Time to pay
As part of the Chancellor's Coronavirus support package taxpayers were permitted to defer payment of the July 2020 income tax Payment on Account instalment until 31 January 2021. However, three lockdowns later and HMRC have become increasingly aware that a large number of taxpayers are still needing to delay not only that payment but also the tax payments that would normally be due on 31 January 2021 namely:
- the balancing income tax payment for 2019/20,
- the first income tax payment on account for 2020/21,
- any capital gains tax for 2019/20 and
- classes 2 and 4 NIC for 2019/20.
Therefore HMRC have set up a method by which further deferment may be applied for online, separate from their usual 'Time to Pay' arrangements facility. Taxpayers unable to pay their tax bills would normally need to call HMRC to discuss a payment plan but this method of applying online makes the process easier.
To use this automatic process the taxpayer needs to set up a Government Gateway account and agree to pay the tax in monthly instalments by direct debit, with the aim of clearing the debt within 12 months. Other conditions include:
- the 2019/20 tax return must have already been submitted,
- the submission of all tax returns must be up to date,
- the debt must be of at least £32 but less than £30,000 and,
- no other tax instalment plans must be in place (i.e. under the usual "Time to Pay" arrangements).
Although payments are expected to be made monthly the system does allow flexibility such that the taxpayer can make additional payments should circumstances allow. However, should the arrangement need to be amended later then HMRC will need to be contacted by phone to discuss revised arrangements. The instalment plan must be set up no later than 60 days after the due date for the tax, which realistically means that it needs to be in place by 31 March 2021. All the late paid tax will accrue interest at 2.6% to the date of full repayment. Should the taxpayer not keep to the arrangement and fall behind with the payments then HMRC has the right to ask for the outstanding amount to be repaid in full.
The facility may be a lifeline for many but it should be noted that care needs to be taken should the application include deferment of class 2 NIC due for 2019/20. The rules covering NIC payments mean that if this NIC is not paid by 31 January 2021, then the year will not count as a completed year in the taxpayer’s NIC record for state pension purposes.
Care also needs to be taken as to when to apply. Tax return submissions normally take up to 72 hours to be processed. Therefore, should the taxpayer apply at the same time as submitting their return for example, then the application may be rejected.
Should the total tax debt be more than £30,000 or the 31 March 2021 deadline is missed then the taxpayer cannot take advantage of this online facility and must go through the normal 'Time to Pay' process. There is also no specific online facility for corporation tax payments and as such the general 'Time to Pay' arrangements will need to be sought. However, it would appear that HMRC are being flexible with these arrangements and in some cases are agreeing to three months interest free extensions on payment dates.
Beware the capital gains tax connected person rules
Although it is possible to transfer assets between spouses at a value that gives rise to neither a gain nor a loss, giving a property to children or other family members may trigger an unwelcome capital gains tax bill, even if nothing was received in return.
The market value rule
Where assets are disposed of to a connected person, the transfer is deemed to take place at market value, regardless of whether any consideration is actually received and the amount of that consideration.
The list of connected persons includes:
- spouses and civil partners;
- relatives (siblings, ancestors or lineal descendants);
- spouse or civil partners of relatives;
- relatives or spouses or of civil partners; and
- spouses or civil partners of those relatives.
However, as noted above, the no gain/no loss rule applies to transfer between spouses and civil partner rather than the market value rules.
The following case study illustrates the potential cost of being caught out by the market value rule.
Adrian has a buy to let property. To help his daughter to get on the property ladder, he decides to make a gift of the property to her. He receives nothing in exchange for the property.
At the time that he gifted the property to his daughter, the house was valued at £300,000.
Adrian purchased the property ten years earlier for £200,000. Costs of acquisition and disposal are £5,000.
As his daughter is a connected person, Adrian is deemed to have disposed of the property for £300,000, giving rise to a chargeable gain of £95,000 (£300,000 – (£200,000 + £5,000)).
Assuming Adrian is a higher rate taxpayer and has used his annual exempt amount already, this will give rise to a capital gains tax bill of £26,600 (£95,000 @ 28%). This must be reported to HMRC within 30 days and capital gains tax paid within the same time frame.
Despite not receiving a penny for the property, Adrian must find £26,600 to pay in capital gains tax.
