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Budget Impact Statement Key-points-from-Sunak-s-Autumn-Budget-20212.63348694-300x200

How the October 2021 budget may affect your business or personal finances

The Chancellor, Rishi Sunak, presented his Autumn 2021 Budget and Spending Review on 27 October 2021.

Before taking any action based on the contents of this update, please contact us to discuss what the Budget announcements will mean for you and that consider your unique business or personal financial circumstances.

Impact on your personal taxes or finances

Income tax rates and allowances for 2022/23

As announced at the March 2021 Budget, the personal allowance will remain at its 2021/22 level of £12,570 for 2022/23, with the allowance being reduced by £1 for every £2 by which income exceeds £100,000. This means that if your income is more than £125,140 you will not receive a personal allowance for 2022/23. You may wish to consider making pension contributions or gift aid donations to preserve your personal allowance and avoid paying tax at the high marginal rate of 60% that applies on income between £100,000 and £125,140.

The rates of income tax remain unchanged, with the basic rate staying at 20%, the higher rate at 40% and the additional rate at 45%. The basic rate band remains at £37,700. The additional rate of 45% will continue to apply to taxable income more than £150,000.

The freezing of the thresholds may mean that if your income keeps pace with inflation, you may move into a higher tax band and pay tax at a higher marginal rate.

The married couple’s allowance, available where at least one spouse or civil partner was born before 6 April 1935, is increased to £9,415. The income limit, above which the allowance is reduced by £1 for every £2 by which income exceeds the limit until the minimum amount of the allowance is reached, is set at £31,400. The minimum amount of the married couple’s allowance increases to £3,640 for 2022/23.

The rates and thresholds applying in Scotland to the non-savings non-dividend income of Scottish taxpayers will be announced in the Scottish Budget on 9 December.

National Insurance increases

As part of the Government’s plan for health and social care funding, the rate of Class 1 and Class 4 National Insurance contributions are increased by 1.25% for 2022/23 only. This means that the main primary rate payable by employees will be 13.25% and the additional primary rate will be 3.25%, while the main rate of Class 4 contributions payable by the self-employed will be 9.25% and the additional Class 4 rate will be 3.25%. The rates payable by employers (secondary Class 1, Class 1A and Class 1B) are also increased by 1.25% for 2022/23, to 15.05%. The rates will revert to their 2021/22 levels from 6 April 2023 when the new Health and Social Care Levy comes into effect.

The upper earnings limit for primary Class 1 purposes (and the associated upper secondary thresholds) and the upper profits limit for Class 4 remain frozen at £967 per week (£4,189 per month, £50,270 per year) for 2022/23. The other thresholds are increased in line with inflation. As a result, the lower earnings limit increases to £123 per week, the primary threshold increases to £190 per week and the secondary threshold increases to £175 per week. A new secondary threshold for Freeport employees of £481 per week applies from 6 April 2022.

The increases in the National Insurance rates and changes to the thresholds will affect your take home pay. If you operate your business through a personal or family company, they will also impact on your profit extraction strategy.

We can help you determine your optimal salary level for 2022/23 and re-examine your remuneration strategy based on this and other budget changes.

The rate of Class 2 National Insurance, payable by the self-employed, is increased to £3.15 per week for 2022/23 and the small profits threshold rises to £6,725. The rate of voluntary Class 3 National Insurance contributions rises to £15.85 per week for 2022/23.

Health and Social Care Levy

A new levy, the Health and Social Care Levy, will apply from 6 April 2023. The funds raised for the levy will be ring fenced to meet health and adult social care costs. Payment of the levy is linked to earnings on which a qualifying National Insurance contribution is payable. This is a Class 1 (employee’s and employer’s) contribution, a Class 1A contribution, a Class 1B contribution and a Class 4 contribution. The levy is payable at the rate of 1.25% on the earnings on which a National Insurance contribution would be due.

However, unlike National Insurance contributions, an individual’s liability to pay the Health and Social Care Levy does not come to an end when the individual reaches state pension age.

Associated changes mean that from October 2023, a cap is introduced on the amount that an eligible person will have to contribute to the costs of personal care over their lifetime. This is to be set at £86,000.

We can advise on the impact of the Levy and what the costs cap will mean for you.

