Beat the 5th April ISA deadline

The Bank of England once again increased the base rate on 23 March 2023 – this time by 0.25% to 4.25%. While rising interest rates are good for savers who are able to enjoy a better return on their savings, it may mean that you will need to pay tax on your interest where previously it was covered by your savings allowance. As the end of the tax year approaches, you may want to consider opening an ISA for 2022/23 to shelter your savings interest from tax.

Key dates

For 2022/23, the ISA savings limit is £20,000 (£4,000 for a lifetime ISA). If you have not already used your ISA limit for 2022/23, you have until 5 April 2023 to invest in an ISA and benefit from tax-free interest on your savings.

This note explains how savings income is taxed and how ISAs can be used to shelter savings income from tax.

Taxation of savings

The rules governing the taxation of savings are quite complicated as the allowances that are available depend on the amount and type of income that you have. Interest on savings is only taxable if it is not sheltered by your personal allowance or your personal savings allowance, and it does not fall within the savings starting rate band. Any interest on savings that is taxable, is taxed at your marginal rate of income tax, either 20%, 40%, or 45%.

Personal savings allowance

Basic and higher-rate taxpayers have a personal savings allowance that shelters interest on bank and building society accounts and other savings income. For 2022/23 and 2023/24, the personal savings allowance is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers. Additional rate taxpayers do not receive a personal savings allowance.

Rising interest rates may mean that for 2022/23 the interest that you received on your savings exceeded your personal savings allowance for the first time, and you will need to pay tax on the excess.

From 6 April 2023, the additional rate threshold is reduced from £150,000 to £125,140. If as a result of the reduction in the threshold, you become an additional rate taxpayer in 2023/24 where previously you have been a higher rate taxpayer, not only will your marginal rate of tax increase, but you will also lose your personal savings allowance. Consequently, from 2023/24 any interest you receive on your savings will be taxable in full.

Personal allowance

The standard personal allowance is £12,570 for 2022/23 and will remain at this level until 6 April 2028. If you have not used your personal allowance in full for 2022/23, any unused amount is available to set against your savings income.

Savings starting rate band

The savings starting rate band is set at £5,000 for 2022/23 and 2023/24, but it is reduced, on a pound-for-pound basis. by non-savings income in excess of your personal allowance. If you have a non-savings income of at least £17,570 for 2022/23 or 2023/24, you will not benefit from the savings starting rate band.

Assuming you receive only the standard personal allowance of £12,570, if you have a non-savings income of between £12,570 and £17,570, your savings starting rate band is £5,000, less the extent to which your non-savings income exceeds £12,570. For example, if you have a salary of £16,000 and no other income apart from interest on your savings, your savings starting rate band is £1,570 (£5,000 – (£16,000 – £12,570)).

Savings income that falls within the savings rate band is taxed at 0%.

The savings rate band is available in addition to the personal allowance and personal savings band. If you only have savings income, you can enjoy £18,750 tax-free in 2022/23 and 2023/24 (personal allowance of £12,570 plus basic rate personal savings allowance of £1,000 plus savings starting rate band of £5,000).

Consider an ISA

With interest rates at a low level for many years, most savers did not have to worry about paying tax on the interest that they received as, unless they were an additional rate taxpayer, any interest that they received was sheltered by their personal allowance. However, with rising interest rates, this may no longer be the case, and if the interest on your savings exceeds your personal savings allowance, it is likely that some tax will be payable. From 2023/24, you may also be faced with a tax bill on your savings if you become an additional rate taxpayer, losing your personal savings allowance in the process.

To reduce the tax that you pay on your savings interest, consider investing in an ISA. You can save up to £20,000 in an ISA each tax year (of which up to £4,000 can be in a Lifetime ISA). You do not pay tax on any interest on cash held in an ISA (or on income and gains if you have a stocks and shares ISA).

If you have not yet used your ISA allowance for 2022/23, consider investing in an ISA before 6 April 2023. You can invest in another ISA from 6 April, utilising your 2023/24 tax-free limit. With careful planning, you can invest up to £40,000 in tax-free accounts in the next couple of weeks.

Remember, you can only open one ISA each tax year and you may be limited as to what you can withdraw.

You may wish to take professional advice prior to making any investments.

