weeks of paid Parental Bereavement Leave.
 
During this period, they will be paid at the statutory flat weekly rate of £145.18 or 90 per cent of average earnings (whichever is lower), if the person has at least 26 weeks continuous service at the date of their child’s death and earnings above the Lower Earnings Limit.

 

Just over half of businesses are prepared for MTD

Adrian Mooy - Monday, March 04, 2019

 

A new study into preparations for Making Tax Digital amongst businesses has found that only 57 per cent of firms are ready to comply with the new regime by 1 April 2019.

 

Despite the various delays and changes to the Government’s new digital tax system, businesses have had several years to prepare themselves for this landmark change in taxation.

 

Initially, the new system will only apply to the recording and reporting of VAT on a quarterly basis for those VAT-registered businesses over the VAT threshold (£85,000).

 

However, the Government intends to extend the system out to other areas of taxation and to other businesses from April 2020 at the earliest.

 

Businesses will be offered a “soft landing” period of a year during which they won’t be fined if they don’t comply with the reporting requirements in time.

 

HM Revenue & Customs has also recently confirmed that during this period “where a digital link has not been established between software programs, HMRC will accept the use of cut and paste as being a digital link for these VAT periods.”

 

Despite its recent communications HMRC has been heavily criticised for not doing enough to make businesses aware of the new regime, with it only launching its social media and email campaign to small businesses in Autumn last year.


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