Here we are again. We are approaching the end of another tax year. The Chancellor of the Exchequer has shown the country his plans and now some of us may need to make some changes in order to adapt to the new lay of the land! Key inclusions in this update are:
- Claiming Capital Allowances – Tax planning
- Changes in Cash-basis Accounting
- Using up ISA Allowances
- Changes in Dividend Allowances
- Changes in Wear & Tear Allowances
- Financial tax relief for Residential Landlords
- Moving tax into the digital age
Claiming Capital Allowances – Tax planning
The Capital allowance scheme allows a business to reduce its corporation tax liability through the purchase of capital assets. This might include equipment, machinery, and business vehicles – though you can also claim on integral fittings (air con systems, electrical systems etc) and various fixtures. However, it cannot be claimed on business cars, previously owned items or gifts to the business!
As of January 2016, the total annual investment allowance (AIA) is £200,000 per year. If your accounting period is less than 12 months, then this figure would be apportioned as required.
There is one key restriction – if a director owns and controls more than one business, or operates both businesses in the same premises, then they will only receive one annual investment allowance and must decide how it is shared. The same applies to sole traders or partners operating in more than one trade.
For sole traders and partnerships with income of £83000 or less, there is the option of using the cash basis system instead. In this form of accounting, capital purchases are treated as expenses rather than assets and therefore affect the profit and loss statement. They are recorded as and when the monetary value leaves the business. This means that with correct planning, tax liability can be significantly reduced.
For example – purchasing a new vehicle:
Assuming a sole trader has a net profit of £65,000 as of 28th February 2017, and available funds/cash injections to do so, then it would be advantageous to purchase a new capital asset before the end of the tax year, so on or before 5 April 2017. Using the cash-basis scheme, this would be expensed and ultimately reduce net profit. Let’s say an asset is purchased at £20,000 on 21st March 2017 – this would reduce total net profit to £45,000.
Again, assuming no secondary or tertiary incomes and personal allowance at £11,000:
PURCHASING BEFORE 06/04 PURCHASING AFTER 06/04
Net trading profit 45,000 65,000
Less personal allowance (11,000) (11,000)
Total taxable income 34,000 54,000
TAX @ 20% BASIC 6,400 6,400
TAX @ 40% HIGHER 800 8,800
Total tax liability 7,200 15,200
In planning effectively and purchasing the new asset in the correct tax year, this person would go on to save £8,000.
Further information can be obtained through the www.gov.uk website, or by getting in touch with Together We Count.
Changes in Cash-basis Accounting
Effective from 6th April 2017, the government is increasing the thresholds for those wishing to use the cash-basis accounting method. The entry threshold will be increased from £83,000 to £150,000, whilst the exit threshold will increase to £300,000.
The proposed change will allow more self-employed individuals to benefit from the far simpler method of calculating taxable profits, rather than being forced into using the traditional accounting method due to higher incomes. Early projections estimate that a further 135,000 businesses will become eligible to use the cash-basis method.
Using up ISA Allowances
ISA’s (individual savings accounts) can prove an excellent method of saving or investing – especially for those starting out. The accounts are exempt from income tax, meaning that any interest that you earn is as well! Many ISAs are now flexible, in that you can withdraw funds and replace it within the same tax year without it counting towards that year’s allowance.
The ISA allowances for 2016/17 are £15,240 for Cash, Stocks & Shares and Innovative Finance ISAs and £4,080 for Junior ISAs. These allowances do not carry forward if unused – so the most tax-efficient method of saving is to ensure that these balances are saved each year. The deadline for monetary transfers is midnight on 5th April 2017. After this, any funds saved will count towards the 2017/18 allowance.
As of the 6th April 2017, the new allowances will be £20,000 for Cash, Stocks & Shares and Innovative Finance ISAs, whilst the Junior limit will increase to £4,128.