The gift will also be a potentially exempt transfer for IHT purposes.
Advantages of using a property LLP
A limited liability partnership (LLP) can be used for a property business and offers some advantages over unincorporated businesses and limited liability companies. A property LLP is something of a halfway house, providing the comfort of limited liability with the flexibility as to how profits are shared.
The use of a property LLP can be particularly useful in a family situation where the individuals each hold property in their own name, but a different income split would be beneficial from a tax perspective.
Setting up a property LLP
Like a company, a property LLP must be registered at Companies House.
An LLP can hold property in its own right. The LLP can acquire property or the partners can transfer property that they already own into the LLP.
Transferring property into the LLP can be advantageous from a tax perspective. The property is held on trust in the LLP, but the underlying legal ownership is unchanged, meaning there is no SDLT to pay. Where a member transfers property into the LLP, the value of that property at the time of transfer forms the opening balance on their equity account.
Flexibility to share profits and losses
One of the key benefits of the LLP is the flexibility to share profits and losses. This provides the potential for a tax efficient distribution.
The default position is to share profits and losses in accordance with the ratios on the members’ capital accounts. However, the ability to pay salaries in a different ratio provides flexibility to tailor the distribution in a tax efficient manner. Providing or withdrawing capital will also change the default profit sharing ratio.
From a tax perspective, an LLP is transparent for tax purposes.
This means that the individual partners are treated as being self-employed and must pay income tax on their share of the profits, and also Class 2 and Class 4 National Insurance contributions where relevant.
Where a property is sold realising a gain, the individual partners pay capital gains tax on their share of the gain.
Each individual partner must return their income from the LLP on their personal tax return. The LLP must file a partnership return.
It is important that the LLP is carried on with a view to making a profit as anti-avoidance rules may apply which have the effect of switching the tax transparency off.
Dissolving a partnership
A partnership can be either an ordinary partnership or a limited liability partnership (LLP); both forms comprise more than two people setting up in business sharing the risks, costs and responsibilities, as well as the profits. One consequence of being a member is that each is liable for the partnership's debts and obligations. There is no limit of liability for an ordinary partnership meaning that a claimant can sue either one or all of the partners for the full amount of their claim. LLPs have similar flexibility and tax status to ordinary partnerships. With the benefits of limited liability each partner is liable only for the amount of capital they invest.
The vast majority of partnerships are set up informally without a written partnership agreement and if this is the case, then dissolution is covered by the Partnership Act 1890. With just two members the partnership will dissolve automatically should one member die, is made bankrupt or resigns. Partnerships can also be forcibly dissolved when an event occurs that makes it unlawful for the business to continue or for partners to carry on as a partnership e.g., if an accountant has their practising certificate withdrawn. In this case the partnership will be dissolved, and a new one can be formed of the remaining members. If the partnership comprises two members or more then it can continue. In comparison, unlike ordinary partnerships, LLPs do not have to be dissolved on the resignation, death or bankruptcy of a member. Instead, the Limited Liability Partnerships Act 2000 applies a modified form of the law relating to companies’ insolvency and winding up.
Individual partners are taxed as sole traders but with their income being a share of the profits declared on the partnership tax return. If the partnership ceases, then the same cessation rules apply as if the partner was a sole trader such that if the final period of trading produces a loss for the partner leaving then that loss can be carried back for three years preceding the beginning of the accounting period in which the loss was incurred, provided part of that accounting period falls within the 12 months prior to cessation.
Should the partnership dispose of assets held on dissolution (e.g. a property or properties), the partner is deemed to be disposing of his proportionate share of those properties. If a partner takes over ownership of an asset on dissolution then the partner receiving the asset is not regarded as disposing of his share. A computation will first be necessary of the gains which would be chargeable on the individual partners as if the asset had been disposed of at its current market value. Where the calculation results in a gain being attributed to the partner receiving the asset, then that gain is 'rolled over' (deferred) by reducing their cost by the amount of the gain. In this way the cost carried forward will be the market value of the asset at the date of distribution less the amount of gain attributed.
On cessation, assets qualify for capital allowances that are not actually sold but taken over by one or more of the partners. These assets are deemed to be disposed of and immediately re-acquired at market value (unless the assets are actually disposed. Balancing allowances may be claimed if the market value is less than the written-down value. A balancing charge will be made if the market value is greater than the written-down.
