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Category: Personal Tax

Thresholds and allowances frozen until April 2026

Thresholds and allowances frozen until April 2026

To help meet some of the costs of the COVID-19 pandemic, the Chancellor has opted to freeze various allowances and thresholds until April 2026, rather than increase the rates of income tax and capital gains tax. As incomes rise over the period, more people will pay tax, and more people will pay tax at the higher and the additional rates.

Personal allowance and basic rate band

The personal allowance is increased to £12,570 for 2021/22, from £12,500 for 2020/21. It will remain at this level for all tax years up to and including 2025/26. The allowance is reduced by £1 for every £2 by which income exceeds £100,000. As a result, for the tax years 2021/22 to 2025/26 inclusive, anyone with income in excess of £125,140 will not receive a personal allowance.

The basic rate band is increased to £37,700 for 2021/22, from £35,500 for 2020/21. As a result, the point at which taxpayers in receipt of the standard personal allowance start to pay higher rate tax is increased to £50,270 for 2021/22, from £50,000 for 2020/21. It will remain at £50,270 for future tax years up to and including 2025/26.

Capital gains tax annual exempt amount

Individuals are allowed to realise net chargeable gains up to the level of the annual exempt amount for each tax year before a liability to capital gains tax arises. The capital gains tax annual exempt amount remains at £12,300 for 2021/22, and will stay at this level for the following four tax years.

National Insurance thresholds

The upper earnings limit for Class 1 National Insurance contributions and the upper profits limits for Class 4 National Insurance contributions are aligned with the level at which higher rate tax become payable. This ensures that once a person starts to pay tax at the higher rate, the rate at which they pay National Insurance drops to the additional rate of 2%, so that they do not pay both higher rate tax and main rate National Insurance contributions on the same income. For 2021/22, the upper earnings limit for Class 1 National Insurance contributions and the upper profits limit for Class 4 National Insurance contributions are set at £50,270. As the higher rate threshold is frozen at this level until April 2026, both the upper earnings limit and the upper profits limit will remain at £50,270 for all tax years up to and including 2025/26.

Inheritance tax nil rate bands

No inheritance tax is payable unless the value of the deceased’s estate exceeds the nil rate band. This has been frozen at £325,000 since 2008/09. It was due to be reviewed in 2021. However, at the time of the 2021 Budget, the Chancellor announced that the nil rate band would remain at £325,000 for another five years, for 2021/22 to 2025/66 inclusive.

A further nil rate band – the residence nil rate band (RNRB) – is available where the main residence is left to a direct descendant, such as a child or a grandchild. The RNRB remains at its 2020/21 level of £175,000 for 2021/22. It too is frozen at this level until April 2026.

The freezing of the nil rate bands will bring more estates within the charge to inheritance tax. Planning ahead and making more lifetime transfers could reduce the eventual liability on the estate at death.

Pension lifetime allowance

The pension lifetime allowance places a cap on the value of tax-relieved pension savings. The lifetime allowance remains at its 2020/21 level of £1,073,100 for 2021/22 and for the following four tax years. If the value of your pension savings is nearing this level, it is important that you review your pension pot before making further tax-relieved contributions in any of the years from 2021/22 to 2025/26 inclusive.

Where tax-relieved pension savings exceed the lifetime allowance, tax relief is clawed back at the rate of 25% where the excess is taken as a pension, and at the rate of 55% where the excess is taken as a lump sum.

Get in touch

Speak to us to understand what the freezing of the allowances and thresholds will mean to you, and what action you can take to mitigate the effects.

April 1, 2021

Budget 2021 – Personal Tax

Budget 2021 – Personal Tax

The personal allowance

The personal allowance is currently £12,500. Budget 2018 announced that the allowance would remain at the same level until 2020/21 and the statutory provision to increase the allowance annually by CPI was to be overridden. The Chancellor has confirmed that the personal allowance will increase by CPI (0.5%) for 2021/22 to £12,570.

There is a reduction in the personal allowance for those with ‘adjusted net income’ over £100,000. The reduction is £1 for every £2 of income above £100,000. So for the current tax year there is no personal allowance where adjusted net income exceeds £125,000. For 2021/22 there will be no personal allowance where adjusted net income exceeds £125,140.

The Chancellor announced that the personal allowance will be frozen at £12,570 for the tax years 2022/23 to 2025/26.