2017/18 will also see the introduction of the new ‘Lifetime ISA’ option – seen by many as the superior alternative to the government’s recent ‘Help to Buy ISA.’ With Lifetime, you can save up to £4,000 a year and the state will add a 25% bonus on top. Key details include:
- The bonus is only paid until you reach 50, meaning a total claimable bonus of £40,000 across the LISA’s lifespan.
- You can only open one from ages 18-40. If your 40th birthday falls on the 6th April, make sure you do it by the 5th April to take advantage!
- Should you already own a property, the ISA can be used for retirement at age 60 – the benefit is that there is no tax to pay on withdrawals!
Changes in Dividend Allowances
The current system allows for directors and shareholders to receive the first £5,000 of dividends as tax-free. This is a sizeable perk for those involved and should definitely be taken advantage of, providing that the company is profitable! As with other allowances, this does not carry forward so if you have the opportunity to take it, please do!
There are no changes in dividend tax rates as this fiscal year closes and remain at:
- Basic rate pays 7.5%
- Higher rate pays 32.5%
- Additional rate pays 38.1%
Something else to take note of is that 2017/18 is the last year in which the £5,000 will be available. The Chancellor recently announced in the Spring Budget that the current annual dividend allowance would be reduced to £2,000, effective 6th April 2018.
Further information is available directly from the Government website below:
Financial tax relief for Landlords
There are also changes underfoot for residential landlords. To date, landlords have been able to claim relief for finance costs (eg mortgage interest) on their let properties, allowing tax relief at higher and additional rates for those falling into those bands. From April 2017, this will no longer be the case – with relief being capped at basic rate (20%).
In this situation, the landlords are also increasing their net property profit (by having less claimable expenses) and therefore are also increasing their total taxable income. If you are close to tax band thresholds, it would be worthwhile checking with your accountant that you haven’t been pushed into the next band – particularly if you are in receipt of certain benefits.
The change is being staggered over the next 4 fiscal years:
- 2017/18 – the deduction from property income will be restricted to 75% of finance costs with the remaining 25% available at the basic rate.
- 2018/19 – 50% of finance costs available for full tax relief and the remaining 50% available at the basic rate.
- 2019/20 – 25% of finance costs available for full tax relief and the remaining 75% available at the basic rate.
- 2020/21 – all financing costs incurred by a landlord will be given as basic rate tax reduction.
Further information and worked case examples can be found in the GOV.UK guidance notes for the topic:
Changes in Wear & Tear Allowances
It turns out that the Chancellor really isn’t keen on allowances – though this one is from his predecessor! As of April 2016, residential landlords are no longer able to claim the wear & tear allowance against their property income. For those unaware, the wear & tear allowance was provided for those lets in which furnishings were provided, allowing roughly 10% of net rental income as tax relief.
It has been replaced by a system where residential landlords can deduct only the actual costs incurred on replacing furnishings within a tax year (this was previously disallowed).
Moving Tax into the Digital Age
Some positive news comes in the abolition of the paper-based tax return. The government is planning to move businesses, self-employed and landlords over to the new digital service in a staggered approach over the next 4 years:
- April 2018 if they have profits chargeable to Income Tax and pay Class 4 National Insurance contributions (NICs) and their turnovers are in excess of the VAT threshold
- April 2019 if they have profits chargeable to Income Tax and pay Class 4 NICs and their turnovers are below the VAT threshold
- April 2019 if they are registered for and pay VAT
- from April 2020 if they pay Corporation Tax (CT)
Those with turnovers below £10,000 will be exempt from these requirements, though it is believed the new digital service will make the whole process simpler for all parties.
The aim is to reduce the amount of avoidable errors that come about from manual tax returns. In doing so, the Treasury hopes to reduce the value of tax lost, business costs, and the inevitable uncertainty and concern raised when HMRC have to get involved to correct errors.
For more information please review – https://www.gov.uk/government/publications/digital-reporting-and-record-keeping-for-business-income-tax/making-tax-digital-for-business