 

Please see this HMRC link: https://www.gov.uk/individual-savings-accounts

If you need more information regarding any of the topics covered in this update or indeed any other accounting issues, please call An Accounting Gem The Tax specialist in Ipswich, Suffolk on 744700.

To see another An Accounting Gem blog check out this link: https://www.aag-accountants.co.uk/changes-to-capital-allowances-from-april-2023/

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.
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Changes to capital allowances from April 2023

The Chancellor, Jeremy Hunt, presented his Spring Budget on 15 March 2023. There were no changes to the income tax rates and thresholds, which had been announced previously. However, the Chancellor unveiled the successor to the capital allowances super-deduction which ends on 31 March 2023.

Key dates

The capital allowances super-deduction for companies is replaced by full expensing from 1 April 2023. Please note, the changes will only affect companies. Sole traders and partnerships do not qualify for the “full expensing” of capital purchases from 1 April 2023, but they can still claim the Annual Investment Allowance (AIA). The annual limit to qualify for the AIA is £1m of qualifying capital purchases.

This note highlights some planning points arising from this change.

Full expensing of capital expenditure

The super-deduction for companies ends on 31 March 2023. It is replaced by full expensing for capital expenditure from 1 April 2023. This applies only to companies and will be available in respect of qualifying expenditure incurred in the three-year period from 1 April 2023 to 31 March 2026. The expenditure which will qualify for full expensing is that which is eligible for main rate writing down allowances. A 50% first-year allowance will continue to apply for the same period for expenditure which is eligible for special rate capital allowances. Expenditure on cars does not qualify for first-year allowances.

Full expensing provides immediate relief for capital expenditure in full in the accounting period in which it is incurred. Unlike the annual investment allowance (AIA), there is no limit on the qualifying expenditure which can be deducted. Full expensing will therefore benefit companies that incur significant capital expenditure in excess of the AIA limit of £1 million. Likewise, there is no limit on the expenditure that will be eligible for the 50% first-year allowance.

Companies incurring significant capital expenditure have a choice of allowances. It should be remembered that capital allowances do not have to be claimed and can be tailored. Balancing charges will apply if the asset is subsequently sold as the disposal proceeds are brought into charge.

The super-deduction is an enhanced first-year capital allowance that allows companies to deduct 130% of the qualifying expenditure in the accounting period in which it is claimed. This provides the highest rate of relief, but time is very short to take advantage of this as unconditional contracts must be signed before 1 April 2023 in order to benefit.

From 1 April 2023, companies incurring expenditure eligible for main rate writing down allowances can receive 100% relief in the period in which it is incurred, either by full expensing or, where the expenditure for the year is less than £1 million, by claiming the AIA. Where significant capital projects are on the horizon with an annual cost in excess of £1 million, it would be advisable where possible to incur the expenditure before 1 April 2026 to benefit from immediate relief on the full amount.

Where a company incurs expenditure that would be eligible for the special rate writing down allowances, claiming the AIA is the best option where this remains available. Once this has been used up, claiming the 50% first-year allowance will provide the greatest deduction and secure relief at the earliest opportunity.

A reminder that full expensing and the 50% first-year allowance are not available to unincorporated businesses. However, the self-employed can benefit from immediate and full relief by claiming the AIA, the limit of which has been permanently set at £1 million.

 

Please see this HMRC link: https://www.gov.uk/government/publications/full-expensing/spring-budget-2023-full-expensing

If you need more information regarding any of the topics covered in this update or indeed any other accounting issues, please call An Accounting Gem The Tax specialist in Ipswich, Suffolk on 744700.

To see another An Accounting Gem blog check out this link: https://www.aag-accountants.co.uk/national-minimum-wages-from-1st-april-2023/

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.
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National Minimum Wages From 1st April 2023

The Government has announced the rates of the National Living Wage (NLW) and National Minimum Wage (NMW) which will come into force from April 2023. In doing so, it has accepted in full the recommendations of the Low Pay Commission.

By law, employers must pay the National Minimum Wage (NMW) as a minimum. The rate will be dependent on the age of the employee, or if they’re an apprentice.

