Base rate rises again – what it means for business

The cost-of-living crisis is taking its toll across all areas of our lives now. While inflation has fallen very slightly this month to 8.7%, food prices remain stubbornly high, and the Bank of England (BoE) is expected to continue with its base rate rises until later this year.

The last rate rise in early May took the base rate to 4.5%, but analysts predict that the BoE could still push forwards with additional rate rises in the coming months and expect the base rate to hit 5% by the end of the year.

What is happening to business borrowing?

Rising base rates impact all types of borrowing – with mortgage borrowers on variable or tracker rate mortgages hit first as lenders are quick to pass these rises on. But businesses are affected too in a variety of ways, because it is also more expensive for them to buy goods and services to keep the business going. Many of these costs would ordinarily need to be passed onto consumers. But as they are already struggling with rising energy bills and mortgages, among other things, the amount that can be passed on without losing customers altogether is minimal.

So, businesses are being squeezed in the middle of these rising costs and many are taking out business loans to cover their outgoings in the short, and sometimes even longer term. The latest official figures from the BoE show that net business borrowing by UK non-financial businesses in March was £2.5 billion in bank and building society loans, including overdrafts.

Large non-financial businesses borrowed £3.2 billion net in March, while small and medium non-financial businesses actually repaid a net of £0.7 billion in March.

This compares with £4.5 billion, £3.7 billion and £0.6 billion of net repayments respectively in February. Borrowing by large businesses rose from 3.1% in February to 3.3% in March, while it fell by 4% in March for SMEs.

Interest rates on business loans have fallen back very slightly, but they are still much higher than they were in December 2021 when the BoE rate rises began. The average cost of new borrowing from banks for non-financial businesses was 5.76% in March, well above the 2.03% average back in December 2021.

For SMEs specifically, the average rate was even higher at 6.36% in March, when in December 2021 it was just 2.51%. But remember, the BoE base rate has risen twice since these figures were collated, so the likelihood is these loans will be even more expensive now.

Reassessing your business needs

These increases in borrowing and the reduction in spending by consumers will put additional pressure on many businesses, prompting them to run leaner and cut costs wherever possible and sensible to do so.

For example, if you hold a lot of stock within your business, you may want to free up some of your cash by either sending that stock back, if it is on sale or return, or putting it into a sale. Your profit margins on that stock may be reduced, but that freed-up cash can be used to plug potential holes elsewhere in the balance sheet.

You may also need to consider reducing staff numbers if you are not as busy as usual. But be careful about doing this because if your service standards reduce, it could drive customers away. Customers are the lifeblood of any business, so prioritise them no matter what is going on in the background.

Get advice on business borrowing

However, if you have cut your costs to the bone and made as many changes to your business as you dare, you may still need to raise funds to get you through a rough patch. You can do this in a variety of ways:

• Borrowing directly from your bank
• Raising money through a fundraiser from investors
• Remortgaging a property you own

The way you choose could depend on how quickly you need the money and what options are available to you. Borrowing directly from your bank would be the simplest and fastest option if your bank is prepared to lend to you. Speak to your accountant to find out what amount you would realistically need to get you through your difficulties based on your income and outgoings.

You don’t want to ask for too little because you will need to raise money again too soon. But you also don’t want too much because you will be paying interest on money you don’t really need.

Raising money from investors can be a good way to get additional investment but will involve parting with a proportion of your business in most cases. This is something to think about carefully, especially if it would involve losing the controlling stake in your business.

Remortgaging a property you own should be a last resort, especially if it is your home. The danger is that if your business ultimately goes under, you could lose your livelihood and your home at the same time. The ultimate double whammy. If things are so bad that the company might fail without remortgaging your home, then think seriously about whether letting the business fail is the best option, no matter how hard that decision might be.

Contact us

There are many ways to reduce the overheads in your business or to increase the amount of money you have available to boost cashflow, buy machinery or stock, or to hire new employees. If you need to achieve any of these things or want to find out if there is a better way to manage the cashflow in your business, we are here to help. Please just get in touch with us and we will support you.

Pension Carry Forward rules are now more beneficial

The Chancellor made some major changes to the pension rules in the March Budget, and one key amendment has made using something called ‘Carry Forward’ rules much more beneficial for pension savers.

How does Carry Forward work?

The Carry Forward rules allow you to use up any unused pension allowance from the last three tax years in a single year, which can give a big boost to your pension pot. There is a limit on the maximum amount you can put into your pension each tax year and receive tax relief. For the last three tax years prior to 2023/24 the annual allowance has been £40,000. However, the Chancellor raised this allowance for this tax year to £60,000.

What does this mean for me?

If you haven’t used your entire £40,000 annual allowance for the last three years – 2020/21, 2021/22 and 2022/23 – then you can make additional contributions this year to use up any remainder of the £120,000 worth of contributions you could have made during that period.

