March Tax Tips & News

Welcome to the Benedicts Tax Tips & News monthly newsletter, bringing you the latest news to keep you one step ahead of the taxman.

If you need further assistance just let us know or send us a question for our Question and Answer Section.

We’re committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.

Please contact us for advice on your own specific circumstances. We’re here to help!

Newsletter issue – March 2023

As an individual landlord you can‘t deduct finance costs, including interest, from your residential property rents for tax purposes. Instead, you get tax relief for those costs as a basic rate tax credit calculated as 20% of the lower of:

• finance costs for the year plus any unused finance charges brought forward;
• your property income profits with no deduction for finance costs, - or your adjusted total income for the year that exceeds your Personal Allowance.

In years where the property income is low, or a loss, little or no tax credit can be set-off, in which case the excess interest which is not relieved is carried forward to the next tax year.

Example

In 2021/22 Bob the Builder had trading profits of £13,500. It was his first year in which he let out a property and he received rents of £3,000, paid mortgage interest of £4,000 and incurred £6,500 of allowable expenses.

Bob made a loss of £3,500 (£3000 – 6500) on his property which can‘t be set against his trading profits. As Bob has zero property profits for the year, he can‘t set off a tax credit derived from his finance costs against his 2021/22 tax liability.

However, both his property loss of £3500 and the unused finance costs (£4000) are carried forward to the next tax year.

In 2022/23 Bob has a better year. He received rental income of £18,000, paid property expenses of £1500 and £6000 as interest. The loss from 2021/22 of £3500 is set against his rental income. His trading profits have also improved to £26,000.

The amount of tax credit is calculated as 20% of the lower of:

• finance costs= £10,000 (£4,000 + £6000)
• net property profits = £13,000 (18,000 – 1500 – 3500)
• adjusted total income = £26,430 (26,000 + 13,000 - 12,570)

Bob‘s tax credit for 2022/23 is calculated as £10,000 x 20% = £2,000.

He has used all his property loss and obtained tax relief for the unused interest paid in 2021/22.

There is no limit on how many years the unrelieved finance costs can be carried forward.

Newsletter issue – March 2023

Online platforms such as Airbnb are now obliged to provide HMRC with data about the payments it makes to individuals who let rooms on a short-term basis. HMRC is matching that data to tax returns and writing to taxpayers who have apparently not declared their rental income correctly.

If you receive such a letter don‘t be alarmed by the aggressive tone, as HMRC is asserting that you owe tax, but that may not be the case.

If you have let a room or two in your own home, the rental income may be covered by rent-a-room relief (£7500 per year). If you have let out a separate property for holiday lets, income of up to £1,000 per year can be covered by your property income allowance.

If the rents you received in a tax year do not exceed these two thresholds (which can‘t be combined for the same property) you are not required to report the rental income on your tax return.

Where your rental income has exceeded these thresholds, you may have expenses to deduct from the gross income, which will reduce your taxable profit.

In any event you should respond to the HMRC letter within 30 days, and we can help with that.

We do not recommend that you sign the certificate of tax position enclosed with the HMRC letter, as this is not a legal requirement. The declaration on the certificate that the information is [[correct and complete]] is not restricted to a specified period, so it could mean you are asserting that an unconnected matter is correct when it isn‘t.

Newsletter issue – March 2023

In his Autumn statement in November 2022 Chancellor Hunt announced cuts to the dividend allowance and the additional tax rate threshold, where individuals start to pay tax at 45%. You need to take these changes into account when planning how and when to extract profits from your company.

Many family companies spread the shareholding over various family members to take advantage of the dividend allowance which allows an individual to receive up to £2,000 of dividends tax free in a tax year.

This dividend allowance will be halved from £2,000 to £1,000 on 6 April 2023, and halved again to £500 on 6 April 2024. Anyone who receives dividends in excess of the dividend allowance needs to report that income to HMRC, so the tax due can either be deducted through their PAYE code, or by way of a self-assessment tax return.

