Category Archives: Tax Newswire (Only used for the newswire)

Should you save more into a pension? What the changes to IHT mean for you

Historically, saving into a pension has been seen as a smart investment strategy to reduce your tax liabilities.

Due to pensions being exempt from Inheritance Tax (IHT), they were seen as a viable way of ensuring that you or your family could benefit from them with little risk of being taxed.

In many instances, people would forgo pay rises and instead opt for bigger pension contributions that they could make use of later in life.

However, IHT is changing, and from April 2027, unspent pension pots will be considered part of your estate for IHT.

As this may confuse your tax planning, we are going to examine the impact of these changes and consider what you can do about it.

Why am I now at risk of Inheritance Tax?

The IHT threshold (known as the nil-rate band) is £325,000 per individual, but the threshold increases to £500,000 if you leave your home to a direct descendant, thanks to the additional £175,000 residence nil-rate band.

This allowance can be passed on to your spouse to create a potential £1,000,000 threshold before IHT is paid at a rate of 40 per cent on the estate.

Given that your property is likely to make up a sizeable portion of your wealth, and your assets may also be substantial, the addition of an unspent pension pot could tip your estate over the edge.

This will be especially true if you have been using your pension pot to reap greater financial reward from working while keeping your tax bill low, thanks to the tax benefits of saving into a pension fund from your regular income.

Does this mean I shouldn’t save for a pension?

A pension is still likely to serve as a decent wrapper for paying reduced tax on your earnings compared to receiving funds as a salary.

However, it impacts the considerations you must make regarding your estate as you approach the end of your life.

While your pension might be challenging to move, other assets could be offset as gifts, provided these are given seven years prior to your death.

Any gifts given seven years prior to your death are not considered for IHT, whereas those given closer to your death will be.

Valuing your assets and prioritising gifting the ones with higher value could be a smart way to reduce your overall estate and thus reduce your risk of IHT.

What is the best strategy going forward?

It is worth remembering that these changes do not come into force until April 2027.

Even then, there is little guarantee of what the future might hold and how rules and regulations might change going forward.

Successive Governments may redefine an estate in terms of IHT, so nothing is ever truly set in stone.

What is important is that you get ahead of the changes by considering smart tax planning as soon as possible.

Seeking advice from a trusted professional is the best way to stay ahead of the changes and ensure that your retirement strategy is kept up to date with evolving tax rules.

If you are concerned about how this change to the IHT rules may affect your retirement planning and estate, speak to our team today.

Tax-efficient investing – Are you making the most of the £41.2 billion on offer?

The beginning of the new tax year is a great opportunity to ensure that you are making the most of tax-efficient investments.

In the 2024 to 2025 tax year, it was estimated that £41.2 billion of tax breaks existed for smart investors to utilise.

As this figure was seven per cent higher than the previous year, it is worth unpacking how it came about and considering what benefits may exist in this new tax year.

Individual Saving Accounts

Individual Savings Accounts (ISAs) were a large part of the tax relief that exists for those who are smart with their money.

Knowing how to effectively utilise ISAs means that you can get the most out of your money.

You can invest £20,000 a year in an ISA without it falling into consideration of tax.

If you were to utilise this and invest before 5 April, you can enjoy the benefit of a full tax year with your tax-free growth that can then be utilised either later in the year or in the future as you require it.

Do not forget to invest more at the start of the next year to further optimise the utility of your ISA.

Pension contributions

While pensions may soon become more challenging given the changes to Inheritance Tax, smartly investing in pensions is still an effective way to offset Income Tax and prepare for the future.

Whether by using a salary sacrifice pension scheme or saving into a self-invested personal pension (SIPP), you can prevent yourself from entering higher Income Tax brackets and move the finances into your pension pot instead.

As the access to your pension is still not as culpable for tax as a salary, this remains a smart investment strategy.

Be mindful that your unspent pension pot will be considered part of your estate for Inheritance Tax purposes as of April 2027, exposing your entire inheritance to taxation.

Changes to Capital Gains Tax

Capital Gains Tax (CGT) underwent notable changes to reduce its tax efficiency.

Where once the tax-free threshold was £6,000, it was reduced to £3,000.