Dividend tax increases

As part of the funding plan for health and social care, dividend tax rates are similarly increased by 1.25% from 6 April 2022.

Anyone who operates their business through a personal or family company and extracts profits in the form of a small salary plus dividends will typically pay little or no National Insurance. As the Health and Social Care Levy is linked to National Insurance contributions, where this low salary strategy is adopted, they will either not pay the levy or pay it at a low rate. To address this and to ensure those operating through a personal or family company contribute towards health and social care costs, dividend tax rates are increased by the amount of the levy.

From 6 April 2022, the ordinary dividend tax rate will be 8.75% (currently 7.5%), the upper dividend tax rate will be 33.75% (currently 32.5%) and the higher dividend tax rate will be 39.35% (currently 38.1%).

The increase in the dividend tax rates will also impact on your profit extraction strategy. As the increase does not come into effect until 6 April 2022, it may be useful to review your dividend policy for 2021/22 to decide whether it is worth taking more dividends in 2021/22 to take advantage of the current, lower, rates. Whether this is beneficial will depend on your personal circumstances. We can help you decide.

The increases in the dividend tax rates will also affect you if you receive dividends from investments in shares.

Increase in the minimum pension age

The normal minimum pension age (NMPA) is the age at which most pension savers can access their pensions without incurring an unauthorised pension tax charge (unless they take their pension earlier due to ill-health). Registered pension schemes cannot normally pay benefits to members until they reach the NMPA (except in the case of ill-health).

The NMPA is to increase from 55 to 57 from 6 April 2028.

The change will affect you if you were born on or after 6 April 1973. If affected, you will need to wait until age 57 to access pension benefits without suffering an unauthorised payments charge (unless the scheme has a protected pension age). This will need to be considered in your ongoing retirement planning.

If you were co-ordinating your business exit planning with your 55th birthday, this will also need to be rescheduled.

Contact us to discuss what this change may mean for you.

Longer payment and reporting window for residential capital gains

If you sell a property that has not been your main residence throughout the period that you have owned it, for example, an investment property or a second home, you will have to pay capital gains tax if the chargeable gain exceeds your available annual exempt amount. The tax is payable at the residential rates of 18% where income and gains fall within the basic rate limit and at 28% once this has been used up.

The time limit for reporting residential capital gains and making a payment on account of the tax due is increased from 30 days to 60 days from Budget Day (27 October 2021).

If you have recently disposed of a residential property which has not been your main home throughout, we can help you.

Impact on your business taxes or finance

Extension of the AIA temporary limit

The Annual Investment Allowance (AIA) is a capital allowance that allows unincorporated businesses and companies to claim a deduction of 100% of the qualifying expenditure up to the amount of the annual limit. The AIA limit was temporarily increased from its permanent level of £200,000 to £1 million on 1 January 2019. Following an extension of one year, it was due to return to its permanent level of £200,000 from 1 January 2022.

However, the Chancellor has announced a further extension of the temporary limit, and the AIA will remain at £1 million until 31 March 2023. This removes the pressure to undertake capital expenditure by 31 December 2021 to benefit from higher limit.

Super-deductions

Companies can also benefit from a super-deduction of 130% of the amount of any expenditure that would otherwise qualify for main rate writing down allowances at 18% where the expenditure is incurred between 1 April 2021 and 31 March 2023. This is a better option for companies than the AIA.

Companies can also benefit from a 50% first-year allowance for expenditure within the same window that would otherwise qualify for a special rate writing down allowance of 6%. The AIA will trump the first-year allowance, but once the AIA limit has been used, it could be worthwhile claiming a first-year allowance.

We can help you plan your capital expenditure to optimise your capital allowances claims.

Business rates

Changes were announced in respect of business rates.

The business rates multipliers are frozen for a second year until 31 March 2023. The small business multiplier is set at 49.9p and the standard multiplier at 51.2p. Different rates apply in London and in Wales. The freezing of the multipliers will mean that your business rates will not increase in 2022/23.

Eligible retail, hospitality and leisure properties will benefit from a 50% relief in their business rates for 2022/23, subject to a cap of £110,000 per business.

