As you may know the 2015 tax year has been a little different to previous years. This year, due to the change in the political climate, we have had two budgets. We had the last coalition Budget in March and the first Conservative Budget in July – the ‘Summer Budget’.

The Summer Budget 2015 introduced a few significant changes in taxation that will have an effect on everyone. We have summarised those changes and produced some practical examples of how you will be affected.

Tax and Allowances

Income Tax Brackets – The tax lock

The Income tax brackets so far remain unchanged:

  • the basic rate of income tax, which is 20%
  • the standard rate of VAT, also 20%
  • the employee rate of National Insurance Contributions (NICs), which is 12%
  • the employer rate of NICs, which is 13.8%

The personal allowance

The personal allowance this year is £10,600 and was expected to rise by £200 next year. Instead, the Chancellor has announced a bigger increase to £11,000 in 2016-17 and £11,200 in 2017-18.

Once the personal allowance reaches £12,500 it will be uprated in line with the National Minimum Wage (NMW) so that no tax will be paid by a person who works 30 hours a week and earns only the NMW.

Table 1:

                        2015-16 2016-17
Personal allowance:  0 % £10,600 £11,000
20% tax on next… £31,785 £32,000
40% tax (the ‘higher rate’) payable above… £42,385 £43,000
Personal allowance clawback above… £100,000 £100,000
Effective 60% rate from £100,000 to… £121,200 £122,000
The ‘additional rate’ of tax above £150,000 45% 45%

 

Taxation of dividends

The change to be introduced as of 05/04/2016

One unexpected change was the reform of dividend taxation. This is the change that will affect everyone.

Dividends are paid out of profits after corporation tax, so the company has already paid tax on the money when you receive the dividend.  For that reason, and for personal tax purposes, dividends were subject to a tax credit which lowered the effective rate of tax paid on dividend income. The following is a summary of the current rates.

Table 2:

Income Tax Bracket PAYE Tax Bracket Gross dividends tax Effective rate (considering 10% Dividends Tax Credit)
Personal tax free allowance – 0 % 0 – £10,600 10% 0%
Basic Tax  rates (bracket £31,785) 20% £10,600 – £42,385 10% 0%
Higher Tax rate 40% £42,385 – £150,000 32.50% 25%
Additional Tax rate 45% £150,000 and above 38.1% 30.56%

 

From April 2016, the dividend tax credit will be abolished. Instead, everyone will have an extra tax free ‘dividend tax allowance’ of £5,000. However, dividends above £5,000 will form the top slice of your taxable income, and the rates of tax will increase, like this:

  • If the dividend falls in the basic rate tax band, you will pay 7.5% on the dividend (compared to 0% now)
  • If it falls in the higher rate tax band, you will pay 32.5% (compared to 25% now)
  • If it falls in the additional rate tax band, you will pay 38.1% (compared to 30.56% now)

The change effectively means that everyone with dividends income above £5,000 a year will now face a personal tax bill.

Take home and tax illustration based on company turnover

Annual Turnover of £35,000.00

These calculations assume the company is registered for Flat Rate VAT at 12% and the agency has given a rate uplift of 13.8% in lieu of Employer’s National Insurance.

Annual PAYE band 35,000.00
Company turnover taking into consideration agency rate uplift (13.8%) 39,725.00
Company expenses
Accounting fees (based on £35 + VAT a week) 2,184.00
Other operating costs (mileage, training, membership, marketing, staff entertainment and other) 8,000.00
Directors Salary (set at Primary Threshold) 8,112.00
18,296.00
Total pre-tax profits 21,429.00
Corporation Tax @20% 4,285.80
After Tax profits/dividends 17,143.20
Dividends from VAT/FRV benefits where application  based on average sector rate of 12% 1,779.68
Personal Tax
Based on the income from the LTD company you will fall into the basic rate tax band
Tax on Salary of £8112 0.00
Tax on Dividends up to £5000 0.00
Tax on dividends above £5000 without FRV benefit 910.74
Tax on dividends above £5000 with FRV benefit 1,044.22
Total Take home amount for the year (minus personal tax + FRV benefit) 33,990.66
Total Tax Bill for the Year (Company Tax plus Personal Tax paid at self-assessment) 5,330.02
PAYE Income of: £35,000.00
0 – 11 000 £346.56 NIC
11 000 – 35000 £7,680.00 NI + PAYE
Total take home £26,973.44  
Total Tax due £8,026.56