While disappointing for those seeking it as a viable way to offset tax payments, the fact remains that some relief is better than none.

Combining CGT relief with other forms of smart investment can be a vital part of a tax-efficient investment strategy.

Venture capital schemes

If you have the capacity, Venture Capital Schemes (VCTs) can be an extremely tax-efficient way to invest.

VCTs offer 30 per cent Income Tax relief on invested amounts up to £200,000, and these can also yield tax-free dividends with the added benefit of there being no CGT on gains.

If your investment budget stretches to it, an Enterprise Investment Scheme (EIS) offers 30 per cent relief on investments up to £1 million.

These can be combined with other forms of relief to provide a network of tax-efficient investment options.

Ultimately, knowing what options are available to you can ensure that your investments remain as tax efficient as possible.

Seeking professional advice is always wise, given the ever-changing economic landscape.

If you want to maximise your money, speak to our team today.

Making the most of work benefits to minimise your tax bill with salary sacrifice

Your hard work deserves to pay off, but after a while, the harder you work and the more you earn, the more you end up paying in tax.

In those situations, it could be worth considering some salary sacrifice options to ensure that you reap the full benefit of the work you do and minimise tax liabilities.

Alongside offsetting Income Tax, salary sacrifice sees you making smaller National Insurance contributions and thus, potentially, having a greater ability to use the money you have earned for your benefit.

What salary sacrifice options are there?

By far the most common form of salary sacrifice comes in the form of pension savings.

Rather than see your wage steadily increase, and thus your Income Tax and National Insurance payments increase too, there is an option to cap your salary and put the extra value into your pension plan.

This money will not be subject to National Insurance considerations and therefore will be of more value than if it were paid to you directly.

The drawbacks of this method are the length of time you must wait before you can access these funds.

If you are planning to retire early or have exciting plans for your twilight years, then this could be a viable investment in the long run.

Professional development

Although this is not universally applicable, some employer-funded training courses can qualify as a salary sacrifice.

These courses would serve to reduce your taxable income while also equipping you with the skills needed to keep growing professionally.

If retirement seems too far off to invest more income into a pension pot, then utilising professional development could be the route to take.

The course will need to be approved by HM Revenue and Customs for this purpose, so be mindful of this caveat before signing up for training courses.

Workplace benefits

Although it is not currently open to new applicants, a childcare voucher scheme did once exist and may return at some point in the future.

Until then, there are schemes to provide employees with bikes or electric vehicles that can qualify as a form of salary sacrifice.

Given that these tend to be valuable commodities, they are certainly avenues to explore, particularly if you are environmentally conscious.

There are always options available to those who want to be smart with their money, and seeking professional advice can aid in this endeavour.

Want to learn how you can make more from your work with the right salary sacrifice scheme? Speak to our team today.

Important tax reporting changes for 2025/26

As is customary for a new tax year, there have been sweeping changes to how the Government handles the reporting and recording of financial information.

This has involved the change to some proposals that have been set for implementation, as well as the introduction of some other measures.

We are examining two of the most notable changes that are likely to impact you in this coming tax year.

Employee hours reporting scrapped

The Government has abandoned its proposal to require the reporting of actual hours worked by employees through payroll.

Originally delayed to April 2026, the plan has now been dropped entirely due to concerns over the implementation cost, which was estimated at nearly £60 million.

This will come as a relief to those who were concerned about the increase in admin time that such a proposition would bring with it.

Monitoring and implementing compliant payroll techniques is already a challenge for many businesses, so it is good that the extra information is no longer being forced upon hard-working business owners.

Business owners are instead being left to manage their payroll information in much the same way as before, but payroll compliance checks are subject to change and seeking professional advice and support is a valuable way to stay ahead of any changes.

Compulsory questions are coming

The question about whether a taxpayer is a director of a close company will also become mandatory on the Self-Assessment return from 2025/26.

As a director, you will need to be prepared with accurate figures, particularly where shareholdings change during the year or where different share classes are involved.

These changes are an indication of a move towards increased transparency and more detailed individual reporting.

This is part of a wider movement by the Government to clamp down on noncompliance and fraud by ensuring that all financial information is consistent and accurate.