  • The apprentice rate applies to people who are under 19 years of age and those aged 19 or over when undertaking the first year of their apprenticeship
  • An employee is entitled to National Minimum Wage if they are under or over the age of 23

 

As of 1st April 2021 the following rates will apply:

Category of worker                                                        Hourly rate

Aged 23 and above (national living wage rate)                     £10.42

Aged 21 to 22 Year Old Rate                                                     £10.18

Aged 18 to 20 Year Old Rate                                                     £7.49

Aged 16 to 17 Year Old Rate                                                      £5.28

Apprentices aged under 19                                                        £5.28

 

The increases announced will support the wages and living standards of low-paid workers at a time when many are feeling increased pressure from a rising cost of living. They are recommended against a backdrop of a tight labour market where unemployment is at record lows and vacancies remain high as businesses compete to recruit and retain staff.

Please see this HMRC link: Minimum wage rates for 2023 – GOV.UK (www.gov.uk)

If you need more information regarding any of the topics covered in this update or indeed any other accounting issues, please call An Accounting Gem The Tax specialist in Ipswich, Suffolk on 744700.

To see another An Accounting Gem blog check out this link: https://www.aag-accountants.co.uk/spring-budget-2023-pensions-tax-regime/

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.
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Spring Budget 2023 – Pension tax regime

The Chancellor, Jeremy Hunt, presented his Spring Budget on 15 March 2023. There were no changes to the income tax rates and thresholds, which had been announced previously. However, the Chancellor unveiled significant pension reforms.

Key dates

The pension lifetime allowance is scrapped from 6 April 2023 and the pension annual allowance is increased from the same date.

This note highlights some planning points arising from these changes.

Pension reforms

The pension lifetime allowance places a cap on total tax-relieved pension savings over a person’s lifetime. The lifetime allowance is set at £1,073,100 for 2022/23. Where the allowance is exceeded, the excess is taxed at 55% where it is taken as a lump sum, and at 25% where taken as a pension. The lifetime allowance is abolished from 6 April 2023, meaning that from that date there is no limit to the tax-relieved pension savings a person can accumulate. As a result of the abolition of the allowance, the punitive lifetime allowance tax charges are also abolished. However, a cap will apply to the amount that can be taken as a tax-free lump sum, which from 6 April will be limited to £268,275 where this is lower than 25% of the pension fund. The cap is equal to 25% of the current lifetime allowance.

The pension annual allowance is also increased from 6 April 2023, from its current level of £40,000 to £60,000. You can make a tax-relieved pension contribution each year of up to 100% of your earnings (or £3,600 if lower) as long as you have sufficient annual allowance available. Employer contributions count towards the annual allowance. Where the annual allowance is not used in full in a tax year, it can be carried forward for up to three years; however, you must use the current year’s allowance before utilising unused amounts from earlier years.

High earners receive a lower annual allowance as a taper applies where both threshold income (broadly income excluding pension contributions) exceeds £200,000 and adjusted net income (broadly income including pension contributions) exceeds the adjusted net income threshold. Prior to 6 April 2023, this is set at £240,000. From 6 April 2023, it is sent at £260,000. The minimum annual allowance is also increased, from £4,000 for 2022/23 to £10,000 for 2023/24. The taper reduces the annual allowance by £1 for every £2 by which income exceeds the adjusted net income threshold. The changes mean that prior to 6 April 2023, the minimum allowance of £4,000 will apply where adjusted net income exceeds £312,000, whereas, from 6 April 2023, the minimum allowance of £10,000 will apply where adjusted net income exceeds £360,000. The changes allow high earners to make higher tax-relieved pension contributions from 6 April 2023 than currently.

The money purchase annual allowance (MPAA) is similarly increased from £4,000 to £10,000. This reduced allowance applies if you have flexibly accessed your money purchase pension plan upon reaching age 55.

If you have yet to use your available annual allowances for 2022/23 and your pension pot is below the current lifetime allowance of £1,073,100 you have until 5 April 2023 to make contributions for the 2022/23 tax year. This may be beneficial if your income is more than £100,000 and making pension contributions will enable you to preserve some or all of your personal allowance for 2022/23. Employer contributions can also be made as a useful and tax-efficient way to extract funds from a family company.

However, if you have already reached the current lifetime allowance, you should not make any further contributions before 6 April 2023 as this will trigger the punitive lifetime allowance charges. These restrictions are lifted from 6 April 2023, so it can be tax-efficient to make further contributions from that date. It should be remembered that while tax relief is available for contributions into a pension scheme, pension payments out of the scheme are taxed at your marginal rate once the tax-free lump sum has been taken. If your pension pot has reached £1,073,100, any further contributions into the pot will not increase the amount that can be taken tax-free.

