The Chancellor George Osborne delivered his Budget on 19 March 2014. In his opening speech he stated the economy is continuing to recover and recovering faster than forecast. The focus of the Budget was on supporting the recovery with emphasis on encouraging savings and making pensions more attractive and flexible. A Budget for ‘Makers, Doers and Savers.’
Key Points of the Budget and introduction of new rates effective from April 2014
Personal income tax allowance and thresholds
- Personal Allowance
– increases from 6 April 2014 from £9,440 to £10,000
– increases from 6 April 2015 from £10,000 to £10,500
The basic rate threshold reduces from £32,010 to £31,865 and the 40p income tax threshold is to rise from £41,450 to £41,865 from 6 April 2014. A further 1% to £42,285 increase will be effective from 6 April 2015.
National Insurance Contributions (NIC)
- Lower Earnings Limit rises to £5,772 per annum (£111 per week/£481 per month)
- Primary Threshold (level at which Employer contributions are due) rises to £7,956 per annum (£153 per week/£663 per month)
- Secondary Threshold (ST) (level at which Employee contributions are due) is also increased from £148 per week and this is now aligned with the PT rate at £7,956 per annum (£153 per week/£663 per month).
- Upper Earnings Limit rises from £41,450 to £41,865 from 6 April 2014.
- Employer’s NIC for most under 21s to be abolished with effect from 6 April 2015 (except those earning over the Upper Earnings Limit).
- Class 2 NIC for self-employed to be collected through Self-Assessment from 6 April 2016
NIC Employment Allowance
From 5 April 2014 businesses and charities in the UK that pays Employer Class 1 NIC on employees/directors’ earnings will be entitled to up to £2,000 Employment Allowance to reduce their employer NIC for the tax year 2014/15.
If your business qualifies for the allowance, the Employer’s NIC can be reduced from your PAYE payments until you have reached the £2,000 limit. For example, if the Employer’s NIC is £1,500 in April no Employer’s NIC will be payable for April and the balance of £500 can be carried forward to set against the May liability.
Employers can only claim one allowance (in the case of multiple PAYE schemes within a group) and some employers are excluded. For example:
- If you employ an employee for personal, household or domestic work such as a nanny, au pair, chauffeur, gardener or care worker.
- Already claim the allowance through a connected company or charity
- Are a public authority, this includes; local, district, town and parish councils
- Carry out functions either wholly or mainly of a public nature (unless you have charitable status), including:
– NHS services
– General Practitioner services
– the managing of housing stock owned by or for a local council
– providing a meals on wheels service for a local council
– refuse collection for a local council
– prison services
– collecting debt for a government department.
The increase in the tax-free rate for Beneficial Loans from £5,000 to £10,000 was announced in the 2013 Budget. With effect from April 2014 the benefit of interest free or low interest rate loans to employees/directors which do not exceed £10,000 at any time during the tax year will be exempt from tax. The Official Rate of Interest to determine if a loan is at a ‘low rate’ for 2014/15 is 3.25% (4% 2013/14).
The various increases in the Personal Allowance and the PAYE and NIC thresholds will allow the rate of salary you currently pay yourself to increase with effect from 6 April 2014, without attracting a liability to tax or NIC. Further, with the introduction of the Employment Allowance it is more tax efficient to consider paying a higher salary instead of limiting to the ST rate. By paying a higher salary, the employer incurs Employer’s NIC and the director Employee NIC but as the amount of Employer NIC is less than £2,000 this will be refunded.
With the increase in the de miminus level for Beneficial Loans it may be worth considering taking a loan from your company. A loan is more than just lending money, it includes any form of credit, ie an amount shown in the records as owed by an employee/director will count as a loan.
If you wish to discuss increasing the level of salary, and/or taking a loan from your company please contact your Account Manager or your usual contact.
Announced on 18 March 2014 a new tax free childcare scheme will replace the current childcare voucher scheme for new entrants from autumn 2015. The new scheme basically provides a subsidy for working parents of up to £2,000 per child under the age of 12. From September 2015 families with both parents earning between £50 per week and £150,000 per annum will be able to open an online account through this new scheme facilitated by NS&I and pay in money as needed.
For every 80p paid by parents (or employers or relatives) the Government will add 20p. The maximum contribution from the state will be £2,000 per child per year. All children under 12 are eligible immediately. Children with disabilities will receive support to the age of 16.
The scheme is open to parents on paid sick leave and on paid and unpaid maternity, paternity and adoption leave.
Parents that are self-employed will be able to participate. The minimum £50 per week income requirement will be waived for the self-employed for an unspecified ‘start up’ period.