To stay ahead of these changes, keeping up-to-date records will be essential, as you do not wish to risk noncompliance.

What does this mean for the future?

Here we have examined a failed proposal and an implemented one to gauge where the Government’s priorities are.

With the global economy struggling, the Government need to ensure that they remain capable of meeting the needs of the country, and they have elected to clamp down on bad actors to facilitate this.

What it is likely to mean for honest businesses is more admin work and a greater need to stay abreast of changes as and when they happen.

Contact our team today to ensure that you remain compliant with the latest tax reporting requirements.

Change to dividend reporting to affect thousands of owner-managed businesses

From 6 April 2025, many directors will need to report dividend income in much more detail in their Self-Assessment tax return.

This change will affect an estimated 900,000 directors across the UK.

HM Revenue & Customs (HMRC) will now require directors to disclose the name and registration number of the company, the highest percentage shareholding held during the tax year, and the amount of dividend income received from that company.

These figures must be listed separately from dividends received from other sources.

At present, directors simply report total dividend income.

HMRC has no visibility of how much comes from their own business versus other investments.

This change will allow HMRC to build a clearer picture of remuneration and target compliance activity more effectively.

How will these changes affect me?

As with many of the changes that are currently being introduced, the goal is to ensure that businesses remain compliant.

You may find yourself at risk of noncompliance if you fail to update how you process information considering these changes.

The most effective way to stay ahead of the new dividend reporting is by updating any payroll or accounting software you currently employ.

If you have not yet taken the leap to utilise technology to get greater control of your finances, now might be the time to do so.

If you use in-house finance teams, make sure they are equipped and ready to implement the changes and that they are educated in ways to advise you of how to proceed with Self-Assessment returns.

For those seeking professional advice, it is wise to do this sooner rather than later.

As the tax year progresses, advisors are likely to become overrun with concerned directors seeking advice at the last minute.

You did not build your business by leaving everything to the last minute, and your tax considerations are no different.

Seek professional advice early to ensure that you can effectively plan for the changes and preserve the operationality of your business.

HMRC are attempting to make the system more transparent and gain greater protection against those with bad intentions.

Need help preparing your self-assessment tax return to account for these changes? Speak to our team today.

Are you ready for changes to the Self-Assessment tax return criteria?

Recent developments in the Self-Assessment tax return criteria have brought significant changes that everyone who files an Income Tax Self-Assessment (ITSA) should be aware of.

Announced in the Autumn Statement 2023 and through various updates and consultations throughout the year, these changes reflect HM Revenue and Customs’ (HMRC) ongoing efforts to simplify and modernise Income Tax services.

Below, we go over some of the key changes to the tax return system and how you should react to them.

Key changes in 2023

There have been three major announcements regarding the Self-Assessment criteria in 2023:

  • Raising the income threshold: The income threshold for filing a Self-Assessment tax return, assuming no other criteria are met, was increased from £100,000 to £150,000. This adjustment applies from the 2023/24 tax year.
  • Simplifying high income child benefit charge: A written ministerial statement in July outlined plans to streamline the process for taxpayers liable for the high income child benefit charge. The Government proposed a system allowing employed taxpayers to pay this charge through their tax code, eliminating the need to register for Self-Assessment. However, further details on this proposal are still pending.
  • Removal of the £150,000 threshold: The Autumn Statement 2023 revealed that the £150,000 income threshold would be completely removed from the 2024/25 tax year onwards.

Unchanged criteria

Despite these updates, several criteria for Self-Assessment remain unchanged:

  • Self-employment income over £1,000.
  • Other untaxed income of £2,500 or more.
  • Claims for tax relief on employment expenses exceeding £2,500.
  • Income from savings or investments over £10,000 (tax on amounts below this level may be collected through a PAYE coding adjustment).

If you are confused as to whether you need to file a tax return for Income Tax Self-Assessment because of the new thresholds, visit the Government website to check your eligibility.

Alternatively, please get in touch with one of our team to discuss your tax liabilities and filing process.

The bigger picture

While these changes aim to simplify tax compliance many accountants have raised concerns about the piecemeal nature of these amendments being potentially confusing.

HMRC has confirmed that other criteria are unchanged but continue to be under review.