Putting funds into a pension can also be worthwhile from an inheritance tax perspective as the funds may be passed on tax-free on death.

Please see the HMRC link: https://www.gov.uk/government/publications/abolition-of-lifetime-allowance-and-increases-to-pension-tax-limits/pension-tax-limits

 

If you need more information regarding any of the topics covered in this update or indeed any other accounting issues, please call An Accounting Gem The Tax specialist in Ipswich, Suffolk on 744700.

To see another An Accounting Gem blog check out this link: https://www.aag-accountants.co.uk/problem-solving-why-keeping-in-touch-is-important/

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.
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Problem solving – Why keeping in touch is important

Why keeping in touch is important…

Business problems you may be facing

Here is a summary of the business-related issues that we are currently helping clients manage:

  • Cashflow concerns
  • Meeting debt repayment obligations
  • The impact of rising prices
  • Maintaining profitability
  • Solvency
  • Minimising tax payments
  • Considering an investment in new plant and equipment
  • Restructuring to reduce tax footprint and other costs
  • Managing working capital
  • Improving credit control
  • Creating business forecasts/plans

Please see the HMRC link below:

https://www.gov.uk/write-business-plan

Other financial problems you may be facing

  • Reduced earnings
  • Unable to fund tax payments
  • Funding pension pots
  • Funding mortgage or other debt repayments

Why communication is important

If we become aware of matters that we believe will need attention – as part of our existing delivery of services for you or your business – you can be assured that we will flag those concerns asap. Where matters arise that we have no access to, we rely on regular updates from clients, especially when problems arise for which it appears there may be no immediate solution.

Based on our experience of problem-solving for numerous business owners in previous years, we have a wealth of experience available to help you. All we ask is that you pick up the phone and let us know – as soon as issues arise – so we can assist in considering and resolving challenges before they become serious problems.

 

If you need more information regarding any of the topics covered in this update or indeed any other accounting issues, please call An Accounting Gem The Tax specialist in Ipswich, Suffolk on 744700.

To see another An Accounting Gem blog check out this link: https://www.aag-accountants.co.uk/tax-free-childcare-how-to-get-tax-free-help/

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.
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Tax-Free Childcare – How to get tax-free help

For working parents, the cost of childcare can be significant. The school holidays often present particular challenges as extra childcare may be needed. This can be prohibitively expensive, particularly during the current cost of living crisis. However, help towards childcare costs may be available via the Government’s tax-free childcare scheme. Please continue to read to find out how to claim the tax-free top-up.

Nature of the scheme

The Government’s tax-free childcare scheme allows working parents to set up an online account from which to pay their childcare costs and receive a tax-free top-up from the Government. The top-up is set at 25% of the amount contributed by the parent(s), up to a maximum of £2,000 a year. If your child is disabled, the maximum top-up is increased to £4,000 a year. This means that for every £8 that the parent pays into the account, the Government will add a further £2 (up to the annual limit).

Are you eligible to join?

Eligibility to join the scheme depends on whether you are working and the amount of your income (and your partner’s income if you have one).

If you are working, you must be expected to earn an amount that is at least equivalent to the National Minimum or Living Wage over the next three months for 16 hours a week on average. For example, if you are 23 or over, you will need to expect to earn at least £1,976 over the next three months (equal to £9.50 an hour for 16 hours a week for 13 weeks). If you have a partner, they will also need to earn at least this amount.

The NMW will be increasing to £10.42 for 23 year olds and over from 1st April 2023, therefore this expected earnings will increase.

If you are self-employed, you can use your average profit for the current tax year if you do not expect to make a sufficient profit over the next three months. This may be helpful if your profit fluctuates.

There is also an upper earnings limit. If you or your partner expect to have an adjusted net income of more than £100,000 in the current tax year, you will not qualify for the tax-free top-up.

If you are not working but in receipt of certain benefits, or on maternity, paternity, adoption, or shared parental leave, you may also qualify.

However, you cannot benefit from tax-free childcare at the same time as Working Tax Credit, Child Tax Credit, Universal Credit, or employer-supported childcare or childcare vouchers. If you also qualify for one or more of these, you will need to work out which is the best option for you.

