With an election looming, Chancellor, Jeremy Hunt, delivered his Spring Budget on 6th March 2024, billing it as a ‘Budget for growth’. As widely predicted, there were further changes and cuts to National Insurance, taking effect from the 2024/25 tax year. Other headline measures included the abolition of the furnished holiday lettings tax regime from April 2025, a reduction in the top rate of capital gains tax on residential property gains, reforms to the High Income Child Benefit rules, an increase in the VAT registration threshold and the replacement of the tax regime for ‘non-doms’ with a residence-based system from April 2025. However, there were no changes to the income tax thresholds, which remain frozen.

Key dates

The VAT registration threshold is to increase to £90,000 from 1st April 2024, while the National Insurance reduction and increase in HICBC threshold take effect from 6th April 2024. The cut in the top rate of residential capital gains tax applies from the same date. The abolition of the Furnished Holiday Lettings (FHL) regime and the replacement of the remittance basis rules take effect from April 2025.

This note highlights some of the key changes.

Further National Insurance cuts

Following on from the National Insurance cuts announced at the time of the 2023 Autumn Statement, the Chancellor announced that the main primary Class 1 rate would fall to 8% from 6th April 2024. The rate was previously cut from 12% to 10% with effect from 6th January 2024. The further 2% cut will reduce the amount of Class 1 National Insurance payable by employees in 2024/25 by £754.

The self-employed are also to benefit from National Insurance cuts. At the time of the Autumn 2023 Statement, the Chancellor announced that the main Class 4 rate was to be cut from 9% to 8% from 6th April 2024. However, this is to be cut by a further 2% to 6% from 6th April 2024. This too will be worth up to £754 in 2024/25.

At the time of the 2023 Autumn Statement, the Chancellor announced that Class 2 National Insurance contributions are to be abolished from 6th April 2024. The Government are to consult later in the year on how this will be delivered.

Abolition of the FHL regime

Furnished holiday letting (FHLs) enjoy tax advantages which are not available to landlords letting residential property on long-term lets. These include the ability to deduct interest and finance costs in full when calculating the taxable profit and access to capital gains tax rollover relief and business asset disposal relief.

To address concerns as to the lack of residential property in tourist hot spots, the FHL regime is to be abolished from 6th April 2025. Draft legislation will be published for consultation. This will include anti-forestalling measures to prevent the use of unconditional contracts to secure capital gains tax relief under the existing FHL rules. The anti-forestalling measures will apply from 6th March 2024.

Reduction in top rate of capital gains tax on residential gains

Currently, chargeable gains on residential property are charged at a rate of 28% where income and gains exceed the basic rate band (set at £37,700). This is to fall to 24% from 6th April 2024. The lower residential rate will remain at 18% where chargeable gains on residential property fall within the basic rate band.

Where the conditions for business asset disposal relief were met, gains on the disposal of an FHL which were not rolled over were taxed at 10%.

Increase in the VAT registration threshold

The VAT registration threshold is to rise from £85,000 to £90,000 with effect from 1st April 2024. The VAT de-registration threshold will rise from £83,000 to £88,000 from the same date.

High-Income Child Benefit Charge

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

The thresholds are increased, and the clawback rate is reduced from 6th April 2024.

For the 2024/25 tax year, the abatement threshold is increased from £50,000 to £60,000. Once adjusted net income exceeds £60,000, the HICBC is equal to 1% of child benefit paid for every £200 by which adjusted net income exceeds £60,000. Once adjusted net income reaches £80,000, the charge will be equal to the child benefit for the 2024/25 tax year.

The HICBC is a complicated charge with several anomalies. Currently, a couple where both partners have adjusted net income of £49,999 (total combined income of £99,998) can keep their child benefit in full, whereas a couple where one partner has no income and the other has an income of £60,000 will effectively lose all their child benefit in the form of the HICBC. To address this, the HICBC will be based on household income from April 2026.

