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If you incur expenses in doing your job, you may be able to claim tax relief. While the rules governing the availability of relief are strict, the process for claiming relief where it is available is relatively straightforward.

Availability of tax relief

Expenses that may qualify for tax relief include travel expenses incurred in relation to business travel, mileage allowances if you use your own car for business journeys, the cost of professional fees or subscriptions and the additional costs of working at home. However, it should be noted that the rules are strict and where a deduction is not granted by a specific provision, the general rule only permits a deduction for expenses incurred wholly, exclusively and necessarily in the performance of the duties of your employment.

Claiming relief

If you are eligible to claim tax relief for employment expenses, there are various ways in which this can be done.

Route 1: Claim online

You may be able to claim online.

Before making a claim, you can check whether you can use the online service by using the tool which can be found at www.tax.service.gov.uk/claim-tax-relief-expenses. You cannot make a claim online if:

you are making the claim on behalf of someone else;

you complete a self-assessment tax return;

you are claiming tax relief for expenses of more than £2,500; or

you are making a claim for more than five different jobs.

If you are eligible to use the online claim service, you will need to include all the expenses that you want to claim for the relevant tax year. The total shown on the summary page will be used to work out the tax relief to which you are entitled.

The online service is available on the Gov.uk website at www.gov.uk/guidance/claim-income-tax-relief-for-your-employment-expenses-p87.

Route 2: Postal claim

You must make a claim by post if you are claiming on behalf of someone else or you are claiming relief for expenses for more than five jobs. Postal claims are only accepted on form P87, which is available to download on the Gov.uk website at www.gov.uk/government/publications/claim-income-tax-relief-for-your-employment-expenses-by-post.

It should be noted that the following information is mandatory, and the form will be rejected if it is not included:

all section 1 information with the exception of title and contact phone number;

the employer’s PAYE reference in section 2; and

the type of industry in respect of which expenses are being claimed in section 2.

Route 3: Telephone claims

A claim can be made by phone (0300 200 3300) if a claim has been made in previous years for the same expense type and your total expenses are either less than £1,000 or less than £2,500 for professional fees and subscriptions.

Claims cannot be made by phone for expenses incurred as a result of working from home.

Route 4: Self-assessment tax return

If you complete a self-assessment tax return, you should claim relief for employment expenses in the employment pages of your tax return.

Most taxpayers know that they must adhere to a rigid timetable for the submission of tax returns and claims, otherwise either penalties are levied or the claim is refused. Taxpayers are also restricted as to the number of years they may go back to seek relief from an overpayment after making an error or mistake in a return. What is not so well known is that HMRC are also restricted as to the date by which they can open an enquiry into someone's tax returns.

For any return submitted on or before the normal deadline, HMRC have up to twelve months from the submission date to start an enquiry. After the normal deadline, the enquiry window runs until the next quarter day (30 April, 31 July, etc) following the first anniversary of when the return was submitted, e.g., for a 2021/22 return submitted on 1 March 2023 (a month and a day late), the enquiry window ends on 30 April 2024.

However, should HMRC miss the deadline, all is not lost as they have other powers by which they can recover unpaid tax outside of the enquiry window by the issue of an assessment, known as a 'discovery' assessment. A discovery assessment is a valuable tool in HMRC’s arsenal, as the time limit is considerably longer than for raising enquiries.

HMRC commonly use their discovery powers if they have good reason to believe that a tax liability has been understated because of an error in the tax return, the underpayment being the result of the taxpayer (or someone acting on their behalf) being careless or as a result of a deliberate action. Many discovery assessments are issued because HMRC receive information from a third party that suggests an error has been made on the return but it is too late for an enquiry to be opened. However, there are restrictions on HMRC's ability to make a discovery assessment when a taxpayer has delivered a tax return for a tax year. The rules say that no discovery assessment may be made for that period unless:

the loss of tax was brought about carelessly or deliberately by or on behalf of the taxpayer; or

the HMRC officer could not reasonably have been expected to be aware of the loss of tax, based on information available at the time.

HMRC must prove they have satisfied the conditions for issuing a valid discovery assessment.

The default time limit for HMRC to make a discovery assessment is four years from the end of the tax year to which it relates. However, the time limit is extended to six years for a careless error or 20 years if deliberate. Importantly, for the issue under discovery assessment, the onus is on HMRC to prove careless or deliberate conduct, e.g., the taxpayer did not declare income known to them at the time.

The distinction between an enquiry and a discovery assessment is important because while HMRC do not need a reason to open an enquiry into a return, they must meet conditions before a discovery assessment can be issued.

Recently HMRC have been issuing discovery assessments to individuals who they believe should have submitted a 2018/19 tax return containing disguised remuneration loans in connection with an employment and who either did not include the loan or did not include the total amount. However, there is a view that a discovery assessment would be invalid if a taxpayer commented about the potential exposure to the loan charge in the 'white space' of the return. HMRC should have issued an enquiry as they could reasonably have been expected to be aware of the loss of tax on the basis of information available at the time.

The difficulty in dealing with partnership taxation is that there are no separate rules and those present are not located in one place. What rules there are have not been updated for over 40 years, making it difficult to get an overview of the tax position.

Partnerships are governed by the Partnership Act 1890, which defines a partnership as being 'the relation which subsists between persons carrying on a business in common with a view of profit', meaning that a formal partnership agreement is not required (though advisable) to be taxed as a partnership. Each partner is taxed on their share of the trade or business and treated as carrying on a 'notional business'. The tax rules apply after the allocation of the profit or loss between the partners has been calculated regardless of whether the profits have been withdrawn from the business. Therefore, the usual rules apply upon the cessation of a partnership as with a sole trader.

However, partnerships are rarely static creatures and may merge, demerge or cease altogether. Provided that there is at least one partner common to the business before and after the change then the partnership will automatically continue.

Change in partners

A partnership's membership may change with the admission, death or retirement of a partner. Such a situation causes no particular tax problems – the new partner will be deemed to commence a new trade and the leaving partner is subject to the normal cessation of trade rules. The partnership will continue provided there is at least one partner common to the business before and after the change.

Problems may arise on merger or demerger of the partnership or when the business closes.

Demergers

In most demerger cases, where a business is split into two separate parts, the old partnership ceases and the cessation rules apply to the partners. As a general rule, a succession will only be deemed to have taken place when one of the new partnerships is so large in relation to the other(s) that it is recognisably still the same business (e.g., where one business has retained large numbers of customers and assets). In such a case, that partnership will be deemed to continue. The partners in the other new partnership(s) will be subject to the normal cessation and commencement rules.

Mergers

Where two partnerships merge which are different in nature then a merger may create a larger business. In this situation, the old partnerships cease and a new partnership starts; the normal commencement and cessation rules apply.

Where two businesses under different ownership merge but carry on the same or similar activities, the total activities of both partnerships are deemed to continue but as a separate partnership. As the business is deemed to continue, the tax treatment of any trading losses brought forward is unaffected.

Where the owners of one partnership acquire only the assets of another partnership there is no change of ownership. Therefore the 'merged' partnership is merely an enlarged version of the first partnership.

Capital allowances

Should a partnership cease and assets qualifying for capital allowances are taken over by one or more of the partners, these assets are deemed to be disposed of and immediately reacquired at market value. Balancing allowances may be claimed if the written down value exceeds the market value. It is possible to make an election to transfer the assets at written down value if there is a succession to the partnership business and a connection between the two.

If you run your property business from home, you may wish to use simplified expenses to claim relief for associated household costs. You can also use simplified expenses to disallow the private element if you live in your business premises, as may be the case if you run a B&B.

You can only use simplified expenses if you are a sole trader or run your property business as a partnership. If you operate your property business through a limited company, this option is not available to you.

Working from home

Working out the additional household costs incurred as a result of working from home can be complicated and time-consuming. Using simplified expenses is quicker and easier.

Simplified expenses work by allowing you to claim a deduction when working out the profits of your property business by reference to the number of hours you have spent working at home on the business. The deduction aims to cover the additional cost of utilities and cleaning incurred as a result of working from home. It does not cover the use of the telephone or the internet and a separate deduction can be claimed for these based on the proportion of business use.

To benefit from simplified expenses, you must work at least 25 hours a month from home. The total includes everyone who works from your home on your business. So, if you employ your spouse in your business, you can include the hours that they work from home as well as your own.

The amounts that can be claimed each month are shown in the table below.

Business use of home –   Hours per month       Monthly flat rate deduction

                                            25 to 50                               £10

                                            51 to 100                             £18

                                           101 or more                         £26

For example, if you spend 90 hours working from home in each month of the tax year, using simplified expenses, you can claim a deduction of £216 (12 x £18) when working out your taxable profit.

Beware rising costs

The rates have not been increased since their introduction and, in a climate of high energy prices and high inflation, may not accurately represent the actual costs incurred as a result of working from home. It may be advisable to review actual costs and compare the business element (determined on a just and reasonable basis) to the flat rate reduction available under simplified expenses. Where actual costs are higher, it will be a question of deciding whether the higher deduction justifies the additional work.

Living in your business premises

If you operate a business such as a small hotel or a B&B, your business premises may also be your home. While you can claim a deduction for your business expenses, you are not able to claim a deduction for your personal living costs. Rather than having to apportion the costs, you can instead use simplified expenses to determine the amount to disallow in respect of private use. The disallowance depends on the number of people living in the premises and is shown in the table below.