A relief is also being introduced for improvements to business properties which will delay the start date of higher business rates triggered by the improvements for 12 months. The Government are to consult on how to implement the relief, which will take effect from 2023 and will be reviewed in 2028. If you are planning improvements to your business premises, this may benefit you.

From 1 April 2023 until 31 March 2035, a targeted business rates exemption will apply for eligible plant and machinery used in onsite renewable energy generation and storage, and a 100% relief will be available for eligible heat networks. This is to support the decarbonisation of non-domestic buildings.

From 2023, business rate revaluations will take place every three years rather than every five years.

Transitional relief for small and medium-sized businesses is extended for one year, which will restrict bill increases to 15% for small properties (i.e., those with a rateable value of up to £20,000 or up to £28,000 in Greater London), and to 25% for medium properties (i.e., those with a rateable value of up to £100,000).

Recovery loan scheme

The recovery loan scheme, which was due to end on 31 December 2021, has been extended by six months and will now run until 30 June 2022. If you need funding to help you recover from the impact of the pandemic, speak to us to see if this will be the right type of funding for you.

Freeport sites announced

Freeport tax sites benefit from a range of tax incentives to encourage businesses to operate from a Freeport Tax Site. The first tax sites will be in sited in Humber, Teesside, and Thames. If you are planning to start a new business or relocate to any of these sites, we can explain the tax advantages that may be available to you.

Making Tax Digital

The next key date in the Making Tax Digital (MTD) calendar is 1 April 2022. VAT registered business with turnover below the VAT registration threshold of £85,000, who have not joined MTD for VAT voluntarily, will be required to join from the start of their first VAT accounting period which begins on or after 1 April 2022. If you fall into this category, we can help you get ready for this change which will involve maintaining suitable digital records and submit digital VAT returns in an appropriate format.

As previously announced, the start date for MTD for Income Tax Self-Assessment (ITSA) has been put back by one year. It will now apply to sole traders and landlords with income of more than £10,000 from 6 April 2024. This will involve the submission of quarterly digital reports, and an end of period statement and final declaration.

However, MTD for ITSA will not apply to general partnerships (i.e., those without corporate partners) until 6 April 2025. A later, as yet unspecified start date applies to other partnerships (i.e., those with corporate partners or LLPS). It is therefore possible to push MTD ITSA further into the future by entering into a qualifying partnership arrangement.

We can help you understand what MTD for ITSA means for you, and when you will need to comply.

Basis period reform

To pave the way for the introduction of MTD for ITSA, the basis period rules are to be reformed for self-employed traders.

Currently, the profits that are assessed for a tax year are those for the accounting period ending in that tax year. For example, if you prepare accounts to 31 December, the profits for the year to 31 December 2021 are assessed in 2021/22.

However, this is all to change and the profits that will be assessed in the tax year will be those for the tax year (i.e., profits from 6 April to 5 April or, where preferred, 1 April to 31 March). As with MTD for ITSA, these reforms have been delayed by one year. A tax year basis period will apply from 6 April 2024, with 2023/24 being a transitional year.

If you do not currently prepare accounts to 31 March (or 5 April), you may want to consider changing your accounting date. We can explain how the rules will work, and how the transitional year changes will affect you.

If you have any questions regarding the budget then email us office@wfrancisandco.co.uk or call us on 01242 370298.

5% VAT on hospitality trades is increased to 12.5% VAT-rate-increase-October-2021

Since July 2020, the rate of VAT that has applied to many services supplied by hospitality trades was reduced from 20% to just 5%. This reduction was extended to 30 September 2021.

From 1 October 2021 to 31 March 2022, the 5% rate will be replaced by a 12.5% rate.

Affected VAT registered traders will need to update their VAT software to account for this rate change.

The 12.5% rate is a new VAT rate. For the first time we have four rates of VAT; 0%, 5%, 12.5% and 20%.

From 1 April 2022, it is assumed that rates for the hospitality sector will return to 20%.

However, during these turbulent times, we can take nothing for granted.

Please call us on 01242 370298 if you need advice on the above matter.

What you can write off against tax for replacement of domestic items in your rented properties

We are often asked to clarify what can be claimed if domestic items in your rented property are replaced.

The following notes are a short summary of GOV.UK published material regarding the Replacement of Domestic Items Relief (RDIR).

