Changes to personal tax allowances and higher interest rates have seen a growing number of people being affected by fiscal drag.

Fiscal drag is the phenomenon where taxpayers are pushed into higher tax brackets due to wage increases as they keep pace with inflation.

With the UK Government freezing most tax bands until 2028, and reducing the threshold on the additional marginal rate, fiscal drag can have a significant impact on the finances of people across different income levels.

Rising inflation

Due to rising inflation and to some degree economic growth, wages have risen from £406 a week to £533 on a median basis over the last ten years, according to Money Week.

It also reported that pay in the private sector, excluding bonuses, rose 6.5 per cent from November 2022 to January 2023.

While these rises may be good news, in reality, they are being eroded by spiralling inflation and the need to pay income tax at higher rates as people enter different tax bands.

Increased tax bills

According to Money Week, those earning £15,000, £20,000, and £30,000 will see their income rise by 21 per cent, but their tax bills will increase by 106 per cent, 50 per cent, and 32 per cent respectively.

High earners paid over £50,000 are expected to see a 21 per cent increase in wages and a 35 per cent increase in their personal tax bill – adding £1,905 to their tax bill.

To avoid fiscal drag, people need to carefully manage their income to take advantage of tax reliefs, allowances and tax-efficient investments.

Need advice on personal tax issues? Speak to us today.

The Residence Nil Band Rate (RNRB) was introduced by the Government in 2017 and benefits families passing on their main property to a direct descendent.

Since its introduction, millions of families around the UK have benefitted from its ability to minimise Inheritance Tax (IHT) bills.

Will the RNRB mean paying less IHT?

As of the 2023/24 tax year, the basic Nil-Rate Band allowance on IHT is £325,000.

The RNRB gives you an additional tax-free allowance of £175,000, where your main property is passed to a direct descendant. This means that the first £500,000 of your estate will be free of IHT.

The current IHT relief thresholds have been frozen at their current level until April 2028.

With house prices rising, this freeze will affect many families who will find themselves increasingly above the thresholds and ultimately paying more tax.

The RNRB will only come into effect if the residences are passed to direct descendants who are defined as:

• A child, stepchild, grandchild, or other lineal descendant
• A spouse or civil partner of a lineal descendant (including their widow, widower, or surviving civil partner)
• An adopted or fostered child
• A child where they’re appointed as a guardian or special guardian when the child is under 18

Direct descendants do not include nephews, nieces, siblings, and other relatives who are not included in the above list.

Can my RNRB allowance work in addition to my spouse’s?

As with the basic IHT allowance, any unused RNRB allowance will be transferred to an individual’s spouse or civil partner upon their death.

This means that descendants of their spouses will be able to claim a tax-free allowance from both individuals. This totals £650,000 in basic IHT Nil-Rate Band allowance and £350,000 from RNRB. This means that descendants can potentially enjoy £1 million of an estate tax-free, where the right conditions are met.

RNRB on high-value properties

On estates worth £2 million or more, the RNRB allowance will reduce by £1 for every £2 that the estate is worth.

This can also affect the amount of RNRB that can be transferred to a surviving spouse or civil partner, so the correct figures must be calculated.

Maximise your tax savings

To take full advantage of the tax planning opportunities this offers, professional advice should be sought.

For help and advice with IHT and the RNRB, contact us today.

Residential landlords are the latest group to have been targeted in receiving ‘nudge’ letters from HM Revenue & Customs (HMRC).

The letters are part of a targeted ‘nudge’ campaign from HMRC to remind landlords of their obligation to declare their full rental income.

What is a ‘nudge’ letter

HMRC has used what has become known as ‘nudge’ letters since 2017. These communications are designed to prompt a response from the recipient by offering reduced fines for a declaration of unpaid tax.

The method has been used on numerous occasions, issuing them to taxpayers who hold overseas bank accounts and taxpayers who claim non-domicile status.

Nudge letters have also been sent to holders of crypto assets, reminding them that Capital Gains Tax (CGT) may be payable on income gained from the sale or trade of crypto assets.

The letters being sent to landlords suggest they review their tax position and include a certificate of tax position to be completed and returned, typically within 30 days.