Number of people living in the business premises         Monthly flat rate disallowance

1                                                                                             £350

2                                                                                             £500

3 or more                                                                                £650

For example, if you live in your business premises with your spouse and your monthly bills are £2,500 in total, using simplified expenses, you will treat £500 as relating to personal expenses and claim a deduction for the remaining £2,000 a month (an annual deduction of £24,000).

In his March Budget, the Chancellor announced a number of changes to the pension tax rules, including an increase in the annual allowance and the abolition of the lifetime allowance.

Annual allowance

The annual allowance places a cap on tax-relieved pension savings. Individuals can obtain tax relief on contributions to a registered pension scheme of up to 100% of their earnings or, if greater, £3,600 as long as their available annual allowance is sufficient to cover their contributions. Employer contributions are not subject to the earnings limit, but they do count towards the annual allowance.

The annual allowance is increased to £60,000 from £40,000 for the 2023/24 tax year.

Unused allowances can be carried forward for up to three years. However, the current year’s allowance must be used before utilising unused allowances from earlier years.

Annual allowance taper

High earners have a reduced annual allowance. The taper applies where threshold income exceeds £200,000 and adjusted net income exceeds £260,000. Threshold income is, broadly, income excluding pension contributions, whereas adjusted net income includes pension contributions.

The taper reduces the annual allowance by £1 for every £2 by which adjusted net income exceeds £260,000 until the minimum amount of the allowance is reached. For 2023/24, this is set at £10,000. Consequently, individuals with threshold income of at least £200,000 and adjusted net income of at least £360,000 will only receive the minimum allowance of £10,000 for 2023/24.

For 2020/21 to 2022/23 inclusive, the taper applied where adjusted net income exceeded £240,000 and threshold income exceeded £200,000, reducing the allowance by £1 for every £2 by which adjusted net income exceeded £240,000 until the minimum allowance of £4,000 was reached.

Lifetime allowance

The lifetime allowance places a cap on lifetime tax-relieved pension savings. It is set at £1,073,100. If tax-relieved pension savings exceeded the lifetime allowance, a tax charge applied for 2022/23 and earlier tax years. The charge was set at 55% of the excess where this was taken as a lump sum and at 25% of the excess where it was taken as a pension. The lifetime allowance charges are abolished from 6 April 2023. Legislation in a future Finance Bill will abolish the lifetime allowance. This paves the way for individuals whose pension pot has reached £1,073,100 to start making pension contributions again.

As a result of these changes, a cap is placed on the amount that can be taken as a tax-free lump sum. This is now 25% of the pension pot or, where lower, £268,275. The figure of £268,275 is 25% of the lifetime allowance of £1,073,100.

Money purchase annual allowance

The money purchase annual allowance (MPAA) is a lower annual allowance that applies where a person has flexibly accessed their pension pot having reached the age of 55. The MPAA is set at £10,000 for 2023/24.

Spouses and civil partners enjoy certain tax breaks, including the ability to transfer assets between them at a value that gives rise to neither a gain nor a loss. Prior to 6 April 2023, a couple are only able to benefit from no gain/no loss transfers until the end of the tax year in which they separate. However, from 6 April 2023, the rules are relaxed in certain situations.

New three-year rule

The window during which separating and divorcing couples are able to transfer assets between them at a value that gives rise to neither a gain nor a loss is extended. From 6 April 2023, separating and divorcing couples will have up to three years from the tax year in which they cease to live together to make no gain/no loss transfers. The no gain/no loss rule will continue to apply until the earlier of:

• the end of the third tax year following that in which the couple cease to live together; or
• the day on which the court grants an order or decree for their divorce, the annulment of their marriage, the dissolution or annulment of their civil partnership, their judicial separation or a separation in accordance with a separation order.

It should be noted that while making a no gain/no loss transfer prevents a chargeable gain arising on the transferor spouse/civil partner, the transferee assumes the transferor’s base cost. The gain at the date of disposal is effectively transferred to the transferee spouse/civil partner and will crystallise when they dispose of the asset. This may not be what they want.

Assets forming part of a formal divorce agreement

From 6 April 2023, assets that form part of a formal divorce agreement can be transferred between the former spouses/civil partners on a no gain/no loss basis without time limit.

Matrimonial home and private residence relief

The rules on the availability of private residence relief where a person disposes of a retained interest in their former main home in which their former spouse or civil partner continues to live have been amended. From 6 April 2023, where one partner transfers their share of the former matrimonial home to their former spouse/civil partner but under an agreement is entitled to receive a share of the profit made on the eventual disposal of the property, they will be entitled to private residence relief in the same proportion that qualified for relief on the original disposal to their former partner. Where the original disposal was made on a no gain/no loss basis, private residence relief is available for the proportion of the gain that qualified for the no gain/no loss treatment.

Changing personal circumstances may mean that individuals who were previously taxpayers find that they are now non-taxpayers. If they are in the habit of making charitable donations under gift aid, they need to tread carefully to avoid an unwanted bill from HMRC.

Nature of gift aid

Donations made by individuals to charities or to community amateur sports clubs qualify for tax relief. Where the donation is made under gift aid, the amount donated by the individual is treated as made net of basic rate tax; the charity claims the associated tax back from HMRC. This means that every £1 donated by an individual under gift aid is worth £1.25 to the charity – the charity receives £1 from the individual and claims 25p from HMRC.

If the individual is a higher or additional rate taxpayer, they can claim additional tax relief (equal to the difference between their marginal rate of tax and the basic rate) through their personal tax return. For example, for every £1 donated by a higher rate taxpayer (equivalent to a gross donation of £1.25), a higher rate taxpayer can claim an additional 25p of relief through their tax return, while an additional rate taxpayer can claim further relief of 31.25p for every £1 donated.

When making a gift aid declaration, the individual must confirm that they are a UK taxpayer.

Have you paid enough tax?

Your donations will qualify for gift aid as long as the donation is not more than four times the tax that you have paid in the tax year in question. Both income tax and capital gains tax count. The amount reclaimed by the charity is funded from the tax that you have paid. If you have not paid sufficient tax to cover the tax reclaimed by the charity under gift aid, HMRC may seek to recover the amount due from you. This will mean that each £1 donation wrongly made under gift aid will cost you £1.25.

Review declarations

If you have gift aid declarations in force covering ongoing donations, you should review these if your income falls to ensure that you are paying sufficient tax to cover that reclaimed on your donations. If you cease to be a UK taxpayer, you should cancel all gift aid declarations and remember not to add gift aid to any future donations.

The potential to be charged capital gains tax (CGT) arises with the sale or gift of an asset.

Deferral of the charge is possible with reference to business assets using 'hold-over' relief, thereby avoiding an immediate CGT charge for the donor. The donee takes over the donor’s CGT base cost, increasing any gain on the eventual sale. The relief is commonly used in the transfer of a business to a company because it allows the debtors and creditors to be retained by the sole trader outside of the company; the company can therefore commence with no leftover debtors or creditors. The relief also permits the sole trader or partnership to retain assets used in the business and in their name, which may be an important consideration if a mortgaged property is being transferred.

'Hold-over' relief is relevant to 'business assets' used by a trading business, profession or vocation and not in a non-trading company (i.e., an investment company). The donor must have carried on the business either individually or in partnership, via a personal company (holding at least 5% of the voting rights but not necessarily 5% of the number of shares) or as a member of a trading group whose holding company is the donor's personal company. As such, business assets can include shares listed on the alternative investment market. Note that the recipient cannot be a company where the business assets comprise shares in a trading company.

The general rule for CGT is that gifts are treated as being made at market value. Should the transfer be made for nil consideration or less than the asset's value at the date of transfer then the disposal is deemed to be ‘otherwise than by way of a bargain made at arm’s length’ and potentially chargeable to CGT (subject to allowable losses). Under a 'hold-over' claim, the CGT charge is on the excess of the value received with only the balance being held over which can cause problems if no cash is accepted on transfer.

As with many tax reliefs, there are conditions, one of which is that the asset must have been used in the trade throughout its period of ownership by the donor. Should the asset not have been so used throughout, the restriction is determined by calculating the number of days the asset has not been used for business purposes. Similarly, where an asset has been used partly for business and partly not (e.g., business premises including a shop with a flat above), a just and reasonable restriction must be made to the held-over gain. The final condition is specific to gifts of trading company shares where the company's assets include non-business assets (invariably investment assets). In this situation, the held-over gain is restricted by the fraction A/B, where A is the value of chargeable business assets and B is the value of all chargeable assets. For example, a gift of shares creates a  gain of £200,000; the company has trading premises worth £3 million and an investment property worth £1 million. The amount of held-over gain is restricted to the ratio of chargeable business assets to total chargeable assets by multiplying the gain by the fraction 3/4, i.e., £150,000 can be held over and £50,000 is chargeable.

Practical tips:

If it were possible to liquidate the 'non-business' assets (e.g., if they were listed investments) before making the gift, this would maximise the relief available. Hold-over relief is not automatic and must be claimed  within four years of the end of the tax year of the gift.

Tax payments for the self-employed or those who declare their income under self-assessment are payable by 31 January and 31 July every year. Taxpayers who cannot pay by those dates have the opportunity to pay via HMRC's 'Time to Pay' scheme whereby HMRC agrees to a payment plan for unpaid tax spread over a longer period than would otherwise be available.