Employees will still be able to join childcare voucher schemes until autumn 2015 and either remain in these or join the new scheme. Workplace nurseries are unaffected by the new announcements.
Tax-free childcare money can only be paid to Ofsted registered providers.
You may be considering options for your company to provide childcare, including the use of the current childcare voucher scheme. If you wish to join childcare voucher schemes you can still do so until autumn 2015. You may then either remain in the voucher scheme or join the new scheme.
If you wish to discuss more details of how the existing childcare voucher scheme works and/or the new childcare scheme and how it will work when it comes into effect next year please contact your Account Manager or your usual contact.
Review of Form P11D reporting
In response to a report from the Office of Tax Simplification in January 2014 HMRC will consult on some recommendations made in that review. It is proposed:
- Simplifying the P11D process – bring all employees into P11D reporting and abolishing the need to use separate Form P9D for those earning less than £8,500 per year. This does not affect directors however who are required to complete P11D regardless of earnings level.
- Payrolling Benefits – to introduce the ability to tax employee benefits through the payroll rather on P11Ds
- Trivial Benefits – to introduce a new statutory exemption for trivial or minor benefits
- Non-taxable Expenses – to introduce a general exemption for reimbursed non-taxable expenses, to replace the current dispensation system in place.
- Travel & Subsistence – the rules and definitions in respect of employee attendance at temporary workplaces are to be considered to simplify the treatment for employees and to increase the certainty and availability of a deduction for allowable travel.
The above proposals are subject to consultation so no details are as yet available. Whilst not all of the above will affect you as a director of your own company, some simplification of the current compliance procedures is to be welcomed. With regard to Dispensations from P11D Reporting this will continue in place and it is likely any new rules for non-taxable expenses will simply override this current procedure.
The current rules for treating Travel and Subsistence as allowable expenses are complex and confusing and further clarity in this respect will hopefully remove some uncertainty. As with all consultations “the devil is in the detail” and we will be following this consultation and will provide further updates as appropriate.
If you have any queries regarding expense or any of the above point’s please contact your Account Manager or usual contact.
Investments and Savings
With effect from 1 July 2014 Individual Savings Accounts (ISAs) are to be reformed into a simpler product, the New ISA (NISA) and the overall subscription has been increased to £15,000. NISA savings can be held in cash or stocks and shares in any combination. The Junior ISAs tax free limit is to be increased to £4,000.
With effect from 6 April 2015 the starting rate for savings income will reduce from 10% to 0%. The maximum amount of interest that can qualify for this rate will increase from £2,880 to £5,000.
The current cap on Premium Bonds is to rise from £30,000 to £40,000 in June 2014 and to £50,000 in 2015. The number of £1 million winners is to be doubled.
Pensioner Bonds will be available from January 2015. These used to be referred to as “Granny Bonds” – an investment of a maximum of £10,000 can be made into Pensioner Bonds. It is proposed that the bonds will pay “market leading rates” – example rates provided so far are 2.8% for a 1 Year Bond and 4% for a 3 Year Bond.
Seed Enterprise Investment Scheme (SEIS) and the Capital Gains Tax (CGT) relief for reinvesting gains in SEIS shares was to end in 2017 but this will be made permanent. There are a number of small changes to the operation of Venture Capital Trusts and the Enterprise Investment Scheme.
There a number of savings opportunities which are also tax efficient. Income Made Smart LLP is not able to provide investment advice, but we can discuss with you the tax effects of such investments.
Please contact your Account Manager or usual contact if you wish to discuss this in more detail.
Defined Contribution Pensions
The Chancellor announced some revolutionary changes to the pension’s systems From 27 March 2014 the following amendments are to be made to Defined Contributions Pensions (DC):
- Increasing the capped draw down limit to 150% of an equivalent annuity
- Reducing the minimum income requirement for accessing flexible draw down from £20,000 to £12,000
- For those with small pension pots the limit for triviality commutation is raised from £18,000 to £30,000 making small pension funds more accessible.
From 6 April 2015 savers in defined contribution person schemes will have the option to take 100% of their pension as a lump sum, with the first 25% being tax-free and the remainder taxed at their marginal rate of tax. This replaces the current system of a 55% tax rate on lump sums greater than 25% of the pension pot.
Under current rules the remaining 75% is usually used to purchase an annuity from an insurance company or put into restricted gradual ‘drawdown’ arrangements. Under the new rules with the flexibility this allows it is likely to increase the attractiveness of pensions as savings vehicles for those within Annual and Lifetime Allowance limits.