Dividend income is treated as falling into the taxpayer‘s highest tax band where it is taxed at these rates in 2022/23:

• Basic Rate band: 8.75% (other income taxed at 20%)
• Higher rate band: 33.75% (other income tax at 40%)
• Additional rate band: 39.35% (other income taxed at 45%)

These dividend tax rates were increased on 6 April 2022, and they could be increased again in the Spring Budget in March this year.

There are other ways of extracting profit from your company, for example as rent, interest, or pension contributions. The first two methods require the shareholder to have lent property or funds to the company, so are difficult to arrange at short notice.

Pension contributions can be paid by the company on behalf of any employee or director, as long as the total remuneration package for that person is reasonable for the work they perform. Employer contributions are currently very tax efficient as they are tax deductible for the company and don‘t carry NIC.

However, you need to ensure that you don‘t exceed your pension annual allowance (generally £40,000) and lifetime allowance (frozen at £1,073,100 for the last three years). Please talk to your financial adviser before deciding whether to pay more or less into your pension fund.

The additional rate threshold is reduced from £150,000 to £125,140 on 6 April 2023, which is worth noting if your income is in this range.

Newsletter issue – March 2023

Many people don‘t realise that they have significant gaps in their National Insurance Contribution (NIC) record, and as a result they won‘t be entitled to the full state retirement pension. This can come as a shock when you start to receive your state pension, but by that time it may be too late to fill the gaps in your NIC record.

A taxpayer needs 35 complete NIC years (as payments or national insurance credits) in order to receive the maximum state retirement pension, and at least 10 completed NIC years to receive any state retirement pension.

You can easily check your NIC record for your complete working life on your online personal tax account on gov.uk (https://www.gov.uk/personal-tax-account).

If your NIC record shows there are gaps, don‘t assume the record is completely correct. You need to investigate the reason for any gap and challenge HMRC to look for missing NI contributions or credits.

It is not uncommon for NI credits to be missed by HMRC for periods where you were claiming child benefit or universal credit, and not working. You should have been given NI credits automatically for these periods. In other circumstances (e.g., when acting as foster carer, or a grandparent caring for a child), you need to apply for NI credits.

Where there is a genuine a gap in your NIC record you can normally go back up to six years and pay voluntary contributions to fill in the missing weeks to make a tax year complete for NIC. For example, gaps in your NIC record for the tax year 2016/17 can be filled by voluntary payments made before 6 April 2025.

However, currently there is a special dispensation that allows women born after 5 April 1953 and men born after 5 April 1951, to complete gaps in their NIC record right back to 6 April 2006. This opportunity to make up these old years with voluntary NIC payments closes on 5 April 2025, so there is not much time to take action!

Newsletter issue – March 2023

Q. My company is buying an electric car for me to use for business and private journeys. In truth there will be very few business journeys. Can the company still claim the 100% first year allowance, although the business use will be small?

A. Your company can claim the 100% first year allowance if the car is acquired brand new and not second hand. It is irrelevant that you use the car mainly for private journeys, as you will be taxed on that benefit calculated at 2% of the list price of the car each year. This taxable benefit will increase on 6 April 2025 to 3% of the list price.

Q. I will have to register my business for VAT soon, but I‘m confused as how to work out net and gross amounts, when the VAT rate is 20%. If I want to receive £2000 for a job, after VAT, what do I quote as the VAT inclusive price for the customer? If my customer will only pay £1600, how do I calculate what I will get after paying over VAT.

A. If you start with the net figure and need to work out the gross amount including VAT, multiple the net amount by 1.2. Using your figures above:

£2000 x 1.20 = £2400. The VAT is £400.

When you start with the gross figure (the maximum the customer will pay) you need to divide by 6 to find the VAT. When the customer pays £1600:

£1,600/ 6 = £266.67. The VAT is £266.67. The net sale is £1333.33 (1600 - 266.67)

Once you are registered for VAT you will be able to reclaim VAT on your purchases, so the amount of VAT you pay to HMRC will be after deducting VAT you paid on things you buy for the business.