Having said this, it is important to discuss the changes with your accountant as soon as possible.

Looking forward

The importance of HMRC’s ongoing developments cannot be overstated, such as the single customer account programme, in enhancing how taxpayers outside of Self-Assessment finalise their income tax liabilities.

As HMRC plans further changes in its digital services and operational processes, the landscape of Self-Assessment is poised for more transformation.

For more detailed information on Self-Assessment criteria, taxpayers are advised to refer to HMRC’s Self-Assessment manual and use their online tool to ascertain if they need to submit a tax return.

Understanding these changes is crucial for taxpayers to remain compliant and navigate the evolving tax landscape effectively so please keep an eye on further updates from HMRC and stay informed and prepared by communicating with your accountant.

If you are concerned about any of the issues raised by changes to the Self-Assessment criteria, please do not hesitate to get in touch with one of our team.

Understanding the role of gifting in Inheritance Tax Planning

Inheritance Tax (IHT) planning is a critical aspect of financial management, especially for those looking to pass on assets to their loved ones without incurring the cost of significant taxation.

One method to potentially reduce your IHT burden is through strategic gifting. However, it is important to consider the significance of gifting in the context of IHT and the importance of meticulous record-keeping for such gifts.

The strategic role of gifting in IHT planning

Gifting can play a pivotal role in reducing the Inheritance Tax liability on an estate. In the UK, IHT is levied on the value of an individual’s estate upon their death.

However, certain gifts made during a person’s lifetime can either be exempt from IHT or potentially become exempt, depending on the circumstances and timing of the gift.

  • Exempt gifts: Some gifts are immediately outside of IHT, regardless of when the donor passes away. These include annual allowances (up to a certain amount per year), small gifts per recipient per year, wedding gifts within specified limits, and gifts to charities or political parties.
  • Potentially exempt transfers (PETs): Gifts that don’t fall under the exempt categories are typically considered PETs. These gifts can become exempt from IHT if the donor survives for seven years after making the gift. If the donor dies within this period, the PET may become chargeable at a tapered rate, where the tax liability can decrease on a sliding scale depending on the date of their passing.

The necessity of record-keeping for gifts

Keeping detailed records of all gifts made for IHT purposes is essential.

Accurate record-keeping not only ensures compliance with tax laws but also helps in accurately determining the potential IHT liability.

  • What records to keep: For each gift, record the date of the gift, the value at the time of the gift, the recipient’s details, and the nature of the gift (whether it is cash, property, or other assets). It is also prudent to note whether the gift falls under any exempt category or is a PET.
  • Why keep records: Detailed records are invaluable in case of an HM Revenue and Customs (HMRC) inquiry. They provide clarity on which gifts are exempt, which are PETs, and whether the seven-year rule applies. In the event of the donor’s death, these records assist executors in accurately reporting the estate’s value and determining any IHT liability.

Final thoughts

Effective gifting can be a key strategy in reducing IHT liability, but it requires careful planning and meticulous record-keeping.

It is important to understand the nuances of distinct types of gifts and their implications for IHT.

Keeping comprehensive records of all gifts is not just a matter of compliance – it is a crucial step in ensuring that your estate is managed and taxed according to your intentions.

Considering the complexities of IHT and the strategic significance of gifting, consulting a professional accountant can be highly beneficial.

An accountant can provide tailored advice, help you navigate the intricacies of IHT planning, and ensure your record-keeping is comprehensive and compliant.

Effective planning and record-keeping today can make a significant difference to the financial legacy you leave for your loved ones.

For tailored advice on gifting and IHT planning, please consult one of our accountants.

Are you ready for the Self-Assessment tax return deadline?

As the 31 January 2024 deadline for filing and paying your Self-Assessment tax return fast approaches, it is crucial to be aware of various claims and deductions that can potentially reduce your tax liabilities.

Below are some tax reduction strategies, to help you to navigate the Self-Assessment process more effectively.

Understand your allowances and reliefs

The first step to completing a successful tax return and reducing your liabilities is to understand the allowances and reliefs you are entitled to.