The marriage allowance

The marriage allowance permits certain couples, where neither pays tax at more than the basic rate, to transfer 10% of their personal allowance to their spouse or civil partner.

The marriage allowance reduces the recipient’s tax bill by up to approximately £250 a year. The marriage allowance was first introduced for 2015/16 and there are couples who are entitled to claim but have not yet done so. It is possible to claim for all years back to 2016/17 where the entitlement conditions are met. The total tax saving for all years up until 2020/21 could be over £1,000. A claim for 2016/17 will need to be made by 5 April 2021.

Tax bands and rates

The basic rate of tax is 20%. In 2020/21 the band of income taxable at this rate is £37,500 so that the threshold at which the 40% band applies is £50,000 for those who are entitled to the full personal allowance.

The Chancellor announced that for 2021/22 the basic rate band will be £37,700 so that the threshold at which the 40% band applies will be £50,270 for those who are entitled to the full personal allowance. The Chancellor announced that the basic rate band will be frozen at £37,700 for the tax years 2022/23 to 2025/26. The National Insurance contributions Upper Earnings Limit and Upper Profits Limit will remain aligned to the higher rate threshold at £50,270 for these years.

Individuals pay tax at 45% on their income over £150,000.

Scottish residents

The tax on income (other than savings and dividend income) is different, for taxpayers who are resident in Scotland, from taxpayers resident elsewhere in the UK. The Scottish income tax rates and bands apply to income such as employment income, self-employed trade profits and property income.

In 2020/21 there are five income tax rates which range between 19% and 46%. Scottish taxpayers are entitled to the same personal allowance as individuals in the rest of the UK. The two higher rates are 41% and 46% rather than the 40% and 45% rates that apply to such income for other UK residents. For 2020/21, the 41% band applies to income over £43,430 for those who are entitled to the full personal allowance. The 46% rate applies to income over £150,000.

In the Scottish Budget on 28 January 2021, the Scottish Government proposed that the Scottish income tax rates will be frozen for 2021/22. The thresholds for the tax bands will be increased by 0.5% except for the 46% rate threshold which remains at £150,000. So the 41% band will apply to income over £43,662 for those who are entitled to the full personal allowance.

Welsh residents

From April 2019, the Welsh Government has had the right to vary the rates of income tax payable by Welsh taxpayers. The UK government has reduced each of the three rates of income tax paid by Welsh taxpayers by 10 pence. For 2020/21 the Welsh Government has set the Welsh rate of income tax at 10 pence which has been added to the reduced rates. This means the tax payable by Welsh taxpayers is the same as that payable by English and Northern Irish taxpayers.

The Welsh Government has announced that the income tax rate will remain at 10 pence for 2021/22.

Tax on savings income

Savings income is income such as bank and building society interest.

The Savings Allowance applies to savings income and the available allowance in a tax year depends on the individual’s marginal rate of income tax. Broadly, individuals taxed at up to the basic rate of tax have an allowance of £1,000. For higher rate taxpayers the allowance is £500. No allowance is due to additional rate taxpayers.

Some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. However, the rate is not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income, less allocated allowances and reliefs) exceeds £5,000.

Tax on dividends

The first £2,000 of dividends is chargeable to tax at 0% (the Dividend Allowance). Dividends received above the allowance are taxed at the following rates:

  • 7.5% for basic rate taxpayers
  • 32.5% for higher rate taxpayers
  • 38.1% for additional rate taxpayers.

Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the Dividend Allowance.

To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed.

Universal Credit

Universal Credit is a single payment that is made up of different amounts depending on an individual’s circumstances. There is no entitlement if an individual’s capital is worth more than £16,000. Shortly after the 2020 Budget the Chancellor announced an increase in the Universal Credit standard allowance by £20 per week for one year.

The government is extending the temporary £20 per week increase for a further six months.

Working Tax Credit

The government is making a one-off payment of £500 to eligible Working Tax Credit claimants to provide extra support over the next six months.

Mortgage guarantee scheme

The government will introduce a new mortgage guarantee scheme in April 2021. This scheme will provide a guarantee to lenders across the UK who offer mortgages to people with a deposit of 5% on homes with a value of up to £600,000.

Under the scheme, all buyers will have the opportunity to fix their initial mortgage interest rate for at least five years should they wish to. The scheme, which will be available for new mortgages up to 31 December 2022, is designed to increase the availability of mortgages on new or existing properties for those with small deposits.

