The Key Points From Budget 2016!

One of the main themes of the Chancellor’s March 2016 Budget was to ensure that the next generation inherits a strong economy, is better educated, and grow up fit and healthy. His proposed “sugar tax” on the soft drinks industry will be used to fund longer school days for those that want to offer their pupils a wider range of activities, including extra sport.

He again stressed his prudence in concentrating on debt repayment and the importance of “mending the roof while the sun shines”, although he acknowledged that there were numerous factors that could impact on his “bullish” growth forecasts and promises of future budget surpluses.

There will be further changes affecting savers and he hinted that there could be yet further changes to pensions, but not for the time being.

PERSONAL ALLOWANCES

As already announced, the basic personal allowance for 2016/17 will be £11,000. The March Budget announced that this will increase to £11,500 for 2017/18. Remember that if your adjusted net income exceeds £100,000 the personal allowance is reduced by £1 for every £2 over £100,000 giving an effective rate of 60% on income between £100,000 and £122,000 for 2016/17. Contact us for advice on planning to avoid this 60% rate.

INCOME TAX BANDS

The 20% basic rate band for 2016/17 will be £32,000 and for 2017/18 it was announced that this will be £33,500. This means that you will pay 40% tax if your taxable income exceeds £43,000 for 2016/17 and the threshold will be £45,000 for 2017/18. The 45% top rate continues to apply to taxable income over £150,000 for 2016/17.

FURTHER CHANGES TO ISAs

The current £15,240 ISA limit is frozen for 2016/17. The Junior ISA limit remains at £4,080 for 2016/17.

The Chancellor announced that the ISA allowance will increase to £20,000 from 6 April 2017 and that from the same date there will be a new “Lifetime ISA” account where investors aged between 18 and 40 who save up to £4,000 a year will have 25% (up to £1,000) added by the government. Those who have been saving in the new “Help to Buy” ISA will be able to transfer their savings to this new account and use the savings to help them buy their first home or use them to provide an additional pension. These may in future replace traditional pension saving schemes.

PENSION ALLOWANCES REDUCED

There was much speculation about further major changes to pensions such as taxing the lump sum and limiting tax relief, but these did not materialise.

From 6 April 2016 the pension fund lifetime allowance will be reduced from £1.25million to £1million. Transitional protection for pension rights already over £1million will be introduced alongside this reduction to ensure the change is not retrospective.

As already announced, those with income in excess of £150,000 will have the normal £40,000 annual allowance reduced by £1 for every £2 over £150,000.

£1,000 SAVINGS INCOME TAX FREE 2016/17

From April 2016, a tax-free allowance of £1,000 (or £500 for higher rate taxpayers) will be introduced for the interest that people earn on savings. If they are a basic rate taxpayer and have a total income up to £43,000 a year, they will be eligible for the £1,000 tax-free savings allowance.

If they are a higher rate taxpayer and earn between £43,000 and £150,000, they will be eligible for a £500 tax-free savings allowance, but those with income in excess of £150,000 a year will be taxed in full on their interest income.
As a result of these changes banks and building societies will pay interest gross from 6 April 2016.

NEW DIVIDEND RULES START 6 APRIL 2016

It was announced in the Summer 2015 Budget that there would be a £5,000 tax free dividend allowance from 6 April 2016 and that once used the rate of tax on dividend income would increase by 7.5%. This means that basic rate taxpayers will pay 7.5% tax on dividend income, higher rate taxpayers 32.5% and additional rate taxpayers 38.1%. Note that from 6 April 2016 dividends will no longer carry with them a 10% notional credit. This is the reason why dividends received by basic rate taxpayers were effectively tax free up to 5 April 2016.

32.5% TAX ON LOANS TO PARTICIPATORS FROM 6 APRIL 2016

Where a “close” company controlled by 5 or fewer shareholders (participators) makes a loan to one of those persons the company is required to pay tax to HM Revenue and Customs. The rate of tax increases from 25% to 32.5% from 6 April 2016 in line with the dividend rate for higher rate taxpayers. This tax is not payable if the loan is cleared within 9 months of the end of the accounting period and will continue to be repaid to the company if the loan is repaid or written off after the 9 month period.