Auto-enrolment - Re-enrolment & re-declaration
The Covid-19 pandemic has introduced many challenges for employers. However, despite the pandemic, their responsibilities in relation to auto-enrolment remain the same. The employer’s on-going duties include their re-enrolment and re-declaration obligations.
Every 3 years, the employer must put certain members of staff back into their auto-enrolment pension scheme and complete a declaration to tell the Pensions Regulator that they have done so. This is known as re-enrolment and re-declaration.
The key date is the third anniversary of the employer’s staging date or start date. Thereafter, the re-enrolment and re-declaration processes must be undertaken at three-year intervals.
Under re-enrolment, the employer must check:
whether they have staff to put back into the pension scheme and re-enrol them; and
write to staff who have been re-enrolled.
To do this, the employer will need to assess staff who have left the scheme or who have reduced their contributions.
Staff must be enrolled in a pension scheme automatically if:
they are aged between 22 and State Pension Age.
they earn over £10,000 a year (£833 a month, £192 a week).
If staff who meet the above criteria have previously opted out, they need to be re-enrolled.
Staff who need to be re-enrolled should be put back into the pension scheme within 6 weeks of the re-enrolment date. If this date is missed, it should be done within 6 weeks of the date on which staff were assessed.
If an employee does not want to be a member of the scheme, they can opt out. However, they must be re-enrolled if they are eligible at the re-enrolment date; once re-enrolled they can opt out. Opting out lasts only until the next re-enrolment date, at which time they must be put back in (but can then opt out again if they want to). Employers must re-enrol eligible staff even if they know they want to opt out.
Once staff have been re-enrolled, the employer must deduct employee contributions from their pay and pay them over to the scheme with the employer contributions.
The employer must write to staff who have been re-enrolled to let them know, and also to inform them of the contributions that will be paid and that they can opt out if they want to.
The final stage of the re-enrolment and re-declaration process is to submit the re-declaration of compliance. This has to be done regardless of whether or not staff have been put back into the pension scheme.
The re-declaration of compliance is an online form which confirms to the Pensions Regulator the employer has met their legal obligations in relation to auto-enrolment. The re-declaration of compliance must be filed no later than 5 months from the third anniversary of the duties start date, or staging date, as appropriate. The deadline is the same regardless of whether staff within 6 weeks are assessed within of the re-enrolment date, or at a later date.
Residence nil rate band frozen until April 2026
The residence nil rate band (RNRB) is an additional nil rate band that is available for inheritance tax purposes when a main residence is left to a direct descendant, such as a child or grandchild. Adopted children, stepchildren, children fostered at any time by the deceased and a child for whom the deceased was appointed a guardian or special guardian when the child was under 18 all count equally as direct descendants.
As with the nil rate band, it can be transferred to the surviving spouse or civil partner. Like the nil rate band, the surviving partner inherits the unused percentage of the deceased’s RNRB. However, this must be claimed by their executor on their death.
High value estates
The RNRB is available in full where the value of the estate is £2 million or less. For estates valued at more than £2 million, the RNRB is reduced by £1 for every £2 by which the value of the estate exceeds £2 million.
RNRB for 2021/22
The RNRB remains at its 2020/21 level of £175,000 for 2021/22. With a nil rate band of £325,000, a married couple or civil partners can pass on £1 million free of IHT as long as a main residence worth at least £350,000 is left to a direct descendant. They each have nil rate bands totalling £500,000 available to them. Special provisions apply to preserve the availability of the RNRB where the deceased has downsized or gone into care.
For 2021/22, the RNRB is not available to estates valued at more than £2.35 million.
RNRB frozen until April 2026
In common with many other thresholds, the RNRB is frozen until April 2026, remaining at its 2021/22 level of £175,000 for 2022/23, 2023/24 and 2025/26.
The lack of inflationary rises in the RNRB and the nil rate band may necessitate some forward planning if the value of the estate is likely to exceed the available nil rate bands. Giving away property in advance will not only open up the possibility of taking it outside the charge to inheritance tax if the deceased survives seven years and reducing the charge if the deceased survives at least three years from the date of the gift, it also protects against inflationary increases.