Many taxpayers are unaware that there is another method of paying HMRC in instalments, the difference being that only those taxpayers whose payments and returns are up to date can take advantage.

A budget payment plan (BPP) allows taxpayers to make regular advance payments towards their next self-assessment tax bill. Taxpayers can set up and manage their own BPP using their HMRC online account. An important element of the scheme is flexibility – the taxpayer decides the regular weekly or monthly amount (which can be amended as desired), choose to suspend payment for up to six months and cancel at any time. Taxpayers whose income fluctuates from year to year may find the plan beneficial, as their tax payments can be based on current in-year income.

A condition for payment via this method is that any balance owing (after subtracting the payment plan payments) must be paid by the due date. The 'downside' of such a payment method is that HMRC does not give interest on such 'overpayments'.

Other payment plans

Rather than paying under a formal agreement, taxpayers can pay an amount to their tax accounts when they have spare cash, and this has the potential to build up funds held by HMRC to pay the next tax payment when due. No formal arrangement is required, no set payment plan is needed but, again, no interest is credited. However, the concern here is that in some instances HMRC views such a payment as an overpayment and may return the monies, not least if it has the taxpayer's bank account details.

The traditional idea of putting money aside in a building society or bank to pay tax and earning some interest does not necessarily work for some taxpayers for several reasons, not least that it is difficult for some people to set aside the money due, and so payments in advance may be preferable. However, if the taxpayer can deposit in an interest-bearing bank account, interest of approximately 4% could be achieved.

Whichever payment method is chosen, it must be remembered that HMRC charges interest on late payments – as from 31 May 2023, HMRC has revised interest rates with late payment bills charged at 7% – double the percentage a year ago.

Interaction with Universal Credit

Regular payments to HMRC whether by formal arrangement or on an ad hoc basis can be beneficial for small sole traders also in receipt of Universal Credit (UC), as tax payments are a deduction against income for UC purposes. That way the claimant could end up with slightly more UC each month rather than one month with a larger increase (which is likely to be less than the cumulative extra when paying monthly due to the minimum income level).

Future for BPP

In the 2021 Budget the government announced investment in HMRC systems to improve the existing BPP to make it easier for taxpayers to use the system. HMRC believes that regular payments towards tax bills aid both HMRC's and the taxpayer's cash flow, reducing the costs involved in charging interest for late payment of tax and the cost of collecting unpaid tax. The extra investment was aimed at 'raising the Budget Payment Plans prominence online making it easier for customers to find and sign up' as well as 'increasing payment flexibility'.

The main residence exemption applies for capital gains tax purposes to the extent that a property is used as the taxpayer’s only or main residence. Where a property is used partly for business and partly as a residence, the relief only applies to that part which is used as a residence. The gain relating to the business part is liable to capital gains tax.

Often, in the past, this was not an issue as the annual exempt amount was sufficient to shelter the gain attributable to the part used for the business, particularly where the property was jointly owned. However, the capital gains tax annual exempt amount is being reduced and this may cause problems.

Annual exempt amount

The annual exempt amount was set at £12,300 for 2022/23 and was due to remain at this level for the next few years. However, this has now changed. The annual exempt amount has been reduced to £6,000 for 2023/24 and will fall again to £3,000 for 2024/25.

The reduction means that where a couple sold a property in 2022/23, they could potentially realise a gain of £24,600 on a part of the property used exclusively for business purposes without triggering a liability to capital gains tax. However, by 2024/25, this will have fallen to £6,000.

Case study

Jane runs her beauty business from home and uses a room exclusively for her business. The room accounts for one-tenth of the floor area in her home.

Jane is planning to sell her home and expects to realise a gain of £100,000. Had she sold the property in 2022/23, the gain attributable to the business part of £10,000 (1/10 x £100,000) would have been covered by her annual exempt amount of £12,300 and there would not have been any tax to pay. However, if she sells her home in 2023/24, only £6,000 of the gain will be exempt. If Jane is a higher rate taxpayer, she will need to pay tax of £1,120 on the balance (£4,000 @ 28%). If the sale does not take place until 2024/25, only £3,000 of the gain will be exempt and she will pay capital gains tax on the remaining £7,000 – a bill of £1,960.

The gain must be reported and the tax paid within 60 days of the date of completion.

Timing

Where a sale is on the cards and it will trigger a gain on the part of the property used exclusively for business, where possible complete in 2023/24 rather than in 2024/25 to benefit from the higher annual exempt amount.

Non-exclusive use

Depending on the nature of the business, it may not be necessary for an area to be set aside exclusively for business use. For example, an office could be used to run a business in the day and by the children for homework after school. This would preserve the private residence exemption and remove the problem of a potential capital gains tax bill where a business is run from the taxpayer’s home.

Employers looking to take on new staff may wish to consider employing two or more part-time workers rather than one full-time worker. This can save them National Insurance.

Employers are liable to pay secondary (employer’s) Class 1 National Insurance contributions on an employee’s earnings to the extent that they exceed the relevant secondary threshold. For 2023/24, the secondary threshold is set at £175 per week, £758 per month and £9,100 per year. Higher secondary thresholds apply where the employee is under the age of 21, an apprentice under the age of 25 or an armed forces veteran in the first year of their first civilian employment (set at £967 per week, £4,189 per month, £50,270 per year). Where the employer has physical premises in a Freeport tax zone, the secondary threshold is set at £481 per week (£2,083 per month, £25,000 per year) for the first 36 months of a new Freeport employee’s employment.

One secondary threshold per employee

An employer is entitled to one secondary threshold per employee. Consequently, if an employer takes on one full-time employee, they only benefit from one secondary threshold, whereas if instead they take on two part-time employees, they benefit from two secondary thresholds. The savings are illustrated in the following example.

Example

An employer is deciding whether to take on one full-time employee, who will be paid £4,000 a month, or two part-time workers who will each be paid £2,000 per month.

The employer will pay secondary Class 1 National Insurance of £447.40 (13.8% (£4,000 – £758)) per month on the earnings of the full-time employee.

By contrast, the employer will pay secondary Class 1 National Insurance of £171.40 (13.8% (£2,000 – £758)) on the earnings of each part-time employee – a total of £342.80 for both part-time employees.

By taking on two part-time employees rather than one full-time employee, the employer saves National Insurance of £104.60 per month -– an annual saving of £1,255. This is because the employer is able to benefit from an additional secondary threshold of £9,100 on which no contributions are payable.

The employees will pay primary contributions on their earnings to the extent that they exceed the primary threshold.

Employees can benefit too

Employees can also benefit from National Insurance savings if they have two or more part-time jobs, rather than one full-time job, as they benefit from the primary threshold in each job. Employee’s contributions are calculated separately for each job and are only payable to the extent that the earnings from that job exceed the primary threshold, set at £242 per week, £1,048 per month and £12,570 per year for 2023/24.

Beware the aggregation of earnings rules

The aggregation of earnings rules are anti-avoidance rules that prevent a job from being split artificially to benefit from multiple thresholds. Where the jobs are with the same employer or the employers are carrying on business in association with each other, the earnings from the different jobs must be aggregated and the National Insurance liability calculated on the total earnings. An exception applies where it is ‘not reasonably practicable’ to aggregate the earnings.

The tax system contains a number of exemptions, some of which are more useful than others. One of the more valuable exemptions is that for mobile telephones. As long as the associated conditions are met, an employee can use an employer-provided mobile phone for private use without being taxed on the associated benefit. However, there are some pitfalls to avoid.

Provision of the phone

The exemption applies where an employee is provided with a mobile phone ‘without any transfer of property in it’. This means that the legal ownership of the phone must not be transferred to the employee.

The method of provision is also key. The exemption will only apply if the contract is between the mobile phone provider and the employer. If the employer chooses to purchase the handset outright, they must retain ownership of it; the airtime contract must be between the employer and the mobile phone provider.

From a tax position, the outcome is different if the employee contracts with the mobile phone company and the employer pays the bill on the employee’s behalf. Here the employer is meeting a personal bill of the employee rather than providing the employee with a mobile phone. As a result, the mobile phone exemption does not apply and the amount paid on the employee’s behalf is taxable and liable to Class 1 National Insurance.

Likewise, if the employee initially meets the cost of the phone and/or the airtime and this is later reimbursed by the employer the mobile phone exemption does not apply as the employee is not being provided with the use of a phone. The exemption for paid and reimbursed expenses does not apply either if the phone is used privately, as the employee would not be entitled to a deduction should they meet the cost personally.

Although at first sight it may seem that the same result is obtained in each case – the employee has the private use of a phone the cost of which is met by the employer – the tax consequences are very different. It is essential that the employer provides the phone and contracts with the mobile phone provider for the exemption to apply.

One phone per employee

The exemption is limited to one phone for private use per employee. Where the employee also has a phone which can only be used for business calls, the exemption remains available for a phone which can be used privately. There is no tax charge if the phone is only available for business calls and is only used for business calls --the business phone is ignored for the purposes of the exemption.

Beware salary sacrifice

The exemption does not apply where the phone is made available under a salary sacrifice or other optional remuneration arrangement.

Business rates are charged on non-domestic properties like shops, offices, warehouses, factories and holiday rentals or guest houses. However, if your property’s rateable value is less than £15,000 and your business only uses one property, you may be entitled to small business rate relief.

Nature of the relief

The amount of relief to which you are entitled depends on the rateable value of your business property. If this is £12,000 or less and you only have one business property, you will receive 100% relief. This means that you will not need to pay any business rates.