Green National Savings and Investment (NS&I) product

The government will offer a green retail savings product through NS&I in the summer of 2021. This product will be closely linked to the UK’s sovereign green bond framework and will give all UK savers the opportunity to take part in the collective effort to tackle climate change. The green gilt framework, to be published in June, will detail the types of expenditure that will be financed to meet the government’s green objectives.

Venture Capital Schemes: extension of the Social Investment Tax Relief

The government will continue to support social enterprises that are seeking growth investment by extending the operation of Social Investment Tax Relief to April 2023. This will continue the availability of income tax relief and capital gains tax hold-over relief for investors in qualifying social enterprises.

Pensions Lifetime Allowance

The lifetime limit sets the maximum figure for tax-relieved savings that an individual can build up over their lifetime.

Legislation will be introduced to remove the annual link to the CPI increase for the next five years. This will maintain the standard Lifetime Allowance at £1,073,100 for tax years 2021/22 to 2025/26.

Budget 2021 links:

March 4, 2021

Gift Aid warning

Gift Aid warning

If you are a taxpayer and you make a Gift Aid declaration when making a donation to a charity, the charity can reclaim basic rate tax on your donation.

Tax relief on the donation

A donation made under Gift Aid is treated as being made net of the basic rate of tax, currently 20%. The charity can reclaim 25% of the amount donated. For example, if you donate £100, the charity can reclaim £25 (25% of £100), bringing the total donation up to £125. Your donation of £100 is 80% of the total donation, with the charity reclaiming the remaining 20%, i.e., £25.

If you are a higher rate taxpayer or an additional rate taxpayer, you can claim relief through your self-assessment tax return for the difference between the highest rate at which you pay tax and the basic rate relief received at source – a further 20% of the gross donation for higher rate taxpayers and a further 25% for additional rate taxpayers.

Have you paid enough tax?

The tax that is reclaimed by the charity on the donation is funded by the tax that the taxpayer has paid. As long as you pay more tax than the charity reclaims on your Gift Aided donations, all is well. However, problems can arise if your income falls and you have not paid enough tax to cover that reclaimed on your Gift Aid donations. If this is the case, HMRC will look to you to make up the shortfall.

Review your Gift Aid donations

If your income has fallen for 2020/21, either as a result of the COVID-19 pandemic or otherwise, you may wish to review your regular Gift Aid donations to ensure that you have paid sufficient tax to cover the basic rate relief given at source. If your income has fallen below the level of the personal allowance, set at £12,500 for 2020/21 and rising to £12,570 for 2021/22, you should cancel any existing Gift Aid declarations so that you do not have to repay the tax claimed on those donations back to HMRC.

When making one-off donations, consider your tax position before completing the Gift Aid declaration.

Contact us

If you would like to review the tax effectiveness of your charitable donations, please contact us.

February 17, 2021

Updating PAYE codes for 2021/22

Updating PAYE codes for 2021/22

The 2021/22 tax year starts on 6 April 2021. If you employ staff, you will need to update their tax codes before you pay them for the first time in the new tax year. However, remember to finalise the 2020/21 tax year before updating your payroll software and data for 2021/22.

Tax codes from 6 April 2021

The tax code that you will need to use for an employee from 6 April 2021 will depend on whether or not HMRC have sent you a notification of a new tax code to use from that date.

The personal allowance is increased to £12,570 for 2021/22. As a result, the PAYE starting threshold will increase to £242 per week (£1,048 per month). The emergency tax code for 2021/22 is 1270L.

Employees with a new tax code

If HMRC issue a new tax code for an employee, you will receive either a paper form P9(T), ‘Notice to employer of employee’s tax code’, or an internet notification of coding if you are registered for HMRC’s PAYE Online Service. To access your code online, you will need to:

  1. Go to the login page for PAYE online and select ‘Sign in’.
  2. Sign in to the service using your Government Gateway User ID and password.
  3. From your Business Tax Account home page, select ‘Messages’ and then select ‘PAYE for employers messages’.
  4. Select ‘View your tax code notices’.
  5. From the tax year drop down menu, select ‘2021/2022’.

You should use the form P9(T) or the online tax code notification with the most recent date if you have received more than one for 2021/22, and discard any previous notifications. You should update your 2021/22 payroll to reflect the tax code shown in the notification for that employee.

