Pension contributions provide individuals with a passive income when they retire. At present, tax relief can be claimed on individuals’ contributions at their highest rate of income tax. This means pension contributions remain one of the most popular ways to save for retirement and reduce income tax payments.

 

However, the new government may change this generous tax deduction by limiting the amount of tax relief that can be claimed by individuals to say 30%. Currently, higher-income earners can claim income tax relief at their highest rates, potentially at 40% or 45%.

 

High-income earners may like to hedge their bets and make their 2024-25 pension contributions ahead of the Autumn Budget due to be announced later this year. Unless changes are back-dated, this may ensure a higher rate of tax relief.

 

A summary of the current tax position of pension contributions follows. But please note, before making any changes to your present pension contributions, please discuss your options with your pension advisor.

 

Limits on an individual’s annual contributions

You will be limited to annual contributions of £60,000 plus any unused annual allowance accrued for the previous three years. For the tax years, 2016-17 to 2022-23 the standard annual allowance was £40,000.

 

This £60,000 allowance will be reduced for high-income earners on a tapered basis and could be as low as £10,000.

Employer contributions

There are no limits on employer contributions, but any contributions made will count towards the employee’s annual allowance.

 

In most cases, HMRC will allow employer contributions to be deducted from profits as a business expense, and this will reduce corporation tax payments. However, HMRC does have the right to challenge this deduction if they consider the payment did not meet their “wholly and exclusively” criteria.

 

Please see the following HMRC advice on the present rules for pension contributions https://www.gov.uk/tax-on-your-private-pension

Further complications

If an individual has taken more than their tax-free cash from their pension fund they may have a reduced annual allowance of £10,000 This is called the money purchase annual allowance.

 

For all your accounting issues please call us today on 01473 744700

Please see another Accounting Gem blog: https://www.aag-accountants.co.uk/new-government-elected-expected-tax-changes/

We have set out below reasons that may mean you have paid back more than you owe on your student loan account(s). And how to reclaim the overpayment from the Student Loan Provider. You can ask for a refund if:

• You have paid more than the total amount you owe.
• Your annual income was below the threshold.
• You started making repayments before you needed to.
• You have repaid more than needed because your employer had you on the wrong repayment plan.

You cannot claim a refund if you made extra repayments.

If you pay back more than you owe

HM Revenue and Customs (HMRC) will tell your employer to stop taking repayments from your salary when you have repaid your loan in full. It can take around 4 weeks for salary deductions to stop. This means you may pay back more than you owe.

If your annual income was below the threshold

Your income is the amount you earn (including bonuses and overtime) before tax and other deductions. You could ask for a refund if you made repayments but your income over the whole tax year (6 April to 5 April the following year) was less than:

• £24,990 a year for Plan 1
• £27,295 a year for Plan 2
• £31,395 a year for Plan 4
• £21,000 a year for Postgraduate Loan

If your annual salary is less than this, your employer may still have deducted repayments. For example, if you were paid a bonus that put you over the monthly threshold for your plan, they would deduct a repayment for that month.

You will not get a refund for any repayments until after SLC has confirmed your annual income with HMRC. This will not happen until after the end of the tax year. You can only ask for a refund for tax years that have ended.

If you started repaying before you needed to

If a deduction is taken from your salary before you are due to start repaying, you can ask for a refund.

If your employer had you on the wrong repayment plan

You can get a refund if you are on Plan 2 or Plan 4, but your employer had you on another plan. Check your employer has you on the correct repayment plan.

Asking for a refund

If your annual income was below the threshold for the previous tax year, sign into your student loan repayment account and ask for a refund. If you need a refund for any other reason call or contact SLC with your customer reference number.

