To May's Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.
How to Avoid the new 60% and 50% Tax Rates
The 60% tax rate will apply to the portion of taxable income falling between £100,000 and approximately £113,000, due to the gradual reduction in the basic personal allowance between these thresholds from 6 April 2010.
The 50% rate of tax will apply to the portion of taxable income over £150,000, also from 6 April 2010. This adds up to a top rate of 51% including the additional rate of NI paid by both employees and the self-employed. It's worth noting that the 1% NI rate will become 1.5% from 6 April 2011, and all the other rates of NI will also increase by 0.5 percentage points from the same date.
Where your accounts year ends on 30 April, as many long-established partnerships do, the profits made in the year starting 1 May 2009 are taxed in 2010/11, when the combined 51% rate kicks in above £150,000. Therefore, if you are self-employed the profits you make from 1 May 2009 onwards could be subject to tax and NI at 51%.
A useful way to reduce higher rate tax at the margins has been to make pension contributions, which have attracted tax relief at the taxpayer's highest margin rate, as long as the annual allowance (£245,000 for 2009/10) was not exceeded. The bad news is this tax relief will be gradually decreased down for those with income over £150,000 from 6 April 2011. There are also anti-avoidance provisions which mean any attempt to change the pattern of pension contributions from 22 April 2009 will in ineffective for those earning £150,000 or more. However, there is no mention in the Budget Notes of any restriction for those with income between £100,000 and £113,000.
If you are likely to be in this income range for 2010/11 you could use the following strategies to reduce your total taxable income:
- Pay personal pension contributions into a registered pension scheme.
- Get your employer to pay pension contributions into your pension scheme and reduce your gross salary proportionately.
- If your spouse has a lower marginal tax rate, transfer income generating assets such as shares, let property or bank deposits into your spouse's sole name.
- Make gift-aided charity contributions.
The last two bullet points will also work for those with total income over £150,000.
If you run your business through your own company you can restrict your taxable income to below the £100,000 or £150,000 thresholds, by reducing your salary and dividends and leaving any surplus funds in the company. A self-employed person is taxed on the total profits the business makes whether or not the funds are extracted from the business. If you are self-employed, incorporating your business at this time will allow you to control your marginal tax rate more effectively in the future. Talk to us to find out how this could work for you.
New NI Threshold to Record
We are now into the new tax year and you may be recording the first salary payments for 2009/10. When you calculate the amount of NI due don't forget to record how much pay for each employee falls above the new Upper Accruals Point (UAP). This is set at £3,337 per month, just below the Upper Earnings Limit (UEL) of £3,656 per month.
For employees who are not in a contracted-out pension scheme, the UAP makes no difference to the amount of NICs they pay. The reduced rate of NICs paid by contracted-out employees now stops at the UAP rather than at the higher UEL, so these employees who earn more than £3337 per month will pay more NICs in 2009/10 than in 2008/09.
There is also a hidden penalty for all employees. Previously earnings above the UEL did not count towards state benefit entitlements, now all earnings above the UAP will not count for state benefits. The UAP has been frozen at £3337 per month (£770 per week) and will not be increased by inflation, so the amount of contributions that is counted for state benefits is capped from now on.
P11D Forms and Dispensations
It's time to start work on those tiresome forms P11D to report expenses and benefits paid to employees and directors in the year to 5 April 2009. The deadline for submitting the forms to the Tax Office, and for giving copies to your employees, is 6 July 2009.
If you have a dispensation for business expenses in place with your local Tax Office your life is made easier, as expenses falling in the categories specified in the dispensation can be left off the P11D forms. However, taxable benefits such as company cars must be reported and the taxable benefit calculated.
Most reportable business expenses consist of travel and subsistence costs. In the past the Taxman has been happy to include the cost of tickets in a dispensation, but he would rarely agree to a flat allowance to cover meals. Now the Taxman has proposed a scale rate of tax free payments for meals taken while travelling in the UK after 6 April 2009 with the following conditions:
- Breakfast - £5 - Starting earlier than usual and leaves home early before 6am.
- One meal - £5 - Away from home or office for 5 hours or more.
- Two meals - £10 - Away from home or office for 10 hours or more.
- Evening meal - £15 - Working later than usual and finish after 8pm.
These rates only apply where the employer has agreed to stick to the scale rates within his dispensation agreement with the Tax Office. This is another good reason for getting a dispensation in place, or updating the one you have.
Please contact us if you need help with P11D's or dispensation claims.
HMRC Change Bank Accounts
HMRC has changed some of the bank accounts it uses to receive tax payments and repayments of overpaid tax credits. The bank accounts used for receiving VAT payments and for paying in NICs for class 2 (self-employed) and class 3 (voluntary contributions) have not changed yet, but most other taxes include PAYE and Corporation Tax are affected.
If your bank account remembers the regular payments you make, check that the bank sort-code and account number agree with the details shown on the your latest PAYE payslip or self-assessment tax demand before your press the 'pay' button. You can check the bank account details for the type of tax you are paying on the Taxman's website here: http://www.hmrc.gov.uk/payinghmrc/bank-account-checker.htm
If you pay your tax by direct debit you don't have to make any changes.
Question and Answer Corner
Q. I recently started a graphic-design business and I have applied for a VAT number but it hasn't come through yet. Should I be adding VAT to my invoices or not?
A. The application for a VAT registration can sometimes take many weeks to be processed. If you haven't received your VAT number you can't issue a full VAT invoice that shows the separate VAT due and the VAT number. However, you will be required to pay over VAT on all sales made after the effective date of VAT registration that you put on the registration form. So you can't show VAT on your invoices, but you will need to charge your customers a sufficient amount to include the VAT due. When your VAT number arrives you will need to issue full VAT invoices to all those customers you have invoiced since the effective date of VAT registration. Please contact us if you need more practical help on how to do this.
Q. The only income I have is about £10,000 from letting rooms in my own home. As this amount is covered by the rent-a-room relief of £4,250 plus my personal allowance of £6,475 I should have no tax to pay. But do I have to inform the Tax Office about this income?
A. Yes you do have to tell the Tax Office, and they should issue you with a self-assessment form to complete. Even if you have no tax to pay you need to declare the taxable income to the Tax Office. If you haven't declared this rental income for some years you should make it clear to the Tax Office that you want to declare this income for the past years.
Q. I am under retirement age but not in employment. All my income comes from investments and a let property. Do I have to register to pay NI on any of my income?
A. You don't have to pay NI on your savings or rental income, but you will have to complete a tax return to report your rental income to the Tax Office (see previous question). However, you should consider whether you have paid NI for enough complete tax years throughout your working life so far to qualify for the full state pension. If you will reach state pension age after 6 April 2010 you will only need 30 qualifying years in which you paid sufficient NI, to get the full state pension. You will also get NI credits for periods you were not in work such as a carer for a young child or disabled person. You may want to pay voluntary class 3 NI to top up your number of qualifying years to 30.
Key Tax Dates for May 2009
1 - New VAT Scale charges for fuel used in private journeys on company cars.
2 - Last day for car change notifications in the quarter to 5 April - Use P46 Car.
19 - Deadline for Employers' 2008/09 end of year PAYE Returns (P35, P14, P38 & P38A). Penalties for non submission.
19/22 - PAYE/NIC and CIS deductions due for month to 5/5/2009.
31 - Deadline for copies of P60 to be issued to employees for 2008/09.
The information contained in this newsletter is of a general nature and no assurance of accuracy can be given. It is not a substitute for specific professional advice in your own circumstances. No action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a consequence of the material can be accepted by the authors or the firm.