Failure to reply could lead to fines, a further investigation or in more serious cases criminal prosecution.

So far 1,000 or so property owners suspected of tax underpayments have been sent a ‘nudge’ letter.

Evidence gathered via online data tracking

The evidence behind these recent approaches was gathered through online booking platforms like Vrbo and Airbnb. These sites are obliged to share data of registered users and their financial transactions.

Issuing the letters is a way to give taxpayers a genuine chance to rectify any discrepancies and pay tax on undeclared income.

Landlords can take out Client Protection Insurance via their accountant, which protects them against the costs of an HMRC investigation.

If you have received a ‘nudge’ letter from HMRC it is important to seek professional advice on the matter.

Need professional advice on property tax issues? Ask our team.

The High Income Child Benefit Charge (HICBC) was introduced in 2013 and was set up to charge tax on individuals claiming child benefits who were earning a yearly income in excess of £50,000.

The tax charges equate to the following:

• One per cent of the total Child Benefit received for every £100 earned over £50,000
• 100 per cent of the total Child Benefit received for individuals earning over £60,000 annually

A decade has now passed since the introduction of the HICBC, and these thresholds have never changed, meaning more and more people are passing beyond the threshold and into the territory of the charges.

Individuals who fall into this category can decide to opt out of receiving child benefits and, therefore, avoid paying the charge.

Unsurprisingly, as the number of workers reaching the threshold has increased, so has the numbers opting out.

As of the year-end of August 2022, 683,000 families had opted out of receiving child benefits due to the HICBC – a figure that has jumped up five per cent from 651,000 in the year before.

Points of tension

A recent debate in parliament highlighted the issue of HICBC and how it was impacting families.

Victoria Atkins, financial secretary to the Treasury, stated that the Government was aware of certain ‘points of tension’, but argued that: “increasing the threshold to more than £50,000 could impact the Government’s spending on public services.”

Should I opt out?

While it seems logical to avoid the HICBC, especially when earning over £60,000 a year, there are certain pitfalls to expect from doing so, namely, the claimants missing out on National Insurance (NI) credits.

These are used to make sure you qualify for certain benefits, including your state pension and the claimant’s child not automatically receiving a National Insurance number. It would be wise to weigh up these factors before deciding to opt out.

For more information and advice about this charge and its obligations on higher earners, contact us today.

As a business owner, determining the ideal salary for company directors can be tricky.

Often, most directors will want to balance their salary and dividend payments to be as tax efficient as possible.

The 2023/24 tax year presents an array of factors to consider, such as income tax thresholds, National Insurance contributions (NICS), and personal tax allowances.

It is important to explore the key considerations that company directors should weigh up when balancing their salaries and dividends.

The tax-free personal allowance

The tax-free personal allowance for the 2023/24 tax year stands at £12,570. By keeping your salary below this threshold, you can avoid paying any PAYE income tax.

However, for every £2 you earn above £100,000, you lose £1 of your personal allowance, meaning it drops to zero once your income reaches £125,140.

National Insurance considerations

Your company will be required to pay 13.8 per cent in Employers’ NICs on salaries exceeding £9,100 per year.

However, the Employment Allowance allows eligible businesses to reclaim up to £5,000 in Employers’ NICs.

To benefit from this, directors must earn at least £9,100, although this does not apply to sole directors without other employees.

You will also need to pay National Insurance personally if your salary is above the Primary Threshold (£12,570 for 2023/24).

Pension and minimum wage concerns

It is essential to consult The Pension Service to understand how your state pension may be affected by your NICs.

If your salary is too low, it may impact your pension entitlement. To secure your entitlement to future state pension and benefits without paying National Insurance, ensure that your salary is above the Lower Earnings Limit (£6,396 for 2023/24).

Additionally, if you have an employment contract with your company, you must pay yourself the National Minimum Wage, which is £10.42 per hour for adults aged 23 or above.

Director’s salary

Since 6 April 2023, directors can withdraw a maximum salary of £758 per month without incurring National Insurance charges, assuming no other income is earned.

