Most people don’t like to think about inheritance tax as it’s a tax that your beneficiaries potentially pay when you die, but it is hugely important to plan your affairs in order to minimize any tax that is due.

One option is to reduce the size of your estate and therefore any potential IHT bill, by giving away or gifting your assets during your lifetime.

Given the current increase in the cost of living, I have had a few discussions with clients where parents are wanting to help their children financially, and asking how they could best do this.

This blog looks at the gifts that can be made regularly, to reduce the size of your estate, whilst helping the younger generation.  Over time these gifts do add up and are a way of passing on family wealth at a time when the family may be most in need of the help.

Gifts are categorized into 2 categories – those that are tax free immediately and those which drop out of your estate after a period of time – typically 7 years.

Tax free Gifting

Each year you can make gifts up to £3,000, and if you don’t use your allowance then you carry it forward for one year.

You can also make as many small gifts of up to £250 per person as you like in a year.

If you have family getting married, then you can make a tax free gift of £5,000 for your children, £2,500 for your grandchildren, or £1,000 for other people.

These are all called Lifetime Gifts and can be useful to help family with education costs, payments into Junior ISA’s or Lifetime ISAs for family, or just to help the younger generation with the cost of living.

Gifts to charities and political parties are usually also tax free.

Gifts out of Surplus Income

In addition to the above, if you give away surplus income, then these gifts can be tax free.  The key here is to show that the income is surplus to your requirements, and not needed to maintain your standard of living.  This would generally mean making regular gifts out of your regular income.

Potentially Exempt Transfers – the 7 year Rule

Other gifts, not meeting the above criteria, are called “potentially exempt transfers (PETs)”.  They are potentially exempt as they will be free from IHT if you survive for 7 years having made the gifts.  If you die within 7 years, then there will be IHT due on the value of those gifts, but how much depends on the length of time you did survive having made the gifts.  The rules around PET’s are very complicated and detailed individual advice would be needed.

The key to inheritance tax planning is to start early.  Using gifting is one way to help reduce your final IHT bill, but it is always advisable to sit down with your accountant and financial advisor and make a plan!

It’s the start of a new tax year – and therefore time to do some number-crunching to work out the optimal salary for company directors.

The Office of Tax Simplification has come up trumps this year and changed the rate of NIC part way through a tax year – to er……. not simplify matters!

So where does this leave us for the company director who want to pay him/herself tax efficiently?

We need to look at 2 scenarios – the company which has only one director and therefore cannot claim the NIC Employment Allowance – and the company which has 2 directors, or a director and at least one employee and is able to benefit from the increased Employment Allowance.

Single Company Director -no other employees earning over the Lower Earnings Limit (LEL) for NIC

You have 3 choices!!

1. To qualify for NI benefits (state pension etc) you need to earn at least the LEL for NIC – which this year is £6,396 pa (£533 pm)
2. The employees NIC threshold has increased to £12,570 – but only from July 2022. Up to 5 July it is £9,880. Over the year, this gives an annual threshold of £11,908.However, the employer’s NIC threshold for the year is lower at £9,100, so if you want to avoid having to pay any NIC at all in the year, your optimal salary is £9100pa (£758pm)
3. As the rate of employers NIC is 15.05% this year, and the rate of corporation tax at least 19%, then you will be better off overall if you pay the higher salary of £11,908pa (£992pm) – as you will save more in corporation tax than you will pay in NIC.The saving though is only £191 over the year.  You will have to weigh up whether this tax saving is worth the hassle of having to remember to pay the employers NIC over to HMRC towards the end of the tax year.

Company with more than one director, or one director and at least one employee earning more than the Lower Earnings Limit for NIC

1. With more than one employee the company should be able to claim the NIC Employment Allowance. This has increased in the year to £5,000 and gives a company a credit against the first £5,000 of employers NIC due – often resulting in a small company not actually physically paying over any employers NIC to HMRC.
   In this situation paying the higher salary of £11,908 would be the optimal level, as the employers NIC due is covered by the allowance.  The additional corporation tax saving from paying £11,908 as opposed to £9,100 is £533.

