HMRC to cap certain tax reliefs

In an attempt to ensure that higher rate tax payers make a reasonable contribution to UK tax revenues, new legislation is to be introduced from 6 April 2013 that limits access to certain tax reliefs. Taxpayers will be denied relief(s) if the claim exceeds 25% of their income or £50,000, whichever is the greater.

This will not affect tax reliefs which are already capped such as Enterprise Investment Scheme and pension reliefs, but may affect “open-ended” reliefs such as interest relief on qualifying loans and gift aid relief. The Chancellor has said that he will consult to make sure that charities are not negatively affected by such a move.

Ironically, this may mean that tax planning opportunities available to 50% rate tax payers in 2012-13, may produce more tax savings than if applied, and capped, in 2013-14 when the top rate of tax is reduced to 45%.

50% tax rate payers therefore have one more fiscal year, 2012-13, to take advantage of certain, unlimited reliefs.

 

Salary v Dividends in 2012/13

UK income tax and National Insurance as a perc...

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It is common for owner managers to take income from their own company through a mixture of salary and dividends.

For 2012/13 the maximum salary at which no tax or NI is payable is £7,485.

Although no employee’s or employer’s NI is due on this level of salary, the employee does still receive a full years credit to their state pension record.

The personal allowance for 2012/13 is set to increase to £8,105 (from £7475).

To avoid going into the band at which higher rate tax becomes payable, the maximum figures for 2012/13 are:

Salary                                                         £7,485

Dividend                                                 £31,491

(before tax credit)

If you have paid pension contributions or made gift aid payments, then the amount of dividend can be increased.

Note dividends can only be paid if the company has distributable profits.

Taxation of jointly owned property

Where property is owned jointly it is possible to divert income from a high rate taxpayer to a low rate taxpayer without necessarily giving up the beneficial interest in the underlying property.

Between husband and wife and civil partners a simple transfer of legal title into joint names, with no change in the beneficial interest will mean that the rental income is automatically split 50:50 for tax purposes between the spouses (s.836 ITA 2007). If a different split of income is required then the beneficial interest must be held in the same proportion as the desired split of income and a joint declaration under s.837 sent to HMRC.

For non-spouses the situation is different. Where there is any beneficial joint ownership (for example 99:1) this gives an opportunity for the rental income to be split in whatever proportion the owners agree between themselves. So if a taxpaying grandparent for example owns a rental property and wishes to pass income to grandchild in a tax effective way without transferring assets they could give a 1% beneficial interest (covered by annual CGT exemption) and agree to split the income however they wish, even as much as 99% to the grandchild. This could form the basis of some useful late planning for school fees for example.

What is the highest rate of tax in 2011-12?

General considerations:

You will be paying tax at the 40% income tax rate if your income less tax allowances exceeds £35,000 and at the additional rate, 50%, if your taxable income exceeds £150,000.

Tax

Tax (Photo credit: 401K)

 

Additionally, your Personal Allowance reduces when your income is above £100,000 – by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age. As the basic personal allowance is £7,475 for 2011-12, when your income exceeds £114,950 this tax allowance is eliminated.

 

Income under £100,000

If your income is under £100,000 you should not lose any of your personal tax allowance and none of your top-sliced income will be taxed at 50%.

 

Income between £100,000 and £114,950

In this income range you are progressively losing a tax allowance and paying tax at 40% on the top sliced £14,950. The combined tax suffered is therefore a significant 60%.

 

Income over £150,000

Will all be taxed at 50%

 

Ironically, therefore, if you want to adopt strategies to reduce your taxable income, it is not those with income over £150,000 that stand to save tax at the highest rate. Instead it is those with income between £100,000 and £114,950 where the possible tax savings are at a rate of 60%.

Self Assessment penalties

Obverse

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In the past as long as you paid your tax liabilities on time and cleared any self-assessment tax due by 31 January, no late filing penalties were due. Even if you failed to pay your tax on time, late filing penalties were capped at £100 or nil if you were due a tax refund. The goal posts have moved! The 2010-11 tax returns have to be filed by 31 October 2011 if you are filing a paper return, or 31 January 2012 if you are filing electronically. If you fail to meet these deadlines you face the following penalty regime, even if your tax payments are up-to-date.

* One day late an initial penalty of £100.

* Three months late a daily penalty of £10 per day up to a maximum of £900.

* Six months late an additional £300 or 5% of any tax outstanding, whichever is the higher amount.

* One year late a further £300 or 5% of any tax outstanding, whichever is the higher amount.

As you can see the minimum penalty for filing 6 months late is £1,300 even if all your tax due is paid on time or you are due a tax repayment. If you have had a relaxed attitude to meeting the filing deadline in the past; you may like to reconsider your priorities for the filing of the 2011 return!

PAYE filing

Pretty well all businesses need to file their yearend payroll returns for 2010-11 online.
The Employer Annual Return comprises:
. a form P14 for every employee
. a form P35 that summarises the end of year payroll totals.
These returns for 2010-11 must reach HMRC by 19 May 2011. Returns filed after this date may incur a penalty.

The National Insurance numbercard issued by th...