When you cannot claim

You cannot claim this relief if:

  • The replaced items are in a property classified as a Furnished Holiday Let for tax purposes.
  • You use the Rent-a-Room Scheme.
  • The purchase is the initial cost of a domestic item(s) for a dwelling house. Planning note: if you are purchasing a rental property with domestic items included, make sure that the contract itemises and values these items as this will then constitute the initial cost.

When you can claim

As the name implies, you can claim when a domestic item in your rented properties is replaced, subject to the above exclusions, and the item is for the exclusive use of your tenants and the old items are no longer available to tenants.

What are domestic items?

The examples quoted by HMRC are:

  • movable furniture for example beds, free-standing wardrobes,
  • furnishings for example curtains, linens, carpets, floor coverings,
  • household appliances for example televisions, fridges, freezers,
  • kitchenware for example crockery, cutlery.

What if the replacement is an improvement?

For example, if a new sofa costs £400 but a sofa bed costs £550, you can only claim the £400 as a deduction and no relief is available for the £150.

What if you sell the replaced item?

The amount of your claim would be the cost of the replacement plus the cost of acquiring or disposing of the old item, less any amount received on disposal of the old item.

The claim would also need to exclude any improvement cost, see above.

Please call us on 01242 370298 if you need advice regarding the tax position of a specific purchase.

A summary of the changes announced to increase funding for the NHS and social care budgets from April 2022.

NIC changes

  • From April 2022, employees, employers and the self-employed will see increases in their Class 1 (employers and employees) and Class 4 (the self-employed and business partners) contributions of 1.25%.
  • From April 2023, assuming that HMRC can adapt their system in time, this increase will be renamed the Health and Social Care Levy and will be shown as a separate deduction on payslips and self-assessment statements.
  • From April 2023, the new Levy will also be payable by individuals who continue to work above the State Pension Age. Presently, pensioners who fall into this category pay no NIC deductions.
  • Class 2 and Class 3 NIC deductions will not be affected by these changes.
  • Most employers will not pay the 1.25% increase in their Class 1 contributions for 2022-23 or the new Levy from April 2023, as both will be covered by the present employment allowance (£4,000 in 2021-22). It is estimated that 70 per cent of the money raised from businesses will come from the largest one per cent of businesses – those with at least 250 employees.

Dividend tax changes

Director/shareholders should note that a similar 1.25% hike in the rates of tax they pay on dividends will also apply from April 2022.

From April 2022, the dividend tax increases will apply as follows:

  • Basic rate taxpayers will see an increase from the present 7.5% to 8.75%.
  • Higher rate taxpayers will see an increase from 32.5% to 33.75%.
  • Additional rate taxpayers will see an increase from 38.1% to 39.35%.

This change will apply UK-wide. It will be confirmed as part of the next Budget and legislated for in the next Finance Bill.

The present £2,000 tax-free dividend allowance will continue, and due to the £2,000 tax-free dividend allowance and the personal allowance, around 60 per cent of individuals with dividend income outside of ISAs are not expected to pay any dividend tax or be affected by this change in 2022-23.

The change will affect director/shareholders who have adopted a high dividend, low salary approach to reduce their NIC footprint.

Need more information?

Please call us on 01242 370298 if you need more information regarding these changes.

 

Find out how much State Pension you will get, when you can get it and how you can increase it, if you can…

We are used to reviewing our private pension arrangements on a regular basis, but when was the last time you checked out your State Pension arrangements?

The following notes assume you have not yet reached your State Pension retirement age, but you want to see how many more years National Insurance contributions (NIC) you will need to make to receive a full pension when you retire.

State Pension and your NIC record

Your new State Pension (NSP) is based on the number of NIC contributions you have made when you reach your State Pension retirement age.

To qualify for any NSP you will need at least 10 qualifying years. To qualify for the maximum NSP you will need 35 years if you have no NIC record before 6 April 2016.

What if you had gaps when you did not work?

You may qualify for NIC credits for years you did not work if during those years:

  • you claimed Child Benefit for a child under 12 years of age,
  • if you received Jobseeker’s Allowance or Employment and Support Allowance; or
  • you received Carer’s Allowance.

In certain circumstances you can also make voluntary NIC contributions to fill gaps in your contribution record.

How to apply for a State Pension forecast

There is a simple online process you can use to apply for this forecast.