Both these levels of salary are below the personal allowance of £12,570, so assuming no other income in the year, there would be no income tax due.  Additional income could be drawn from the company as dividends.  The first £2,000 of salary remains tax free.  Tax rates of dividends this year have also increased and are 8.75% for basic rate taxpayers, and 33.75% for higher rate taxpayers.

The above rates are illustrative only and assume no other income from other sources in the year.  You should always take personal tax advice as to the optimal level of salary for you, given you own personal circumstance.

For more information and advice, please contact Rosie Forsyth.

Spurred on by the recent queues for fuel, more and more people are looking at switching to electric cars when they next change their car.  Here we look at how tax efficient this can be when the car is purchased through your limited company.

Benefit in Kind Tax

As most company car drivers are aware, if you use a car owned by your company for private use, then each year you have a personal tax charge (known as a benefit-in-kind.) The more expensive the car and the higher its CO2 footprint, the higher the tax charge, as the BIK is calculated by multiplying a given percentage for each CO2 level by the list price of the car.

So a car with a list price of £30k and average CO2 emissions of 120g/km has a percentage of 28% and therefore a BIK value of 28% x 30,000 = £8400.  The employee is treated as having additional income in the year of £8400 and taxed on this accordingly (£1680 for basic rate taxpayers, and £3360 for higher rate).  The employer pays employers NIC on this amount as well – a total of £1160 (which will increase when the 1.25% increase to NIC comes in next year.)  Company cars are generally therefore expensive!

To encourage the switch to electric, the BIK on electric cars was initially set at 0%.  This has increased to 1% for fully electric cars for this tax year and will increase to 2% for 22/23.  The same car above, if it were fully electric would only have a BIK of £300, and a £60 tax charge for a basic rate taxpayer.

For hybrids, with Co2 emissions under 50g/km the BIK percentage depends on its electric range, but is still between 1 and 13% in this tax year.

Capital Allowances

Capital allowances are like a tax-deductible expense, so you can write off the cost of the car against your profits over a period of time. Without getting too technical, generally for a company car, it takes many years to write off the cost against your profit.

A brand new fully electric car qualifies for a first year allowance which means you can write off the full cost in the year you buy the car, reducing your company profit for that year and saving corporation tax.  Nearly new, or hybrids don’t qualify for the first year allowance and will be written off over a period of time.

VAT

For VAT, electric cars are sill cars and follow the general vat rules that the vat on the purchase price cannot be reclaimed by the business, unless the car is genuinely only used for business purposes (almost impossible to prove!)

Charging

The cost of installing a charging point at work (potentially AKA – home!) will also be fully tax deductible in the year, and there is no BIK on the employee for the cost of the electricity if the company allows employees to recharge at work.

Road tax and Congestion Charge

A fully electric car is exempt from the both the above.

The Downside!

There is always one – the cost of purchase – and the current lack of supply!

Electric cars are still an expensive option to purchase – I know – I’ve been looking! The initial outlay is higher than for a fuel or diesel car.  Also demand is high at the moment so you will need to be patient if you decide to make the switch.

Buying any car for your business is an investment and needs careful consideration of your own circumstances.  If you need any further information or guidance then please get in touch with us.

2 increases were announced yesterday -NIC and dividend taxes are both increasing by 1.25% from April 2022.

For the first year, this will be collected as an increase in National Insurance.

But from April 2023, National Insurance will return to its current rate, and the extra tax will be collected as a new Health and Social Care Levy.

How will this affect you if you are self employed, an employee– or a limited company owner?

The Self-employed:

You currently pay 2 types of NIC – class 2 and class 4 NIC.

Class 2 NIC is a flat rate, currently £3.05 a week, or £158.60 a year.  This is paid via self-assessment when you do your tax return, and is not affected by the new measures.

Class 4 NIC is charged on your profit and is currently 9% of profits over £9,568. If you have profits over £50,270 then you only pay 2% class 4 NIC on amounts over this.  This is the rate that will go up to 10.25%, and then 3.25% from April 22.