Also from this date, the first £1,000 of dividends remains tax-free. Beyond that, dividend income is taxed as follows:

• Basic tax rate – 8.75 per cent
• Higher tax rate – 33.75 per cent.
• Additional tax rate (now above £125,140) – 39.35 per cent

Weighing up all of these points above and each director’s pay objectives, you should be able to reach a balance that is tax efficient.

Ensure compliance

HMRC is increasing checks to ensure dividend payments are accurately recorded. To satisfy HMRC and Company law requirements, directors should consider company reserves, cash flow, personal tax situations, and director requirements when determining dividend amounts.

Additionally, directors should hold meetings to decide on dividend amounts and methods of payment, and record minutes to maintain accurate documentation.

If you need advice on remuneration for your directors, please get in touch.

A new ‘failure to prevent fraud’ offence is being introduced by the Government to encourage businesses to do more to deter offending, which will ultimately protect themselves, consumers, and other businesses.

The new legislation, which is likely to come into force by the end of 2024, will make it easier to prosecute a large organisation if an employee commits fraud for the organisation’s benefit.

Larger organisations in the firing line

The new legislation, being introduced in the Economic Crime and Corporate Transparency Bill, will target a wide range of large businesses across all sectors, including not-for-profit organisations such as charities and incorporated public bodies.

A large organisation is defined (using the standard Companies Act 2006 definition) as organisations meeting two out of three following criteria:

• More than 250 employees
• More than £36 million turnover
• More than £18 million in total assets

Potential penalties

A business could face legal action under the new legislation if, for example, employees were selling products to a customer under false pretences, or falsified accounts to mislead investors.

The business in these scenarios could receive an unlimited fine if it is found to not have reasonable fraud prevention procedures in place.

These severe penalties are seen to encourage businesses to clamp down on fraudulent activities within their organisation.

SMEs still bound by fraud legislation

The above thresholds mean that small and medium-based enterprises (SMEs) will be exempt from the new offence, but they will remain accountable under the existing legal framework. These thresholds can be amended in the future through secondary legislation if necessary.

Small and medium enterprises are often the businesses that fall foul of fraud committed by larger organisations so they may benefit from the greater protection that the new legislation will bring.

What you need to do

If your business falls below the thresholds mentioned above, then while it is important to keep an eye on the existing legal framework, your organisation should not be impacted all that much.

If your business is in this scope, then it is of vital importance to ensure you have the necessary fraud prevention measures in place.

Need help with fraud prevention or advice on the new legislation? Contact us today.

The abolition of the pensions Lifetime Allowance, (LTA) which was announced in the Spring Budget, releases people to save as much as they like into their schemes.

Chancellor Jeremy Hunt abolished the allowance, which is the limit on how much people can build up in their pension pots over their lifetime while still benefiting from key tax incentives. The previous threshold was £1,073,100 and anything over that was subject to a tax charge of up to 55 per cent.

Necessary change

The Government had argued that the LTA change was necessary because too many highly paid professionals, including NHS consultants and GPs take early retirement, and there have been predictions that more and more older public and private sector employees would change their behaviour or retire early to avoid being hit by penalties.

The Chancellor also increased the Annual Allowance (AA), which is the total amount paid into your pension plans each year from all sources, before you have to pay additional tax charges, from £40,000 to £60,000. He has also increased the Money Purchase Annual Allowance (MPAA) and Tapered Annual Allowance (TAA) from £4,000 to £10,000, and the Adjusted Income for TAA from £240,000 to £260,000.

MPAA changes

Previously, if you accessed any taxable money from your pension plan you would see your allowance reduce from £40,000 to £4,000. This is a limit on how much people over 55 could pay into a defined contribution pension with tax reliefs, once they start drawing an income from their retirement pot.

The Chancellor has increased this from £4,000 to £10,000, which might be useful for anyone who dipped into their pension plan to help top up their income during the pandemic or while living costs are so high.

TAA changes

The TAA applies where an individual has a threshold income of £200,000 and adjusted income of £240,000 (adjusted income includes all pension contributions, while threshold income excludes pension contributions).

Where the TAA applies, an individual’s AA is reduced by 50p for every £1 over the adjusted income threshold, down to the minimum level. The minimum level has now been increased to £10,000.

Need help with understanding pension tax liabilities? Contact us.