Where the rateable value of your business property is between £12,000 and £15,000, the rate of relief is found by the following formula:

(£15,000 – rateable value)/(£15,000 – £12,000) x 100%

For example, if the rateable value of your business property is £14,000, you will receive relief of 33.33% (£1,000/£3,000 x 100%). Similarly, if the rateable value of your business property is £13,500, you will receive 50% relief (£1,500/£3,000 x 100%).

The rate of relief gradually reduces from 100% for properties with a rateable value of £12,000 or less to 0% for properties with a rateable value of £15,000.

Further conditions for holiday lets

From April 2023, holiday lets are only eligible for business rates if certain conditions are met. To qualify, the property must be actually let as a holiday let for at least 70 nights in the tax year and available for letting as a holiday let for at least 140 nights. If the holiday let qualifies as a furnished holiday letting for tax purposes, it will meet the business rates test as this is less stringent. If the property does not meet the new business rates test, council tax will be payable instead.

More than one business property

If you have more than one business property, you may still qualify for small business rate relief. This will be the case if none of your other business properties have a rateable value in excess of £2,899 and the total rateable value of all your properties is not more than £20,000 (£28,000 in London).

Claim the relief

You will need to claim the small business rate relief if you are eligible. Contact your council to find out how to make a claim.

2023 revaluation

Properties are revalued every five years for business rates purposes. From 1 April 2023, business rates are based on the rateable value at 1 April 2021. If your rateable value has changed, this may affect your entitlement to small business rate relief.

You may be entitled to transitional relief if your bill has increased from 1 April 2023 as a result of the revaluation, either because you have lost small business rate relief or because the relief that you received has been reduced. The relief caps the amount by which the bill can increase. If your rateable value is less than £20,000 (£28,000 in London), the amount by which your bill can increase from one year to the next is capped at 5% for 2023/24, at 10% plus inflation for 2024/25 and at 25% plus inflation for 2025/26. Transitional relief ends when your business rates bill reaches the amount calculated by reference to your new rateable value.

The council should give you the relief automatically if you are eligible but check your bill to make sure it is correct.

Furnished holiday lettings (FHLs) have a number of tax advantages over residential lets. These advantages include the opportunity to benefit from a number of capital gains tax reliefs.

The capital gains tax legislation treats the commercial letting of furnished holiday letting as a trade. This allows the FHL business access to certain reliefs which are available to traders.

FHLs

The business must qualify as an FHL to benefit from the reliefs. To do this, it must be a furnished property that is let commercially with a view to making a profit. In addition, it must pass the following occupancy conditions:

Lettings exceeding 31 continuous days or more must not exceed a total of 155 days in the tax year.

The property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year.

The property must be let commercially for at least 105 days in the tax year.

Where a person has more than one holiday let, the third test can be met on average across all properties by making an averaging election. If the conditions are not met for a particular year, but have been met previously, it may be possible for the property to be treated as an FHL under a ‘period of grace’ election.

Roll-over relief

Roll-over relief is particularly beneficial if you want to sell one holiday let and invest in another. The relief allows the gain arising on the disposal of the furnished holiday let to be ‘rolled over’ into the new property. This means that any gain arising is not immediately chargeable. Instead, the base cost of the replacement FHL is reduced by the gain. The gain will crystallise when that property (or a subsequent property) is sold without the gain being rolled over into a replacement asset.

This allows landlords with furnished holiday lets to sell and reinvest without losing access to valuable capital. By contrast, a landlord letting residential accommodation must pay the capital gains tax on any gain arising on the disposal of the property within 60 days.

Example

Ben has two holiday let properties in Norfolk which meet the conditions for FHLs. He sells one of the properties for £400,000, realising a chargeable gain of £75,000. He buys a property in Margate to let as an FHL for £450,000, rolling over the gain. The base cost of the Margate property is reduced by £75,000 to £375,000. Ben, who is a higher rate taxpayer, is able to reinvest the full proceeds in the Margate property without having to give £21,000 (capital gains tax of £75,000 @ 28%) to the taxman.

If he eventually sells the Margate property without reinvesting in another business property, the gain arising will be calculated as if the property cost £375,000 rather than on the actual cost of £450,000. The gain is deferred until that property is sold.

Business asset disposal relief

The other main advantage of an FHL from a capital gains tax perspective is the ability to benefit from business asset disposal relief. As long as the qualifying conditions are met, the landlord is able to benefit from a favourable capital gains tax rate of 10% on lifetime gains of up to £1 million where the property is sold on or following the cessation of the business. By contrast, a landlord making a gain on a residential let would pay capital gains tax at the rate of 28% if they were a higher rate taxpayer. The main qualifying condition is that the landlord had owned the business or been a partner in it for at least two years up to the date on which the business ceased.

The relief does not apply to properties sold where the business is continuing (unless they are comprised in the disposal of part the business).

Gift hold-over relief

Hold-over relief is also available on the gift of an FHL property. Again, this has the effect of deferring the gain until the recipient disposes of the property. This can be a useful tool in succession planning if the FHL is gifted to the landlord’s child/children. The base cost of the gifted property is reduced by the held-over gain.

Moving house can be stressful, not to mention costly. A major cost of purchase can be stamp duty land tax (SDLT) (or equivalents in Scotland and Wales, not considered here).

Extra SDLT?

Care is needed to distinguish between a replacement dwelling and an additional dwelling; the latter is generally liable to higher SDLT rates (if bought for £40,000 or more and is not subject to a lease with more than 21 years left to run), which are 3% higher than standard SDLT rates.

Is it a replacement?

However, the purchase of a qualifying replacement dwelling is not liable to the additional SDLT (FA 2003, Sch 4ZA, paras 3(6), (7)). But what is a ‘replacement’?

(1) ‘Old’ residence sold before (or on same day as) ‘new’ residence

For the ‘new’ dwelling to be an eligible replacement for the purchaser’s ‘old’ dwelling, certain conditions must be satisfied where the old dwelling was sold first (or at the same time), which are paraphrased below.

• a. When purchasing the new property, the purchaser intends it to be their only or main residence.
• b. In the three years before purchasing the new property, the purchaser or spouse (or civil partner) at the time must have disposed of a major interest in another dwelling.
• c. Immediately after disposing of the old property, neither the purchaser nor the purchaser’s spouse (or civil partner) had a major interest in it.
• d. The purchaser must have lived in the old property as their only or main residence at some point in the three years before purchasing the new property.
• e. At no point between selling the old property and buying the new property had the purchaser or spouse (or civil partner) acquired a major interest in another dwelling with the intention of living in it as their main or only residence.

(2) ‘Old’ residence sold after ‘new’ residence

Furthermore, the ‘new’ property can be treated as a replacement if the ‘old’ property was sold afterwards, broadly where the following conditions are satisfied:

• a. Upon purchase, the individual intended living in the ‘new’ property as their only or main residence.
• b. In the three years after purchasing the ‘new’ property, the purchaser or spouse (or civil partner) disposes of a major interest in the ‘old’ property.
• c. Immediately after disposing of the ‘old’ property, neither the purchaser nor the purchaser’s spouse (or civil partner) had a major interest in the ‘old’ property.
• d. The purchaser lived in the ‘old’ property as their only or main residence at some point in the three years before purchasing the new property.

In ‘exceptional circumstances’, HM Revenue and Customs (HMRC) may extend the three-year period at its discretion if a valid application is made (see HMRC’s Stamp Duty Land Tax Manual at SDLTM09807).

Claiming a refund

If the old property is still owned when the new property is purchased, the higher rates of SDLT initially apply. However, the SDLT return can subsequently be amended within statutory time limits, and the extra 3% can be refunded if the above conditions are subsequently met (see www.gov.uk/guidance/stamp-duty-land-tax￾online-returns).

The pandemic changed the way in which many people worked, forcing them to work from home if they could. Post-pandemic, many employees have continued to work from home some or all of the time.

Under hybrid working arrangements, an employee will work from home some of the time and from the employer’s premises some of the time. As a general rule, tax relief is not available for the cost of travel from home to work. Consequently, where an employee has hybrid working arrangements, HMRC will only allow tax relief for travel between the employee’s home and the employer’s premises if they accept that the employee’s home is a workplace.

Home as a workplace

The tests that need to be met for HMRC to accept an employee’s home is a workplace are strict and outdated and do not reflect the current reality.

For HMRC to accept that an employee’s home is a workplace, all of the following conditions must be met:

The duties that the employee performs at home are substantive duties of the employment. These are duties that the employee has to carry out and which represent all or part of the central duties of the employment.

The duties cannot be performed without the use of appropriate facilities.

No such appropriate facilities are available to the employee on the employer’s premises (or the nature of the job requires the employee to live so far from the employer’s premises that it is unreasonable to expect them to travel to those premises on a daily basis).

At no time, either before or after the employment contract is drawn, is the employee able to choose between working at the employer’s premises or elsewhere.

The reality of modern working is that many employees can work anywhere as long as they have a laptop and an internet connection. While in the past, the nature of the duties may have dictated where they could be carried out, for many employments this is no longer the case. The travel expenses rules have yet to catch up with this and the conditions that need to be met for home to be regarded as a workplace mean that in practice it is difficult for hybrid workers to secure tax relief for the costs of travel between their home and their employer’s premises.

