Welcome to August’s Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.
Thank you to those of you that came to our Budget Breakfast. If you missed it and would like an update with your account manager, please contact them to book a meeting.
We have another free QuickBooks Online Training course in September; details and a link to book can be found in the events section on the website.
If you need further assistance just let us know or you can send us a question for our Question and Answer Section. We are committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year. Please contact us for advice in your own specific circumstances.
Table Of Contents
Tax-free childcare is part of the government’s long-term plan to support working families and will provide up to 1.8m families across the UK with up to £2,000 of childcare support per year, per child, via a new online system. It was originally planned that the scheme would launch in Autumn 2015, but, as a result of a direct legal challenge from a small group of childcare voucher providers, development of the scheme was suspended. However, the Supreme Court has recently ruled that government proposals for delivering tax-free childcare are lawful, which means that the scheme can go ahead and is now expected to launch in 2017. Here are some of the key points of the scheme:
– the scheme will be available for children up to the age of 12, and for children with disabilities up to the age of 17
– to qualify for tax-free childcare, parents will have to be in work, earning just over an average of £50 a week and not more than £150,000 per year. Unlike the current rules for employer-supported childcare, eligibility for tax-free childcare is not dependant on the employer offering the scheme
– self-employed parents will be able to qualify for tax-free childcare. For newly self-employed parents, there will be a ‘start-up’ period during which there will be no minimum income level requirement
– the scheme will be available to parents on paid sick leave and paid and unpaid statutory maternity, paternity and adoption leave
Anyone wishing to use the scheme will need to open an online account via the government website (www.GOV.uk) and pay in money to the account to cover the cost of childcare with a registered provider.
The government will top up accounts with 20% of childcare costs, up to a total of £10,000 – the equivalent of up to £2,000 support per child per year (or £4,000 for disabled children). So, for every 80p invested, the government will top up with a 20p contribution.
HMRC will re-confirm a claimant’s circumstances every three months via a simple online process.
Where circumstances change, and the parent no longer wishes to pay into the account, it will be possible to simply withdraw any funds that have built up. However, where funds that have already attracted tax relief are withdrawn, the government will also withdraw its corresponding contribution.
There are no particular rules regarding when and how much can be saved in the new accounts. The scheme is designed to give as much flexibility as possible regarding savings. This means that parents can build up a balance in their account to use at times when they need more childcare than usual, for example, over the summer holidays.
Rent a Room
In the Summer Budget 2015, the government announced that the level of rent-a-room relief will be increased from the current level of £4,250 to £7,500 from April 2016. This means that from 6 April 2016, an individual will be able to receive up to £7,500 tax-free income from renting out a room or rooms in their only or main residential property. The relief also covers bed and breakfast receipts as long as the rooms are in the landlord’s main residence.
To qualify under the rent-a-room scheme, the accommodation has to be furnished and a lodger can occupy a single room or an entire floor of the house. However, the scheme doesn’t apply if the house is converted into separate flats that are rented out. Nor does the scheme apply to let unfurnished accommodation in the individual’s home.
The rent-a-room tax break does not apply where part of a home is let as an office or other business premises. The relief only covers the circumstance where payments are made for the use of living accommodation.
If additional services are provided (cleaning and laundry etc.), the payments must be added to the rent to work out the total receipts. If income exceeds £4,250 a year in total, a liability to tax will arise, even if the rent is less than that.
There are two options if the individual is receiving more than the annual limit a year:
– the first £4,250 is counted as the tax-free allowance and income tax is paid on the remaining income
– renting the room is treated as a normal rental business, working out a profit and loss account using the normal income and expenditure rules
In most cases, the first option will be more advantageous.
The principal point to bear in mind is that those using the rent-a-room scheme cannot claim any expenses relating to the letting (e.g. insurance, repairs, heating).
To work out whether it is preferable to join the scheme or declare all of the letting income and claiming expenses via self-assessment, the following methods of calculation need to be compared:
– Method A: paying tax on the profit they make from letting worked out in the normal way for a rental business (i.e. rents received less expenses).
– Method B: paying tax on the gross amount of their receipts (including receipts for any related services they provide) less the £4,250 exemption limit.
Method A applies automatically unless the taxpayer tells their tax office within the time limit that they want method B.
Once a taxpayer has elected for method B, it continues to apply in the future until they tell HMRC they want method A. The taxpayer may want to switch methods where the taxable profit is less under method A, or where expenses are more than the rents (so there is a loss).
The individual has up to one year after the end of the tax year when their income from lodgers went over £4,250 to decide the best option to take, so it is worth taking a bit of time to work out which route produces the lowest tax bill, we can help you with this.