Your child

The scheme can only be used to top-up childcare costs for a child who is 11 or under and who usually lives with you. Eligibility ceases on 1 September following the child’s 11th birthday. If your child is disabled, you can continue to claim the top-up until they are 17.

Approved childcare

You can only use the Government top-up to pay for ‘approved’ childcare. This includes childcare provided by registered childminders, nurseries, nannies, after-school clubs, and play schemes. However, your childcare provider must be signed up for the scheme.

Claim online

If you are eligible for help under the scheme, you will need to apply for a childcare account online (see https://www.gov.uk/apply-for-tax-free-childcare). You will need to reconfirm your details every three months.

 

If you need more information regarding any of the topics covered in this update or indeed any other accounting issues, please call An Accounting Gem The Tax specialist in Ipswich, Suffolk on 744700.

To see another An Accounting Gem blog check out this link: https://www.aag-accountants.co.uk/directors-national-insurance-annual-recalculation/

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.
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Directors National Insurance – Annual Recalculation

Company directors have an annual earnings period for National Insurance contributions. This may necessitate an annual recalculation at the end of the tax year.

Key dates

When you pay a company director for the final time in the 2022/23 tax year, you will need to tick the relevant box in your payroll software to indicate this so that the software will calculate the contributions due on the final payment by reference to the annual thresholds.

Contributions due for 2022/23 must be paid over to HMRC by 22 April 2023 where payment is made electronically, and by 19 April 2023 where payment is made by cheque.

This note explains the nature of the directors’ Class 1 National Insurance contributions and the annual recalculation.

Annual earnings period

Unlike tax, National Insurance is calculated separately for each earnings period without taking account of previous earnings in the tax year. This means that it is possible to reduce the liability by making uneven payments of earnings throughout the year. Unlike other employees, company directors, particularly those of personal and family companies, are in a position to determine when and how much they are paid. To prevent directors from taking advantage of the non-cumulative nature of National Insurance to reduce the amount that they pay, directors have an annual earnings period for Class 1 National Insurance contributions. This applies for both primary and secondary contributions.

Where an annual earnings basis applies, the director does not pay any Class 1 National Insurance until his or her earnings for the tax year to date reach the annual primary threshold. Once this is reached, contributions are paid at the main rate on all earnings until the upper earnings limit is reached. Thereafter, contributions are payable on all earnings at the additional rate. The contributions due on each payment of earnings are found by calculating the liability on earnings to date for the tax year and deducting contributions already paid.

Secondary contributions payable by the employer are calculated in a similar way. The employer does not pay any contributions on the director’s earnings until the secondary threshold (or, where appropriate, the relevant upper secondary threshold) is reached. Thereafter, contributions are payable on earnings at the secondary rate.

Annual rates and thresholds

The 2022/23 tax year was a complicated tax year as far as National Insurance contributions were concerned, with a change to the primary threshold from 6 July 2022 and a change to the rates from 6 November 2022. As a result, average annualised rates and annualised thresholds are used to calculate directors’ Class 1 National Insurance liabilities for 2022/23.

The annual rates and thresholds applying to company directors for 2022/23 are shown in the table below.

Lower earnings limit £6,396
Primary threshold £11,908
Upper earnings limit £50,270
Secondary threshold £9,100
Main primary rate 12.73%
Additional primary rate 2.73%
Secondary rate 14.53%

Alternative arrangements

Where the director is paid a regular salary, calculating their National Insurance liability using the annual thresholds will mean that the liability (and the amount that the director receives each month) is uneven throughout the year – no contributions are payable initially while earnings are below the primary threshold, contributions are then deducted on all earnings at the prevailing main rate, before falling once the upper earnings limit is reached.

To overcome this and allow the liability to be spread more evenly throughout the year, the alternative arrangements can be used instead. This allows the contributions to be calculated initially by reference to the prevailing rates and thresholds for the actual earnings period as for other employees. However, where this method is used, the director still has an annual earnings period and a recalculation must be performed on an annual basis at the end of the tax year.

Annual recalculation

When the director is paid for the last time in the tax year, the software will recalculate the liability (both primary and secondary) on an annual basis using the earnings for the tax year and the annual rates and threshold. The contributions payable on the final payment of earnings are found by deducting those paid to date from the annual liability, as calculated using the annual rates and thresholds on earnings for the whole tax year. To ensure that the annual recalculation is performed, it is important that the ‘last payment in the tax year’ box is ticked when making the final payment to the director in the 2022/23 tax year.