Flexibility v tax relief

Hybrid working is attractive because of the flexibility that it offers, but it is this flexibility that can jeopardise the availability of tax relief for the costs of travel between the employee’s home and the employer’s premises (and render any reimbursement of these costs by the employer taxable).

As is often the case, there is a compromise to be had by adopting a more structured arrangement under which the employee works at home on set days and at the employer’s premises on other days, rather than being able to choose each day whether to work at home or in the office.

For example, if an employee works at home on Tuesday, Wednesday and Friday but in the office on Monday and Thursday, as long as it is not possible to work in the office on a homeworking day, tax relief should be forthcoming if the employee has to travel to the office on one of those days – the travel would be travel between two workplaces rather than home to work travel. However, no relief would be available for travel to the office on the office-based days.

Cryptocurrency is a complicated concept and the following text gives HMRC's view on the basic rules.

Modern cryptocurrencies were first described in 1998 but the concept fully emerged in 2008 with the release of a white paper explaining their foundations. The first cryptocurrency was Bitcoin but since 2008 the market has expanded to include other transferable tokens, including Ether, Litecoin and Ripple. Given the trade volumes now seen in the UK, it is no wonder that HMRC are taking a more active interest in cryptocurrency.

What is cryptocurrency?

A cryptocurrency has been defined as a 'digital virtual currency that uses encryption technology to ensure the security of transactions involving its use' and can be transferred, stored or traded electronically. Each 'coin' is a computer file stored in a 'digital wallet' app on a smartphone or computer, every transaction being recorded in a public list called the 'blockchain'. Computers use complex programmes to validate a 'block' before being added to a 'blockchain'.

Tax position

Although no taxes apply specifically to cryptocurrency assets, HMRC have confirmed that, in the majority of circumstances, anyone holding them as a personal investment is subject to capital gains tax (CGT) on any profit; this is because HMRC see cryptocurrency as an exchange of tokens rather than a form of money. However, following the usual tax rules for the definition of a trade, there are some instances where transactions are either not taxable or subject to income tax (or corporation tax for a company).

HMRC state that the disposal of cryptocurrency falls within one of three classifications:

• short-term speculation – similar to betting and not taxable. However, loss relief is not available. Note that HMRC does not generally accept transactions in cryptoassets as being gambling.
• buying and selling to make a profit – as with the usual rules under the definition of a trade being liable to income tax (or corporation tax) usually where there is a high volume of transactions in a short space of time.
• occasional investments – any gains and losses made from buying and selling are within the scope of CGT under the usual rules.

'Disposal' has been defined by HMRC as:

• selling crypto assets for money;
• exchanging cryptocurrency assets for a different type of crypto asset;
• using cryptocurrency assets to pay for goods or services;
• gifting crypto assets to another person.
• donating tokens to charity

Income tax

As well as the situation whereby, an employee is paid via cryptocurrency, HMRC detail the following scenarios as being liable for income tax (or corporation tax for companies):

'Mining'

'Mining' is how new cryptocurrency units ('coins') are created. The reward is a coin which may be taxed as a trade receipt depending on the level of activity. Alternatively, if the activity does not amount to a trade, the coins will be taxed as miscellaneous income. HMRC consider Bitcoin mining as outside the scope of VAT.

'Staking'

'Staking' is also the creation of a 'coin' but this time being determined by a user’s wealth in the crypto asset rather than via a computer. Transactions are verified and rewarded with fees rather than new tokens; such activities are generally taxed as miscellaneous income.

'Airdrops'

An 'airdrop' is when an individual receives an allocation of tokens typically in exchange for carrying out a service, e.g., as part of a marketing or advertising campaign. Providing there is no trade or business involving cryptoassets, such tokens are taxed as miscellaneous income unless received without carrying out a service (in which case income tax does not apply).

'Trading'

The level and sophistication required for the activity to be deemed a trade is high and profits could be taxed as income if trading is of regular large amounts.

Capital gains tax

CGT is relevant when investors pay for new coins or tokens in a cryptocurrency or company as yet unreleased using existing cryptocurrencies. The sale proceeds are the existing cryptocurrency's market value on the date the exchange took place. This same market value is used as the cost basis for the new tokens received when calculating pooled costs, CGT being liable on any profit. CGT may also be due on any profits made on the purchase of goods and services and when one cryptocurrency token is swapped for another.

Partner note:

Policy paper – Tax on crypto assets

https://www.gov.uk/government/publications/cryptoassets-taskforce

HMRC – new cryptocurrencies guidance

https://www.gov.uk/government/collections/cryptoassets

https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual

Landlords who have benefited from rising property prices in recent years may wish to consider releasing equity now in case prices drop. This may be to free up a deposit to expand the portfolio to take advantage of lower prices, to help children get on the property ladder or simply to release some cash to help with rising living costs. However, while extracting equity from your property portfolio may be an attractive proposition, there are some tax considerations to factor into the equation.

Relief for loan interest

The general rule is that tax relief for borrowings is available up to the value of the property when it was first let. If you have owned the property for some time, it may now be worth considerably more than it was when you first let it out, and in releasing equity, your borrowings may exceed the tax relief ceiling. Consequently, you may not be able to claim tax relief for the full amount of your interest and finance costs. With rising interest rates, the amount not eligible for relief may be significant, eating into your profits.

The way in which relief is given depends on the type of let and also on whether you operate an unincorporated business or run a limited company.

If your business is an unincorporated property business letting residential properties (other than as furnished holiday lettings), tax relief for interest and finance costs is given as a reduction in your tax bill, reducing the amount of tax that you pay on the profits of your rental business by 20% of your interest and finance costs. If you are a higher or additional rate taxpayer, the rate of relief is less than the rate at which you pay tax. However, if you run a furnished holiday lettings business or let commercial property, you can deduct your interest and finance costs in full when working out your rental profit. This is also the case if you run your business as a company, and you can deduct your interest and finance costs in full in working out the company’s profit, regardless of the type of let.

Example

Ali purchased a flat as an investment in 2005. At the time, the flat cost £100,000. He let it out following the purchase and it has been let out ever since. The property was purchased with a mortgage of £80,000.

In early 2023, the property was worth £250,000. To take advantage of this, he increased the mortgage to £200,000 to provide his daughter with a deposit to buy her first home. However, he can only claim tax relief, as a tax reduction of 20%, in respect of the interest on £100,000 of the loan (the value of the property when first let). No relief is available for the interest on the remainder of the loan.

Looking ahead

Releasing equity may cause problems further down the line if the property is sold realising a chargeable gain. If the property is highly mortgaged when sold, there may not be sufficient funds left after clearing the mortgage to pay the associated capital gains tax bill. Where the property in question is a residential property, the tax must be paid within 60 days.

A self-invested personal pension (SIPP) can be an attractive option for saving for retirement and is one that is popular with company directors. Under a SIPP, you can choose and manage your investments yourself, or you appoint a financial adviser to manage a SIPP on your behalf. The range of investments that can be held in a SIPP is wide and includes commercial (but not residential) property.

Financial advice should be sought before setting up a SIPP.

SIPPs and commercial property

If you operate your business from commercial premises, it can be beneficial to purchase the premises through a SIPP and rent them to the company. While the SIPP must charge the company rent at a commercial rate, the rent paid goes into your pension pot rather than being lost to a third party. The company is still able to deduct the rent when working out its taxable profit.

The rent paid into the SIPP does not count towards the annual allowance, leaving this available to shelter individual and employer contributions to the SIPP. This is also a significant advantage if you have chosen to flexibly access your pension pot on reaching age 55.

Flexible access and the MPAA

The pension tax rules allow an individual to access pension savings in a money purchase pension on reaching age 55. You may choose to take your tax-free lump sum at this point. The amount that can be taken tax-free is equal to 25% of the pension pot at that time, capped at £268,275 from 6 April 2023. Once the tax-free lump sum has been taken, further withdrawals are taxed at your marginal rate of tax. If rather than taking the full tax-free lump sum, you make smaller withdrawals, 25% is tax-free and the balance taxed at your marginal rate of tax.

To prevent recycling of contributions, the annual allowance is reduced once a pension pot has been flexibly accessed and instead of the full annual allowance, tax-relieved contributions are capped by the money purchase annual allowance (MPAA), which is set at £10,000 for 2023/24.

It is here that rental payments to the SIPP once again come into their own as they do not count towards the MPAA, providing the opportunity to rebuild the pot at a rate of more than £10,000 a year (subject to the rent being set at a commercial level).

Beware missed rental payments

The SIPP is not a sympathetic landlord and care should be taken not to miss rental payments as if rent remains unpaid, the unpaid rent is treated as an unauthorised payment, triggering the unauthorised payments tax charge. This can be as much as 55% of the payment.

 Employees often need to undertake business trips and it is common practice to reimburse the employee’s fuel costs by means of a mileage allowance. The tax rules allow mileage payments to be made tax-free up to certain limits. However, the rules are different depending on whether the employee is driving their own car or a company car.

Employees using their own cars

If an employee uses their own car for business, you can pay mileage allowances tax-free up to the ‘approved amount’. This is set for the tax year, rather than for each individual journey, and is found by multiplying the business mileage in the tax year by the approved mileage rate. For cars and vans, the approved mileage rate is set at 45p per mile for the first 10,000 business miles in the tax year and at 25p per mile for any further business miles. For motorcycles, the rate is 24p per mile and for cycles the rate is 20p per mile.