Where the main residence is owned as tenants in common, consideration could be given to each spouse/civil partner leaving their share to their children or grandchildren on their death, rather than to the surviving spouse/civil partner as this will offer some protection against rising property values.
If you commenced self-employment after 5th April 2019
If you started your self-employment after 5 April 2019, you were initially denied support under the Self-Employed Income Support Scheme (SEISS) and the first three quarterly payouts to 31 January 2021.
Thanks to a change in the recent Budget, you may be eligible – for the first time – to grants that will be made available for the quarter end 30 April 2021 and a final period to 30 September 2021.
HMRC are adding a further security check
To counter fraudulent use of the SEISS scheme, HMRC have decided to contact taxpayers who became self-employed during 2019-20, and who submitted a self-assessment return for that period.
What will the letter say?
The letter will tell you to expect a telephone call on the number provided on your tax return. If our contact details were added to your return, HMRC will ask us to pass on your contact number.
On this occasion we cannot deal directly with HMRC and they will need to speak with you to obtain proof of identity and evidence of trade in the form of bank statements.
Why a letter and then a phone call?
Here’s what HMRC said:
We are aware of increased scam activity related to HMRC’s coronavirus support schemes. The purpose of the letter is to explain to you that this is a genuine call, and to give customers details on how to recognise it as such.
Worried about HMRC calling you?
HMRC’s reason for this added layer of security seems to be to exclude fraudsters from making claims. But if you have any concerns regarding this process, please call.
Tax allowances frozen until April 2026
The financial impact of the Covid-19 pandemic is unprecedented and borrowing levels in 2020/21 of 16.9% of GDP represent the highest level of peacetime borrowing. To meet some of this cost, the Chancellor, Rishi Sunak, announced in the 2021 Budget that various thresholds and allowances would remain at their 2021/22 levels until April 2026.
The personal allowance is increased to £12,570 for 2021/22 – an inflationary increase of £70 over the 2020/21 level of £12,500. However, the allowance will remain at this level for 2022/23, 2023/24, 2024/25 and 2025/26. As incomes rise with inflation, people who currently do not pay tax may start to pay tax once their income rises above £12,570.
Income tax rates and bands
The basic rate band is increased to £37,700 for 2021/22. This means that where someone is in receipt of the personal allowance of £12,570, they will start paying higher rate tax once their income exceeds £50,270. This remains the case for tax years up to and including 2025/26.
The basic rate band and higher rate threshold will remain at these levels until April 2026. As incomes rise in line with inflation, more people will pay tax at the higher and the additional rates. Tax is payable at the additional rate of 45% on taxable income in excess of £150,000.
Capital gains tax annual exempt amount
The capital gains tax annual exempt amount remains at £12,300 for 2021/22 and is frozen at this level until April 2026.
However, there may be changes to capital gains tax on the horizon as this is something that the Government are looking at.
The upper earnings limit for Class 1 National Insurance contributions and the upper profits limit for Class 4 contributions are aligned with the rate at which higher rate tax becomes payable. Both are set at £50,270 for 2021/22. For Class 1 purposes, this is equivalent to £967 per week and £4,189 per month. These too will remain unchanged until April 2026.
All other National Insurance thresholds will be reviewed at the appropriate time.
The nil rate band has been frozen at its current level of £325,000 since 2008/09. It will remain at this level up to and including 2025/26. The freezing of the threshold brings more estates within the ambit of inheritance tax.
The residence nil rate band (RNRB) remains at its 2020/21 level of £175,000 for 2021/22. It too will remain at this level for the 2023/24 to 2025/26 years inclusive. The RNRB is reduced where the value of the estate is £2 million or above by £1 for every £2 by which the value of the estate exceeds £2 million.
Pension lifetime allowance
The pension lifetime allowance places a cap on the value of tax relieved pension savings. The tax relief on pension savings in excess of the lifetime allowance is recovered in the form of a 25% tax charge where the excess is taken as a pension and a 55% tax charge where the excess is taken as a lump sum. The lifetime allowance remains at £1,073,100 for 2021/22 and will stay at this level until April 2026. This will limit the ability of anyone with pension savings at or near this level to make further tax-relieved pension contributions during 2021/22 and the following four tax years.