Or contact the Student Loans Company

Please see the following link for further information: https://www.gov.uk/government/organisations/student-loans-company

Telephone: 0300 100 0611 (England, Northern Ireland or Scotland)
Telephone: +44 (0)141 243 3660 (outside the UK)
Monday to Friday, 8 am to 6 pm

Telephone: 0300 100 0370 (Wales)
Monday to Friday, 8 am to 6 pm (not open on bank holidays)

You can also contact SLC by post.

Student Loans Company Ltd
10 Clyde Place
Glasgow
G5 8DF

For all your accounting issues please call us today on 01473 744700

Please see another Accounting Gem blog: https://www.aag-accountants.co.uk/savings-interest-and-tax/

 

If you are thinking of setting up a business, or if you already operate as a sole trader, you may be considering whether to incorporate your business and if so, when to incorporate.

This decision will affect how you run your business and ultimately, what taxes you pay, and when you pay them.

Operating as a sole trader

If you run your business as a sole trader, there is no distinction for tax purposes between you and your business. Any profits that you make from running your business are considered in working out your overall tax liability for the tax year. The rate at which you pay tax depends on your total taxable income for the year, not just on the level of your business profits.

If you make a loss, relief may be available for that loss. The reliefs that are available for that loss will depend on when in the business cycle the loss is made and whether you use the cash basis or the traditional accruals basis to work out your profit or loss.

If your profits from all sources of self-employment are £1,000 or less, you benefit from the trading allowance and do not need to tell HMRC or pay any tax on them. Above this level, you can deduct the £1,000 allowance instead of actual expenses to arrive at your taxable profit where this is beneficial.

For 2022/23, and previous tax years, once the business was up and running, you were taxed on the profits for the accounting period that ended in the tax year. For example, if you prepared your accounts to 30^th June each year, for 2023/24, you would be taxed on your profits for the year to 30^th June 2023.

However, from 2024/25 onwards you will be taxed on the profits for the tax year, with 2023/24 being a transitional year.

If you started your business in 2023/24, it would be advantageous to pick a 31^st March or 5^th April year-end to make life easier under the tax year basis and remove the need to apportion the profits from two accounting periods to arrive at the taxable profit for the tax year. If you currently do not have a 31^st March or 5^th April accounting date, you may wish to consider changing your accounting date.

For 2024/25, the basic personal allowance remains at £12,570. Income tax is charged on taxable income as follows:

Rate	%	Taxable income
Basic rate	20%	£0 to £37,700
Higher rate	40%	£37,701 to £125,140
Additional rate	45%	Above £125,140

 

Scottish taxpayers pay income tax at the Scottish income tax rates.

You will also pay Class 4 National Insurance if your profits are above £12,570. For 2024/25, Class 4 National Insurance is payable at the rate of 6% on profits between £12,570 and £50,270 and at the rate of 2%% on profits in excess of £50,270.

Operating as a limited company

If you choose to operate your business as a limited company, the first point to note is that the company is a separate legal identity and pays tax in its own right.

The company must pay corporation tax on its profits. Unlike an individual, there is no tax-free allowance for a company; corporation tax is payable from the first pound of taxable profit.

Since 1 April 2023, the rate at which corporation tax is payable depends on your profits.

If profits are less than the lower profits limit, set at £50,000, for a standalone company, the small company corporation tax rate is 19%.

However, if your taxable profits are more than the upper profits limit, set at £250,000 for a standalone company, you will pay tax at 25%. Between these limits, the tax charge is initially calculated at 25% but is reduced for marginal relief, so that the effective rate is between 19% and 25%.

The limits of £50,000 and £250,000 are proportionately reduced if you have associated companies or prepare accounts for a period of less than 12 months.

If you operate your business as a company and you want to use your profits outside of the company, for example, to meet your living expenses, you will need to take the profits out of the company, and depending on the route chosen, this may incur additional tax and possibly National Insurance liabilities.

A popular and tax-efficient strategy is to pay a salary at the personal allowance and primary threshold for Class 1 National Insurance purposes (set at £12,570 for 2024/25). Any further profits can be extracted as dividends.