Employees

 Employees have NIC deducted from their salaries each month through their pay packet.  There is no NIC due on the first £184 per week (£9,568 pa) and then NIC is payable at 12% on income between £184 and £967 per week (£9,568 – £50,284).  Over this amount the rate reduces to 2%.

This rate will increase from 12% to 13.25% from April 22.

Currently you stop paying NIC once you reach state pension age.  When this new amount of 1.25% moves from being called NIC and becomes the Health and Social Care Levy in April 23, this will be paid by state pensioners who are still working.

Employers

Employers pay employers NIC on employee’s salary.  Currently there is no employers NIC on the first £170 per week (£8,840 pa).  After this, employers NIC is paid at the rate of 13.8%, with no upper limit.  This rate will increase to 15.05% from April 22.

If a company has more than one employee on their payroll earning over the NI threshold, they can currently claim the NIC Employment Allowance.  This gives them a credit of up to £4,000 against their employers NIC bill and is claimed via the payroll each month.

Nothing has been said about the employment allowance in connection with the increase in NIC – presumably a company will still be able to claim the allowance while the increase is called NIC – but when it changes to the Health and Social Care Levy………………….?

Many small business owners choose to set their own salaries at £8,840 pa so that there is no NIC payable by either the employee or the employer, and their salaries will therefore not be affected by the increase in NIC.  This is why the dividend tax has been increased as well!

Dividend Tax

Dividends are paid to shareholders of limited companies and are often the way that company directors will take money out of their companies.  There is no NIC on a dividend, and hence it is an efficient way to pay yourself from your company.

Dividend tax is currently 7.5% for basic rate taxpayers, and 32.5% for higher rate taxpayers.

These rates will rise to 8.75% and 33.75% respectively from April 22.

As there is no NIC on a dividend, it is argued that increasing the tax on dividends at the same rate brings about some equality in the increases between the employed and the self-employed.  Company directors I am sure will be asking where the equality was in the covid help given out by the government in the last 18 months!

The dividend allowance of £2,000 remains, and any investments held in ISA’s are tax free so will also not be affected by this increase in dividend tax.

As this has just been announced there is limited information available at the moment so the above is produced on what we now know.  We will of course be updating you with new information as we get it!

If you are self-employed or a landlord with gross income over £10k, then the way you report your results to HMRC is signifcantly changing from April 23.

This seems ages away but it is something that you need to be aware of, and need to plan for.

Making Tax Digital for Income Tax will apply from 6 April 2023 and under this, the self-assessment tax return will be replaced by 5 (yes 5!) new reports a year.  You will need to submit quarterly updates of your income to HMRC and then a final year end declaration.

Your first return is due in the 4^th month of your accounting period and then every 3 months after that.

So if you have a 5 April year end you will have to file the following:

Return to 5 July 23 – due in Aug 23

Return to 5 Oct 23 – due in Nov 23

Return to 5 Jan 24– due Feb 24

Return to 5 April 24– due May 24

Final year end return, including any year-end adjustments to 5 April 24– due 31 Jan 25

And don’t forget – your tax return under the old system for 22/23 will also be due by 31 Jan 24!

To submit the information you will either need to use MTD compliant accounting software, or have a decent spreadsheet set up that you can link to bridging software to enable you to submit.

Initially your tax is still only due to be paid in one go, in January, as now – though the logical next step is for tax payments to be made throughout the year based on the information being supplied!

The one bit of good news is that there won’t be any late filing penalties for the first year – while we all get used to the new system!!

So without totally panicking – what can you do now?

• Work out if this will apply to you.  Do you have gross income (not profit) from your self employment, or rental income of over £10K.  If you have both, you need to look at the combined total ( eg self employment income of £6k and rental income of £6k – total £12k) to see if you are caught.
• Review your accounting system and consider making any required changes from the start of the next tax year (6 April 22.) This will give you a year to work out how to use it properly and be confident in your bookkeeping before all the changes come in the year after.
• If you are using a spreadsheet, give serious consideration to using an online accounting package. All of the main suppliers have basic packages and will be working hard to ensure they are MTD compliant by April 23.
• Don’t panic! The changes are still some way off, and there is time to plan.  At least having an awareness of what lies ahead means you can plan effectively for the changes and ensure your business is ready to meet the challenge.