CAPITAL TAX RATES

An unexpected announcement was a reduction in the rate of capital gain tax from 6 April 2016 down from 18% to 10% for basic rate taxpayers and 28% down to 20% for higher rate taxpayers. The 18% and 28% rates remain for disposals of residential property.

There has been no change in the inheritance tax nil rate band which remains at £325,000 until 2020 although an additional nil band will be available from 6 April 2017 where the main residence or assets of an equivalent value are left to direct descendants. This additional relief will be protected where the person downsizes to a less valuable property from 8 July 2015 onwards. Please contact us if you would like to discuss inheritance tax planning.

FURTHER CHANGES TO CGT ENTREPRENEURS’ RELIEF

Entrepreneurs’ relief (ER) will be extended to external investors in unlisted trading companies. This new investors’ relief will apply a 10% rate of CGT to gains accruing on the disposal of ordinary shares held by individuals. These shares must be subscribed for by the claimant and acquired for new consideration on or after 17 March 2016. The shares must have been held for a period of at least three years starting from 6 April 2016 and there will be a lifetime cap of £10 million.

In the 2014 Autumn Statement it was announced that it is no longer possible to claim CGT entrepreneurs’ relief against the gains arising on the sale on or after 3 December 2014 of goodwill by a sole trader or partnership to a limited company in which they have a controlling interest. That restriction was then legislated in Finance Act 2015. It has now been announced that the relief will still be available provided that the transferor does not receive more than 5% of share capital or voting rights in the acquiring company.

LOWER CORPORATION TAX RATES

A single corporation tax rate of 20% has applied since 1 April 2015 regardless of the level of the company’s profits. In the Summer 2015 Budget it was announced that this would reduce to 19% in April 2017. The Chancellor has now announced that this will now be reduced to 17% from 1 April 2020.

£1,000 TAX FREE FOR “MICRO -ENTREPRENEURS”

From April 2017, the government will introduce new allowances for the first £1,000 of trading income and the first £1,000 of property income. Those with income below this level will no longer need to declare or pay income tax on that income. Those with income above the allowance will also benefit by deducting the relevant allowance from their gross income. This appears to be aimed at people starting small businesses on E-Bay and renting on air B&B.

NEW CORPORATE TAX LOSS RULES

There will be fundamental changes to the rules for setting off corporate tax losses starting on 1 April 2017. For losses incurred on or after 1 April 2017, companies will be able to use carried forward losses against profits from other income streams or from other companies within a group. However, large companies with profits in excess of £5m will only be allowed to offset brought forward losses against 50% of the amount of profit in each future period.

INTEREST RELIEF RESTRICTED FOR MULTI- NATIONAL COMPANIES

From 1 April 2017, to restrict profit shifting by multi-nationals, the UK will be introducing a Fixed Ratio Rule limiting corporation tax deductions for net interest expense to 30% of a group’s UK earnings before interest, tax, depreciation and amortisation (EBITDA). This is in line with the rules that exist in several other countries and will address profit-shifting through interest charges. Note that this restriction will not apply where the net UK interest expense is less than £2 million.

SDLT CHANGES

The rules for calculating the Stamp Duty Land Tax (SDLT) charged on purchases of non-residential properties and transactions involving a mixture of residential and non-residential properties changed with effect from Budget Day to bring them more into line with the mechanism for charging SDLT on residential property. On and after 17 March 2016, SDLT will be charged at each rate on the portion of the purchase price which falls within each rate band. The new rates and thresholds for freehold purchases and leases premiums are:

Purchase price	SDLT rate,  cumulative
Up to £150,000	NIL                        NIL
£150,001 - £250,000	2%                   £2,000
£250,001 and over	5%       (no maximum)

Note also that the additional 3% SDLT charge on additional residences commences on 1 April 2016.

TAX RELIEF ON SMALL DONATIONS TO CHARITY INCREASED TO £8,000

The Gift Aid Small Donations Scheme (GASDS) allows charities to treat small donations such as those in collecting boxes as if Gift Aided.