Let’s say you made £20,000 worth of contributions in each of these tax years. This would leave £60,000 of the remaining allowances you can now ‘carry forward’. Remember, this figure includes tax relief at your highest level from the taxman. If you are a 40% taxpayer, for example, then adding £40,000 to your pension would cost you just £24,000 with the remaining £16,000 being added by HMRC from the tax you would pay for that year.

You also have a £60,000 annual allowance for the 2023/24 tax year. If you hadn’t put anything into your pension for the previous three years, then this year you could add £180,000 in one go, providing you earn enough to do this. HMRC won’t give you more tax relief in a single year than the tax you have to pay. You would need to earn at least £180,000 this year to qualify for this much tax relief.

If you can’t use all of your allowance for this year, then you can always use the Carry Forward rules next year.

Don’t I have to be careful how large my pension pot gets during my lifetime?

Well, there is still theoretically a Lifetime Allowance of £1,073,100 which was the maximum you could have in your pension fund before you were hit with charges as high as 55% on amounts over this limit. But during the Budget, the Chancellor removed the penalty on this Lifetime Allowance, meaning there is no problem now for breaching it. Legislation is needed to remove the limit completely.

The change applies from April 6 this year. The only thing you can’t do is take more than £268,275 as your tax-free lump sum no matter how big your pension pot gets – which is 25% of the current Lifetime Allowance.

We can help you

Using Carry Forward is a great way to catch up on pension contributions you didn’t make in previous years. It can be especially useful if you are getting close to retirement and want to put more into your pension. If you want to explore Carry Forward, please get in touch and we will be happy to help.

Could you benefit from a free Government midlife MOT?

Our cars go through MOTs each year once they reach a certain age, but have you ever thought of giving yourself an MOT? The Government is offering a free midlife MOT for those in their 40s, 50s and 60s to help them make the right financial decisions for retirement.

The midlife MOT provides free online support to those in the private sector, and can be done face-to-face with Department for Work and Pensions staff in job centres for those looking for work. The aim is to ensure you are giving sufficient thought to your money, work and wellbeing as you head into the later stages of your life.

What’s involved?

The online midlife MOT provides a series of prompts to make you think more carefully about what you may need to do as you get older. For example, will you be able to continue in your current job as you get older? Or will you need to learn new skills to continue to provide for yourself and your family?

You are also prompted to consider whether you have enough money to live on to maintain your current lifestyle? Or whether you might need to examine your pension saving and put some extra aside to enjoy your retirement more comfortably.

The specific questions on the midlife MOT site are:

My work: Am I confident I can continue in my current job, or do I need to protect myself by reskilling? Will caring responsibilities or other priorities mean I need to work more flexibly?

My health: Am I taking the right steps to maintain or improve my health? Would workplace adjustments make it easier for me to stay in my job for longer?

My money: Do I have enough savings to maintain my current lifestyle? I’m confused about pensions, what are my options?

My work and skills: As your situation changes as you get older, you may find that flexible working arrangements can make a difference.

Source: https://www.yourpension.gov.uk/mid-life-mot/

Is this relevant to employers or just individuals?

There is a specific section of the website that highlights what employers can do to help their staff access the midlife MOT for their workplace. There are details on how this could work for both larger companies and smaller employers and you can also download toolkits to use within your business for relevant staff.

There are also a number of useful links within the YourPension.gov.uk/mid-life-mot/ webpage to help people navigate to the relevant information they need to check all aspects of their life are on track as they reach this point in their life.

Let us help you

Do you feel like you need a midlife MOT but would rather talk things through with someone than simply navigate this on your own? If so, then we can help you understand whether you are financially ready for the next chapter of your life. Just contact us and we will guide you through everything you need to know.

Check your PAYE code is correct for this tax year

Every employee working for a company has a Pay-As-You-Earn (PAYE) code which denotes how much tax you will pay in a year. If this code is incorrect, it could mean you are paying more or less tax than you should be, and may need to reclaim that money, or pay more. Neither is a good option, so spending a little time at the start of the tax year checking you have the right code could save a lot of hassle later on.

Why your tax code could be wrong

If you have changed jobs recently, got a pay rise, or gone on maternity leave, you could find your tax code hasn’t kept up with the changes in your life.

Your employer and HMRC are not responsible for ensuring you have the right tax code, and while they do their best to ensure you are paying the right tax, ultimately it is your responsibility to make sure your code is correct. They are computer generated by HMRC, so failing to check could mean you have the wrong tax code for an entire year or more.

The question is, how do you check? Helpfully, you can find out what the different parts of your tax code mean online. There are a few things to look for. For example, most people – with the exception of very high earners who have their personal allowance reduced once they reach annual earnings of £100,000 – can earn £12,570 this year before they need to pay any tax at all.