Help to Buy ISAs
The new help-to-buy ISA, which is expected to be available from Autumn 2015, will enable first-time buyers to save up to £200 a month towards their first home. Investors will receive £50 from the government for every £200 saved, up to a maximum of £3,000. This means that the maximum that can be saved in a help-to-buy ISA is £12,000. The government bonus is added to this amount, so total savings towards the property purchase can be up to £15,000.
Accounts will be limited to one per person rather than one per home, which means that those buying together can both receive a government bonus. A couple will be entitled to hold an ISA each, meaning that a total of £24,000 could be built up across two accounts. With the addition of the government bonus, a total of £30,000 can be built up by a couple under the scheme.
An initial deposit of £1,000 may be made into the account, in addition to regular monthly savings limits. This initial deposit also qualifies for the 25% boost from the government.
The minimum bonus payable by the government will be £400 and the maximum £3,000 per person.
The bonus can be claimed once savings have reached the minimum amount of £1,600. Under the scheme it will take investors just over four and a half years to qualify for maximum bonus of £3,000, if desired.
Help-to-buy ISAs will be available to individuals aged 16 and over. The bonus will only be available to first-time buyers purchasing UK properties.
New accounts will be available for four years, but once opened, there will be no limit on how long an account can be held.
The bonus will be paid when the property is purchased. It will be available on home purchases of up to £450,000 in London and up to £250,000 outside London.
There are certain restrictions under the new scheme, including:
– help-to-buy ISAs cannot be used if the property is to be rented out;
– purchases of overseas property do not qualify under the scheme;
– only one help-to-buy ISA may be held by an individual; and
– investors cannot open a help-to-buy ISA and a normal cash ISA in the same tax year.
The Summer Budget 2015 contained two announcements affecting the employment allowance (EA).
Broadly, the EA potentially cuts every company’s NIC payments by allowing businesses and charities to offset up to £2,000 (2015-16) against their employer (secondary) PAYE NIC liabilities.
From April 2016, eligible employers will be able to reduce their employer Class 1 NICs liability by up to £3,000 per tax year, instead of the current £2,000.
Secondary Class 1 NICs are ‘excluded liabilities’, and therefore do not qualify for EA, if they are incurred:
– employing someone for personal, family or household work, such as a nanny, au pair, chauffeur, gardener. Prior to 6 April 2015 this category also included care support workers, but from 6 April 2015 where all an employee’s duties are performed for a person who needs support because of old age, mental or physical disability or past or present alcohol or drug dependence, illness or mental disorder any Secondary Class 1 NICs are not ‘excluded liabilities’;
– on deemed payments of employment income for workers supplied by personal and managed service companies;
– by an employer who has had a business, or part of a business, transferred to them in the relevant tax year and the payments relate to an employee employed (either wholly or partly) for purposes connected with the transferred business, or part business; or
– as a result of avoidance arrangements.
The Summer Budget 2015 also announced that from April 2016, companies where the director is the sole employee will no longer be able to claim the employment allowance.
August Questions and Answers
Q. I have realised that I made a mistake on my most recent VAT return. What should I do?
A. You can adjust your current VAT account to correct errors on past returns if the error:
– was below the reporting threshold (broadly, less than £10,000, or up to 1% of your box 6 figure (up to a maximum of £50,000);
– was not deliberate; and
– relates to an accounting period that ended less than 4 years ago.
When you submit your next return, add the net value to box 1 for tax due to HMRC, or to box 4 for tax due to you. Make sure you keep good accurate records relating to the adjustment.
Q. A friend has told me that I may be entitled to a larger state pension if I pay Class 3A national insurance contributions. What are they and how do I know if paying them is worthwhile?
A. Class 3A is a new voluntary type of national insurance contribution (NIC) that is being introduced from 12 October 2015. Broadly, between then and 5 April 2017 certain people will be able to make a contribution to top up their state pension by up to £25 per week. Men born before 6 April 1951 and women born before 6 April 1953 will be eligible to make top up payments. The cost of the contribution will depend on how much extra pension the applicant wants to qualify for (between £1 and £25 per week), and how old they are when they make the contribution. A top up calculator is available on the GOV.uk website at www.gov.uk/state-pension-topup/y. The calculator will help you work out whether it is worthwhile you making Class 3A contributions.
Q. I have assets worth around £600,000, including my home. I am single, have never been married and have no children. I intend leaving my estate to my siblings. Will they qualify as ‘direct descendants’ and, in turn, will I qualify for the extra £175,000 family home inheritance tax allowance that was announced in the Summer Budget?
A. The draft legislation and guidance on this issue states that the relief will only be available where the family home is passed to children. This includes stepchildren, adopted and foster children, plus grandchildren. Therefore the family home allowance will not be available.
August Key Tax Dates
2 – Last day for car change notifications in the quarter to 5 July – Use P46 Car
19/22 – PAYE/NIC, student loan and CIS deductions due for month to 5/8/2015