 

Annual Turnover of £43,000

Annual PAYE band 43,000.00
Company turnover taking into consideration agency rate uplift (13.8%) 48,934.00
Company expenses
Accounting fees (based on £35 + VAT a week) 2,184.00
Other operating costs (mileage, training, membership, marketing, staff entertainment and other) 8,000.00
Directors Salary (set at Primary Threshold) 8,112.00
18,296.00
Total pre-tax profits 30,638.00
Corporation Tax @20% 6,127.60
After Tax profits/dividends 24,510.40
Dividends from VAT /FRV benefits where application  based on avarage sector rate of 12% 2,192.24
Personal Tax
Based on the income from the LTD company you will fall into the basic rate tax band
Tax on Salary of £8112 0.00
Tax on Dividends up to £5000 0.00
Tax on dividends above £5000 without FRV benefit 1,463.28
Tax on dividends above £5000 with FRV benefit 1,627.70
Total Take home amount for the year (minus personal tax + FRV benefit) 41,186.94
Total Tax Bill for the Year (Company Tax plus Personal Tax paid at self-assessment) 7,755.30
PAYE Income of: £43,000.00
 £0 – £11,000 £346.56 NIC
£11,000 – £43,000 £10,240.00 NI + PAYE
Total take home £32,413.44  
Total Tax due £10,586.56

 

Annual Turnover of £50,000

Annual PAYE band 50,000
Company turnover taking into consideration agency rate uplift (13.8%) 56,900
Company expenses
Accounting fees (based on £35 + VAT a week) 2,184
Other operating costs (mileage, training, membership, marketing, staff entertainment and other) 10,000
Directors Salary (set at Primary Threshold) 8,112
20,296
Total pre-tax profits 36,604
Corporation Tax @20% 7,320.8
After Tax profits/dividends 29,283.2
Dividends from VAT/FRV benefits where application  based on average sector rate of 12% 2,549.12
Personal Tax
Based on the income from the LTD company you will fall into the basic rate tax band
Tax on Salary of £8112 0
Tax on Dividends up to £5000 0
Tax on dividends above £5000 without FRV benefit 1,821.24
Tax on dividends above £5000 and up to £43 000 with FRV benefit 2,012.42
Total Take home amount for the year (minus personal tax + FRV benefit) 47,931.9
Total Tax Bill for the Year (Company Tax  plus Personal Tax paid at self-assessment) 9,333.22
PAYE Income of: £50,000.00
 £0 – £11,000 £346.56 NIC
£11,000 – £43,000 £10,240.00 NI + PAYE
£43,000 – £50,000 £2,940.00
Total take home £36,473.44  
Total Tax due £13,526.56

 

Annual Turnover of £100,000

Annual PAYE band 100,000
Company turnover taking into consideration agency rate uplift (13.8%) 113,800
Company expenses
Accounting fees (based on £35 + VAT a week) 2,184
Other operating costs (mileage, training, membership, marketing, staff entertainment and other) 10,000
Directors Salary (set at Primary Threshold) 8,112
20,296
Total pre-tax profits 93,504
Corporation Tax @20% 18,700.8
After Tax profits /Dividends 74,803.2
Dividends from VAT /FRV benefits where application  based on average sector rate of 12% 5,098.24
Personal Tax
Based on the income from the LTD company you will fall into the basic rate tax band
Tax on Salary of £8112 0
Tax on Dividends up to £5000 0
Tax on dividends above £5000 without FRV benefit 5,235.24
Tax on dividends above £5000 and up to £43,000 with FRV benefit 2,241.6
Dividends above £43,000 with FRV 11,993
Total Take home amount for the year (Minus personal tax + FRV benefit) 80,785.2
Total Tax Bill for the Year ( Company  tax  plus Personal Tax paid at self-assessment) 32,935.4
PAYE Income of: £100,000.00
 £0 – £11,000 £346.56 NIC
£11,000 – £43,000 £10,240.00 NI +PAYE
£43,000 – £100,000 £23,940.00
Total take home £65,473.44
Total Tax due £34,526.56

 

This change will significantly affect the planning of profit extraction from limited companies. Clients who currently have a policy of restricting dividends will be contacted over the next few months so that all these decisions may be revisited ensuring the best policy going forward.

