Spring Budget 2017

The Chancellor’s 2017 Budget contained some important announcements and confirmed a number of changes planned for the new tax year.

There was both good and bad news for sole traders and small businesses in today’s Budget. Following this, we have put together a review which contains the latest tax and financial information, which we trust you will find useful. Please click here to download.

For more information on how the changes in the Budget may affect you, please contact us

In Brief:

Class 4 NICs will increase from 9% to 10% in April 2018, and then to 11% in April 2019 for those earning more than £8,060. Employees currently pay 12%. Class 2 contributions – as previously announced – will be abolished from April 2018. This will affect you if you are self-employed.

In addition, Hammond announced that the tax-free dividend allowance – introduced last year – will be reduced from £5,000 to £2,000 from April 2018. This will affect you if you trade as a Limited Company.

As plans for Making Tax Digital (MTD), continue apace, Hammond also announced that for businesses with turnover below the VAT registration threshold this will be delayed by one year to April 2019 to allow more time to prepare for the changes.

Businesses that have an annual turnover below the VAT registration threshold will have an extra year before they are required to keep records digitally and send HMRC quarterly updates.

Those businesses trading above the VAT threshold will still be required to keep digital records and send HMRC quarterly updates from April 2018.

The exemption threshold for MTD remains at £10,000.

At Liric, we are working on ensuring all our clients have the systems they will need to ensure they comply and there will be much more about this in future newsletters.

 

Changes to Flat Rate VAT scheme

Following last years Autumn Statement, the government have issued their draft legislation detailing the changes to the Flat Rate Scheme (FRS). These will come into effect on 1 April 2017.

If you are using the Flat Rate scheme for calculating your VAT it’s really important that you read the following information.  We will also be contacting you directly if our records indicate that you may be affected by these significant changes.

If your business is classed as a “Low or Limited cost trade”, which will probably catch any consultancy based businesses, the flat rate will increase to 16% from 1 April.

So for example:
If your sales are £5,000 the VAT is £1,000, total £6,000 x 16.5% = £990 VAT payable. So HMRC let you keep £10.

Compare to the 14% rate and the VAT payable would have been £840, allowing you to keep £160.

Please click here for our full factsheet on this important subject and do get in touch with us if you are affected.

Paying your self assessment tax – deadline 31 January 2016

HMRC will not be issuing paper statements and payslips to self-assessment taxpayers to remind them of the 31 January 2016 filing and payment date unless the taxpayer has filed their 2014/15 tax return by 31 December 2015, and has not opted for digital only communications from HMRC.

HMRC will not be issuing paper SA reminders and payslips for taxpayers who file their 2014/15 tax returns in January 2016 or for those taxpayers who have opted for digital-only SA communications from HMRC. Payment options available without a payslip are by debit/credit card, CHAPS/BACS, direct debit or via online or telephone banking.

Payment by cheque through the post is available but only with a paying in slip. If you do not have a paying in slip you can print a payslip but this cannot be used to pay over the counter at a bank, building society or Post Office.

Further details on how to pay can be found on the HMRC website – GOV.UK at: https://www.gov.uk/pay-self-assessment-tax-bill

Have you heard of the new Personal Savings Allowance (PSA)?

From April 2016 the new Personal Savings Allowance (PSA) will start.

The PSA will apply to all non-ISA cash savings and current accounts, and will allow some savers to receive a generous portion of their interest totally free of tax.

It’s expected that 95% of savings will no longer be taxed.

Basic rate taxpayers will receive £1,000 in savings income tax free, higher rate taxpayers get a band of £500 and additional rate tax payers get nothing.

From April 2016 banks and building societies will stop automatically taking 20% in income tax from the interest earned on your non-ISA savings.

personal tax

Limited company or sole trader?

What is a Limited Company?

A limited company is an organisation that you can set up to run your business – it’s responsible in its own right for everything it does and its finances are separate to your personal finances.

Any profit it makes is owned by the company, after it pays Corporation Tax. The company can then share its profits.

What is a Sole Trader?

If you start working for yourself, you’re classed as a self-employed sole trader – even if you’ve not yet told HM Revenue and Customs (HMRC).

As a sole trader, you run your own business as an individual. You can keep all your business’s profits after you’ve paid tax on them.

You can employ staff. ‘Sole trader’ means you’re responsible for the business, not that you have to work alone.

You’re personally responsible for any losses your business makes.