Taking profits as dividends has the advantage that no National Insurance is payable and also that the dividend tax rates are lower than the rates of income tax. For 2024/25, the first £500 of dividend income is tax-free.

Thereafter, dividends (which are treated as the top slice of income) are taxed at:

• 75% to the extent that they fall within the basic rate band,
• 75% to the extent that they fall within the higher rate band, and
• 35% to the extent that they fall within the additional rate band.

Dividends are paid out of the company’s retained profits that have already suffered corporation tax. Consequently, companies that have exhausted their reserves of retained profits can no longer make dividend payments to shareholders.

Should you incorporate?

At first sight, it may seem beneficial to operate as a limited company if the company will pay corporation tax at the 19% rate, as this is lower than the basic rate of income tax. Incorporation may also be beneficial if the company is paying corporation tax at 25% as this is considerably lower than the additional rate of income tax at 45%.

However, this is not the full picture – a company has no tax-free allowance, and further tax and National Insurance may be payable if you extract the profits from the company for personal use.

The increase in the corporation tax rates from April 2023, the increase in the dividend tax rates from 6^th April 2022, and the continuing reduction in the dividend allowance from 6^th April 2024 mean incorporation is less attractive than it once was. Depending on personal circumstances and the level of profits, these changes may have the effect of swinging the pendulum away from incorporation.

The most tax-efficient option will depend on personal circumstances and will be affected by the level of profits that your business makes and also any other income that you may have.

There is no substitute for crunching the numbers; this is essential to assess which is the most tax-efficient option for you.

It is also important to plan ahead. While incorporation relief is available if you incorporate your business in exchange for shares, there is currently no relief if you disincorporate, and moving between structures can in itself trigger tax bills.

Limiting liability

Aside from the tax and National Insurance issues in the previous sections of this update, business owners should consider their personal liability should their business fail.

In a nutshell, if you are self-employed (whether sole trader or in a regular partnership structure) if your business becomes insolvent you may become personally liable for business debts not covered by business assets.

It is possible to cover this risk by converting to a Limited Liability Partnership, but this will not change your tax status.

Incorporation as a Private Limited Company is probably your best option if commercial risks are a significant factor. This may be so even if the tax benefits are marginal.

We can help

The shift towards a higher company tax regime combined with a less generous dividend allowances and higher tax rates for dividends complicates the issues to be considered when deciding on a self-employed or incorporated business structure.

We can help you work out what is the most tax-efficient, and risk-averse structure for your business, call us today on 01473 744700

You may find the following link helpful: https://www.gov.uk/government/publications/incorporation-and-names/incorporation-and-names

Please see another An Accounting Gem blog: https://www.aag-accountants.co.uk/why-business-planning-is-imperative-2024-25/

 

2024 has seen the advent of continuing inflation, high energy costs, falling profits, and hard-pressed businesses across multiple sectors calling it a day. 

And later this year, we will have to deal with the consequences of a possible change in government.

Consequently, this is not the time to relax, and expect that the UK economy will do more than mark time or decline in the current fiscal year.

Challenges we can expect 2024/25

We are likely to encounter:

• Inflation, although the pundits are forecasting a reduction to 2%.
• No relaxation in bank rates.
• Increasing cost of labour as skilled staff are increasingly harder to find.
• Increasing taxation.
• Reduction in profit margins.
• Supply line uncertainties.
• Cash-flow issues.
• Solvency concerns.

Almost without exception, business owners tend to be sales-focused; as long as targets are met all will be well.

This is no longer the case. Offering extended credit terms to win market share may place unsustainable strain on cash resources, and it is imperative to keep an eye on rising costs. The ability to match these concerns with increases in your pricing will determine profit levels and the long-term survival of your business.

Maintaining business fitness 2024/25

There are very few businesses that have emerged unscathed from the disruption created by the recent pandemic and the measures – lockdowns – that the government was required to introduce.