Abolition non-UK domicile tax regime

The remittance basis tax regime for non-UK domiciled individuals who are resident in the UK allows them to be taxed only on foreign source income and gains if they are remitted to the UK in return for paying a remittance basis charge. The charge depends on how many years they have been resident in the UK for tax purposes. Once a person has been resident for 15 of the previous 20 tax years, they are deemed to be UK-domiciled and taxed in the UK on all their worldwide income.

The remittance basis rules are to be abolished from April 2025 and replaced by a simpler residence-based regime. Individuals who opt into that regime will not pay any tax on foreign income for the first four years in which they are resident in the UK as long as they have not been resident for the last ten tax years. Transitional arrangements will apply.

Overseas Workday Relief (OWR) is also to be reformed and eligible employees will be able to claim it for the first three years of tax residency.

The Government is also to consult on moving to a residence-based regime for inheritance tax.

British ISA

The Government is to introduce a British ISA with a separate £5,000 limit in addition to the usual ISA limit of £20,000. They will consult on the details at a later date.

Freeports

The window for claiming tax reliefs available in Freeport special tax sites is increased from 5 years to ten years. This means that the sunset date for English Freeports will be 30th September 2031, while the sunset date for special tax sites in Scottish Green Freeports and Welsh Freeports will be 30th September 2034.

Abolition of SDLY multiple dwellings relief

Multiple Dwellings Relief is a stamp duty relief that applies where multiple dwellings are purchased together. The relief is to be abolished for contracts completed on or after 1st June 2024. Where contracts are exchanged before 6th March 2024, the relief will remain available regardless of when they are completed.

Duties

Fuel duty rates will remain frozen for a further 12 months until March 2025, while alcohol duty rates will remain frozen until 1st February 2025.

A new duty on vaping products is to be introduced and will apply from 1st October 2026. Rises in tobacco duty will take effect from the same date.

Air passenger duty for flights other than economy flights is to increase from 1st April 2025.

 

You may find the following link helpful: https://www.gov.uk/government/publications/spring-budget-2024

Please see another An Accounting Gem blog: https://www.aag-accountants.co.uk/reduce-your-tax-bill-year-end-tax-planning/

Please call us today on 01473 744700 or if  you need any further help with your accounting issues.

 

 

 

 

 

HMRC’s latest one-to-many letter targets company owners who they believe may have failed to declare dividend income. The letters have been sent where the company accounts show a large drop in reserves, but the shareholders have failed to declare dividend income on their personal tax returns.

Key dates

Dividend income should be shown on the shareholder’s personal tax return, which must be filed online no later than midnight on 31st January following the end of the tax year to which it relates.

This note explains how dividend income is taxed, and what to do if you receive a letter from HMRC.

Extracting profits as dividends

Directors of personal and family companies will often take a small salary (usually up to the level of their available personal allowance) and extract further profits as dividends, assuming they have sufficient retained profits available from which to pay the dividend.

Dividends can only be paid from retained profits. Where a particular class of share has more than one shareholder, dividends must be paid in proportion to shareholdings. However, this restriction can be overcome by having an alphabet share structure (so that each shareholder has their own class of share, for example, ”A” ordinary shares and “B” ordinary shares). This is useful in a family company as it enables family members to receive dividends to use their dividend allowances and basic rate bands.

Taxation of dividend income

Although the profits from which dividends are paid have already suffered corporation tax, the shareholder will also have to pay personal tax to the extent that any dividends that they receive are not sheltered by their dividend or personal allowances.

All taxpayers, regardless of the rate at which they pay tax, receive a dividend allowance. This is essentially a nil rate band rather than a true allowance and dividends sheltered by the dividend allowance are taxed at a zero rate. However, they count as band earnings. The dividend allowance is set at £1,000 for 2023/24, reduced to £500 for 2024/25.

Once the dividend allowance and any remaining personal allowances have been used, dividends (which are treated as the top slice of income) are taxed at the dividend tax rates – 8.75% where the dividend income falls in the basic rate band, 33.75% where it falls in the higher rate band and 39.35% where it falls in the additional rate band.