Free guidance will be provided for pensions savers at retirement to help them make the right choices. Pensioners will not have to buy an annuity and will be able to draw down as little or as much, with tax restrictions on access to pension pots removed.
The introduction of the changes to the pension systems may affect you as an individual. Income Made Smart LLP is not able to provide pension investment advice but we can discuss with you the tax effects of your proposed pension investments and guide you further as to where to seek specific advice.
In the first instance please contact your Account Manager or usual contact if you wish to discuss this in more detail.
Tax Avoidance and Collection
There were some anti-avoidance measures announced following previous introductions of the Disclosure of Tax Avoidance Schemes (DOTAS) and the General Anti-Abuse Rule (GAAR) with HMRC to have the power to demand tax payments in certain circumstances. In essence those accused of using tax avoidance schemes will be required to “pay up front.”
From midnight on 19 March 2014 properties bought for more than £500,000 by a company as part of tax avoidance will be liable to 15% Stamp Duty.
The Government has also stated that it will “modernise and strengthen HMRC’s powers to recover tax and tax credit debts directly from debtors’ bank and building society accounts, including ISAs. The Direct Recovery of Debts will focus on debtors who owe at least £1,000 and have been contacted multiple times by HMRC to pay. A minimum aggregate balance of £5,000 will be left across all accounts, including ISAs, after the debt is recovered. The Government will consult on the implementation of this measure shortly after Budget 2014.”
The Direct Recovery of Debts raises a number of potential issues, some to be welcomed with protection in place against funds “disappearing into the night” but what safeguards will be in place to check that the tax is due in the first place and the resultant effects of extracting such monies may have, such as with diminished funds not being able to pay employees, suppliers etc. We wait to see how this is to work in practice.
The Corporation Tax rates have already been announced:
Main rate of Corporation Tax reducing:
– from 23% to 21% with effect from 1 April 2014
– from 21% to 20% with effect from 1 April 2015.
– Small profits rate to remain at 20%.
The Annual Investment Allowance (AIA) for businesses is doubled to £500,000 for all qualifying investment in plant and machinery from 1 April 2014. The period of the allowance has been extended to 31 December 2015.
The main rate of Corporation tax will be reduced to 21% from 1 April 2014 with a further reduction to 20% from 1 April 2015. The small profits rate that applies to your limited company remains unchanged at 20%.
In the Autumn Statement proposals were announced to extend the scope of UK CGT to include the disposal of UK residential property by non-residents. This is subject to consultation so not all details are known as yet. At present non-residents are not liable to CGT in the UK regardless of whether they dispose of UK or overseas assets (with exception of certain temporary non-residents and owners of assets used in a trade in the UK). It is anticipated that a charge to tax will apply to gains arising to non-residents on the sale of assets and is expected to be introduced in April 2015.
The automatic exemption from CGT for the final period of ownership of the former principal Private Residence (PPR) is to be halved from 36 months to 18 months with effect from 5 April 2014.This change may affect individuals who own property which has previously been their main residence but which they ceased to occupy before 6 October 2012. Currently the final 36 months of ownership always qualifies for relief provided that the property was the PPR at some point.
Former homes that are subsequently let out can still qualify for additional lettings relief which can be linked to the amount of the PPR relief available.
Two new bands will be introduced for the Annual Tax on Enveloped Dwellings (ATED) paid by companies owning high-value residential property. From 1 April 2015 ATED will apply to properties with a value of more than £1 million and from 1 April 2016 a further new band will apply to properties with a value greater than £500,000.
With effect from 20 March 2014 such properties bought for more than £500,000 will be liable to Stamp Duty Land Tax (SDLT) at 15%.
The “Help to Buy Scheme” is extended to 2020. In the 2013 Budget it was announced that the Government will support people who have at least a 5% deposit to buy a home through two types of scheme aimed at increasing the supply of low-deposit mortgages and housing. Each scheme helps to purchase a home with a maximum value of £600,000. One scheme was to run from 1 April 2013 for three years and the other from January 2014 for three years. Both schemes are now extended.
The extension of UK CGT to include the disposal of UK residential property by non-residents is subject to consultation and so no specific advice can be provided at this stage. However as there is a period of a year or so before implementation we are happy to discuss with you any potential disposals of assets that may give rise to a CGT liability and how this may affect you.
The reduction in the period for exemption of the former PPR may not have significant impact if the property is sold within a few months of the 18 months limit. Any chargeable gain may be covered by your personal annual exemption from CGT (£11,000 for 2014/15). It is still possible to make savings and look at how best to manage any future CGT liability with advance planning when purchasing new residential property.
If you require specific advice regarding CGT in the first place contact your Account Manager or usual contact.