Many businesses have abandoned planning and management of their businesses to cope with the challenging effects of lockdowns and the consequent reduced demand for their products and services. COVID concerns have been replaced with the consequences of rising costs.

What to do?

Key areas of concern

Financially, there are a vast number of issues that will need your attention in the coming months. They will range from recreating sales, establishing a supply chain for goods and services you will need, monitoring and controlling costs, and continuing to invest in services and equipment to drive the process forward.

You will need to manage:

• Cash flow.
• Servicing debt
• Maintain solvency, and
• Rebuild reserves. 

How best to monitor progress?

Progress has a variety of faces:

• Businesses that have fared badly will be happy to re-establish some semblance of financial security,
• Those that have marked time during recent times will want to plan to expand, and
• Those who have achieved growth against all odds will want to consolidate their gains.

To monitor progress there are certain building blocks it would be good to have in place. For example:

• Effective accounting systems that use responsive bookkeeping software.
• A comprehensive business plan that can be flexed as circumstances change.
• A set of key indicators.
• The ability to produce management reports that compare actual trading results with your budget. This will direct change to plug adverse variances before they become a big problem.

Last, but very definitely not least, you must set up a formal process to review the above.

Key benefits of a review 2024/25

There is a well-known parable – the tortoise and the hare – where the hare gets so far ahead in a race with his slower challenger that he decides to take a nap. The nap becomes a deep sleep, and the remorseless tortoise slowly ambles past and wins the race.

This tale still has relevance for UK businesses. We cannot afford to take our eye off the ball if we want to achieve our goals – win our race.

The best way to stay conscious of developments, changes, and challenges is to actively review progress regularly.

How frequently should we review progress? There are four basic options:

• After your year-end – the least attractive option. This will likely leave you – like the hare – waking at your year-end to find that you have lost out to your competitors. 

• Before your year-end – an improvement on the first option, but any trends that emerged during the pre-review period may escape much-needed remedial action.

• Quarterly – a realistic option for businesses that start 2024-25 on a reasonably sound footing.

• Monthly – the best option for businesses that need to be ultra-cautious, perhaps building from an exhausted financial base. A monthly review will also benefit firms that have set an aggressive agenda and are keen to invest in the review process to capitalise on any opportunities that open.

Reviews ensure you cover all bases. That you deal with challenges and take advantage of opportunities. Without reviews, you may, like the hare, suffer the inevitable consequences of unconsciousness…

We can help

There is no one-size-fits-all approach to staying ahead of business challenges.

The collection of financial data offers almost unlimited scope to present that data in formats that will be of value to your business. The real skill is not designing the required reports, it’s identifying the original problems and results you want to achieve.

We help many of our business clients by being an active partner in creating goals and reviewing progress regularly.

Call us today 01473744700 so we can discuss your options. Pick up the phone; there is no charge for an initial discussion or if  you need any further help with your accounting issues.

You may find the following link helpful: https://www.gov.uk/write-business-plan

 

Recognising that business owners are under pressure during current economic uncertainties, the dates from which Making Tax Digital (MTD) will be implemented for income tax and corporation tax have been deferred.

 

MTD is the Government’s digital tax programme which requires taxpayers to maintain digital records and to send tax information to HMRC quarterly using approved software.

MTD for VAT

The MTD programme started with MTD for VAT and is the only tax regime that has been transferred to this new reporting platform. If you are a VAT-registered business, you will already be within MTD for VAT. From 1^st April 2022, MTD for VAT became compulsory for all VAT-registered companies.

Under MTD for VAT you must keep your VAT records digitally, using either a compatible software package or other software, such as spreadsheets that connect to HMRC’s systems. If you use more than one software package, or spreadsheets and software packages, you will need to link them electronically – you can’t simply input data manually from a spreadsheet into a software package.

You must also file digital VAT returns.