You can access at https://www.gov.uk/check-state-pension

This will confirm how many years NIC contributions you have made and the current forecast of State Pension you would receive.

NOTE: The government may extend the State Retirement Age or change the rates of NSP you might receive, which is why it is worth applying for a forecast on a regular basis.

You will need to have a Government Gateway account to apply for a forecast. If you need help, please call us on 01242 370298, and we will talk you through what you need to do.

If you are still claiming support via the Furlough Scheme, what are your options when the scheme ends 30 September 2021?

The Coronavirus Job Retention Scheme (CJRS), commonly referred to as the furlough scheme, has proved to be the most effective government support for employers struggling to keep their teams together during the current, unprecedented COVID disruption.

Unfortunately, we are now entering the final quarter for claims as the furlough scheme is closing 30 September 2021.

How have you been affected by COVID disruption?

There are two extreme positions:

  1. Your business has been severely affected by recent events and with no continuing financial support from the furlough scheme you will need to consider redundancies.
  2. The markets have been kinder to you, and you will be able to maintain your present workforce with no changes.

And there will be businesses that sit between these bookends.

Planning for changes

If your business has been adversely affected by recent events and you cannot see how you can survive financially beyond 30 September without shedding staff, before you make any decisions, consider your options.

For example, what are your projections for the next year in respect of:

  • Sales
  • What staff do you need to meet these sales forecasts?
  • Direct costs
  • Other overheads
  • Loan repayments
  • Capital investments

Without considering all these issues you may make the wrong decisions.

We can help

Let us help you prepare a business forecast for at least the next year. This will enable you to try out different options and decide which is the strongest candidate to take your business forward as we start to emerge from – what is hopefully – the worst of COVID lockdown disruption.

Pick up the phone and call us on 01242 370298. Making informed decisions will be your best choice to surviving the coming year and minimising any reduction in your present workforce.

Determine COVID effect on profits for 2020-21 and if lower than previous year reduce tax payment due 31 July 2021.

Many of us have been personally impacted by the COVID outbreak, financially and some health-wise. This alert is being sent to all our clients that submit a self-assessment tax return and are due to make a second payment on account for the tax year 2020-21 on or before 31 July 2021. You may have an opportunity to reduce how much you need to pay.

How have you been affected financially by COVID disruption?

The self-assessment tax payment you are due to make 31 July 2021 is presently based on the profits/income you earned during 2019-20. As we all know, COVID disruption started early 2020. Accordingly, many of us have seen a reduction in taxable income in the following tax year 2020-21.

In which case, could you have payments on account rebased on what has happened in 2020-21 rather than the previous tax year? The answer, of course, is yes you can.

Let’s complete your tax return sooner this year

The most effective way to rebase your 2020-21 tax payments on actual data is to complete and file the 2020-21 tax return before 31 July. In this way we can apply – as part of the tax return submission process – to reduce payments on account due 31 July 2021.

But what if you can’t file your tax return before 31 July 2021

If you can produce a realistic estimate of your income for 2020-21, we can lodge a formal request to HMRC to reduce your tax payments for 2020-21 without actually filing your tax return. The downside of this process is that if your subsequent tax return shows higher income levels than the estimate, then interest charges may be applied by HMRC.

What about the first payment on account for 2020-21 made 31 January 2021?

If your taxable income for 2020-21 is lower than that for 2019-20, then any payment on account you may have made in January 2021 my have been too much. By rebasing your income on actual earnings for 2020-21, and if applicable, applying for both payments on account due January and July 2021 to be reduced, any overpayment made in January will automatically be included in the recalculated payment due 31 July. In some cases, this may result in a tax refund.

What to do next

If you have suffered a reduction in income – for 2020-21 compared to 2019-20 – call us now on 01242 370298 or email us office@wfrancisandco.co.uk so we can get organised. There is no point in paying over hard-won cash reserves to HMRC if it is unnecessary.

Deadline to join this scheme is 21st June 2021.

Businesses that deferred VAT payments last year have until 21st June to join the new online payment scheme and spread the impact of deferred VAT payments.

Which VAT arrears can be paid off in this way?

The scheme covers VAT deferred – and is still unpaid – from the period 20 March 2020 to 30 June 2020 under the VAT Payment Deferral Scheme.