You may also qualify for the VAT flat rate scheme which could make the VAT calculations easier, but that will depend on your business sector.

Q. My wife and I lived in our joint-owned property for 12 years and it is now let it out, but we plan to sell it in two years time. What will be the impact of capital gains tax on that sale?

A. When you sell the property you need to calculate the gain made, being the difference between the sales and purchase price after deducting selling/ purchase costs in each case, including stamp duty land tax paid on purchase. Let‘s assume the capital gain made on the property will be £180,000.

If you own the property for exactly 15 years: 180 months, you will make an average gain of £1,000 per month. The period you lived in the property as your main home (12 years: 144 months) and the last 9 months are free of CGT: 153 months: £153,000.

Your taxable gain is £27,000 (180,000 – 153,000). As you owned the property jointly (presumably 50: 50), you have £13,500 of gains each. There is no deduction for a period of letting after you have moved out.

If you were selling the property before 6 April 2023 that gain would be mostly covered by your individual annual exemptions of £12,300. But this exempt amount is cut to £6,000 in 2023/24 and cut again to £3,000 in 2024/25.

If you sell in 2024/25 you will each have to pay CGT on £10,500 (13,500 – 3000).

Newsletter issue – March 2023

2 - Where income tax, CGT, class 2 NIC or class 4 NIC remains unpaid for 2021/22 a 5% penalty is imposed. This penalty can be avoided if a time to pay arrangement is agreed in advance with HMRC.

10 - Last day to set up a variable direct debit to pay PAYE for payment this month.

15 - Chancellor Hunt to present his Spring Budget.

22 - PAYE, NIC and student loan deductions to be paid to HMRC by electronic means for month to 5 March 2023, unless the employer has set up a direct debit so HMRC can collect the amounts due.

31 - Last day to amend returns and pay any outstanding ATED charge for the year 1 April 2021 to 31 March 2022.

Chancellor Hunt billed his Budget as a Budget for growth with emphasis on fixing problems in the labour market alongside improving business investment and innovation.

For the former he has addressed barriers to staying in work experienced by high earners with large pension pots, and provided some help to parents who are looking for affordable childcare.

Under the investment heading he announced incentives for investment in 12 new investment zones, and a ‘fully expensed‘ system of obtaining tax relief for plant and machinery.

The chancellor also confirmed that the energy price guarantee for domestic consumers would remain in place for another three months keeping the annual bill for an average household at £2,500 for the year.

Pension reform

High earners tend to max out their annual pensions allowance of £40,000 quite easily, especially if they are a member of a final salary pension scheme. The annual allowance will rise to £60,000 from 6 April 2023 and the facility to carry forward unused allowance for three years remains in place.

Taxpayers with adjusted net income in excess of £200,000 and income including pension contributions in excess of £240,000, have their annual allowance tapered down by £1 for every £2 over the higher figure down to a minimum of £4000. This income threshold will increase to £260,000, and the minimum tapered annual allowance increase to £10,000, also from 6 April 2023.

Taxpayers who started to draw the taxed portion of their defined contribution pension, are subject to a lower money purchase annual allowance (MPAA) of only £4,000. This can catch out individuals who have retired early but return to paid employment and become enrolled in a workplace pension. Hunt has also increased the MPAA to £10,000 from 6 April 2023.

The pensions lifetime allowance catches those who have diligently saved all their life and built up a significant pension pot. If that pot exceeds their lifetime allowance of £1.0731m at the time they start to draw their benefits the excess value is subject to a lifetime allowance tax charge at 25% or 55% on lump sum. This pensions lifetime allowance charge is scrapped from 6 April 2023 and the lifetime allowance will be abolished completely in a future Finance Bill.