Shareholders should declare their dividend income on their personal tax return.

Company accounts

HMRC has been looking at company accounts for evidence of dividend income which may not have been declared. This may be the case where the reserves have fallen despite the company making a profit or have increased by less than the profit.

The letter

HMRC has written to company owners who they believe may have undeclared dividend income. The letter states that the company accounts show a profit but also a large drop in reserves, which usually means that the shareholders have received a distribution or dividend. It instructs the recipient to check their Self-Assessment tax return to make sure that they have declared any dividend income, pointing out that they may owe tax if they have not done so.

Action

The action that must be taken depends on whether or not you have dividends to declare.

Where you have dividends to declare, this should be corrected using the online service at www.gov.uk/guidance/tell-hmrc-about-underpaid-tax-from-previous-years. You will need to register to use this service. Undeclared dividends must be notified to HMRC within 30 days of the date of the letter.

Once you have declared your dividend income, HMRC will issue you with a payment reference number (PRN) by post. You should use the same online service to pay what you owe, including interest and penalties, within 90 days of the date on which you received the PRN.

If there is nothing to declare, for example, because any dividends you received were sheltered by your personal or dividend allowances, you must inform HMRC by emailing them using the address in the letter or by calling them on 0300 123 0998. This must be done within 30 days of the letter.

HMRC warn company owners that if they ignore the letter, they may open a compliance check and that higher penalties may be charged.

Please see another An Accounting Gem blog here: https://www.aag-accountants.co.uk/reduce-your-tax-bill-year-end-tax-planning/

Please call us today on 01473 744700 if you need any help with your accounting issues

 

If you run a family or personal company, you will need to consider how best to extract profits from your company. There are various ways in which you can do this. A traditional tax-efficient approach is to take a small salary and extract any further profits as dividends. However, you can also extract profits in other ways.

Salary

If you pay a salary that is at least equal to the lower earnings limit for National Insurance purposes (set at £6,396 for 2023/24), the year will count as a qualifying year for state pension and contributory benefit purposes. To be eligible for the full single-tier state pension when you reach state pension age, you will need 35 qualifying years. If you do not have 35 qualifying years when you reach state pension age, but you have at least 10 qualifying years, you will receive a reduced state pension.

For 2023/24 the primary threshold (the point at which employee National Insurance contributions become payable) is fully aligned with the personal allowance at £12,570. Both are to remain at this level until at least 6 April 2028.

The optimal salary level where the recipient receives the standard personal allowance with no deductions and the allowance has not been used elsewhere is equal to £12,570. At this level, the employee will not pay any tax or any National Insurance, but the year will count as a qualifying year for state pension and contributory benefit purposes.

If the employee’s personal allowance is not £12,570 or has been fully or partially used elsewhere, the optimal salary will depend on the employee’s circumstances. There is no substitute for doing the sums.

The extent to which employer National Insurance contributions are payable on an optimal salary of £12,570 will depend on whether the employment allowance is available and also whether one of the upper secondary thresholds (applying where the employee is under 21, an apprentice under the age of 25, an armed forces veteran in the first year of their first civilian employment since leaving the armed forces or a new Freeport employee) is available.

If the employment allowance is not available (as is the case for a personal company where the sole employee is a director) and none of the upper secondary thresholds applies, a small amount of the employer’s National Insurance will be payable on earnings between the secondary threshold of £9,100 and the annual primary threshold of £12,570 at the rate of 13.8%. However, as this is deductible for corporation tax purposes, paying a salary equal to the higher primary threshold rather than one equal to the secondary threshold (so no National Insurance liability arises) is worthwhile. The rate of relief will depend on the rate at which the company pays corporation tax which from 1 April 2023 onwards will be between 19% and 25% depending on the level of the company’s profits.

Where the employment allowance is available, for example, if your company is a family company with more than one employee, no employer contributions will be payable on the optimal salary of £12,570. This will also be the case if one of the upper secondary thresholds applies.