Employees without a new tax code

If HMRC have not issued a tax code notification for an employee, you will need to update their 2020/21 tax code to reflect the increase in the personal allowance to £12,570 for 2021/22. To do this, you should:

  • add 7 to any tax code ending in L;
  • add 8 to any tax code ending in M; and
  • add 6 to any tax code ending in N.

For example, 1250L will become 1257L.

You should not carry over any ‘week 1’ or ‘month 1’ markings.

Scottish and Welsh taxpayers

Scottish taxpayers are identified with an ‘S’ prefix and Welsh taxpayers are identified with a ‘C’ prefix. Check any Scottish or Welsh employees (those living, respectively, in Scotland or in Wales) have the correct tax codes, including the prefix.

More information

You can find more information on tax codes to use from 6 April 2021 in HMRC’s P9X(2021) guidance.

Get in touch

Please get in touch if you need assistance in updating your employees’ tax codes for the 2021/22 tax year.

February 10, 2021

31 January self-assessment deadline approaching

31 January self-assessment deadline approaching

There are a number of key tasks that you need complete by midnight on 31 January 2021. These include filing the self-assessment tax return for 2019/20, paying any remaining tax due for 2019/20 and, where applicable, calculating and paying the first payment on account for 2020/21.

Filing deadline

The deadline for filing the 2019/20 tax return online is midnight on 31 January 2021. If you received a notice to file a return which was issued after 31 October 2020, a later deadline applies, and you have three months from the date of that notice in which to file your return. The deadline for filing paper returns (31 October 2020) has already passed. While any paper returns filed after that date (or more than three months from the date of notice to file a return, if later) will attract a late filing penalty, the penalty can be avoided by filing your return online by midnight on 31 January 2021.

If you miss the filing deadline, you will receive an automatic late filing penalty of £100. This is the case regardless of whether you have any tax to pay. Further late filing penalties are charged where the return remains outstanding after three months, six months and 12 months.

Do I need to file a return?

You will need to file a tax return if HMRC have sent you a notice requiring you to file one. You will also need to register for self-assessment if you have not already done so and file a tax return for 2019/20 if in that year you had taxable income that was not taxed at source. This might include:

  • income from self-employment of more than £1,000;
  • money received from renting out a property;
  • savings income, such as interest or dividends;
  • foreign income; or
  • capital gains.

You might also need to fill in a tax return if you have income tax reliefs that you wish to claim, although this will not always be the case as some, for example, relief for employment expenses, can be claimed online.

Paying tax

You must pay any tax owing for 2019/20 plus the first payment on account for 2020/21 by 31 January 2021. As a result of the COVID-19 pandemic, you may find that your bill is higher than normal this year if you opted to delay making the second payment on account for 2019/20. If you are struggling to pay your bill, you may be able to pay in instalments.

If you filed your tax return by 30 December 2020, have PAYE income and owe £3,000 or less, the tax that you owe can be collected through PAYE by adjusting your 2021/22 tax code.

Tax due for 2019/20

Unless you have agreed a Time-to-Pay arrangement with HMRC, you will need to pay any tax that you owe for 2019/20 by 31 January 2021. Remember, to take off any payments that you have already made when working out what you need to pay – the HMRC tax calculation does not do this automatically. If you are unsure what payments have been made, you can check this by looking at your personal tax account.

If you opted to delay your second payment on account for 2019/20 (which would have normally been due by 31 July 2020), you will need to pay this by 31 January 2021, along with any balance that remains outstanding. As long as you pay the delayed payment by this date, there will be no interest to pay.

First payment on account for 2020/21

You will need to make payments on account of your 2020/21 self-assessment liability if your tax and Class 4 National Insurance bill for 2019/20 was at least £1,000, unless at least 80% of your tax is collected at source, for example, under PAYE. Each payment on account for 2020/21 is 50% of the tax and Class 4 National Insurance liability for 2019/20. You must make the payments by 31 January 2021 and 31 July 2021.

However, because of the impact of the COVID-19 pandemic, your liability for 2020/21 may be considerably lower than that for 2019/20. The payments on account for 2020/21 are based on pre-pandemic profits of 2019/20; where your income has fallen significantly, you may wish to reduce your 2020/21 payments on account to more realistic levels. However, when working out your estimated liability for 2020/21, remember to include any COVID-19 support payments as these are taxable. You can opt to reduce your payments on account by completing the relevant section of your self-assessment tax return or via your personal tax account.