With effect from 6 April 2016 the maximum annual donation amount which can be claimed through GASDS will be increased from £5,000 to £8,000 allowing charities and Community Amateur Sports Clubs to claim Gift Aid style top-up payments of up to £2,000 a year.

VAT REGISTRATION LIMIT £83,000

The VAT registration limit has been increased by £1,000 to £83,000 from 1 April 2016. The de-registration limit also increased by £1,000 to £81,000.

If you have any questions, please contact us at:
☎ 020 89310165 | ☏ 07900537459 | ✉ info@apjaccountancy.com 

Proposal to restrict tax relief for travel expenses for IR35 workers!

One of the controversial measures included in the draft Finance Bill 2016 was the proposed restriction of the deduction for travel and subsistence expenses incurred by certain workers caught by the IR35 rules. This proposed change was consulted on during summer 2015 and, if enacted, will significantly restrict the tax relief available for those affected.

The original proposals have been toned down to a certain extent and will only apply if the IR35 rules apply to the engagement and there is supervision, direction and control (SDC) over the worker. This now seems to be the key test to determine whether the new rules will apply and ignores the other employment status factors. The examples in the consultation document seem to suggest that if there is no expertise within the end user organisation then there is likely to be limited SDC and the worker will be entitled to relief for travelling to the client’s premises.

Any tax debt arising from the deliberate misapplication of the rules is to be transferred ‘jointly and severally’ from the ‘intermediary company’ to its director(s). It would appear that the ‘engager’ will not now be liable, which was one of the proposals in the consultation. It is intended that these rules will be implemented where it can be shown that the ‘intermediary’ had knowingly failed to apply the rules correctly.

Please get in touch with us if these new rules are likely to have an impact on your business.

☎ 020 89310165 | ☏ 07900537459 | ✉ info@apjaccountancy.com 

Contractor tax: Limited Company and Personal Taxes Explained

If you are contracting via own Limited Company the amount of tax you will pay as a contractor will arise in two different ways.

1)     Which you pay through your company and

2)     That which you pay personally.

The total amount of tax which you will pay will be determined by the IR35 status of your contract.

If your contract falls within IR 35 you will inevitably suffer higher tax. This can be significantly detrimental and so you should try to remain outside this if you can.

Let us explain each of the two categories of tax in more detail.

1)    Taxes Paid Through Your Limited company

There are 3 different kinds of tax which you will pay through Limited company

The first one is Corporation Tax  

This is effectively paid on net profit of your company affairs.

All limited companies are subject to Corporation Tax at rates varying between 0% and 30%.

Most contracting companies will pay at the small company’s rate of 20%.

If your contract is not caught by IR35, then you will most likely take the traditional route of low salary combined with high dividends.

Since dividends can only be paid from company profits, you will need to pay corporation tax at 20% of your net company profit. Corporation Tax is payable 9 months after your year end.

 

Second is the employer's National Insurance Contributions

This is a company cost based on the amount of your gross salary charged at the rate of 13.8%.

If your contract is caught by IR35, then your salary will be substantially higher as result and consequently the amount of Employer’s National Insurance will be based on the IR35 salary.

If your contract is not caught by IR35, then best advice would be to take a very low salary, potentially avoiding Employer’s National Insurance contributions altogether. No National Insurance contributions are chargeable on company dividends. Employer's National Insurance is paid monthly.

Third one is VAT (Value Added Tax)

If your company is registered for VAT (which the vast majority of contracting companies are), then you will need to charge VAT on your invoices to agencies/clients at the standard rate of 20%.

This money is collected by the company on behalf of HMRC and must be accounted to them on a quarterly basis. You will be able to make claims for input VAT (on your company purchases) by deduction when you make the payment to HMRC. Most contractors register for the VAT Flat Rate Scheme which is a means of obtaining a VAT rebate without the need to account for the input VAT on all purchases. It often means an overall VAT saving to the business which is even higher in the first year when HMRC allow a 1% greater saving. VAT does not affect the profits of a company except where there is a VAT ‘profit’ from the flat rate scheme.