Dividends

Once you have paid yourself the optimal salary, it is tax-efficient to extract further profits in the form of dividends rather than paying yourself a higher salary. However, you can only pay dividends out of retained profits; therefore, you must have sufficient retained profits to cover the dividends you wish to pay.

Dividends are paid out of post-tax profits and the profits from which they are paid will have already suffered corporation tax. From 1 April 2023, the rate of corporation tax depends on the level of the company’s profits, ranging from 19% to 25%. Where profits exceed the lower profits limit (set at £50,000 for a standalone company), the company will pay corporation tax at a higher rate from 1 April 2023, reducing the profits available for distribution.

Dividends must be paid in proportion to shareholdings. However, if you use an alphabet share structure whereby each shareholder has their class of share (e.g., A ordinary shares, B ordinary shares, etc.) you can tailor dividend payments by declaring different dividends for different classes of shares.

All taxpayers, regardless of the rate at which they pay tax, have a dividend allowance. Dividends covered by the allowance are tax-free. This provides the opportunity to extract profits tax-free by paying dividends to family shareholders to utilise their available dividend allowance.

The dividend allowance has been reduced to £1,000 for 2023/24, down from £2,000 for 2022/23. It is to be further reduced to £500 from 6 April 2024. The reduction in the dividend allowance reduces the profits that can be extracted tax-free by paying dividends to family members to mop up their dividend allowances.

Once the dividend allowance has been used up, dividends (which are taxed as the top slice of income) are taxed at 8.75% where they fall within the basic rate band, at 33.75% where they fall within the higher rate band, and at 39.35% where they fall within the additional rate band. As dividends are paid out of retained profits, they have already suffered corporation tax.

Rent

If you run your company from home, you can consider renting your home office to the company. The rent, which should be at a commercial rate, is deductible in computing the company’s taxable profits. However, you must pay income tax on it and declare it on your self-assessment tax return. On the plus side, there is no National Insurance to pay.

Benefits in kind

There are several tax exemptions for benefits in kind, such as those for mobile phones and trivial benefits, which enable you to extract profits as a benefit in kind without an associated tax or National Insurance liability,

Pension contributions

You can also extract profits in the form of pension contributions as your company can pay contributions into a pension plan for you (if your available annual allowance has not been used up).

Directors’ loans

If you need money for a short time, taking a director’s loan can be tax efficient. You can borrow up to £10,000 for up to 21 months tax-free. However, there are tax consequences if the balance exceeds £10,000 at any point in the tax year, or if you do not repay the loan within nine months and one day of the end of your accounting period.

Leave profits in your company

Extracting profits from your company may trigger tax and National Insurance charges. If you do not need the profits for personal use, consider leaving them in the company to extract later when this can be done more tax efficiently.

We can help

We can help you formulate a tax-efficient strategy for extracting profits from your personal or family company. Please call us today on 01473 744700 or if  you need any further help with your accounting issues.

You may find the following link helpful: https://www.gov.uk/running-a-limited-company/taking-money-out-of-a-limited-company

Please see another An Accounting Gem blog here: https://www.aag-accountants.co.uk/when-to-incorporate-your-business

 

 

 

 

 

 

 

 

 

 

 

 

If you operate your business as a personal or family company, you will need to extract profits if you want to use them to meet personal expenditures. This update considers some of the various ways in which this can be done. If you need to extract more than £50,270 in 2023/24, is it worth taking a higher salary to avoid a tax of 33.75% on dividends received above the £50,270 limit?

Key dates

The 2023/24 tax year ends on the 5th of April 2024. To take advantage of 2023/24 allowances, profits must be extracted by this date.

This note explains the tax implications of taking profits from your company in the form of salary and dividends.

Small salary plus dividends

A popular tax-efficient profit extraction strategy is to take a small salary and to take extract any further profits needed outside the company in the form of dividends. However, this is not a one-size-fits-all strategy, and whether it is right for you will depend on the level of your profits and your personal circumstances.