 

MTD for Income Tax Self-Assessment

MTD for Income Tax Self-Assessment (MTD for ITSA) is being introduced in stages. MTD for ITSA replaces the current requirement to file a self-assessment tax return with a requirement to make periodic digital submissions.

Under MTD for ITSA, instead of filing an annual self-assessment tax return, you will need to use MTD-compatible software to keep digital records and file:

• quarterly updates for business income and expenses.
• an end of period statement; and
• a final declaration.

The date by which you will need to comply with MTD for ITSA depends on your circumstances.

From April 2026, self-employed individuals and landlords with an income of more than £50,000 will be required to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software.

Those with an income of between £30,000 and £50,000 will need to do this from April 2027. Most affected taxpayers will be able to join voluntarily beforehand.

The government has also announced a review of smaller businesses, particularly those under the £30,000 income threshold mentioned above. The review will consider how MTD for ITSA can be shaped to meet the needs of these smaller businesses and the best way for them to fulfil their Income Tax obligations. It will also inform the approach for any further rollout MTD for ITSA after April 2027.

MTD for ITSA will not be extended to general partnerships in 2025 as previously announced. The government remains committed to introducing MTD for ITSA to partnerships at some future date.

Quarterly updates are required for each business and each property business. This may mean that you need to make multiple submissions. Quarter-end dates are set for 5^th July, 5^th October, 5^th January, and 5^th April. However, you will be able to elect to use calendar quarters instead and submit information by the 30^th of June, 30^th of September, 31^st of December, and 31^st of March.

The quarterly updates will be used to send income and expenses data to HMRC. However, this will need to be adjusted for any accounting adjustments and to claim any reliefs. This is done by means of an end of period statement. This will also be used to confirm that the information that has been submitted is correct.

You will need to submit the end-of-period statement by 31^st January following the end of the tax year.

You will also need to submit a final declaration. This replaces the current self-assessment tax return. The final declaration must also be submitted by 31^st January after the end of the tax year, and any tax due must be paid by that date.

Under MTD for ITSA, HMRC will produce ongoing tax calculations based on information submitted on the quarterly returns. However, as these do not consider adjustments and reliefs, these should be seen as a guide only – the eventual liability may be very different.

Although the start date has been deferred (to 6^th April 2026) this is not that far ahead. It is important that you plan ahead and that you understand what MTD for ITSA will mean for you.

In particular, all businesses and landlords subject to income tax on business profits should be transferring their accounting records to an electronic format approved for MTD purposes. We can help you choose appropriate software and show you how to process your business transactions.

 

MTD for Corporation Tax

Corporation Tax will also be brought within MTD, but a start date has not yet been set.

As with MTD for VAT and MTD for ITSA, under MTD for corporation tax, companies will be required to maintain digital records and to send data digitally to HMRC.

HMRC has consulted on what MTD for corporation tax may look like. Watch this space as MTD in this area of tax compliance may be some years away.

 

Planning for this change

Without a doubt, MTD for all taxes will mean a significant change as we move reporting to HMRC from annual to quarterly returns.

The days of manual record keeping are ending, and we recommend that all taxpayers who are required to submit a self-assessment tax return make a change to digital, cloud-based software sooner rather than later.

Aside from the benefits of having real-time data at your fingertips, you will be ready to link your software to HMRC’s servers and comply with all the MTD requirements as and when they are mandated.

We can help you understand your obligations under MTD and what you need to do to prepare.

We can also help you find appropriate MTD software for your business and assist you in keeping your records digitally.

 

You may find the following link helpful: https://www.gov.uk/guidance/sign-up-your-business-for-making-tax-digital-for-income-tax

Please see another Accounting Gem blog: https://www.aag-accountants.co.uk/why-tax-planning-is-a-worthwhile-investment-2024-25/

Pass on the news!

If you know anyone who may be interested in this update, please let them know or ask them to call 01473 744700, we would be delighted to help them with their accounting issues.