The approved amount is the maximum amount that can be paid tax-free, even if the actual cost exceeds the approved amount.

Example

An employee drives 12,000 business miles in the tax year using his own car. The maximum that can be paid tax-free is £5,000 (10,000 miles @ 45p per mile plus 2,000 miles @ 25p per mile).

If the amount that is paid is less than the approved amount, the employee can claim tax relief for the difference between the approved amount and the mileage allowance paid, if any.

If the employee gives a lift to one or more colleagues, you can also make a tax-free passenger payment of 5p per passenger per business mile. There is no corresponding relief if you choose not to make passenger payments.

Company car drivers

If an employee has a company car but pays for the fuel, you can meet the cost of business mileage tax-free, as long as the amount paid does not exceed the current advisory fuel rate. The advisory fuel rates are set by HMRC and are updated quarterly. They are lower than the approved mileage rates because the approved rates also reflect depreciation and running costs, as well as the cost of the fuel. By contrast, the advisory rates are fuel-only rates.

The advisory rates applying from 1 March to 31 May 2023 are as shown in the table below.

Engine size          Petrol – rate per mile      LPG – rate per mile

1,400cc or less              13p                                10p

1,401cc to 2,000cc        15p                                11p

Over 2,000cc                 23p                                17p

Engine size           Diesel – rate per mile

1,600cc or less              13p

1,601cc to 2,000cc        15p

Over 2,000cc                 20p

If the employee drives an electric company car, you can pay a mileage rate of 9 pence per mile tax-free.

The super-deduction, which allowed companies to claim an immediate deduction of 130% of their qualifying expenditure, came to an end on 31 March 2023. It was replaced with full expensing. As with the super-deduction, unincorporated businesses cannot benefit from full expensing (although the Annual Investment Allowance (AIA) will secure a 100% deduction for qualifying expenditure up to the annual AIA limit of £1 million).

Nature of full expensing

Full expensing allows companies to claim, in the form of a capital allowance, immediate relief for the full amount of qualifying capital expenditure. Although at a rate of 100% of qualifying expenditure, the rate of relief is the same as under the AIA, unlike the AIA, there is no cap on the amount of the expenditure which can benefit.

As with its predecessor, the availability of full expensing is time-limited – it only applies to qualifying expenditure which is incurred in the three-year period from 1 April 2023 to 31 March 2026. Expenditure is eligible for full expensing if it would otherwise qualify for main rate writing down allowances and is not excluded expenditure. The main category of excluded expenditure is that on cars (although a 100% first-year allowance is available for expenditure on new zero emission cars).

Full expensing will benefit companies making significant capital investment in excess of the £1 million limit applying under the AIA. It can be used instead of the AIA to leave the AIA limit free for use against qualifying expenditure that would otherwise qualify for special rate writing down allowances.

As with other capital allowances, full expensing is optional and must be claimed.

Balancing charges will apply if the asset is sold, the disposal proceeds being brought into account. Consequently, if the intention is only to keep the asset for a short time and to dispose of it before it has lost much of its value, it may be preferable to claim writing down allowances instead to avoid a clawback of the relief in the not-too-distant future.

50% first-year allowance

A 50% first-year allowance was introduced alongside the super-deduction. It allowed companies to claim an immediate 50% deduction for expenditure that would otherwise qualify for special rate writing-down allowances (such as that on thermal insulation). The 50% first-year allowance has been extended and is now available without limit for qualifying expenditure incurred in the three-year period from 1 April 2023 to 31 March 2026. As with full expensing, the 50% first-year allowance is not available to unincorporated businesses.

The 50% first-year allowance will be useful where the AIA limit of £1 million has already been used up. If some or all of the AIA limit remains available, this should be used first as it will provide a higher rate of relief.

Claims for the 50% first-year allowance are optional. Where the allowance is claimed, the balance of the expenditure is allocated to the special rate pool and relieved by writing down allowances (at the rate of 6% on a reducing balance basis) in subsequent years.

Annual Investment Allowance

The AIA limit of £1 million has now been made permanent.

In his March Budget, the Chancellor announced a number of changes to the pension tax rules, including an increase in the annual allowance and the abolition of the lifetime allowance.

Annual allowance

The annual allowance places a cap on tax-relieved pension savings. Individuals can obtain tax relief on contributions to a registered pension scheme of up to 100% of their earnings or, if greater, £3,600 as long as their available annual allowance is sufficient to cover their contributions. Employer contributions are not subject to the earnings limit, but they do count towards the annual allowance.

The annual allowance is increased to £60,000 from £40,000 for the 2023/24 tax year.

Unused allowances can be carried forward for up to three years. However, the current year’s allowance must be used before utilising unused allowances from earlier years.

Annual allowance taper

High earners have a reduced annual allowance. The taper applies where threshold income exceeds £200,000 and adjusted net income exceeds £260,000. Threshold income is, broadly, income excluding pension contributions, whereas adjusted net income includes pension contributions.

The taper reduces the annual allowance by £1 for every £2 by which adjusted net income exceeds £260,000 until the minimum amount of the allowance is reached. For 2023/24, this is set at £10,000. Consequently, individuals with threshold income of at least £200,000 and adjusted net income of at least £360,000 will only receive the minimum allowance of £10,000 for 2023/24.

For 2020/21 to 2022/23 inclusive, the taper applied where adjusted net income exceeded £240,000 and threshold income exceeded £200,000, reducing the allowance by £1 for every £2 by which adjusted net income exceeded £240,000 until the minimum allowance of £4,000 was reached.

Lifetime allowance

The lifetime allowance places a cap on lifetime tax-relieved pension savings. It is set at £1,073,100. If tax-relieved pension savings exceeded the lifetime allowance, a tax charge applied for 2022/23 and earlier tax years. The charge was set at 55% of the excess where this was taken as a lump sum and at 25% of the excess where it was taken as a pension. The lifetime allowance charges are abolished from 6 April 2023. Legislation in a future Finance Bill will abolish the lifetime allowance. This paves the way for individuals whose pension pot has reached £1,073,100 to start making pension contributions again.

As a result of these changes, a cap is placed on the amount that can be taken as a tax-free lump sum. This is now 25% of the pension pot or, where lower, £268,275. The figure of £268,275 is 25% of the lifetime allowance of £1,073,100.

Money purchase annual allowance

The money purchase annual allowance (MPAA) is a lower annual allowance that applies where a person has flexibly accessed their pension pot having reached the age of 55. The MPAA is set at £10,000 for 2023/24.

Class 2 NICs are flat-rate contributions payable by the self-employed, currently charged at a rate of £3.45 a week. Non-payment (or credit) could mean entitlement to the state retirement pension (and other contributory state benefits) will be affected unless the individual is also paying Class 1 NIC because they are employed.

The majority of self-employed individuals liable to pay Class 2 NIC do so via the self-assessment regime at the same time as paying any income tax due on 31 January after the tax year end. Payment is mandatory if profits exceed the lower profits threshold (£11,908 for 2022/23 and £12,570 for 2023/24). Pre-6 April 2022, where profits were below the small profits threshold no liability to Class 2 NIC was payable and should the individual have wished for the year to count towards the state pension, voluntary Class 2 payments were required.

Pre-6 April 2022

The deadline for submitting a tax return is 31 January after the tax year end although amendments are possible up to a year after. Therefore, for 2021/22 the deadline for amendments and payment of Class 2 voluntary contributions was 31 January 2023. HMRC has recently announced that it has identified 3,900 customers who deferred filing their 2020/2021 self-assessment return until after 31 January 2023. This means that it is now too late to pay voluntary Class 2 NICs and therefore the year will not count towards the state pension and other contributory state benefits. HMRC intends to write to those customers advising them of the situation. Some of those taxpayers will have made payment for Class 2 NIC and now find that they have made an overpayment. However, that amount will not be refunded but will be retained to be deducted from any future tax payments unless a formal repayment claim is made. Should an individual wish for the 2021/22 year to count towards the state pension, Class 3 voluntary payments will be required at a rate of £15.85 per week.

Post-6 April 2022

Post-6 April 2022the National Insurance Contributions (Increase of Thresholds) Act 2022 created a new form of NIC credit. A self-employed earner whose profits are below the same threshold for Class 4 NIC charges (i.e., £9,880 for 2023/24) is to be treated as having paid Class 2 NICs. This will bring them in line with lower paid employees by allowing them to secure a qualifying year for zero contribution cost; it will also make the payment of voluntary Class 2 contributions redundant. To receive the Class 2 NIC credit the taxpayer will have to submit a tax return, although if they have no other income in the year, they will have no tax to pay.

Class 3 voluntary contributions

Any taxpayer wishing to make up a missing NIC year has only a few weeks to do so as the deadline for paying voluntary Class 3 NICs to fill any NIC deficiencies in tax years back to 2006/07 only has until 31 July 2023 to do so. Therefore, it is now too late to make up years before 2006/07.

This opportunity to pay Class 3 NIC for past years applies to women born after 5 April 1953 and men born after 5 April 1951. Taxpayers under 45 still have another 22 to 23 years of working life to pay Class 1 or Class 2 NIC, so it is unlikely that it would be economical for them to pay Class 3 NIC to complete any existing gap years.

The rate of payment for  Class 3 NIC in these circumstances will depend on the year for which payment is being made. Contributions relating to the previous two tax years are at the original rates for those years (i.e., £15.40 per week for 2021/22 and £15.85 per week for 2022/23); for all other years payment will be at the current rate (£17.45 per week).