If you don’t have any benefits in kind from your employer, such as a company car, or a season-ticket loan, then you will most likely have the tax code 1257L. The ‘L’ in this code simply means you are entitled to the normal personal allowance.

However, let’s say you have transferred 10% of your personal allowance to your spouse under the Marriage Allowance transfer. In this case, you will have an ‘M’ at the end of your tax code.

A full list of tax code information and what you should expect to see can be found on the Gov.uk website. If you aren’t sure what your tax code should be, then discuss this with your employer or, if you work for a larger company, you can speak to your HR department.

We can help you meet your obligations

If you are still struggling with your PAYE code and want to be sure you are paying the right amount of tax, then contact us and we will go through this for you to make sure everything is correct.

Make the most of the new tax year by acting now

The new tax year started on April 6 and while many people will wait until the last minute to maximise the tax benefits available to them, there is a lot to be said for starting your tax housekeeping sooner rather than later.

There are many ways we can benefit from the tax breaks available each tax year. But trying to cram everything into the month before the tax year ends means you are likely to miss out on some of them. Planning ahead from the start of the tax year means you can mop up any allowances you can access.

Use your ISA allowance early

One of the most beneficial allowances to start using early in the tax year is your Individual Savings Account (ISA) allowance. Each tax year – which runs from April 6 to April 5 – we all have the option of putting up to £20,000 into an ISA. You can put as much as you want into any type of ISA, providing you don’t breach the £20,000 threshold in a single tax year. The money grows free of Capital Gains Tax and Income Tax, plus in a cash ISA you will not pay any tax on savings interest.

Using your ISA allowance at the beginning of the year can generate significant benefits, even if you can’t put the whole £20,000 in at once. For example, if you calculate the difference in the value of an ISA with just £3,000 invested at the beginning of every tax year since 1999 compared with the same amount invested on the last day of the tax year over the same period, the early birds will have more than £9,000 extra in their pot based on the performance of the average global equity fund.

If you and your spouse have both used up your £20,000 allowance and you have children, you can also put up to £9,000 for each child into a Junior ISA. This is a perfect way to put money aside throughout their childhood to pay for school fees, university or even to build a deposit to help them buy their first home.

Use your Capital Gains Tax allowance

This tax year – 2023/24 – the Capital Gains Tax allowance has been more than halved, from £12,300 in 2022/23 to just £6,000. So, anyone crystallising gains of more than £6,000 in this tax year will need to pay CGT on any amount above this limit. The rate you pay will depend on your marginal rate of income tax and what type of asset the gain has been crystallised on.

As we all have the same CGT allowance, it is possible for spouses to shelter up to £12,000 from CGT this year, but that will take some planning. So, speak to your accountant to make sure you are making the right decisions at the right time.

Maximise your Inheritance Tax planning by using your annual allowances

Inheritance tax (IHT) is often considered to be a tax just for the rich. But as house prices have risen and the threshold for paying this tax has remained static at £325,000 since 2009, and is likely to remain at this level until 2028, more people than ever are paying IHT. In fact, the latest figures released by HMRC show IHT receipts have soared by £1 billion to £7.1 billion from April 2022 to March 2023, largely due to house price increases, especially in the South East of England.

So, if you own your home, you may want to think about how you can use the annual allowances to reduce your liability when you pass away.

Any amount you have in your estate at death above this Nil Rate Band – which includes all your assets such as your home, cars, antiques, jewellery, collections and so on – will be taxed at 40%. There is an additional allowance of £175,000 per person, called the Residence Nil Rate Band, if you are passing your home to a direct descendant, such as a child or grandchild. But this is not available to those without children.

Spouses or civil partners passing assets between them on death will not be subject to IHT. So, any unused allowance remaining can be used by the second spouse or civil partner on their death, giving a maximum threshold of £1m if none of the Nil Rate Band or RNRB was used on the first death. The allowance can be passed automatically, you would just need to let the executor of the estate on the second death know this as they would need to make the claim when they apply for probate. So, a letter with your will would be a good way to do this, or by discussing this with the person who writes your will with you.

If your estate would still exceed this level, then you can legally reduce your estate’s value each year by making gifts to loved ones. For example, you can make gifts of up to £3,000 each year which will be free of IHT when you die.

You can also make other gifts of any amount you like, and providing you survive those by seven years, they will no longer be within your estate for IHT purposes. But the rules can be complex, so get advice from your accountant if you think you could be affected by IHT.

Contact us

These are just a few of the ways you can reduce your tax bills this tax year. We can help you make the most of these and other allowances before you lose them. So, please get in touch with us and we will help you make the right financial decisions for you and your family.