Postponed VAT accounting from 1 January 2021
The Brexit transitional period comes to an end of 31 December 2020 and various changes come into effect from 1 January 2021. One of these changes is the introduction of postponed VAT accounting. This will affect you if you are a VAT-registered business and you import goods into the UK, particularly if you do not use duty deferment.
Nature of postponed VAT accounting
Under postponed VAT accounting, you declare and recover VAT on the same VAT return. This is beneficial as it means that you do not have to pay the VAT upfront and recover it later. Normal VAT rules continue to govern what can be reclaimed.
You can use postponed VAT accounting from 1 January 2021 if your business is registered for VAT in the UK and you import goods into Great Britain from anywhere outside the UK or into Northern Ireland from outside the UK and the EU.
There are no changes to the VAT treatment of goods moved between Northern Ireland and the EU, or in the way in which the VAT is accounted for.
Accounting for import VAT on your VAT return
You can account for import VAT on your VAT return if:
• you import goods for use in your business;
• you include your EORI number, which starts with ‘GB’ on your customs declaration; and
• you include your VAT number on your customer’s custom declaration if required.
If you use customs special procedures, you can account for the import VAT on your VAT return when you submit the declaration to release those goods into free circulation.
Completing your VAT return
The introduction of postponed VAT accounting means that there are some changes to the way in which you will complete your VAT return from 1 January 2021.
You will need to download a monthly statement which shows the total import VAT postponed for the previous month which you will need to include on your VAT return. There are also changes to what you need to enter in Boxes 1, 4 and 7.
• In Box 1, include the VAT due in the period on imports accounted for through postponed accounting.
• In Box 4, include VAT reclaimed in this period on imports accounted for through postponed accounting.
• In Box 7, include the total of all imports of goods shown on your online monthly statement, excluding any VAT.
Consignments not exceeding £135
Where the value of the consignment is less than £135, VAT will be collected at the point of sale rather than at the point of importation.
Tax day announcements hint at system overhaul
On 23 March 2021, dubbed “tax day”, the government published a number of policies that seem to suggest the UK tax system will be subject to major reform in the coming years.
What were the key announcements?
Tax day was the day the government published a document containing 30 announcements relating to tax policy. Much of this is high level, for example the announcement relating to promoters of tax avoidance. However, some of the content suggests that the UK tax framework will be revised over the coming years. Of particular interest is the intention to move the payment dates for income tax and corporation tax for small companies closer to the point that the underlying income is received, i.e. more akin to real-time payment. This will undoubtedly go hand in hand with the Making Tax Digital initiative.
Another welcome point is the commitment to reducing red tape associated with inheritance tax reporting. From 1 January 2022, the publication says that “over 90% of non-taxpaying estates each year will no longer have to complete inheritance tax forms for deaths when probate or confirmation is required. In addition, the current temporary provision for those dealing with a trust or estate to provide an inheritance tax return without requiring physical signatures from all those involved will be made permanent.” There is no detail on exactly how this will be achieved, but it appears the government will implement some changes recommended by the Office of Tax Simplification in 2018.
Legal v illegal dividends
Changed business conditions in light of the Coronavirus pandemic have caused many companies to review their dividend policies not least because the company's financial position may have deteriorated significantly from that shown in its last annual accounts.
The Companies Act 2006 requires that a dividend be paid only if there are sufficient distributable profits. Even if the bank account is in credit the company will need to have sufficient retained profits to cover the dividend at the date of payment. ‘Profit’ in this instance is defined as being ‘accumulated realised profits’.
If a dividend is paid that proves to be more than this amount, is made out of capital or even made when there are losses that exceed the accumulated profits then this is termed ‘ultra vires’ and is, in effect, ‘illegal.’
For private companies there is no need for full accounts to be prepared to prove sufficient profits in the calculation for an interim dividend but they will be needed for the declaration of a final dividend. HMRC’s Corporation Tax Manual states that the accounts need to be detailed enough to enable ‘a reasonable judgement to be made as to the amount of the distributable profits’ as at the payment date.
Therefore, the financial status of the company needs to be considered each time a dividend payment is made which can prove difficult with the payment of interim dividends unless the company is VAT registered and the accountant does the VAT return calculations. The test must be satisfied "immediately before the dividend is declared" and this is generally interpreted to mean that the 'net assets' test must be satisfied immediately before the company's directors decide to pay the dividend. If the directors correctly prepare basic interim accounts and a dividend is paid based on those accounts then that will be deemed lawful, even if, when the final annual accounts, prepared at a later date, show that there was an insufficient amount for distributable profits.