Change in Corporation tax rates

A surprise was that in 2017 the corporation tax rate is to be reduced from 20% to 19%, with a further reduction in 2020 to 18%.

This means that the after-tax amount available for dividends will be higher, so this softens the effect of the higher dividend tax rate.

The Employment Allowance

The Employment Allowance was introduced in 2014-15 and cancels out the first £2,000 of Employer Class 1 NICs paid by most businesses.

From April 2016 the allowance will increase to £3,000 but will no longer be available where ‘the director is the sole employee.’ It’s not certain if the allowance will be available where the director is not ‘the sole employee’ because the business also employs other family members, such as a spouse or children.

Expense Claims

Travel and subsistence: the new rules

In the March Budget, the government announced that they were considering removing the tax relief for travel and subsistence for all those working through service companies, umbrella companies and similar intermediaries, if the individual was subject to the ‘supervision, direction or control’ of the client.

The legislation will be amended so that each engagement will be treated as a separate employment for the purposes of the tax relief rules, so it will not be possible to argue that the location is a ‘temporary’ place of work.

HMRC have previously explained what they understand by ‘supervision, direction and control’ in the context of the rules which apply to agency workers. In this consultation they have confirmed that the same approach will be taken by HMRC when they consider these new travel and subsistence restrictions. The guidance can be found at

www.hmrc.gov.uk/manuals/esmmanual/ESM2029.htm

It may also be necessary for the legislation to define what is meant by a ‘personal service company’ because these new rules will not apply to all companies but only ‘intermediaries’. The consultation document says only that service companies ‘are generally considered to be small limited companies through which an owner/director provides personal services.’ When the legislation is published, it will be important to check how an ‘intermediary’ is defined for the purposes of these new travel and subsistence rules.  We will send further communication in April 2016.

From April 2016, these costs may no longer be deductible for tax purposes. This is a factor that you will have to consider when negotiating your rates going forward.

Trivial Benefits

It has now been re-introduced by the Conservative Government to be effective from 6 April 2016. Guidance will be needed from HMRC in due course but it is safe to assume the same rules as set out in the Financial Bill 2015 will apply, i.e.:

  • The trivial benefit cannot be cash or cash voucher
  • Cannot exceed £50
  • Cannot be part of a salary sacrifice arrangement
  • Cannot be in recognition of services.

A trivial benefit is to cover a gift such as flowers, chocolates, and wine for events such as the birth of a baby, birthdays, weddings, etc.

Changes in Pensions

There were two main changes to pension tax reliefs, the lifetime allowance and the annual allowance. In addition, there is a possibility that the entire pension regime will be torn up and a new system introduced.  It is our suggestion if you have been considering paying into a pension for a while to act sooner rather than later. A consultation document included in the Budget papers suggests replacing this long-standing system. Instead of tax and NICs relief on contributions, you would save for your pension out of after-tax income, as with ISAs. When the money was taken out of the pension, it would be tax free.

The consultation document does not promise that this is going to happen. But if the government decided to change the pension regime in this way, it would save around £50bn – the amount spent on pension tax relief. That must be tempting for a Chancellor trying to reduce the deficit

Currently you can save up to £1.25m in a pension. If you save more than this, you are likely to pay tax at 55% on any excess.  From April 2016 the lifetime allowance will be reduced to £1m.

If you will already have over £1m in your pension on 6 April 2016, or expect that the money you already have will grow to more than £1m before you take money out of your pension, you will be able to ‘protect’ an amount up to £1.25m. HMRC will set out the procedure for protection in due course.