How will payments be spread under this scheme?

Businesses can pay their deferred VAT in two to eight consecutive instalments without adding interest if they join online by 21 June 2021.

A first payment will be taken when you join.

How to join this scheme:

Before joining, you must:

  • have your VAT registration number,
  • create your own Government Gateway account (if you do not already have one),
  • submit any outstanding VAT returns from the last 4 years – otherwise you’ll not be able to join the scheme,
  • correct errors on your VAT returns as soon as possible,
  • make sure you know how much you owe, including the amount you originally deferred and how much you may have already paid.

To use the online service, you must:

  • join the scheme yourself, your agent cannot do this for you,
  • still have deferred VAT to pay,
  • be up to date with your VAT returns,
  • join by 21 June 2021,
  • pay the first instalment when you join,
  • pay your instalments by Direct Debit (if you want to use the scheme but cannot pay by Direct Debit, there is an alternative entry route for you).

Time to act

If you still have unpaid, deferred VAT from last year this scheme offers a way to get up to date with payments and minimise the impact on your cashflow.

Claims process for the final Self-Employed Income Support Scheme grant will open next month.

The 5th and final grant under the SEISS will be opened to claims from late July 2021. This grant will cover the five-month period 1 May 2021 to 30 September 2021. To be eligible for the grant you must be self-employed, either a sole trader or member of a partnership.

Conditions to qualify for this grant:

  • You must have traded in the tax year 2019-20 and submitted your tax return for that year on or before 2 March 2021 and traded in the tax year 2020-21.
  • You must either be currently trading but impacted by reduced demand due to COVID or have been trading but are presently unable to do so due to COVID restrictions.
  • To be eligible to claim HMRC will check previous years tax returns to see if your trading profits are no more than £50,000 and at least equal to your non-trading income.
  • When claiming you must declare that you will continue to trade and that you reasonably believe that your business activity will be reduced in the period 1 May to 30 September 2021.

The 5th grant is different:

The 5th grant will be determined by how much your turnover has been reduced in the year April 2020 to April 2021.

  • If the turnover reduction is 30% or more, you can claim 80% of 3 months’ average trading profits up to a maximum £7,500.
  • If the turnover reduction is less than 30%, you can claim 30% of 3 months’ average trading profits up to a maximum £2,850.

HMRC have said they will provide more information by the end of June to help you work out how your turnover will be affected.

When can you claim:

HMRC will contact you mid-July to give you a date to make your claim.

We can help

If you need help deciding if you can make a claim contact us on 01242 370298 or email us office@wfrancisandco.co.uk when HMRC issue their extended guidance notes later this month.

In this update we have listed some of the tax incentives you may be able to claim if you choose or are required to work from home.

If you are employed:

  • Employers can provide the equipment and supplies that an employee needs to work from home, such as office furniture, stationery, a computer and suchlike, without a taxable benefit arising, if ownership of the equipment remains with the employer and private use is not significant.
  • Employers can also pay employees a tax-free allowance of £6 per week (£26 per month) to cover the cost of additional household expenses incurred because of working from home.
  • If employers do not pay the above allowance (£26 per month), employees can claim an equivalent deduction from their taxable income.

If you are self-employed:

  • If you are self-employed and working from home, expenses are deductible if they are wholly and exclusively incurred for the purposes of the business. This will apply to costs incurred in running a home office, such as cleaning, heat and light, Wi-Fi costs etc.
  • If you don’t want to keep a track of actual costs you can claim a tax office approved flat rate deduction. This ranges from £10 to £26 per month and depends on hours of business use.

If you run a company from home:

  • Directors can charge their company a rent for use of a home office, but rents received in this way may be taxable.
  • A company can meet costs paid by a director that are exclusively for business purposes.
  • Beware claiming for the exclusive business use of space in your home as this may create a capital gains tax charge when you sell your home. This can be avoided if there is a duality of use, i.e., your home office doubles as a spare bedroom or storage area.

Need more help on this topic?

If you want to capitalize on the tax-free perks that are available to home workers, but you are unsure how to set up the arrangement in the most tax efficient way, please call us on 01242 370298 or email office@wfrancisandco.co.uk, we can help you consider the options available.