Payment difficulties

If you are struggling to pay the tax that you owe by 31 January 2021, you may be able to set up an arrangement to spread the cost and pay your tax in instalments. You can do this online if you owe £30,000 or less and have no other payment plans or debts with HMRC; otherwise, you will need to contact HMRC to agree a payment plan.

Interest and penalties

If you pay any tax owing for 2019/20 after 31 January or make your 2020/21 payments on account late or reduce your payments on account by too much, you will be charged interest. Interest is also charged where payments are made in instalments. In the absence of an instalment plan, you will also be charged penalties at the rate of 5% of the unpaid tax where it remains unpaid after 30 days, six months and 12 months.

Contact us

Please let us know if you would like us to file your return on your behalf or if you need help working out what tax you need to pay and by when.

December 2, 2020

File your tax return by 30 December 2020

File your tax return by 30 December 2020

Although the deadline by which your 2019/20 self-assessment tax return must be filed online is 31 January 2021, an earlier deadline of 30 December 2020 applies if you want any tax that you owe for 2019/20 to be collected through PAYE. This can be advantageous as you can spread the cost across the tax year, rather than paying it in a single instalment.

Conditions

You can pay your self-assessment bill through PAYE if all of the following apply:

  • the amount that you owe is £3,000 or less;
  • you already pay tax through PAYE (for example, because you are an employee or you receive a company pension); and
  • you either submitted a paper tax return for 2019/20 by 31 October 2020 or filed your return online by 30 December 2020.

You should note that if you meet all of these conditions, HMRC will collect any tax that you owe through the PAYE system. If you file your self-assessment return by 30 December 2020 and owe less than £3,000 and do not want to pay it in this way, you will need let HMRC know. You can do this on your tax return. If you choose this route, you will need to pay the tax you owe for 2019/20 by 31 January 2021 (unless you have agreed a Time to Pay arrangement with HMRC).

You will not be able to pay any tax that you owe via PAYE if:

  • you do not have sufficient PAYE income to cover the tax that you owe;
  • collecting tax in this way would mean that you would pay more than 50% of your PAYE income in tax; or
  • if you would end up paying twice as much tax as you would do otherwise.

Collection through your tax code

Your tax code will be adjusted to facilitate the collection of the tax that you owe through the PAYE system. The adjustment will reflect the amount that you owe and the rate at which you pay tax.

Underpayments for 2019/20 will be collected by adjusting the 2021/22 tax code. Adjusting the tax code will have the effect of collecting the underpaid tax in 12 equal instalments over the 2021/22 tax year. Interest is not charged, meaning this is an interest-free way of paying any tax that you owe in instalments.

Speak to us

If you have a tax underpayment of £3,000 or less and would like it to be collected via an adjustment to your 2021/22 tax code, please let us know so that we can ensure that your 2019/20 tax return is filed by the 30 December 2020 deadline.

November 18, 2020

More time to pay your tax bills

More time to pay your tax bills

In his Winter Economy Plan, the Chancellor, Rishi Sunak, unveiled measures which will allow self-assessment taxpayers and VAT-registered businesses more time to pay back deferred tax.

New Payment Plan for VAT

At the start of the pandemic, VAT-registered business could delay paying VAT where it fell due between 20 March 2020 and 30 June 2020. VAT falling due after that date – i.e. that for VAT quarters ending on or after 31 May 2020 – must be paid in full and on time.

Under the original proposals, if you took advantage of the opportunity to defer paying your VAT due to Coronavirus, you had until 31 March 2021 to pay it. However, if this is likely to be difficult, you can take advantage of the New Payment Plan for VAT and instead pay your deferred VAT in 11 interest-free instalments over the 2021/22 tax year. This will mean that you will have an additional year – until 31 March 2022 rather than 31 March 2021 – to pay the full amount. To take advantage of the instalment option, you will need to opt in. HMRC will publish details of how to do this over the coming months.

Enhanced Time-to-Pay for self-assessment

If you owe tax under self-assessment, you will be able to use enhanced Time-to-Pay arrangements to set up a monthly repayment plan online, without the need to call HMRC. Taxpayers can now use this service as long as they do not owe more than £30,000 in tax. Previously, the service was only available to taxpayers owing £10,000 or less.

Self-assessment taxpayers were able to opt to delay the second payment on account for 2019/20, which was due by 31 July 2020. Under the original proposals, the deferred tax had to be paid by 31 January 2021, together with any balancing payment for 2019/20 and the first payment on account for 2020/21.