Childcare support

Amount of Universal Credit (UC) that is awarded to cover childcare payments will be increased to maximum of £951 per month for first child and to £1630 for two children. This only helps UC claimants who are already paying out the maximum in childcare costs. The current limits are £646.35 per month for one child and £1108.04 for two or more children, but those amounts haven‘t changed since 2016.

The most important change is around the timing of the UC payment. Currently the parent must pay the childcare costs up front and claim that cost in arrears. From a date to be confirmed the parent will be able to claim the childcare fees up front. This will help parents who want to return to work but can‘t afford to pay the childcare fees in advance before they get their first pay cheque.

The Chancellor also announced an extension of free childcare places to children aged one and two in England, to match the 15 or 30 hours of free childcare currently provided to three and four year olds in term time. This will be rolled-out in stages:

• From April 2024, all working parents of two-year-olds will be able to access 15 hours per week.
• From September 2024, all working parents of children aged nine months up to three years old will be able to access 15 hours per week.
• From September 2025 all working parents of children aged nine months up to three years old will be able to access 30 hours free childcare per week.

To qualify for the free childcare places the parents must be working and each earning at least £659 per month, but not over £100,000 per year.

The staff to child ratios in nurseries will be changed to an optional 1: 5 from the current 1: 4 for two year olds, to align with the ratios that apply in Scotland.

The payment made by the Government to nurseries to provide these free places will be increased by around 30%. Currently amount paid is well below the hourly cost of providing care, so the free places have to be cross-subsidised by charging other parents more.

As education is a devolved matter, any decision to expand the free childcare places in Scotland, Northern Ireland, and Wales will be up to those regional governments.

To increase the number of childminders the Government will provide all newly registered childminders with a start-up grant of £600 and those who register with a childminder agency will receive a grant of £1,200.

Disability benefits

Work capability assessment (WCA), which determines whether people are too ill to work, will be removed. Currently disabled people need to have a health assessment and be found incapable of work to receive additional income support through universal credit and other benefits. This assessment is likely to be replaced by another test, perhaps that for the personal independence payment (PIP).

If individuals are not subject to the WCA, they should be able to take up a job trial without fear of losing all the addition help they receive through the benefits system, should that job not work out.

Corporation tax

From 1 April 2023 the main rate of corporation tax will rise from 19% to 25%, but the small profits rate will stay at 19%. The boundary between these two rates is nominally set at annual profits of £50,000, but in practice there is a £200,000 marginal relief zone as follows:

• below £50,000: small profits rate of 19%
• above £250,000: main rate of 25%
• between £50,000 and £250,000: main rate of 25% less marginal relief.

These profit thresholds are reduced proportionally if the accounting period is less than 12 months, or if the company has associated companies. For example, where there are two associated companies the thresholds will be £25,000 and £125,000.

Marginal relief results in an effective rate of 26.5% on the profits in the marginal relief zone.

Capital Allowances

The super deduction capital allowances, which provide companies with a deduction of 130% of the cost of new plant and machinery, will end from 1 April 2023 as scheduled.

In their place the Chancellor has proposed a new system of full expensing of the cost of all plant and machinery purchased new and unused by companies between 1 April 2023 and 31 March 2026. This is effectively a 100% first year allowance for the assets which would have qualified for the super deduction. The Chancellor indicated that this relief may be made permanent after a review.

Those assets which qualify for the special rate of 50% continue to benefit from that rate when purchased by companies on and after 1 April 2023.

Most businesses can get a 100% deduction for expenditure on assets, other than cars, using the Annual Investment Allowance (AIA) which now has a permanent cap of £1 million per year. Second-hand assets qualify for the AIA.

Investment incentives

“Levelling up” has been the mantra of the Conservative Government since it was elected in December 2019, but there has been little evidence of any significant investment in the regions to achieve this. Chancellor Hunt hopes that 12 new investment zones clustered around research institutes such as Universities will change this, with up to £80m of grants given over five years to encourage growth in areas of technology, creative industries, life sciences, advanced manufacturing and green industries.