If the annual rates and thresholds have been used throughout, a recalculation is not needed at the end of the tax year.

Please see the HMRC link below:

https://www.gov.uk/employee-directors

 

If you need more information regarding any of the topics covered in this update or indeed any other accounting issues, please call An Accounting Gem The Tax specialist in Ipswich, Suffolk on 744700.

To see another An Accounting Gem blog check out this link: https://www.aag-accountants.co.uk/holiday-homes-meeting-your-tax-obligations/

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.
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Holiday Homes – Meeting your tax obligations

HMRC have sent ‘nudge’ letters to individuals who they believe have undeclared income from letting holiday homes and short term lets on sites such as Airbnb and Booking.com.

Key dates

If you have received income from holidays lets you need to tell HMRC about it by completing a self-assessment tax return. The return must be filed online no later than 31st January after the end of the tax year to which it relates.

This note explains your tax obligations in relation to holiday lets.

Income from property

If you receive income from letting property, you will need to declare it to HMRC and pay tax on any rental profit under self-assessment.

If you let a holiday home, you may be able to benefit from the more favourable tax rules that apply to furnished holiday lettings. Alternatively, if you let a room in your own home, you may be able to take advantage of rent-a-room relief.

Any taxable profit that you make from letting a holiday home must be taken into account when working out your total income tax liability for the tax year.

Property allowance

The property allowance (set at £1,000) means that if your income from letting is £1,000 or less for the tax year, you can enjoy the income tax-free without the need to report. If your income is more than £1,000, you can deduct the property allowance instead of the actual costs if this is beneficial when working out your taxable rental profit; however, you will need to report this to HMRC and pay tax on it.

Furnished holiday lettings

Furnished holiday lettings (FHLs) enjoy more favourable tax treatment than residential lets.

Unincorporated landlords can deduct interest and finance costs in full in computing their rental profits for FHLs (for residential lets relief is given as a tax reduction equal to 20% of the costs). FHLs also benefit from certain capital gains tax reliefs, such as business asset rollover relief.

However, it is not enough simply to let the property as an occasional holiday let. To be treated as a FHL for tax purposes, the property must be in the UK or the EEA and must be let furnished. It must also pass all three of the following occupancy tests.

  1. The property must be available for letting for 210 days in the tax year.
  2. The property must be let for at least 105 days in the tax year.
  3. Lets exceeding 31 continuous days must not in total exceed 155 days in the tax year.

Periods when you are using the property or where it is let free or cheaply to family and friends are not taken into account when seeing whether the above tests have been met.

If you do not meet the tests for a particular property for a particular tax year, your holiday home may still be able to qualify as a holiday let if you have several holiday properties and the tests are met on average across all of your holiday homes. Alternatively, if you have met the tests in the past, you may be able to make a period of grace election.

If your holiday home does not qualify as a FHL, it will instead be taxed as for other residential lets.

Please see the HMRC link below for more information on FHL:

https://www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet/hs253-furnished-holiday-lettings-2022

Rent-a-room

You may be able to claim rent-a-room relief if you let a room in your own home as a short-term let, for example, through a site such as Airbnb, Under this scheme, you can earn up to £7,500 each tax year from letting a furnished room in your own home.

If you share the income with at least one other person, you can each earn £3,750 tax free in the tax year. Where your income is below the rent-a-room limit, you do not need to report it to HMRC. If it is more than the limit, you will need to complete a tax return. However, you can claim rent-a-room relief and deduct your rent-a-room limit (£7,500 or £3,750, as appropriate) rather than your actual expenses when calculating your taxable profit if this is beneficial.

Dealing with the ‘nudge’ letter

HMRC have reviewed the information that they have received from the online holiday home and short-term let providers and where they believe that an individual has failed to declare the rental income that they have received, they have sent a ‘nudge’ letter. The letter includes a Certificate of Tax Position, which HMRC ask that you complete within 30 days.

Before taking any action, it is advisable that you take advice. There is no statutory requirement to complete the Certificate of Tax Position.

If you have received income from letting out your holiday home and that income exceeds the tax-free limits and you have not told HMRC about it, there may be tax, interest and penalties to pay. It is important that this is managed correctly as you may be able to settle on more favourable terms if you make use of HMRC’s disclosure facility to tell HMRC about the tax that you owe, rather than ignoring the letter and waiting for them to come to you.