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There are a few excepted employers, those that can still send in paper returns. They are:
. employers using a simplified scheme for personal or domestic employees,
. members of religious societies or orders whose beliefs are incompatible with the use of computers,
. employers who employ persons to provide care or support services at or from their home – subject to certain conditions,
. limited companies that need to file solely to confirm CIS deductions suffered, Box 28 on form P35.
Employers should be aware that if they file paper returns for 2010-11, when online filing was required, HMRC may charge a penalty even if the paper filing is within the required filing deadlines.
What if you have no returns to make this year?
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If you are registered with HMRC for PAYE purposes they will expect you to make a return. If you had employees in previous tax years but this tax year, 2010-11, you had no employees, you need to notify HMRC that no return is required for 2010-11. If you don’t, you will receive unnecessary reminders and possibly penalty notices.
You can let HMRC know:
. Online at https://online.hmrc.gov.uk/shortforms/form/P35NilEmployer?dept-name=&sub-dept-name=&location=1&origin=http://www.hmrc.gov.uk
. By writing to, or telephoning HMRC.
Have you provided any taxable benefits to employees in the year?
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If you have provided any taxable benefits to employees you are also required to file form P11D(b) by 6 July 2011. This form sets out the amount of taxable benefits that apply for the year and any Class 1a National Insurance contributions due.
If you are unsure how to complete these returns please call in good time so we can assist you meeting your filing deadlines and avoiding penalties.

Tax refunds on holiday property

If you have a commercial furnished holiday let within the EU, then there is potential for a tax refund.

Did you know up to 30% of the purchase price of a furnished holiday letting may be eligible for capital allowances? If these allowances are higher than your profits from rental income, any excesses may be set against tax payable on general income such as salary or business profits. There is a limited window of opportunity to make use of this “set off”, or sideways loss relief, as it will only be available until 5th April 2011.
Capital allowances are available on plant and machinery such as fitted kitchens, plumbing, central heating, loose furniture, and equipment.

backyard swimming pool

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How it works
Typically, the level of plant and machinery is between 10 and 30% of the purchase price of the property, for example:

On a £500,000 property in Spain, the potential allowances are up to £150,000 made up of heating system, swimming pool, sanitaryware and electrics, amongst many others

This would translate to a total tax saving of £75,000 for a 50% tax payer!

What conditions must you satisfy?
The property must be in the UK or in the EU
The property or properties must be run on a commercial basis
Available to let for 140 days per year, and actually let for over 70 days per year
Not let to long term tenants for over 155 days per year
Long term letting is to the same person for over 31 days

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Home based business

At first glance, Paul Mellor’s recent Tribunal victory was nothing to write home about. Mellor, a self employed electrician living in Ruislip, successfully argued his home was his business base and won his appeal against an increased amendment to his self assessment, in which HMRC had disallowed a proportion of his motor expenses. HMRC had contended Mellor’s home could not be considered to be his business base.

Mellor travelled from his home to the various sites he was engaged to work at and claimed business mileage when he closed his front door and got into his car to set off for work. The majority of readers familiar with this subject will immediately recognise that Mellor should have won because of the precedent set by the Horton v Young (40TC60) tax case. As usual, HMRC sought to apply the factors featured in the Newsom v Robertson (33TC452) tax case. The full decision can be found at www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=5275

What is interesting about this victory is the thinking behind the Tribunal’s decision, as it potentially reignites the whole debate about what constitutes the business base for all trades and professions, and may be particularly relevant to professionals such as Hospital Consultants and barristers.

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50% tax rate payers beware

50% rate tax payers beware…

HMRC have no present system for deducting tax at a flat rate of 50% from second or subsequent employments. The nearest tax code is DO that only collects tax at 40%.

As a result tax payers in this position will be underpaying tax through the PAYE system and should be prepared for an underpayment when they complete their annual tax return.

Beware bogus emails from HMRC

Scammers are capitalising on the recent publicity surrounding HMRC demands for unpaid tax and notification of refunds by sending out spurious emails that seek to obtain personal data and financial information by deception.

HMRC will never email you on any aspect of your tax affairs and all emails purporting to be from HMRC should be ignored. If you are due a refund or have underpaid tax you will be notified by post.

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Should I complete a tax return?

The recent press coverage of taxpayers who may be receiving unexpected tax refunds or tax demands has created yet further anxieties about the integrity of our tax system. The refunds and demands are due to HMRC errors in tax codings and other issues for the two tax years ending 5 April 2009 and 5 April 2010. In the main, tax payers who are not required to complete a self-assessment tax return will be affected, although not all tax payers in this category will be included.

If you complete a self-assessment tax return your annual tax position is reconciled as part of the filing process.

Certainly, if you do receive an unexpected demand you should check HMRC’s calculations – if you have multiple employments or other complicated matters that affect your tax position you could well benefit from a consultation with a tax professional. Please call if you would like our help.

If you don’t presently complete a tax return we have included a list below of tax payers who should be submitting a return. Again, if you would like our help in organising registration, please call.

Who needs to complete a tax return?

The most common reasons for needing to fill in a tax return are listed below.

•You’re self-employed
•Company directors, ministers, Lloyd’s names or members
•Income above a certain level from savings, investment or property – income from savings and investments of £10,000 or more; income from untaxed savings and investments of £2,500 or more; income from property (before deducting allowable expenses) of £10,000 or more; income from property (after deducting allowable expenses) of £2,500 or more; annual trust or settlement income on which tax is still due (even if you’re only treated as receiving this income); income from the estate of a deceased person on which tax is still due
•If you receive a reduced age-related allowance because you’re 65 but your income is over a certain level (£22,900 for the 2010-11 tax year), you’ll need to complete a tax return. But there are exceptions, for example if your tax affairs are very straightforward.
•Income from overseas
•Your annual income is £100,000 or more
•You need to claim certain expenses or reliefs
•You owe tax and HMRC can’t collect it through your tax code, or you prefer to pay direct
•You have Capital Gains Tax to pay
•You’ve lived or worked abroad or aren’t domiciled in the UK
•You’re a trustee