As the cost-of-living crisis bites, landlords may find that tenants struggle to pay their rent. Where this is the case, the relief that is available and the way that it is given depends on how the landlord prepares his or her accounts. We explain the rules.

Cash basis

The cash basis is the default basis of accounts preparation for most landlords with rental receipts of £150,000 a year or less. The cash basis is a simple basis of accounts preparation, which works on a money-in and money-out approach.

Under the cash basis, income is only taken into account when it is received. Likewise, expenditure is only recognised when paid. There is no need to match income and expenses to the period to which they relate, or to take account of accruals and prepayments or debtors and creditors.

One of the advantages of the cash basis is that it gives automatic relief for bad debts – if the landlord does not receive the rent, it is not taken into account when calculating the taxable profits. Likewise, if the rent is paid late, it is not taken into account for tax purposes until it is received.

Example

David lets out a number of properties. Due to the cost-of-living crisis, one of his tenants has been struggling to pay the rent.

In property A, his tenant’s rental contract came to an end on 31 March 2023. The rent was £1,000 a month. In the year to 31 March 2023, the tenant paid the rent on time from April 2022 to January 2023. £700 of the rent for February was paid on 26 April 2023. The remaining rent for February and the rent for March have not been paid.

In calculating his rental profits for 2022/23, only the rent received in that year from property A (10 months @ £1,000) is taken into account. The £700 paid in April 2023 in respect of February 2023 is not recognised in 2022/23 but is instead taken into account when paid and assessed in the 2023/24 tax year. As the balance of the rent for February and the rent for March (£1,300 in total) are unpaid, they are not taken into account for tax purposes. Relief for the bad debt is given automatically.

Accruals basis

If the landlord is not eligible for the cash basis or elects for it not to apply, accounts must be prepared under the traditional accruals basis under which income and expenditure are recognised in the period to which they relate, even if the income is not received or the bill paid. This means unpaid rent is taken into account for the period it is due. However, the tax legislation provides relief for bad and doubtful debts. Relief is given as a deduction when it becomes clear that the debt is bad or doubtful. Where a tenant is slow to pay but eventually pays, no relief is available – the rent is still taken into account for the period to which it relates regardless of when it is actually received.

If the debt is subsequently recovered, the amount recovered is brought into account as income.

If in the above example, David had prepared accounts using the accruals method, he would have needed to take account of the full amount of the rent due for the year to 31 March 2023 when calculating his taxable profits for 2022/23 (i.e., £12,000). If the balance of the February rent and the March rent remain unpaid, he would be able to claim a deduction of £1,300 in respect of the bad debts.

If you have a spare room in your home, you may consider letting it out to raise some much-needed cash to help meet rising living costs. If you do decide to do this, the rent-a-room scheme means that you may be able to enjoy the associated rental income tax-free. The scheme applies where you let out furnished accommodation in your own home.

Automatic exemption

If you earn less than £7,500 from renting out one or more furnished rooms in your own home, the exemption applies automatically. You do not need to tell HMRC about the income or include it on your tax return.

If the income is received by more than one person, each person can enjoy £3,750 tax-free under the scheme, regardless of how many people receive the income. For example, if a property is owned by three people and they let out two furnished rooms, each can receive £3,750 tax-free – a total of £11,250.

Income exceeds £7,500

If the rental income exceeds the tax-free limit of either £7,500 or £3,750 as appropriate, under the scheme, a person can choose to work out the taxable amount by deducting the tax-free amount rather than the actual expenses. For example, if a person lets out furnished rooms in their own home and receives rental income of £10,000, they could opt to use the scheme and deduct the tax-free amount of £7,500 to arrive at a taxable profit of £2,500.

This will be beneficial where the tax-free limit is more than the associated expenses. If expenses exceed the rent-a-room limit, or the taxpayer would realise a loss, it is more beneficial to calculate the profit in the usual way (rental income minus deductible expenses).

The taxpayer will need to complete a tax return and opt to use the rent-a-room scheme.

Do the sums

Using the rent-a-room scheme will not always give the best outcome, even if rental profits are below £7,500. If using the normal calculation method would result in a loss, it is better to take the loss so that it is available in the future to set against any future taxable profits.

You can choose each year whether to use the scheme or not. If you change the basis, you must tell HMRC by the tax return filing date of 31 January after the end of the tax year. This can be done in your tax return.

The Employment (Allocation of Tips) Act 2023 sets out a new legal framework for the fair allocation of tips. A new Code of Practice is to be introduced and employers will have a legal obligation to adhere to the Code. It will set out the principles of fairness and transparency and will reflect the different ways in which tips are reasonably collected by employers and distributed to workers.

Tips, gratuities and service charges

A customer may pay extra as a tip, a service charge or a gratuity. A tip or gratuity is a voluntary payment that the customer has no obligation to pay. Increasingly, restaurants are adding a service charge to the bill. If it is made clear that there is no obligation on the customer to pay the service charge, it is a voluntary service charge. If the customer must pay it, the charge is a mandatory service charge.

The tax and National Insurance consequences depend on the nature of the payment and how it is made and distributed.

Tips made directly to the staff

A customer may give a tip direct to a worker or leave the tip on the table at the end of a meal. Tips given directly to workers are liable for tax. It is the responsibility of the worker to tell HMRC about the tips that they receive, either by completing a Self-Assessment tax return or via their personal tax account. HMRC will usually collect the associated tax via an adjustment to the employee’s PAYE code. There is no National Insurance to pay on tips given direct to a worker.

Employer shares out the tips

In a situation where the employer initially collects all the tips, irrespective of whether they are made in cash or paid by card, and distributes them to the employees, the amounts distributed must be paid through the payroll and included in gross pay for tax and for National Insurance. The amounts are liable to both tax and National Insurance.

Troncs

A tronc is an arrangement for sharing tips. A tronc is run by a troncmaster and the troncmaster is responsible for operating PAYE and National Insurance on the distributed tips. The tronc will have its own PAYE scheme for this purpose, which must be run independently from the employer’s PAYE scheme.

Tips and the NMW

A worker is entitled to be paid at least the National Living Wage (NLW) or National Minimum Wage (NMW) for their age. Amounts paid to workers in respect of tips, gratuities or service charges do not count towards the minimum wage – the worker must be paid these in addition to the NLW or NMW.

Partner note: Employment (Allocation of Tips) Act 2023; the Social Security (Contributions) Regulations 2001 (SI 2001/1004), Sch. 3, Pt. 10, para. 5; www.gov.uk/government/publications/e24-tips-gratuities-service-charges-and-troncs/guidance-on-tips-gratuities-service-charges-and-troncs.

Even if you pay all your tax through PAYE, you may still need to complete a Self-Assessment tax return if you are a high earner. For 2022/23 and earlier tax years, this is the case if your income is more than £100,000. However, for 2023/24 onwards, the trigger threshold is increased to £150,000.

Unless you have to complete a self-assessment tax return for another reason, if you are taxed under PAYE and your income is between £100,000 and £150,000, you will need to file a tax return for 2022/23 but will not need to do so for 2023/24 onwards. You must file your 2022/23 tax return online by 31 January 2024. It is important that you do this, as HMRC will charge you a late filing penalty of £100 if you miss the deadline, even if you have no tax to pay.

Reasons you may need to file a return

Even if you are employed and your income is below the Self-Assessment trigger threshold, you may still need to file a Self-Assessment tax return. This could be because you also had income of more than £1,000 from self-employment or because you were a partner in a business partnership. You may also need to file a Self-Assessment tax return if:

• you receive income of more than £1,000 from renting out properties;
• you receive dividend income in excess of the dividend allowance;
• you receive interest that is taxable;
• you have foreign income to report;
• you realise chargeable gains in the tax year; or
• you are liable to pay the high-income child benefit charge.

Remember that the additional rate threshold has been reduced from £150,000 to £125,140 from 2023/24. If your income is between £125,140 and £150,000, you will no longer receive a personal savings allowance as this is only available to higher and basic rate taxpayers. The allowance is set at £500 for higher rate taxpayers. If you were previously entitled to the allowance and you received savings interest of less than £500, you would not have had to pay tax on that interest. However, if you are now an additional rate taxpayer, any savings interest (other than that in a tax-free wrapper such as an ISA) is taxable and you will need to report it to HMRC.

Telling HMRC

If you think that you no longer need to file a Self-Assessment return because your income is below the new threshold and you have nothing else to report, or if you have retired, you will need to tell HMRC. You can do this online, either using HMRC’s digital assistant or by completing an online form. You can also write to HMRC or tell them by phone (although it should be noted that the Self-Assessment helpline is closed until 4 September).

If you own a large plot of land that you no longer require but you don’t want to move home, you may consider selling some of it for development. However, from a tax perspective, there are considerations that you need to be aware of up front.

Selling the garden v developing the garden

There is a difference from a tax perspective between selling some of your garden to a developer and developing the land and then selling the property or properties that you have built on the land.

If you sell part of your garden but the attached property is, at the time of the sale, your only or main residence (or has been at some point), you may be entitled to private residence relief on any gain that you make on the land. This is a huge plus as it may mean that there is no tax to pay.

What counts as a ‘garden’?