The key Advantages and Disadvantages of Companies are shown below:

Advantages Disadvantages
Credibility – be seen as a serious business Reporting – annual return, statutory accounts and corporation tax return
Tax – normally you will pay less tax by having a company IR35 – are you a disguised employee
Reduced risk – you are protected from personal liability Directors – obigations under the Companies Act
Flexible – shares can be created and transferred Advice – professional help and advice reqiured to maximise benefits

How do you form a Limited Company?

You can form your company directly with Companies House for £15, it normally takes 24 hours. We can form it for you, ensuring the optimum share structure is in place and we than also deal with any VAT or payroll registrations required with HMRC.

You’ll need:

  • the company’s name and registered address
  • names and addresses of directors (and company secretary if you have one)
  • details of shareholders and share capital

What are the next steps?

Once your company has been formed you need to:

  1. Open a bank account for the Company, this can often take a couple of weeks
  2. Register for Corporation Tax
  3. Register for other taxes (if they apply to your business) – VAT, PAYE, CIS
  4. Set up your accounting software
  5. Create shareholder agreements, contracts and other legal documents (if required)

Starting a new business, whether sole trader or Limited, needs careful consideration, a business plan and some start up capital to name but a few things.  We do recommend you come and talk to us right at the beginning so things are set up in the best way that works for you. What may be the optimum route for one person is not necessarily the same for another – we offer bespoke advice.

 

fee protection

RENEWALS BASIS IS BACK FOR BUY TO LET LANDLORDS

Following the restriction of tax relief for mortgage interest and the 3% increase in Stamp Duty Land Tax all is not doom and gloom for buy to let landlords. Following on from the consultation this summer the draft Finance Bill 2016 includes the legislation to reintroduce tax relief for the replacement of furnishings in buy to let properties from 6 April 2016.

 

This will apply to both furnished and unfurnished lettings and will mean that the cost of replacing items such as cookers and washing machines will again qualify for relief following the withdrawal of a concession from 6 April 2013.

Note that the alternative, and simpler, 10% wear and tear allowance will be withdrawn from 6 April 2016 for those letting properties fully furnished.

Those letting properties under the more stringent furnished holiday letting rules will continue to be able to claim the Annual Investment Allowance which provides 100% tax relief for the initial furnishing as well as renewal of furniture in holiday properties.

Auto Enrolment pensions

Pension Automatic Enrolment is with us and the staging dates for smaller companies are on the horizon. Between 2015 and 2017, over 1 million companies will be staging, which is a staggering 51,134 companies per month.

There is a wealth of information available on the Pension Regulators website www.thepensionsregulator.gov.uk but we have summarised the key facts for you. LIRIC-Auto-Enrolment-guide.pdf

Don’t leave this until the last minute, or think “it doesn’t affect me” because any business with a PAYE reference has a duty to comply and there are serious fines for non-compliance.

If you have the correct company pension structure in place, that’s great, but if you don’t it is important that you read on.

Whether you have an existing pension scheme or not, you absolutely must ensure that you comply with the government’s pension reform regulations. Not just any old pension scheme will do… it has to follow the new rules.

Following the rules not only means that your company pension scheme has to be in line with the regulations the government have put in place, but it also means that you have a duty to explain all changes to your staff so that they are aware of the situation!

The good thing is that we are here to help with this.

If in doubt give then contact us:

NEW RULES FOR DIVIDENDS FROM 2016/17

In the Summer Budget Newsletter we outlined the new rules for the taxation of dividends that will apply from 6 April 2016. Further guidance has now been published by HMRC setting out how the new rules will operate and it seems the rules don’t work as many people expected.  As previously reported, there will be no 10% credit against the tax on dividends which means there will be a 7½ % increase in the rate of tax on dividends once the £5,000 dividend allowance has been used up. Currently dividends falling into the basic rate band are effectively tax free.

However the £5,000 allowance needs to be taken into consideration in determining the rate of tax on your dividends. For example if you have salary and other non- dividend income of £40,000 next year and £9,000 in dividends, the £4,000 of taxable dividends are taxed at 32.5%, not £3,000 at 7.5% then £1,000 at 32.5%. This is because the £5,000 is added to the £40,000 income pushing the taxable dividends into the higher rate band.

If you own your own company it may be beneficial to bring forward dividend payments from next year to save the additional 7½ %. However, it would be important to consider all of the tax implications of such actions so come and talk to us to discuss your options.

How do new interest rules affect my buy to let property?

Changes announced in the Summer Budget may  significantly increase your tax liability if you have a property business – including a single buy to let – read on….