 

2)    Taxes Paid Personally

There are 3 different kinds of tax which you will pay personally to HMRC

First one is the Income Tax

If you are working in an IR35 caught contract, then you will pay tax on deemed salary.

Our post on what should I do if my contract is caught within IR 35 explains further.

Click here to read this post

If you are not caught by IR35, then only a very small amount of your Income Tax liability will be deducted through PAYE (on the low salary). On IR35 exempt contracts, you will receive dividends, on which there will be tax credits covering your basic rate tax liability. If your taxable income is less than the higher rate threshold, then you will not have any further income tax liability.

Income Tax is paid monthly under PAYE or twice a year in January and July if there is additional Income Tax to pay under self-assessment.

Second is the employee's National Insurance Contribution

If your contract is caught by IR35, then you will suffer Employee’s National Insurance contributions on your salary. These are currently 12% up to £797 per week and 2% thereafter on all earning above this limit.

If your contract is not caught by IR35, then you will pay very little, if any, Employee’s National Insurance contributions, since the bulk of your income will be taken by dividends, which do not attract National Insurance contributions of any kind.

Employee's National Insurance Contributions are paid monthly.

And finally the Capital Gains Tax

You may be subject to Capital Gains Tax when you close your company and make a capital distribution to yourself as shareholder. This can be advantageous and is worth asking your accountant about in advance of the business ceasing to trade. In addition, Entrepreneurs Relief can reduce the amount of any final tax liability on cessation of trade.

I hope this helps. All the best

APJ Accountancy

www.apjaccountancy.com

Tax Tips For Contractors – What should I do if my contract is caught within IR 35?

We often get asked about the best way to extract money from a limited company if contract is caught by IR 35.

First and foremost the only way to be sure whether your contract falls inside or outside IR35 is to have it review by professional accountant firm who are specialised in Contractor Accountancy services. (Note - @ APJ Accountancy we offer this free within our standard package service)

And by the way, It works on a contract by contract basis. So for one contract you may fall under IR35 but for some other’s you may be outside.

Be aware that every contract needs to be evaluated on its own merits and every contract can be different.

If you aren’t sure you can take the 10 minute Contractor IR35 Test to see if you are likely to be working under IR35 from HMRC website yourself.

Going back to the question about what is the best method to pay your self. In simple terms

For Income from all contracts that fall outside scope of IR 35 – you can pay yourself combination of small salary and big dividend to maximise your tax savings.

For income related to contracts that fall inside scope of IR 35 –

You may need to pay some additional PAYE and National Insurance on the taxable income from these contracts at the end of the financial year.

So your company will continue you pay you as usual throughout the year deducting PAYE and NICs as applicable.

At the end of the tax year you will need to check that you have paid the right amount of tax and NI by calculating the deemed employment payment due on the IR35 contract(s) undertaken.

If you don’t know much about deemed payment then a step-by-step guide for how to calculate ‘deemed salary’ and related NICs can be found on the HMRC website.

HMRC also have a IR35 ‘deemed salary’ calculation spreadsheet which can be downloaded.

Paste www.hmrc.gov.uk/ir35/ir35.xlt into your browser to download the spreadsheet.

Alternatively, contact us to discuss how we can be of help in calculating your IR35 contract(s) ‘deemed salary’ and NIC liabilities.

Visit www.apjaccountancy.com/contractor-accountant.html

Finally if you are wondering if I need to pay myself the deemed salary? Or Can I only take dividends, do they count? Then answer is:

You don’t need to actually pay yourself the salary, although it is a deductible expense for Corporation Tax purposes so it works out well when you have combination of contracts falling inside and some falling outside IR 35.

If you had paid yourself the salary during the year of the IR35 contract then the ‘deemed salary’ would have been less. You can’t retrospectively pay yourself the salary without incurring more tax.

You can, however, pay dividends and offset the ‘deemed salary’ against these. This claim will reduce the amount of reportable dividends for tax purposes.