If you need more time to pay your tax, you can use HMRC’s self-service facility to set up a Time-to-Pay plan. This will give you an additional 12 months (until 31 January 2022) in which to pay the second payment on account for 2019/20, any balancing payment for 2019/20 and the first payment on account for 2020/21.

Get in touch

Contact us to find out how we can help you set up payment plans and budget for your tax bills.

October 29, 2020

Option to defer July self-assessment payment on account

Option to defer July self-assessment payment on account

Taxpayers facing financial difficulties as a result of the COVID-19 pandemic can opt to delay making their second self-assessment payment on account for 2019/20, due by 31 July 2020. As long as the amount is paid in full, together with any outstanding balance for 2019/20, by 31 January 2021, HMRC will not charge any interest or penalties.

Requirement to make payments on account

Under the self-assessment system, taxpayers are required to make payments on account of their tax and Class 4 National Insurance liability if their self-assessment bill for the previous tax year was £1,000 or more, unless at least 80% of the tax owed for that year was deducted at source, for example, under PAYE.

Each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability. Although Class 2 National Insurance contributions are collected via the self-assessment system, they are not taken into account when working out payments on account. Payments on account are made on 31 January in the tax year and on 31 July after the end of the tax year, with any balance being paid by the tax return filing date of 31 January after the end of the tax year. If the payments on account are more than the eventual liability, the excess is refunded or set against the next year’s liability.

The first payment on account for 2019/20 was due by 31 January 2020. The second payment would normally need to be paid by 31 July 2020.

Option to defer

This year, taxpayers have the option to defer the second payment on account if they are finding it difficult to make the payment by 31 July 2020 due to Coronavirus. There is no obligation to defer – taxpayers can still make the payment by 31 July 2020 if they so wish.

Where a taxpayer takes the deferral option, the outstanding payment can be made whenever the taxpayer is able to meet the payment, as long as this is no later than 31 January 2021. Any balance owing for 2019/20 must be paid by the same time, together with the Class 2 National Insurance liability for the self-employed and the first payment on account for 2020/21.

Taxpayers choosing the deferral option do not need to tell HMRC – they simply pay the tax by 31 January 2021; nor do they have to provide evidence that they were adversely affected by the COVID-19 pandemic.

Guidance on the deferral option is available on the Gov.uk website.

Pros and cons

Delaying the payment will no doubt help those struggling as a result of the COVID-19 pandemic. Indeed, it may provide a lifeline for particular groups of taxpayers, for example, those who are self-employed and who do not qualify for a grant under the Self-employment Income Support Scheme and who have been unable to work due to the restrictions.

However, the deferred tax has to be paid eventually, and the payback for having nothing to pay in July is a big bill in January 2020. Not only will the deferred tax be payable then, but also any balance due for 2019/20 and the first payment on account for 2020/21.

Get in touch

It would be a pleasure to help you decide whether the deferral option would be beneficial to you and what it will mean for your cashflow come January 2021.

June 30, 2020

NIC implications of COVID-19 support payments

NIC implications of COVID-19 support payments

Various support payments have been made to help those affected by the COVID-19 pandemic. How are those payments treated for National Insurance purposes?

Grant payments under the CJRS

Where an employer claims a grant payment under the Coronavirus Job Retention Scheme (CJRS), the full amount of the grant (topped up to 80% of wages in the last two months of the scheme) must be paid over to the employee. As far as the employee is concerned, this is treated in the same way as a normal salary payment. The employer deducts Class 1 National Insurance and pays it over to HMRC.

The payment is also liable to employer’s Class 1 National Insurance to the extent that it is not covered by the employment allowance. For pay periods prior to 1 August 2020, the employer can reclaim the associated employer’s National Insurance on grant payments from the Government under the CJRS. The employer’s National Insurance must be paid over to HMRC in the usual way.

Grants under the SEISS

Grants under the Self-Employment Income Support Scheme (SEISS) should be taken into account in computing profits for 2020/21. Where those profits exceed £9,500, Class 4 National Insurance contributions will be payable. If the profits for 2020/21 are more than £6,475, you must pay Class 2 contributions.