  • Personal allowance: The most fundamental relief is your Personal Allowance – the amount of income you do not have to pay tax on. For the 2023/24 tax year, this is £12,570 but it is important to check for any changes or if your income exceeds the threshold, causing a reduction in this allowance.
  • Savings allowance: If your income from savings is below £1,000 (if you are a basic rate taxpayer), or £500 (if you are an additional rate taxpayer) you are entitled to the Savings Allowance. For those in the additional rate band, you are not entitled to a savings allowance.
  • Dividend allowance: For those with dividend income, the Dividend Allowance allows for £1,000 of dividend payments tax-free. However, this will be changing to £500 from April 2024, so it is important to plan your investment strategy wisely.

Claiming deductions

There are several deductions that individuals can claim on their Self-Assessment tax returns:

  • Work-related expenses: If you’re employed, you can claim tax relief on certain job expenses that haven’t been reimbursed by your employer, such as professional subscriptions, tools or uniforms.
  • Home office expenses: With more people working from home, claiming home office expenses is increasingly relevant. This includes a proportion of heating, electricity, Council Tax, mortgage interest or rent, and internet and telephone use.
  • Charitable donations: Donations to charity under Gift Aid can reduce your tax bill. Higher rate taxpayers can claim the difference between the rate they pay and the basic rate on their donation.

Pension contributions

Contributions to your employees and your own pension can significantly reduce your tax liability.

For higher earners, this is an effective way of reducing their taxable income while saving for retirement.

The current pension allowance per year is £60,000 and the lifetime allowance is just over £1 million.

Capital Gains Tax allowances

If you’ve sold assets like property or shares, you may be liable for Capital Gains Tax.

The tax rates depend on your Income Tax bracket. as well as the type of asset you have sold.

For basic rate taxpayers, the rate is 10 per cent for non-property assets (18 per cent for residential property gains).

For higher and additional rate taxpayers the Capital Gains Tax rate is 20 per cent (28 per cent for residential property).

Each taxpayer has an allowance, known as the Annual Exemption. For the 2023/24 tax year, the Capital Gains Tax allowance has been significantly reduced, halving from the previous year’s threshold of £12,300 to £6,000.

As a result, individuals who realise gains exceeding £6,000 on assets within a year will now need to pay Capital Gains Tax on the amount above this threshold, according to their marginal tax rate.

Be aware that this threshold will fall again from April 2024 to just £3,000, so it is important to consider any sales, disposals or transfers of any assets subject to CGT.

Investment schemes

Investing in certain schemes can offer tax relief:

  • Enterprise Investment Scheme (EIS): Offers income tax relief on investments made in qualifying companies.
  • Seed Enterprise Investment Scheme (SEIS): Similar to EIS but for smaller, early-stage companies, offering even greater tax relief.
  • Venture Capital Trusts (VCTs): Investments in these can offer income tax relief, albeit with certain risks.

Rent-a-Room relief

If you rent out a furnished room in your house to a lodger, the Rent-a-Room scheme allows you to earn a certain amount tax-free on this rent.

The annual Rent-a-Room limit is £7,500., but this is reduced to £3,750 if someone else receives income from letting accommodation in the same property, such as a joint owner.

The scheme is available to both homeowners and tenants, provided the property is your main residence and you have the permission to rent out the room (tenants should check their lease agreements).

It is important to note that the scheme only applies to residential properties and not to rooms let as an office or for other business purposes.

Reporting and paying your tax

It is vital to accurately report all your income and claim only the reliefs and allowances you are entitled to.

Remember, the deadline for online tax returns and paying any tax owed is 31 January 2024.

Late filing or payment can result in penalties, so it’s wise to start preparing well in advance.

In addition, tax affairs can be complex, and seeking advice from a tax professional is often a prudent step, especially if your situation is complicated.

Understanding and utilising these allowances and reliefs can make a significant difference in your tax bill.

As you prepare your Self-Assessment tax return, remember these tips to not only comply with the legal requirements but also to manage your tax liabilities effectively.

Stay informed and consider seeking professional guidance to navigate the intricacies of tax laws and regulations.

If you want to discuss your upcoming tax return with an accountant, please get in touch.

New HMRC rules set “hustlers” in their sights

HM Revenue & Customs (HMRC) has recently been granted new powers by the Government, aimed specifically at addressing unpaid taxes from e-traders and side hustlers.