There will be lots more information coming out about MTD in the next year, and there is still lots to be confirmed about the new regime.  We will keep you updated with information as it becomes available.

In these difficult economic times, it is important to ensure that you are not paying more tax than you need to.

I am delighted to offer you the chance to download a copy of my tax planning guide for 2021/22.

This guide suggests many ways in which you can save money on your tax bill by taking full advantage of the tax system. It highlights tax planning opportunities as well as some of the pitfalls you should avoid.

The booklet is a clear and concise guide to the taxes that you, your business and your family may pay.  I hope that it will give you practical tips on how you can save tax – or at least areas where there may be scope for action and that you will contact me for help and advice.

You can download your copy by clicking on the link below:

Unsurprisingly, HMRC has announced how they will be cracking down on incorrect self-employed Covid grant claims. Due to the speed and urgency that claims were made and issued, there are likely to be a number of innocently miscalculated grants.  Claims were made by individuals, often without any involvement from their accountants, or with little up to date financial information.

HMRC is requesting that businesses double-check their calculations and repay HMRC within 90 days of receiving any grants if they were claimed in error.  Keeping a grant that you knew at the time you should not have had, could result in a 100% penalty (ie repaying the full grant – and the same again in fines!)  However, if when you do your 20-21 tax return you then determine that you were not eligible for a grant, as long as the amount is repaid by 31 Jan 2022, no penalty should be due.

If you are self employed, then by now you could potentially have claimed 4 SEISS grants.  The amounts you received have to be separately identified on your tax return, and are included in the tax year in which the grant was received.

To claim the first 2 grants your business had to have been “adversely affected” by Covid in the relevant period.

It may be the case that your business was adversely affected earlier on, but then your trading patterns resumed as normal, so although you claimed the first or second grant you might not have been eligible for the third or fourth grant.

The third grant covered the period 1 November 2020 to 29 January 2021 and for this grant the conditions were different.

To qualify, your business had to have suffered reduced activity, capacity or demand AND as a result, you must have reasonably believed that you would have suffered a “significant reduction” in trading profits for the relevant basis period (this is generally your full financial year, not just this 3 month period.)

There was no requirement for trading profits to be reduced by a certain fixed amount or percentage, but the reduction must be ‘significant’. HMRC say you need to consider your individual and wider business circumstances to determine what is significant!

The conditions for the fourth grant are the same, but cover the period 1 February to 30 April 2021.

So if claimed a grant and then on review, you don’t think you should have – what should you do?

You need to let HMRC know and repay the grant within 90 days of receiving it.  You can do this online.

If you do not do this and you knew that you should have not received the grant at the time of receipt, then HMRC may charge you a penalty, potentially of 100% of the grant received.  However, if you did not realise until later that you should not have received the grant, as long as the grant is repaid by 31 Jan 2022, there should be no additionally penalty incurred.

In any situation it is always better to tell HMRC that you have made an error and the grant needs to be repaid, than let HMRC discover that you were not eligible and raise the assessment themselves.  In this situation, penalties will almost certainly be higher.  Find out more about potential penalties here.

For more information, please contact Rosie Forsyth at Wilkins & Co.

Tax doesn’t have to be taxing – remember HMRC telling you that?

That’s all well and good if you know what you are doing, but tax is pretty daunting when you are setting up on your own or running a small business and would much rather just be getting on with running your business!

However, you do need to at least have an understanding of what tax you will pay and when, so it doesn’t come as a total surprise when you or your accountant come to submit your tax return.

As a self employed person operating as a sole trader then you have to think about both income tax and National Insurance (NIC).

Most people know they have to pay tax at 20% (of something!)  but often the NIC comes as a bit of a shock when they realize this is due as well.