Private residence relief is available for a property for the period for which it has been the owner’s only or main residence, and also this test has been met at some point, for the last nine months of ownership. The relief also applies to land which is occupied and enjoyed by the owner with the residence as its gardens or grounds up to the permitted area. The ‘permitted area’ is set at 0.5 of a hectare. However, a larger area may be allowed within the scope of the relief where this is deemed to be reasonable having regard to the size and character of the house.

To qualify, the land will generally be enclosed land surrounding or attached to the property which is used chiefly for ornament or recreation. Land that is let out or used for a business does not qualify for the relief, nor does land which at the date of disposal has been fenced off for development.

Order of sale

If some or all of the land is sold separately, it will only qualify for private residence relief if the disposal is made at the time the property eligible for main residence relief is still owned. Once the main residence has been sold, the land is no longer ‘enjoyed’ with the main residence and the relief is not in point. The test is applied at the date of sale.

Development first

Care should be taken if the plan is to develop the garden yourself. Private residence relief is not available if you have fenced off part of your garden to develop it or the development work has commenced. The land will no longer be part of the garden and enjoyed as such as the main residence.

Any value arising from the development is likely to be taxed as a trading profit. However, any gain up to the point when it ceased to be used with the main residence may be liable to capital gains tax.

The ‘pros’ and ‘cons’ of tax planning in the context of trusts and rental property.

Unlike capital gains tax (CGT), there are virtually no exempt assets for inheritance tax (IHT) purposes.

For example, motor cars and the family home, both generally exempt for CGT purposes, will still be liable to IHT at the death of the taxpayer. Landlords may therefore find themselves considering ways in which they can reduce their death estate by the value of their rental properties to lower their IHT exposure.

Disposing of the property by sale is an option, but by selling the property, the landlord will instead simply replace the property with cash, which will remain chargeable to IHT in their estate. However, if the landlord gifts the property seven years post the transfer, the property will no longer form part of their estate, leading to an IHT saving of up to 40%. This is particularly attractive for older landlords who perhaps no longer require the rental income and have their younger generation for whom they wish to provide.

The gift is possible through directly transferring the rental property to the next generation; but depending on the characteristics of the recipients, there could also be benefits of gifting the property into a trust.

Advantages of gifting the let property into trust

The main benefit of gifting the property is the fact that so long as the landlord survives for seven years post the gift, there will be no IHT (up to 40%) on the asset at the date of the landlord’s death. Even if the full seven years do not pass before their death, as long as they survive for more than three years, taper relief is potentially available, such that the tax charge will reduce by 20% in the three to seven years after the death.

After seven years, the gift is completely exempt. Not only does gifting the asset potentially reduce the eventual death estate, but should the potentially exempt transfer become chargeable, the IHT charge is based on the value at the time of the gift; so in rising prices, gifting has a double IHT benefit.

By gifting the property into a trust (rather than directly), the landlord has the benefit of being able to ensure that the beneficiaries are only entitled to as much income as the trustees agree that they can have. The property itself can also be sold or mortgaged only by the trustees.

The landlord is thus guaranteed that immature or spendthrift beneficiaries are limited in the level of income they can receive. In addition, they do not have the power to dispose of the property. The landlord could also appoint themselves as the trustee (or one of the trustees) and therefore retain effective control of the let property and the income generated from it, all while having legally given it away.

Another advantage of transferring the property into a trust is that more than one person can obtain an ongoing benefit from the income of the let property. A discretionary trust can be set up such that there is a ‘pool’ of beneficiaries to choose from when distributing income.

Alternatively, an interest in possession trust can be set up such that there is more than one life tenant or more than one ‘remainderman’. In addition to being able to spread the asset between several beneficiaries, the creation of a trust can also spread the eventual tax burden by the beneficiaries that receive benefit from the trust.

Depending on the type of trust and the tax band of the landlord, the income tax payable on the income from the rental property may also be lower. If there is an interest in possession trust, the income will initially be taxable in the trust at the basic rate.

This may be significantly lower than the income taxed in the hands of the landlord if they are a higher or additional-rate taxpayer. Once the income is paid out to the specific beneficiaries by the trustees, if they are not taxpayers (such as children), they will be entitled to a refund from the tax paid on their behalf by the trustees.

Disadvantages of gifting the property into trust

The main disadvantage is the impact of CGT on the initial settling of the trust. This is a disposal for CGT purposes and if the property has enjoyed an increase in value since the landlord acquired the property, the tax on any gain payable will be a ‘dry tax charge’ such that there are no proceeds received with which to pay any CGT charge. In addition, if the property is (say) a residential let property in London, any tax on the gain and the return itself need to be paid and filed respectively with HMRC within 60 days of the completion. If there is a mortgage on the property, stamp duty land tax may also become payable on the transfer.

There are two situations where this gain can be transferred (held over) to the trustees, payable only when the trustees eventually dispose of the property. These are the relief for gifts of business assets and the relief for gifts where there is both a CGT and an IHT charge.

As a normal rental property business is not defined as a ‘business’ for CGT purposes, the business asset method of holdover relief is not possible. However, if the landlord is transferring a property that satisfies the requirements of the furnished holiday let legislation, this is considered a business for CGT purposes, so any gain on this transfer could be held over.

The other situation where holdover is possible is when there has been both a CGT and an IHT charge levied on the asset as a result of the transfer to the trust. As all additions to trusts are chargeable lifetime transfers, holdover relief due to an IHT charge will be possible. This is because even if the value of the asset added to the trust is below the nil-rate band (NRB), because the NRB is a nil-rate band (i.e., not an exemption) it is still an IHT tax charge, albeit charged at a nil rate or zero per cent.

A further benefit of this is that the trustees can also use holdover relief should they wish to appoint the asset out to the beneficiaries once it is in the trust. If the let property, being a chargeable asset for CGT purposes, has risen in value during the period the trustees have held it, this would result in a capital gain.

As the trust will be in the relevant property regime, an IHT exit charge will be incurred after the first quarter of the asset being in the trust. A trust for this purpose, notwithstanding the other advantages, allows a donor to pass on the CGT to the recipient through a two-stage process, even when it is not a business asset.

The other major disadvantage of the rental property being in a trust is the income tax charge. Unless the trust is an interest in possession (see above), it will be a discretionary trust and due to pay the ‘rate according to trusts’ (RAT).

This is equal to the highest individual band and is charged at 45% for non-savings and interest and 39.35% for dividends. Only those landlords already in the additional band will not incur higher income tax rates by putting the property in a trust. A refund may arise, however, if payments are made to a beneficiary in a lower tax band.

Another disadvantage of holding the property in trust in cases where holdover relief is not possible (e.g., because the trustees sell the asset rather than gift it), the annual CGT exempt amount available to a trustee to offset any gain is only half of an individual taxpayer, so currently only £1,500.

Practical matters to consider are the obligation of the trustees to adhere to the requirements of the trust deed. If the trustee is the prior landlord, they need to appreciate that they no longer own the property, which can be a challenge in itself.

Practical tip Beware of a settlor-interested trust. If the landlord, their spouse or minor child can benefit from the trust, all the income is chargeable to income tax on the landlord and the property will remain in their death estate.

For stamp duty land tax (SDLT) purposes, a property may be a residential property, a non-residential property or a mixed-use property. The classification is important as it determines the rates at which SDLT is charged.

Recently, there has been a slew of cases concerning mixed-use properties. A mixed-use property is one comprising both residential and non-residential use. Having an element of non-residential use alongside a residential property can be beneficial from an SDLT viewpoint as SDLT is charged at the lower non-residential rates. Where the purchaser already has a residential property, a further benefit of being able to access the non-residential rates is that the 3% supplement does not apply.

What counts as a mixed-use property?

A mixed-use property is one that has both residential and non-residential elements. HMRC cite the example of a flat attached to a doctor’s surgery or an office. A property comprising a shop with a flat above it would also qualify as a mixed-use property.

However, problems may arise in practice where mixed-use rates have been paid where there is a small area of what is claimed to be commercial land attached to a house and HMRC may challenge whether the land purporting to be non-residential land is actually non-residential land. Challenges are particularly prevalent where amended SDLT returns have been filed with a view to securing a refund of SDLT previously paid at the residential rate.

Residential use

The definition of residential property includes land that forms part of the garden or grounds. Consequently, if the land in question forms part of the garden or grounds, it is residential land.

Non-residential use

A non-residential property is any property that is not a residential property.

Non-residential property includes:

commercial property, such as shops or offices;

property that is not suitable to be lived in;

forests;

agricultural land that is part of a working farm or that is used for agricultural reasons; and

other land or property that is not part of a dwelling’s garden or grounds.

The mixed-use rates also apply to six or more residential properties purchased in a single transaction.

Practical application

For the mixed-use rates to apply, there must be an element of non-residential use. Land can only be non-residential land if it is not residential land. The first question to ask is whether the land is all residential land (and that includes land that is garden or grounds as well as the house itself). The answer has to be no for mixed-use rates to be applicable. In deciding whether the non-residential test is met, consideration must be given to the extent of the commercial use and whether the commercial use will mean that the land does not form part of a garden or grounds.

In recent cases, HMRC accepted that land used for grazing and let to a local farmer was non-residential land.

However, they did not accept that a lane running through a property which was classified as a public highway was non-residential land as the footpath did not compromise the reasonable enjoyment of the dwelling. A similar argument was applied in respect of a pole in a garden which supported electricity cables.

Businesses are often run from home and where there is genuine commercial use of part of the land, there should not be a problem securing the mixed-use rates. However, HMRC are alert to flimsy claims.