This move places greater scrutiny on individuals selling items on platforms like eBay, Vinted, or Depop.

These sellers must now be more vigilant about their sales and the income generated from them, as these platforms are required to monitor and report seller earnings from 1 January 2024. Non-compliance by platform operators could result in substantial fines.

Online selling, a common method for earning additional income, affects a large number of people who could find themselves impacted by these new regulations, especially if their earnings exceed certain thresholds.

The £1,000 tax-free allowance

There’s a £1,000 tax-free allowance for UK residents who have a primary job but also earn additional income from casual or irregular sources.

This might include activities like freelance writing, crafting, pet or house-sitting, or tutoring.

Many individuals, especially when starting such activities, may not consider the tax implications of these earnings, as they often fall under the tax-free threshold.

However, once your additional income exceeds £1,000, it’s necessary to register as self-employed and file a Self-Assessment tax return. This process is required to report your additional income and work out your tax dues.

Completing a Self-Assessment tax return

Self-Assessment is HMRC’s method for collecting income tax from individuals not covered by the PAYE (Pay-As-You-Earn) system.

Tax returns must be submitted by the end of the tax year (5 April) to which they apply, and the tax due must be paid by 31 January of the following calendar year.

Missing the deadline for submitting a return can result in a minimum fine of £100, increasing for delays beyond three months.

Implications of the new rules

For many, these changes won’t affect their earnings if they remain below the £1,000 threshold.

Those regularly exceeding this amount are likely already familiar with and compliant with Self-Assessment requirements.

However, it’s the middle bracket of earners, those close to the threshold, who need to be particularly mindful of their earnings.

A common oversight is not recognising that sales on e-trading sites count as taxable income.

With HMRC now automatically informed of such earnings, failing to report them could lead to accusations of unpaid taxes.

Therefore, it’s crucial for all e-traders and ‘side hustlers’ to meticulously record their sales and earnings to understand their tax obligations.

For further information or clarification on these tax rules, please contact our expert team for guidance.

Home Responsibilities Protection (HRP) – Correction of National Insurance records and State Pension entitlement

The National Insurance (NI) system plays a pivotal role in determining an individual’s eligibility for certain state benefits, including the State Pension.

However, there are instances where individuals, particularly those who take time off work for caregiving responsibilities, might find gaps in their NI records.

This is where Home Responsibilities Protection (HRP) comes into play.

What is Home Responsibilities Protection (HRP)?

Introduced in 1978 and since replaced by National Insurance credits in 2010, the HRP was designed to protect the State Pension entitlement of individuals who were not working and therefore not making NI contributions because they were taking care of children under 16 or disabled individuals.

It ensured that these caregiving years were not counted as ‘gaps’ in their NI record, which could potentially reduce their State Pension amount.

How does HRP affect the State Pension?

The State Pension amount an individual receives is based on their NI record. To qualify for the full State Pension, one needs a certain number of qualifying years on their NI record.

HRP helps by reducing the number of years required. So, if you took time off work for caregiving responsibilities, HRP ensures that these years do not negatively impact your State Pension entitlement.

Checking your NI record

It is crucial to regularly check your NI record to ensure all your contributions and credits are correctly recorded.

The easiest way to check your NI record is through the online service provided by the Government. Once you log in, you can view your NI contributions and any gaps in your record. This can also be done by post or by phone.

Correcting missing years

If you discover gaps in your NI record, it’s essential to address them promptly. You might be able to pay voluntary contributions to fill these gaps, or if you were not working because of caregiving responsibilities during a particular year, ensure that you received HRP credits for that year. If not, you can apply for them.

If there are discrepancies in your record, contact HM Revenue and Customs (HMRC).

In June 2023, the Government announced that taxpayers now have until 5 April 2025 to fill gaps in their National Insurance record from April 2006 that may increase their State Pension – an extension of nearly two years.

Regularly checking your NI record and addressing any gaps ensures that you receive the State Pension amount you’re entitled to.

Whether you’re approaching retirement age or just starting your career, it’s never too early or too late to understand and manage your NI contributions. Contact us today for advice.