So what is due when you are self-employed?

Income Tax

Income tax is due at 20% of your profit for the year.  Profit is essentially your sales less your costs.  Everyone has a personal allowance of £12,570 in this tax year, so you will not pay tax on the first £12,570 of your income, but after that you pay tax at 20%, up to the basic rate tax threshold (this year £50,270.)  If your income goes over this amount, then your income tax rate goes up to 40%.

National Insurance

Being self employed you pay 2 types of NIC – class 2 and class 4.

Class 2 is a flat rate per week of £3.05 per week (£158.60 per year.)  Although this is calculated as a weekly amount, it is actually paid once a year along with your self-assessment tax bill.  Class 2 NIC gives you an entitlement to state benefits and a state pension when you retire.

If your profits are low (under £6,515 this year), you are exempt from paying class 2 NIC, but you have the option to pay it voluntarily.  This is often a good idea to do, given the entitlement to benefits that it gives you, for a relatively low cost.

Class 4 NIC is based on your profits for the year.  The rate is 9% and you pay this on your profits over £9,569 and up to £50,270.  If your profits are more than this, the rate then falls to 2% on the higher profits.

Class 4 NIC is the one that tends to be forgotten, but at 9% of profit, it can add up.  You could be in a position where you have class 4 NIC due, but not any income tax, if your profits are between £9,569 and £12,500)

SEISS Grants

Just a reminder as well that any SEISS grants received are taxable, and NICable (love that word!) and do need to be included on your tax returns.  The grants are taxable when they are received, so the 4^th grant due to be paid shortly will go on your 21/22 tax return, even though it related to Feb, March and April 21 (most of which is in the 20/21 tax year!)

There is a separate box on your tax return for 20/21 where you put the details of any SEISS grants received – presumably making it easier for HMRC to check your entitlement to it in the first place!

If you would like any further information or help with your tax return for 20/21, then please get in touch with Rosie Forsyth.

For most limited company directors, the optimal solution is to pay a low salary and then to pay dividends.

Why is this the case?

• If you pay yourself a salary no higher than the personal allowance, there is no personal tax to pay on it
• You should however ensure that the salary is high enough for national insurance purposes to count as a “qualifying year” – towards your state pension and other benefits
• Then pay additional amounts as dividends – as there is no national insurance payable on dividends.  Ideally keep total income under £50,270 to avoid paying higher rate tax
• The salary paid is an expense of the business and therefore reduces your profit, and your corporation tax

Obviously, every person has a different personal tax situation and this is only intended to be general guidance for salary levels. We have assumed:

• You are a UK resident
• You have no student loan
• You have no other income other than salary and dividends from your company
• You are not working inside of IR35
• You have a standard personal allowance
• Your company has sufficient post tax profits to legally pay these dividends

So what salary should you pay yourself this year?

First we need to understand the impact that National Insurance has on your salary choice, as you start paying NI at a lower level of income than you start paying income tax.

There are 3 NI thresholds to consider:

• Lower Earnings Limit – If your salary is above this limit, you’ll keep your future entitlement to state pension and benefits. However, you don’t actually pay any NI contributions. For the 2021/22 tax year the threshold is £520 per month or £6,240 per annum 
• Primary Threshold– Once you earnings start exceeding this threshold you will pay employee’s national insurance. The limits are £797 per month or £9,568 per annum for the 2021/22 tax year
• Secondary Threshold– When you earn above this threshold, your company is required to pay employer’s national insurance. The threshold for 2021/22 is £736 per month or £8,840 per annum.

Salary Option 1:

The first strategy is to pay yourself a salary up to the Employer’s National Insurance Threshold – £736 a month or £8,840 per annum. This is the most that you can pay yourself without you or your company paying any income tax or national insurance on your salary.

You can then pay dividends of £41,430 without paying any higher rate tax, and your basic rate tax bill for the year would be £2,678.

The company would save corporation tax of £1680 (19% x £8,840)

Salary Option 2:

The second strategy is to pay yourself a salary up to the Personal Allowance threshold of £12,570 or £1,047.50 per month.