Chancellor Jeremy Hunt has announced a partial replacement for the Super Deduction that allows companies to write off 100 per cent of the cost of investment in one go.

The Full Expensing scheme was announced in the March Budget. Businesses that invest in IT equipment and machinery will be able to claim back the cost by writing it off against tax on their profits, the Chancellor announced.

100 per cent claim

It will allow businesses to claim up to 100 per cent of the cost of the investment.

To further encourage investment after the pandemic, the Government first introduced the super-deduction in 2021.

Full Expensing came into effect in April 2023 and will be in place until at least March 2026.

Less generous

For every pound a company invests, they can get up to 25p in tax relief. This measure is designed to make the UK’s capital allowances system among the best in the world.

It is less generous than the Super Deduction, which allows firms to claim back 130 per cent on investment in areas such as machines for manufacturing.

Although the measure is due to last only three years, with the possibility of renewal, it is expected to cost the Government £10.7 billion a year by 2025.

There are different types of capital allowances available, including the Annual Investment Allowance (AIA), Writing Down Allowances (WDAs), First-Year Allowances (FYAs), and Structures and Buildings Allowances (SBAs).

For help and advice with full expensing and capital allowances, contact us today.

The Government has announced there will be greater scrutiny on the reporting of all crypto transactions, including for cryptocurrencies and non-fungible tokens (NFTs).

HM Revenue & Customs (HMRC) will now require cryptoasset reporting in Self-Assessment tax returns by requiring separate reporting of gains and income.

The changes will be introduced on the forms for the 2024-25 tax year.

Greater security

The heightened scrutiny of cryptoasset holders becomes more of an issue for taxpayers as a result of the reduction in the tax-free Capital Gains Tax (CGT) Annual Exempt Amount.

After a turbulent year, interest seems to have been renewed in digital currency after major problems in the traditional banking sector.

This saw the bailout of U.S. lenders Silvergate Bank, Silicon Valley Bank and Signature Bank, to be followed by Credit Suisse in Switzerland.

Crypto markets have bounced back in 2023, with a particular enthusiasm for AI crypto tokens and projects.

Tax relief

It is now crucial for investors to make sure they are reporting their crypto correctly, to get their tax right or to take advantage of valuable tax relief on any losses.

Investing in,  mining, creating or actively trading cryptoassets means you are likely to be generating taxable income or gains.

The new requirements will allow HMRC to check annual tax reporting against data they receive directly, for example from crypto exchanges and other trading platforms.

Crypto exchanges like Coinbase, Binance or Kraken have provided contact details of those trading in crypto assets for HMRC in recent years.

Disclose data

Under UK regulations, to have UK customers, these exchanges are expected to disclose user data to HMRC.

The rule change also affects crypto investors who have not accessed their cryptoassets.

HMRC says its view is that crypto is situated where the holder is a resident. This means that the remittance basis of taxation will generally not protect crypto gains or income.

Need advice with cryptocurrency and Self-Assessment? Contact us.

Changes to the amount of Corporation Tax (CT) businesses pay came into effect on 1 April.

From that date, the main rate of CT rose from 19 per cent to 25 per cent for the most profitable companies.

Companies whose year-end is 31 March will pay 19 per cent CT for the whole of the 2022/23 period, and then 25 per cent for the whole of the 2023/24 period.

Hybrid rate

However, for companies whose accounting period straddles 1 April, it will be necessary to apportion profits between those that arose up to 31 March and those that arose after 1 April.

Generally, the effective amount of Corporation Tax due will, however, rely on the taxable profits your company makes as follows:

• Small companies with profits of up to £50,000 will pay CT at 19 per cent
• Companies with profits of £250,000 and over will pay CT at 25 per cent
• Companies with profits over £50,000 but under £250,000 will pay on a sliding scale of between 19 per cent and 25 per cent.

Where companies have taxable profits between these two thresholds it is more complex as the rate of tax they pay will depend on their level of profit.

This is due to Marginal Rate Relief (MRR). This is a tapered relief, which increases in line with a company’s profits.

The basic method used by HM Revenue & Customs (HMRC) to calculate this relief is quite complex, so seek advice from your professional adviser.

Need advice on the rise in Corporation Tax and related matters? Contact us.