Now

At present, full tax relief is available for interest on a loan used in a property business.  The funds may have been used to purchase the let property, to make major repairs, or just to fund the working capital of the property business.

From April 2017

From April 2017, tax relief on interest in property businesses ( including single buy to lets) will be restricted so that by 2020, interest will not be an allowable expense in computing the profit of the business, but instead will attract tax relief at 20%. The change does not affect furnished holiday lettings.  The change will be phased in as follows:

 

2017/18 2018/19 2019/20 2020/21
% of interest allowed as a deduction 75 50 25 0
% of interest given as a relief at 20% 25 50 75 100

A letting activity that has a low level of interest in relation to the borrowings will not be too badly affected, but where there is a higher level of borrowing, individuals will find that the business model has been severely undermined.

So how will this work?

Example 1

Jo is a 40% taxpayer. He has purchased a buy to let property as an investment. Here is the effect of the changes:

 now  2020/21
 Gross rents 7,200 7,200
 Repairs, agents fees and other tax deductible costs 1,000 1,000
 Mortgage interest 2,500
 Net rental profit 3,700 6,200
 Tax at 40% 1,480 2,480
 less interest relief at 20% 500
 Net tax liability on rental income 1,480 1,980
tax increase 500
effective tax rate on “real” rental profit 40.0% 53.5%

   

Example 2

In this case Jo has a bigger mortgage and hence more interest:

 now  2020/21
 Gross rents 7,200 7,200
 Repairs, agents fees and other tax deductible costs 1,000 1,000
 Mortgage interest 5,000
 Net rental profit 1,200 6,200
 Tax at 40% 480 2,480
 less interest relief at 20% 1,000
 Net tax liability on rental income 480 1,480
tax increase 1,000
effective tax rate on “real” rental profit 40.0% 123.5%

 

The tax due is more than the net funds available from the rental surplus by £280.

The new rules may also push a tax payer into the higher rate band, result in reduction of personal allowance or trigger the repayment of child benefit.

What are your options?

  1. Incorporation – has tax and other cost implications and borrowing often not easy
  2. Reduce borrowing so impact is less
  3. Sell property
  4. Accept the increase if expected capital gain on property makes it worthwhile

 

Please contact us to find out how this will impact on you.

01763 – 853633

enquiries@liricaccountants.com

“Reconsider the new Dividend Tax for small businesses”.

Uproar amongst business owners, the entrepreneurs of now and the future  has resulted in a petition being put to the Government to which there is now an official response :

“The Government is committed to supporting entrepreneurs and a fair tax system. Dividend tax reform allows further cuts in Corporation Tax and reduces the incentives for tax motivated incorporations.

The Government is fully committed to supporting business and entrepreneurship. As set out at the Summer Budget 2015, the Government believes that one of the best ways to support growth and enterprise in the UK is through lower and more competitive Corporation Tax rates.

Owners of small companies will also benefit from a range of other measures announced at the Summer Budget, including an increase in the National Insurance Employment Allowance to £3,000 from April 2016 and a permanent increase to the Annual Investment Allowance to £200,000 from January 2016. They will also pay less tax as a result of the increases to the tax-free Personal Allowance to £11,000 and to the Higher Rate Threshold to £43,000 in April 2016. We also have a commitment to go much further, taking the Personal Allowance to £12,500 and the Higher Rate Threshold to £50,000 by the end of this Parliament.

However, it is not possible to continue to reduce the Corporation Tax rate without looking at the overall balance of the tax system, including taxation of dividends. Lowering the Corporation Tax rate without action elsewhere increases incentives for individuals to set up a company and pay themselves through dividends to reduce their tax bill (also known as tax motivated incorporation). Therefore the Government is reforming dividend taxation. These reforms, which will also simplify the dividend tax system, will significantly reduce the incentives for people to set up a company and pay themselves through dividends rather than wages simply to reduce their tax bill. Taxpayers and the Exchequer will now be £500 million better off as result of reduced incentives for tax motivated incorporation. Those who choose to work through a company continue to pay lower rates of tax than the employed or self-employed. But the reforms move the overall tax rates for the self-employed and those incorporated closer together, making the system fairer overall.

HM Treasury”

Click this link to view the response online and register your name:

https://petition.parliament.uk/petitions/106525?reveal_response=yes

 

The Petitions Committee will take a look at this petition and its response. They can press the government for action and gather evidence. If this petition reaches 100,000 signatures, the Committee will consider it for a debate.