 

To see another An Accounting Gem blog check out this link: https://www.aag-accountants.co.uk/child-benefit-high-income-charges/

If you need more information regarding any of the topics covered in this update or indeed any other accounting issues, please call An Accounting Gem The Tax specialist in Ipswich, Suffolk on 744700.

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.
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Child Benefit – High Income Charges

You are able to claim child benefit if you are responsible for bringing up a child under the age of 16, or under the age of 20 where the child stays in approved education or training. However, some or all of the child benefit that you receive may be clawed back by the High Income Child Benefit Charge (HICBC) if you and/or your partner have adjusted net income in excess of £50,000.

Key dates

Where the HICBC applies, the person liable for paying a charge must complete a self-assessment tax return by 31 January after the end of the tax year to which it relates and pay the charge (as part of their overall self-assessment tax bill) by the same date. The HICBC for 2022/23 must be reported on the 2022/23 tax return and paid by 31 January 2024.

This note explains the nature of child benefit and the HICBC.

Child Benefit

You can claim Child Benefit if you are responsible for a child under 16. Child Benefit will cease on 31 August after the child’s 16th birthday if they leave education or training.

However, you can continue to benefit from Child Benefit until the child turns 20 if they remain in approved education or training. Education must be full-time (more than 12 hours a week on average) and can include study for A levels or similar, T levels, Scottish Highers, and NVQs. It does not include University Education. Approved training should be unpaid and can include Foundation Apprenticeships. Courses that are part of a job contract do not count. The young person must be accepted onto the course or training programme before they turn 19.

When the child leaves the approved education or training, Child Benefit will cease on whichever of the following comes first: the last day of February, 31 May, 31 August, or 30 November.

Need to claim

Child Benefit is not given automatically and must be claimed. A claim can be made once you have registered the birth of your child or the child for whom you are responsible comes to live with you. Only one person can claim Child Benefit in respect of a particular child. However, Child Benefit is paid for each child; there is no limit on the number of children in respect of which Child Benefit can be claimed. Claims can be made by completing form CH2 and sending it to the Child Benefit Office, the address for which is on the form. The form is available at www.gov.uk/child-benefit/how-to-claim

Child benefit is currently paid at the rate of £21.80 per week for the first child and at the rate of £14.45 per week for the second and subsequent children. The rates are to increase to, respectively, £24 per week and £15.90 per week for 2023/24.

Nature of the HICBC

The High Income Child Benefit Charge (HICBC) has the effect of restricting the availability of child benefit by clawing back the benefit where the recipient or their partner has an adjusted net income of more than £50,000. The charge is set at 1% of the Child Benefit received for the tax year for every £100 by which adjusted net income exceeds £50,000. Once adjusted net income reaches £60,000, the charge is equal to the full amount of the Child Benefit received.

If both the recipient and their partner have adjusted net income in excess of £50,000, the charge is levied on the partner with the highest adjusted net income.

The nature of the charge may mean that a person has to pay back a benefit that they did not receive. It also creates the anomaly that a couple where each partner has an adjusted net income of £49,000 (total combined income of £98,000) will receive their child benefit in full, whereas a couple where only one partner earns and that partner has adjusted net income of £60,000 (total combined income £60,000) will lose all the child benefit that they receive, the full amount being clawed back by the HICBC.

Declaring and paying the HICBC

The person liable to pay the HICBC must complete a self-assessment tax return and pay the charge under self-assessment by 31 January after the end of the tax year to which it relates.

Opting out of Child Benefit

To avoid a situation whereby Child Benefit is paid only for it to be returned in the form of the HICBC, it is possible to opt out of receiving Child Benefit. This can be done by completing the online form available on the Gov.uk website. A person who opts out of child benefit can opt back in at any time; although any associated HICBC will still be due.

Even if the HICBC applies in full, it is important to register for Child Benefit and then opt out, particularly if the Child Benefit is received by a non-working partner, in order to preserve the associated National Insurance credits which provide qualifying years for state pension purposes.

Please see the HMRC link below:

https://www.gov.uk/child-benefit-tax-charge

If you need more information regarding any of the topics covered in this update or indeed any other accounting issues, please call An Accounting Gem The Tax specialist in Ipswich, Suffolk on 744700.