If regular amounts have been withdrawn then the amounts are deemed ‘illegal’ if at the date of each payment the management accounts show a trading loss or the profit cannot support the payment. HMRC will argue that ‘in the majority of such cases’ the director/shareholder of a close company will be aware (or had reasonable grounds to believe) that such a payment as dividend was ‘illegal'.
A significant consequence of paying an ‘illegal’ dividend could arise if the company goes into liquidation when the liquidator or administrator routinely reviews the director's conduct over the three years before insolvency. If it is found that a dividend has been paid ‘illegally’ then under the Companies Act 2006 rules the shareholders will be expected to repay the amount withdrawn (or the ‘unlawful part’). HMRC will actively pursue this route being as they are often the largest unsecured creditor. Furthermore, under the Insolvency Act a director can be held personally liable for any breach of his or her fiduciary duty to the company.
However, it is not only in liquidation that HMRC could open an enquiry into the treatment of a dividend. HMRC treats a dividend that it perceives to be illegal as being equivalent to a loan and, for a ‘close’ company, this means being a loan to a participator and as such it must be declared on the company tax return. If such a 'loan' is not so declared and the financial statements filed online show that the company’s reserves are in deficit at the end of the relevant period then HMRC may raise enquiries. Likewise where the opening balance next year is in deficit but dividends are still paid.
HMRC have also been known to argue that the repayable amount is an interest-free loan and for a director employee could result in a taxable benefit-in-kind should the loan be less than £10,000.
Self-employment and the £2,000 dividend allowance
All taxpayers, regardless of the rate at which they pay tax, are entitled to a tax-free allowance for dividends. For 2020/21 this is set at £2,000, so if you’re thinking of branching out to be self-employed or have made the switch last year, this is what you need to consider.
Nature of the allowance
If you’re self-employed and own your limited company, you can take money out of your company as a dividend, or you may receive a dividend payment if you own company shares.
Although termed the ‘dividend allowance’ it is in fact a zero rate band. Dividends covered by the allowance are taxed at a zero rate of tax, but count towards band earnings.
Where the personal allowance has not been otherwise utilised, dividends sheltered by the personal allowance are also received free of tax.
Dividends not covered by the allowance
Where dividends are not sheltered by either the dividend allowance or the personal allowance, they are taxable at the dividend rates of tax. Where the taxpayer has different sources of income, dividends are treated as the top slice of income. For 2020/21, dividend income is taxed at 7.5% to the extent that it falls within the basic rate band, at 32.5% to the extent that it falls within the higher rate band and at 38.1% to the extent that it falls within the additional rate band.
Using the 2020/21 allowance
The dividend allowance is lost if it is not used in the tax year. As the end of the 2020/21 tax year approaches, it is sensible to review your dividend policy and consider whether it desirable, and indeed possible, to pay further dividends before the 2020/21 tax year comes to an end on 5 April 2021.
Where an individual receives dividends both from their investments and their family or personal company, depending on their shareholdings, their dividend income may have fallen in 2020/21 as a result of the Covid-19 pandemic. This may provide the scope to pay higher dividends than normal from the family or personal company in order to utilise the allowance.
However, remember that dividends can only be paid from retained earnings.
Where profits are low for example if you have just started a business, or a loss has been made in 2020/21 as a result of the pandemic, this does not necessarily prohibit the payment of dividends – dividends can be paid as long as retained profits brought forward are sufficient to cover both any loss and any dividends paid out.
To comply with company law requirements, dividends must be paid in accordance with shareholdings. However, using an alphabet share structure (such that one shareholder has A class share, another has B class shares, and so on) overcomes this restriction and allows dividend payments to be tailored to utilise family members’ unused dividend (and indeed personal) allowances for 2020/21.
Personal and family companies – Optimal salary for 2021/22
A popular profit extraction strategy for shareholders in personal and family companies is to pay a small salary and to extract further profits as dividends. The optimal salary will depend on whether the employment allowance is available to shelter any employer’s National Insurance liability that may arise.