I hope this helps. All the best

APJ Accountancy

www.apjaccountancy.com

Top Tips For Contractors

If you are already contracting or perhaps thinking of contracting then following 10 tax planning tips will help.

1. Go Limited

This may sounds immediately obvious but this is the first step any contractor/freelancer should take if they want to maximize their disposable income as far as legally possible. By setting up a limited company typical contractor/freelancer should be able to save around 20 – 30p in the £ of tax when compared to PAYE, umbrella co or being self employed.

2. Register for Flat Rate scheme of VAT

This is a potential winner for contractors/freelancers and is easier to administer. In some circumstances it can even save you tax! On the flat rate scheme you pay a fixed amount of VAT based on your turnover (including VAT). The fixed rate depends upon your profession/trade and is pre-determined by HMRC. You can only join this scheme if your turnover is expected to be lower than £150,000 per annum. And don’t forget for the first year you also get discount of 1% on normal VAT rate. So for e.g. it will be 13.5% instead of usual 14.5% for IT contractors. Also note that you can claim input VAT( this is vat you pay for purchasing items like computer etc) if it has been incurred prior to registering for flat rate VAT

3. Pay yourself a minimal (director) salary

The whole purpose of setting up limited company is take advantage of tax planning techniques in order to pay minimum tax. As at 2012/13, the amount you can take tax free is £8,105 which equates to £675 per month. This is the level of an individual’s personal allowance for income tax. The NIC free allowance is £7,605 and is payable at 12% for any salary amount between £7,605 and £34,870 and 2% on any amounts thereafter.

4. Claim All Eligible Expenses

There are a suite of expenses contractors/freelancers can claim that they do not realise. Expenses through your Ltd Co. attracts corporation tax relief at 20% (small business rate). However, there are strict rules on expenses and carelessness or ignorance does not bode well with the tax authorities.

5. Time your dividend extractions correctly

Dividends are a key tool for contractors/freelancers wishing to extract money out of their Ltd Co’s as drawings. Timing your dividend extraction can be a useful tactic in saving tax. In 2012/13 a contractor/freelancer has up to £31,500 (net) dividends (per shareholder) they can extract without incurring additional tax. Any amounts above this will incur an additional dividend tax of 32.5% (effective rate is 25% after the notional tax credit of 10%) and 42.5% for any amounts above £150,000.

6. Claim the AIA on capital assets

If you buy a capital asset (items such as laptops, hardware, fixture and furniture for your office), you can claim what is known as a first year capital allowance. The first year capital allowance is like an accelerated depreciation charge that provides tax relief in the year of purchase. In 2012/13, the first year allowance is £25,000 although there are transitional rules in place.

7. Ensure you comply with IR35 rules

IR35 is a piece of tax legislation that assesses contractors/freelancers based on the substance of their working arrangements. Being caught inside of IR35 can defeat the object of running your contractor/freelancer business through a Ltd Co. IR35 is assessed on a contract by contract basis.

8. Making your spouse/civil partner a partner or shareholder in your business to reduce your tax bill

If your spouse/civil partner earns less than the single persons allowance of £9,440 per year and helps out in your business you can pay them a wage to reduce your taxable profits. A wage of between £109 and £148 per week will not create a national insurance charge, but it will help your spouse gain credits toward the state pension and other state benefits.

9. Financial products

• Pension contributions

• Relevant life policy (life assurance)

• Investment products

Why not get your Ltd Co. to pay your pension contributions or life assurance premiums? This attracts corporation tax relief instantly and is a great way get the taxman to make a contribution to both. A director can set up an executive pension scheme and get the company to make (reasonable) contributions to get their life assurance paid through the company by way of a relevant life policy.

10. Entrepreneur’s relief

This is available to contractors/freelancers who are selling/closing down their Ltd Co’s. Once all other tax-efficient means have been utilised (director salary & dividends), entrepreneurs relief can be applied to any remaining funds in the company taxed at only 10%. However, this is subject to a whole host of criteria being satisfied.

To get more tips on tax planning for contractors log on to www.apjaccountancy.com