To see another An Accounting Gem blog check out this link: https://www.aag-accountants.co.uk/voluntary-national-insurance-contributions/

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.
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Voluntary National Insurance Contributions

Class 3 National Insurance contributions are voluntary contributions which an individual can choose to pay to increase their entitlement to the state pension. Individuals who have gaps in their contribution record from 2006/07 to 2015/16 have a limited window in which to take advantage of an extended time limit for making contributions.

Key dates

The normal deadline for paying voluntary Class 3 National Insurance contributions is six years from the end of the tax year in respect of which the contributions are being paid. However, an extended deadline applies to contributions for the tax years 2006/07 to 2015/16, which must be paid by 5 April 2023. The normal six-year time limit applies to contributions for 2016/17 and the subsequent tax year.

This note explains the nature of Class 3 contributions and the limited opportunity to take advantage of the extended deadline to make additional contributions for missed years.

Importance of qualifying years

To be eligible for the full single-tier state pension, an individual who reaches state pension age on or after 6 April 2016 needs 35 qualifying years. A reduced state pension will be received if they have less than 35 qualifying years, but at least ten. A person will build up qualifying years from the payment of Class 1 contributions if they are employed and from the payment of Class 2 contributions if they are self-employed. Someone who does not have sufficient qualifying years for the full state pension can top their pension record by making voluntary contributions.

A person who reached state pension age before 6 April 2016 only needed 30 qualifying years to secure a full state pension.

Check your pension record

Before making voluntary contributions, it is necessary to check your National Insurance record. You can do this online by visiting the Gov.uk website at www.gov.uk/check-national-insurance-record. If you already have 35 qualifying years or expect that you will have 35 qualifying years by the time you reach state pension age it will not be worthwhile making voluntary contributions.

If you will not have 35 qualifying years by the time you reach state pension age, it may be beneficial making voluntary contributions. However, if you currently have less than 10 qualifying years, paying voluntary contributions will only be worthwhile if it increases the number of qualifying years that you have to at least ten. People with less than ten qualifying years are not eligible for the state pension.

Nature of Class 3 contributions

Class 3 National Insurance contributions are voluntary contributions that you can opt to pay to fill in gaps in your National Insurance record. Class 3 contributions are payable at a rate of £15.85 per week for 2022/23.

Guidance on how to pay Class 3 National Insurance contributions can be found on the Gov.uk website at www.gov.uk/pay-voluntary-class-3-national-insurance.

Take advantage of the extended time limit

As a result of the increase in the number of qualifying years needed to secure a full state pension for people reaching state pension age on or after 6 April 2016, a longer period applies for making contributions for 2006/07 to 2015/16 where these have not already been paid. Individuals have until 5 April 2023 to fill in any gaps for those years. This provides the chance to add up to ten years to the number of qualifying years, enhancing the state pension by up to 28%.

Contributions for the missing years must be paid at the current rate of £15.85 per week – a cost of £824.20 for each additional year.

However, as contributions relating to the previous two tax years are paid at the rate applying to the year in question, if you only need to top up a couple of years and have not paid contributions for 2020/21 and/or 2021/22 it will be cheaper to pay contributions for these years. The Class 3 rate was £15.30 per week for 2020/21 and £15.40 per week for 2021/22.

Can you pay Class 2 instead?

If you are self-employed and your earnings from self-employment are less than the small profits threshold (set at £6,725 for 2022/23), you are not obliged to pay Class 2 National Insurance contributions but can do so voluntarily. The extended time limit for paying contributions for 2006/07 to 2015/16 also applies for Class 2 purposes, and where a person is eligible to pay Class 2 voluntarily, they have until 5 April 2023 to make the contributions for some or all of these years.

Contributions must be paid at the 2022/23 Class 2 rate of £3.15 a week – an annual cost of £163.80. This is significantly cheaper than paying Class 3 contributions. Where the option is available to take advantage of the extended deadline to plug gaps in your National Insurance record by paying voluntary Class 2 contributions for these years, it is likely to be worthwhile.

If you need more information regarding any of the topics covered in this update or indeed any other accounting issues, please call An  Accounting Gem The Tax specialist in Ipswich, Suffolk on 744700.

To see another An Accounting Gem blog check out this link: https://www.aag-accountants.co.uk/super-deductions-ends-on-31st-march-2023/

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.
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