Preserving pension entitlement
One of the main advantages of paying a small salary is to ensure that the year remains a qualifying year for state pension and contributory benefit purposes. To qualify for a full state pension on retirement, an individual needs 35 qualifying years.
For the year to be a qualifying year, earnings must be at least equal to the lower earnings limit. A director has an annual earnings limit, and for 2021/22, the annual lower earnings limit is set at £6,240. Where the shareholder is not a director, earnings for each earnings period must be at least equal to the lower earnings limit. For 2021/22, the weekly and monthly thresholds are, respectively, £120 and £520.
Contributions are payable by the employee at a notional zero rate on earnings between the lower earnings limit and the primary thresholds. The employee starts paying contributions once earnings exceed the primary threshold.
Optimal salary – Employment allowance is not available
The employment allowance is not available to companies where the sole employee is also a director. This means that personal companies will generally be unable to claim the allowance.
For 2021/22, the primary threshold is set at £9,558 (£184 per week/£797 per month) and the secondary threshold is set at £8,840 (£170 per week, £737 per month).
Although the maximum salary that can be paid without paying any National Insurance is one equal to the secondary threshold of £8,840 for 2021/22, it is beneficial to pay a higher salary equal to the primary threshold of £9,568. Employer’s National Insurance will be payable on the salary to the extent that it exceeds £8,840 at a cost of £100.46 (13.8% (£9,568 - £8,840)), however, this is outweighed by the corporation tax deduction at 19% on the additional salary and the employer’s NIC.
Once the primary threshold is reached, employee contributions are payable at 12%. At this point, the combined National Insurance cost of 25.8% (13.8% + 12%) is more than the corporation tax saving and paying a salary in excess of the primary threshold is not worthwhile.
Thus, where the employment allowance is not available, the optimal salary is equal to the primary threshold for 2021/22 of £9,568 (£184 per week, £797 per month).
Optimal salary - Employment allowance is available
In a family company scenario, the employment allowance will be available if there is more than one employee on the payroll. As long as the employment allowance is available to shelter the employer’s National Insurance that would otherwise arise, the optimal salary is one equal to the personal allowance, set at £12,570 for 2021/22. No National Insurance is payable until the primary threshold is reached. Above this level, employee National Insurance is payable at the rate of 12%. However, the additional salary saves corporation tax at 19%. However, once the personal allowance has been used, tax at 20% is payable as well as employee’s National Insurance of 12%, which exceed the corporation tax deduction of 19%.
Thus, where the employment allowance is available, the optimal salary for 2021/22 is one equal to the personal allowance of £12,570 (£242 per week, £1,048 per month).
ATED return and charge for 2021
The annual tax on enveloped dwellings (ATED) is payable where high value residential property is held within an ‘envelope’, such as a limited company. The charge applies if a dwelling in the UK that is valued at more than £500,000 is owned, or partly owned, by:
a partnership where at least one of the partners is a company; or
a collective investment scheme, such as a unit trust or an open-ended investment vehicle.
Qualifying property rental business
Relief is available in various situations, including where there is a qualifying rental business.
the business must be a property rental business; and
it must be carried out on a commercial basis with a view to profit.
The property must be let to a third party, and not occupied by an owner.
If it is not currently generating receipts, all is not lost – relief remains available if steps are being taken to use the property to generate an income without delay, such as advertising for a tenant.
Relief, however, is not available if the property is held in a company which is not a qualifying property rental business (for example, a trading company), even if it is let commercially.
Amount of the charge
Where relief or an exemption is not available, an annual charge applies based on the value of the property at the relevant valuation date. For 2021/22 the charges are as follows:
More than £500,000 up to £1 million £3,700
More than £1 million up to £2 million £7,500
More than £2 million up to £5 million £23,500
More than £5 million up to £10 million £59,100
More than £10 million up to £20 million £118,600
More than £20 million £237,400
The charge period runs from 1 April 2021 to 31 March 2022. Where a property within the charge to ATED is held on 1 April 2021, the tax must be paid by 30 April 2021. Where a property is acquired after that date, the tax is payable within 30 days of the date on which the property came within the charge to ATED.
An ATED return for 2021/22 must be filed online by 30 April 2021 using the ATED Online Service where the property is held on 1 April. Where the property is acquired in the year, the deadline is 30 days from the date on which the property comes into charge.