These investment zones will benefit from reduced stamp duty land tax, discounted business rates and limited exemptions from employer‘s NIC for new employees. The Investment Zones will have access to flexible grant funding to support skills and incentivise apprenticeships, provide specialist business support and improve local infrastructure, dependent on local requirements.

The first eight low tax zones will be located in the East Midlands, Greater Manchester, Liverpool, North East, South Yorkshire, Tees Valley, West Midlands and West Yorkshire. A further four investment zones will be set up in Scotland, Wales and Northern Ireland.

R&D row back

In Chancellor Hunt‘s Autumn Statement, he announced a reduction in R&D tax credit relief from 130% to 86%, and a cut in the payable tax credit from 14.5% of the loss surrendered to only 10% of that loss. These new rates apply to expenditure incurred from 1 April 2023 included in claims made under the small company scheme and were legislated for in FA 2023.

However, in this Spring Budget the Chancellor has reinstated the 14.5% payable tax credit for R&D intensive SMEs. These are companies with qualifying R&D expenditure at least equal to 40% of their total expenditure for the relevant period. For these purposes, ‘total expenditure‘ will be defined as the expenditure in the profit and loss account, plus any amount included in the R&D claim, less any non-deductible expenditure.

The restriction on some overseas expenditure for R&D claims announced last year will now come into effect from 1 April 2024 instead of 1 April 2023.

The R&D expenditure credit (RDEC) is the method by which large companies claim enhanced tax relief for R&D expenditure. The rate of RDEC will increase from 13% to 20% on 1 April 2023.

Seed enterprise investment scheme

The Seed Enterprise Investment Scheme (SEIS) is only available to relatively new, small companies to help them raise equity capital.

The amount that a single company can raise using SEIS will increase from £150,000 to £250,000, and the age limit on the qualifying trade will be raised from two year to three years. In addition, the maximum an investor can subscribe for shares under the scheme will double from £100,000 to £200,000. All these changes will take effect for shares issued from 6 April 2023.

VAT

The VAT registration threshold has been frozen at £85,000 from 1 April 2017 to 31 March 2026, with the deregistration limit set at £83,000 for the same period.

The VAT exemption that applies to healthcare will be expanded to cover medical services carried out by staff directly supervised by registered pharmacists, with effect from 1 May 2023.

The VAT scheme for self-build house builders (DIY scheme) will be digitised and the time limit for making a claim under the scheme will be extended from three months to six months.

Income tax

The income thresholds have been frozen until April 2028, as announced last year, with the exception of the additional rate threshold, which is reduced from £150,000 to £125,140. However, Scottish residents pay income tax on earnings and profits according to the Scottish rates and thresholds, with the rest-of-UK rates applying to their dividends, savings, and the threshold for capital gains tax.

The various personal allowances were also announced in last Autumn as follows:

Individuals who provide foster care and shared lives carers benefit from tax relief on the first £18,140 of care income in 2023/24 plus £375 to £450 per person per week.

National Insurance contributions

The rates and thresholds of national insurance were largely announced last year, but there has been a recent change in the timing of payments of voluntary class 3 NIC:

Road Fuel Duty

Duty on road fuel has been frozen again for the twelfth year running. The chancellor has also chosen to retain the 5p per litre cut in duty for petrol and diesel which was introduced last year.

Capital Gains Tax

The rates and exemptions for capital gains tax in 2023/24 are shown in the table below.

The annual exemption will be cut to £3,000 on 6 April 2024, with the exemption for trusts set at half that level: £1500.

Inheritance tax

The rates, exemptions and thresholds for inheritance tax have been frozen since 2020/21, with the nil rate band frozen at £325,000 since 2009.

Land situated outside of the UK will no longer qualify for agricultural property relief and woodlands relief from inheritance tax to property from 6 April 2024.

Benedicts Accountants are based in London, offering local business owners and individuals a wide range of services.

All clients are entitled to fixed fees, work delivered on time and unlimited phone support. Visit our website jbenedict.co.uk for more information.