As a result of the pandemic, profits may be lower in 2020/21 than previously. If profits are below the small profits threshold, set at £6,475 for 2020/21, there is no obligation to pay Class 2 contributions. However, it may be worthwhile to do so voluntarily to ensure that 2020/21 remains a qualifying year for state pension and contributory benefit purposes. This is much cheaper than paying Class 3 contributions to make up a shortfall.

Other grants

Businesses may also receive other grants, such as those payable to businesses qualifying for small business rate relief or payable to specific sectors, such as the hospitality and leisure sector. For self-employed taxpayers, these are taken into account in calculating profits, which in turn will determine whether a liability to Class 2 and Class 4 National Insurance contributions arise.

Talk to us

Speak to us to ascertain the effect of grant payments on your National Insurance bill.

June 3, 2020

Budget 2020 – rates and allowances

Budget 2020 – rates and allowances

The Chancellor, Rishi Sunak, presented his first Budget on 11 March 2020, confirming the rates and allowances applying for the 2020/21 tax year. The following key rates and allowances were announced.

Full details of the rates and allowances applying for 2020/21 are available on the Gov.uk website.

Income tax

As previously announced, the personal allowance remains at £12,500 for 2020/21. It is reduced by £1 for every £2 by which income exceeds £100,000. This means that if your income is more that £125,000 for 2020/21, you will not receive a personal allowance.

Income tax rates and allowances are unchanged too. The basic rate remains at 20%, the higher rate at 40% and the additional rate at 45%. The basic rate band is also unchanged at £37,500, meaning that the point at which higher rate tax becomes payable remains at £50,000. Tax is payable at the additional rate on income over £150,000.

The Scottish and Welsh rates of income tax apply to the non-savings, non-dividend income of Scottish and Welsh taxpayers.

Dividends

The dividend allowance remains at £2,000 for 2020/21. Dividends, which are treated as the top slice of income, are taxed at 7.5% to the extent that they fall within the basic rate band, 32.5% to the extent that they fall in the higher rate band and at 38.1% to the extent that they fall in the additional rate band.

Savings

Basic rate taxpayers continue to benefit from a savings allowance of £1,000 for 2020/21, while higher rate taxpayers can enjoy a savings allowance of £500. There is no savings allowance for additional rate taxpayers.

The starting savings rate of 0% applies to savings in the savings starting rate band of £5,000, but remember this is reduced by taxable non-savings income.

Corporation tax

The rate of corporation tax was due to fall to 17% for the financial year 2020. However, as previously announced, it will remain at 19%. It will stay at 19% for the financial year 2021 too.

Capital gains tax

The capital gains tax annual exempt amount is increased to £12,300 for 2020/21 for individuals and personal representatives, and to £6,150 for trustees.

Capital gains tax rates remain at 10% where income and gains fall in the basic rate band and at 20% thereafter. Higher rates of 18% and 28% apply to residential property gains.

March 12, 2020

National Insurance contributions for 2020/21

National Insurance contributions for 2020/21

The starting point for paying National Insurance is to increase to £9,500 for 2020/21 for employees and for Class 4 contributions payable by the self-employed. This is in line with a Government commitment to increase the starting threshold to £12,500 – the level of the personal allowance for tax purposes.

Employees and Employers

Class 1 National Insurance contributions are payable on an employee’s earnings by the employee (primary contributions) and by the employer (secondary contributions). The rates and thresholds applying for 2020/21 are shown in the table below.

Class 1
Weekly lower earnings limit (LEL)£120 per week £520 per month £6,240 per year
Primary threshold (PT)£183 per week £792 per month £9,500 per year
Secondary threshold (ST)£169 per week £732 per month £9,500 per year
Upper earnings limit (UEL)£962 per week £4,167 per month £50,000 per year
Upper secondary threshold for under 21s£962 per week £4,167 per month £50,000 per year
Apprentice upper secondary rate (AUST)£962 per week £4,167 per month £50,000 per year
Employee’s primary rate (payable on earnings between the PT and UEL)12%
Employee’s additional rate (payable on earnings above the UEL)2%
Secondary rate (payable on earnings above the relevant secondary threshold)13.8%
Reduced rate for certain married women (on earnings between the PT and UEL)5.85%

For 2020/21, the primary and secondary thresholds are no longer aligned. This means that the point at which employer contributions for employees over the age 21 kicks in is £169 per week (£732 per month), while employee contributions are not payable until earnings reach £183 per week (£792 per month). On earnings between these limits, employer contributions are payable but not employee contributions.