Optimal salary level

For many directors, it makes sense to take a small salary from their company, particularly if they do not yet have the 35 qualifying years needed to secure a full state pension. Where this is the case, paying a salary at least equal to the lower earnings limit for National Insurance purposes will secure a qualifying year for state pension purposes.

If the director has the full personal allowance available to shelter the salary, the optimal salary level for 2023/24 is equal to the personal allowance of £12,570. As this is also the level of the primary National Insurance threshold, the director will not pay primary Class 1 National Insurance on their salary but will benefit from a qualifying year for state pension purposes.

If the employment allowance is available, there will be no employer’s National Insurance to pay either. However, remember, personal companies where the sole employee is also a director are not eligible to claim the allowance. Where the company cannot benefit from the employment allowance, the employer’s National Insurance is payable on earnings over £9,100 at the rate of 13.8%. Consequently, where a salary of £12,570 is paid, the employer’s National Insurance hit is £478.86.

However, as the rate of the employer’s National Insurance is less than the corporation tax rate and both salary payments and the employer’s National Insurance are deductible in calculating profits for corporation tax purposes, this is worthwhile.

If the personal allowance available to the director to shelter his or her salary is not £12,570, it is a question of doing the sums, to ascertain their optimal salary for 2023/24.

Implication of taking a higher salary

Once the personal allowance has been used up, is it worth taking a higher salary, and what are the tax and National Insurance implications?

The first point to note is that the employer’s National Insurance of 13.8% is payable on all earnings more than £9,100. However, as this is deductible for corporation tax purposes, the effective rate depends on the rate at which you pay corporation tax. If your corporation tax is 19%, the effective rate is 11.178%, whereas, if you pay corporation tax at 25%, the effective rate is 10.35%.

Once the personal allowance has been used up, further salary payments are taxable at the rate of 20% to the extent that they fall within the basic rate band. Once the salary level reaches £50,270, tax is payable at the higher rate of 40%.

At a higher level, the marginal rate rises to 60% where the salary is between £100,000 and £125,140 because of the abatement of the personal allowance, falling to 45% on income more than £125,140.

The director will also pay the employee’s National Insurance on earnings between the primary threshold of £12,570 and the upper earnings limit of £50,270. Directors have an annual earnings period for National Insurance, and because of the reduction in the main primary Class 1 rate from 12% to 10% for 2023/24, they pay Class 1 National Insurance contributions at a rate of 11.5% for 2023/24 on earnings between the primary threshold and the upper earnings limit and at the rate of 2% on earnings over the upper earnings limit.

The company can deduct salary payments and the employer’s National Insurance in calculating their taxable profits.

Dividends

The dividend tax rates are lower than the income tax rates, making them an attractive proposition for extracting profits from a company. However, when comparing the tax rates, it is important to remember that as dividends are paid from post-tax profits, those profits have already suffered corporation tax at between 19% and 25% depending on the rate at which you pay corporation tax.

There are also restrictions governing the payment of dividends. Firstly, they can only be paid if you have sufficient post-tax profits from which to pay them, and secondly, they must be paid in proportion to shareholdings (although having an alphabet share structure overcomes this restriction).

All shareholders have a tax-free dividend allowance, and for 2034/24 this is £1,000 (but is to fall to £500 for 2024/25), Where profits are available, it makes sense to pay dividends to use shareholders’ dividends allowances.

Once the allowance (which acts as a zero-rate band) has been used up, dividends, which are taxed as the top slice of income, are taxed at 8.75% where they fall in the basic rate band, 33.75% where they fall in the higher rate band and at 39.35% where they fall in the additional rate band.

Dividends or more salary

It will generally be preferable to take dividends rather than an additional salary if profits permit once the personal allowance has been used up, but there is no substitute for doing the sums for your situation.

You may find the following link helpful: https://www.gov.uk/tax-on-dividends

To see another An Accounting Gem blog check out this link:https://www.aag-accountants.co.uk/file-your-2022-23-self-assessment-tax-return/

Please call us today on 01473 744700 if you would like to revisit your profit extraction strategy for the new tax year, 2024-25.