This level of income is above the NIC thresholds, so you will pay employees NIC of £360 on your salary over the course of the year, resulting in net pay of £12,210.

Technically the company will also pay employers NIC, but if you have more than one employee earning over the LEL, then you can claim the NIC employment allowance. This is currently up to £4,000, and is offset against the employers NIC due, resulting in none actually being paid!

Note that a sole director cannot claim this allowance, so the company would then pay £514 in employers NIC on this salary.

If you pay a salary of £12,570, you can then pay dividends of up to £37,700 without paying higher rate tax. Your personal income tax bill would be £3,038 and the company would save £2,388 in corporation tax.

Option 1 or 2?

If you have more than one employee and can benefit from the employers NIC employment allowance, then taking the corporation tax and personal tax into account, you would be better off by £348 going with Option 2.

Option 1 would be better for a sole director.

For both these options, the company needs to have a proper payroll set up and be reporting monthly to HMRC under RTI. If you want to pay any salary at all from your company then you need to speak to an accountant to ensure this is being done properly as there are penalties for getting it wrong!

If you would like more information or help in respect of your personal position then please get in touch.

Just a couple of weeks to go before we say goodbye to the 20/21 tax year.  Many allowances will roll over on 6 April 2021 and if you have not used them in this tax year, the opportunity will be lost.  Noted below are some of the key areas for you to review to ensure you have been tax efficient in the year. Taking action now will allow you to take advantage of any exemptions, remaining reliefs and allowances before they are lost for the year.

Income tax

Ensure if possible you have sufficient income to use your personal allowance. The allowance is £12,500 for 2020/21. If a family member has unused allowance consider if there are ways for this to be utilised.

If you have a limited company, ensure the £2,000 tax free dividend allowance has been utilised – assuming you have sufficient distributable profits to be able to declare a dividend.  Also remember that dividends are paid “per share” so have to be paid to everyone holding that class of share in accordance with their shareholding.

For married couples/civil partners that are eligible for the Married Couples Allowance, ensure this has been claimed.  If one partner has not used all their personal allowance, and the other is a basic rate taxpayer, then up to £1,250 of the personal allowance can be transferred, saving £250 as a couple.  This can also be backdated to tax years since 5 April 2016 if not claimed previously. The claim is simple and can be done here .

Consider ways to reduce your taxable income if you are within the £100,000 to £125,000 group to prevent a 60% effective charge. Pension contributions and charitable donations are two ways you can reduce your taxable income.

If your income will be over £50,000 also consider ways to reduce this if you have children and are claiming child benefit.  This is clawed back if the higher earning partner’s income is over £50,000, on a sliding scale, and all has to be paid back if your income is over £60,000 in a tax year.

Annual ISA subscriptions should be maximised. The limit for 2020/21 remains at £20,000. The investment return from ISAs is free from income tax and capital gains tax. Talk to an IFA to get advice on utilising your ISA allowance.

Pensions 

Most individuals can make contributions of up to 100% of their earnings, capped at £40,000 each tax year. Pension contributions are tax effective as tax relief is given at source for a personal contribution, but the contribution needs to be made before the end of the tax year for it to qualify.  Very high earners may be limited on the amount they can contribute and need to take individual advice.

If you do not use all your allowance in one year, you can carry it forward for up to three years. Any unused allowance for 2017/18 will be lost after 5 April 2021.

Even if you have no income, you can still make a net pension contribution of up to £2,880 and the government will add £720 basic rate tax relief, which can be a significant benefit.

Again take advice from an IFA as to your personal pension situation.

Inheritance Tax

Everyone has a £3,000 annual exemption to use each year. This is the amount individuals can give away without any inheritance tax implications.  Any unused exemption can be carried forward for one tax year only. This may be of use to the older generation wanting to help their families in these difficult times.

Small gifts of up to £250 made to an individual are also exempt each tax year.

If you would like any advice about your personal tax position then please do get in touch with Rosie Forsyth@wilkinsco.co.uk