Once you have protected your pension fund, you must not make any further pension contributions, and neither must your employer. If you make even a single contribution (for instance, if you forget to stop a direct debit) you will almost always forfeit the protection.

Annual allowance

At present, the total of employer and employee pension contributions must not exceed £40,000. If it does, the excess is taxed at your marginal rate via your self-assessment calculation.

However, if you have not used your annual allowances in the previous three years, you can carry forward the unused amounts and pay a larger sum into your pension.

Under the new rules announced in the Summer Budget, this £40,000 allowance will be reduced for those whose total income is above £150,000.

In working out whether your income is above £150,000 you need to include, not only your income but also the value of any pension contributions you make, any pension contributions made by your employer, and the increase in value of any final salary scheme over the tax year. This figure is called ‘adjusted income’.

For every £2 of adjusted income over £150,000, your annual allowance will be reduced by £1. The maximum reduction is £30,000, leaving a ‘rump’ annual allowance of £10,000. This means that once your income is over £210,000, there is no further reduction.

If you have unused annual allowances from earlier years, these can be carried forward in the usual way and added to your reduced annual allowance.

However, if your taxable income – after pension contributions and other reliefs – is £110,000 or less, these rules will not apply.

Annual allowance and the new flexible access rules

If you have taken money out of your pension using the new ‘flexible access’ provisions, your annual allowance has already been reduced to £10,000 under changes which took effect from 6 April 2015. That means you no longer have a £40,000 annual allowance.

But you can’t escape these new tapering rules so easily. If you only have a £10,000 annual allowance, and your adjusted income is more than £150,000, the £10,000 allowance is tapered to zero. This means that, if you have income of £210,000 and have flexibly accessed your pension, your annual allowance will have disappeared entirely.

IR35

The government announced that HMRC would start a dialogue with business on how to improve the effectiveness of IR35 and will publish a consultation document on the topic shortly. More on IR35 at https://incomemadesmart.com/knowledgebase/ir35-guide/).

In reality, there have not been any actual changes despite a lot of the speculations on various contracting websites. HMRC has attempted in the past on numerous occasions to improve the effectiveness of IR35 but these attempts haven’t particularly successful.  To assist our clients, IMS has teamed up with one of the best companies available on the market, Abbey Tax, who can assist clients with IR35 reviews. We have also managed to negotiate a significantly reduced price for our clients. They specialise in IR35 and have a great team could also assist with IR35 audits if they take place. You will be able to take on fee cover insurance for a minimum price that would cover all defence fees if worse comes to worst.  We will soon send further information on how to reach them and use their advice. You will also be able to take on insurance and protect yourself should worst comes to worst.

Buy to let properties

There are two separate parts to this change. The first is a restriction in the amount of interest you can deduct from your rental income.

  • in 2017-18 the deduction will be restricted to 75% of mortgage interest,
  • in 2018-19 the deduction will be restricted to 50% of mortgage interest
  • in 2019-20 the deduction will be restricted to 25% of mortgage interest
  • in 2020-21 no mortgage interest will be deducted from profits.

The second stage allows 20% tax relief on the disallowed part of the mortgage interest as part of your overall tax calculation. The basic rule is that this will match the sliding scale set out above, so that

  • in 2017-18 you can reduce your total tax bill by 20% of the 25% mortgage interest which you were not allowed to deduct from the profits
  • in 2018-19 you can reduce your total tax bill by 20% of the 50% mortgage interest which you were not allowed to deduct from the profits
  • in 2019-20 you can reduce your total tax bill by 20% of the 75% mortgage interest which you were not allowed to deduct from the profits
  • in 2020-21 you can reduce your total tax bill by 20% of all your mortgage interest.

However, there are further restrictions if either (a) you have other income, or (b) there are low profits from your UK property business.

More information

Please note that the above is not a complete overview of the budget. If you want to read more about the Budget, the HMRC information can be downloaded here:

https://www.gov.uk/government/collections/budget-july-2015-hm-revenue-and-customs
https://www.gov.uk/government/publications/summer-budget-2015