The rate of Class 1A contributions (payable on benefits in kind) and Class 1B contributions (payable on items included in a PAYE settlement agreement) remains at 13.8%.

The self employed

The self-employed pay flat-rate Class 2 contributions and also Class 4 contributions on their profits.

For 2020/21, Class 2 contributions increase by 5p per week to £3.05 per week. Contributions are only mandatory if profits exceed the small profits threshold. This is set at £6,475 for 2020/21. However, they can be paid voluntarily where profits are less than this level.

As with employees, the starting point at which Class 4 contributions become payable on the profits of the self-employed – the lower profits limit – increases to £9,500 for 2020/21. Contributions are payable at the main rate of 9% on profits between this level and the upper profits limit, which remains at £50,000 for 2020/21. Above this, contributions are payable at the rate of 2%.

Voluntary contributions

Voluntary (Class 3) contributions can be paid to make up a shortfall in your contributions record and preserve your entitlement to the state pension. Class 3 contributions rise to £15.30 per week for 2020/21.

Check your contributions record

Speak to us about whether you need to pay additional contributions to ensure that you will qualify for the full state pension when you reach state pension age. You can obtain a pension forecast online.

February 10, 2020

Personal allowances – use them or lose them

Personal allowances – use them or lose them

With the end of the 2019/20 tax year approaching, now is a good time to review your available personal allowances for 2019/20 and make sure that they are not wasted.

Personal allowance

For 2019/20, the personal allowance is £12,500. However, where income is more than £100,000, the allowance is reduced by £1 for every £2 by which income exceeds £100,000. This means that individuals with income of £125,000 or more in 2019/20 do not have a personal allowance. If your income is between £100,000 and £125,000, you will receive a reduced personal allowance.

At the lower end of the income scale, if you are married or in a civil partnership and if you are not able to use all of your personal allowance or your partner is unable to use all of their personal allowance, you can claim the marriage allowance. This works by allowing the person who is unable to use all of their allowance to transfer 10% of their personal allowance — £1,250 for 2019/20 – to their spouse or civil partner. However, this is only allowed if the recipient is a basic rate taxpayer. The marriage allowance is worth £250 to a couple for 2019/20. It can be claimed online.

At the other end of the scale, taxpayers whose income exceeds £100,000 could consider taking steps to reduce their income to below £100,000 to preserve their full personal allowance. Options include making pension contributions or gift aid donations or delaying taking salary or dividends until after 5 April 2020.

Dividend allowance

All individuals, regardless of the rate at which they pay tax, are entitled to a dividend allowance of £2,000 for 2019/20. In a family company scenario, where family members have not yet used their allowance, paying dividends by 5 April 2020 to mop up the allowances can be a tax-efficient way to extract profits. The use of an alphabet share structure will enable dividends to be tailored to the circumstances of the recipient.

Pensions annual allowance

Making contributions to a registered pension scheme can be tax efficient. You can make pension contributions to the higher of 100% of your earnings and £3,600 (gross), as long as you have sufficient annual allowance available. The annual allowance is set at £40,000 for 2019/20, but is reduced for high earners. If you have already accessed a money purchase pension, you have a reduced allowance of £4,000.

The annual allowance can be carried forwarded for up to three years. However, before using brought forward allowances (earliest year first), you must use the allowance for the current year. Any allowances unused for 2016/17 will be lost if they are not used by 5 April 2020.

Capital gains tax annual exempt amount

Capital gains tax is only payable where net gains and losses for the tax year exceed the annual exempt amount. This is set at £12,000 for 2019/20. Spouses and civil partners have their own annual exempt amount.

Where a disposal is on the cards which will give rise to a capital gain, if the annual exempt amount for 2019/20 has not been used up yet, consider making the disposal before 6 April 2020 to utilise this. Remember, where a spouse or civil partner has an unused exempt amount, assets can be transferred between them on a no gain/no loss basis, making it possible to make use of their annual exempt amount too.

Inheritance tax annual exemption

The inheritance tax annual exemption allows you to give away £3,000 each year without the gift counting as part of your estate for inheritance tax purposes. If it is not used, it can be carried forward to the next tax year, but is then lost. If you do not use your exemption for 2018/19 by 5 April 2020, you will lose it. There are also various other gifts that you can make IHT-free each tax year.

Act now

Why not speak to us to find out what action you need to take to make sure your allowances are not wasted.

February 3, 2020