If relief is available, for example, for a qualifying rental business, a Relief Declaration Return should be submitted instead. Again, this can be done using the ATED Online Service.
Bounce-Back loans - Pay as You Grow options
You may have received, or are about to receive, a letter from your bank if you took out a government-backed Bounce-Back Loan (BBL) last year. You may remember that in the first year of the BBL no repayments were required, and the government picked up the tab for any setup costs and interest charges.
Banks are therefore writing to remind account holders that BBL repayments are about to commence if the first year has expired. They are also including details of certain relaxations that are available following the Chancellor’s Pay as you Grow announcements last month.
Repayment options. Pay as you Grow (PAYG)
If you need to reduce your monthly repayments, you can advise your bank that you want to take advantage of one the following PAYG concessions:
• Reduce monthly payment for six months by paying interest only. This option is available up to three times during the course of your BBL.
• You could take a payment holiday for six months. This option is available once during the term of your BBL.
• You could request an extension of your BBL loan term from six to ten years. This would reduce your monthly repayments. For example, on a £5,000 loan, monthly repayments would drop from £88.74 per month to £51.75 per month.
You can use certain combinations of these options together, but as the banks will point out, all of these options will increase the overall interest costs of your loan.
How might this affect your credit score?
If you ultimately fail to meet your obligations to repay your BBL the government has fully guaranteed your loan. However, your bank will point out that failure to repay may affect your credit score.
Rather cryptically, correspondence from High Street banks we have seen regarding the take-up of PAYG options, also includes the following remark:
Using these options [PAYG] won’t affect your credit score, though it may influence how we assess your creditworthiness in the future…
You would be forgiven if you were confused by the two contradictory remarks in this sentence.
Should you take advantage of the PAYG options?
If you have concerns that you need all the help you can get in the coming months and yes, you would like to make the most of the PAYG options, please call so we can discuss your options including any likely consequences for your credit worthiness.
NL Wage and NM Wage changes from April 2021
Under the minimum wage legislation, workers must be paid at least the statutory minimum wage for their age. There are two types of minimum wage – the National Living Wage (NLW) and the National Minimum Wage (NMW). From 1 April 2021, as well as the usual annual increases, the age threshold for the National Living Wage is reduced.
National Living Wage - The NLW is a higher statutory minimum wage payable to workers whose age is above NLW age threshold. Prior to 1 April 2021, it was payable to workers age 25 and above. From 1 April 2021, the NLW age threshold is reduced; from that date it must be paid to workers aged 23 and above.
National Minimum Wage - The NMW is payable to workers who are below the age of entitlement to the NLW. Prior to 1 April 2021, the NMW applied to workers above compulsory school leaving age and under the age of 25; from 1 April 2021, the NMW must be paid to workers under the age of 23 and over the school leaving age.
There are three NMW age bands:
Workers aged 21 and 22 (prior to 1 April 2021, workers aged 21 to 24).
Workers aged 18 to 20.
Workers aged 16 and 17.
Apprentices - There is also a separate NMW rate for apprentices. It is payable to apprentices under the age of 19 and also to those who are over the age of 19 and in the first year of their apprenticeship.
Accommodation offset - Employers who provide their workers with accommodation are able to pay a lower minimum wage to allow for the cost of the accommodation provided. The amount that you are obliged to pay is found by deducting the ‘accommodation offset’ from the appropriate minimum wage for the worker’s age. The daily accommodation offset rate can be deducted for each full day for which accommodation is provided. For these purposes, a day runs from midnight to midnight. The weekly accommodation offset rate is seven times the daily rate.
Rates from 1 April 2021
NLW: Workers aged 23 and above £8.91 per hour
NMW: Workers aged 21 and 22 £8.36 per hour
NMW: Workers aged 18 to 20 £6.56 per hour
NMW: Workers aged 16 and 17 £4.62 per hour
NMW: Apprentice rate £4.30 per hour
Accommodation offset £8.36 per day £58.52 per week
Check you are paying the correct rates
Employers should ensure that the amounts that they pay workers on the NLW or NMW from 1 April 2021 are in line with the new rates. They should also ensure that they have processes in place to identify when a worker moves into a new age bracket. From 1 April 2021, this will include workers aged 23 and 24 who will be entitled to the NLW from that date.