Marriage allowance

Marriage Allowance – Are you eligible?

The marriage allowance was introduced 6 April 2015, it allows an individual, normally with income below the personal allowance to transfer 10% of their personal allowance to their husband, wife or civil partner. It’s the individual with the lower income that can transfer 10% of their personal allowance to their higher earning spouse. This is then added to the higher earning spouses’ personal allowance.

The Marriage Allowance is also known as the transferable tax allowance but should not be confused with the Married Couples Allowance.

Example

Partner 1 earns £7,000 per annum, partner 2 earns £35,000

Partner 1 transfers £1,250 to partner 2

This would give a tax saving of £250 calculated as £1,250 x 20% = £250 for the current tax year.

Conditions

  • One of you earns less than the personal allowance currently £12,500 and your partner earns income within the basic rate band, £12,501 – £50,000.
  • You were born after 6 April 1935.
  • You are married or in a civil partnership.
  • You are not in receipt of the Married Couple’s Allowance. 

How to claim

The lower earner will need to make the claim, this can be made over the phone by calling the HMRC income tax helpline or online — details here .

An application can also be made through self-assessment or by writing to HMRC.

The claim can be made up to 4 years from the relevant tax year.

Backdating your claim

You can back date your claim for up to 4 years, this can be done online or by contacting the HMRC income tax helpline and by post.

A four-year claim could be worth £900.

You can claim for a deceased partner’s allowance.

Your personal allowance will transfer automatically to your partner every tax year — if your circumstances change, you will need to contact HMRC to cancel the transfer.

Expenses

Landlords – Don’t overlook these common deductible expenses

As a landlord, the lower the taxable profit from your property rental business, the less tax you will pay. As allowable expenses are deducted from rental income to arrive at the profit figure, it is important that you do not overlook any expenses which you have incurred and which can be deducted when working out your taxable profits.

What is deductible?

The general rule is expenses can be deducted in calculating the profits of your property rental business if they are incurred wholly and exclusively for the purposes of that business. Revenue expenses can be deducted regardless of whether you prepare accounts on the cash basis or the accruals basis. However, if you prepare accounts on the cash basis, you can also deduct many capital expenses (the main exceptions being the cost of cars and the property itself). If accounts are prepared on the accruals basis, there is no deduction for capital expenditure when calculating profits (although relief may be available otherwise depending on the nature of the expenditure).

Expenses checklist

The following is a checklist of common expenses. This can be used to check that you have not forgotten to deduct any when working out your taxable profit. Remember to keep records of all expenses that you incur so they do not get overlooked.

Common expenses:

  • general maintenance and repairs to the property (but not improvements);
  • water rates;
  • council tax;
  • gas and electricity;
  • insurance (such as landlord’s insurance for buildings and landlord’s contents);
  • cleaning costs;
  • gardening costs;
  • letting agents’ fees;
  • property management fees;
  • legal fees for lets of less than a year or for renewing a lease of less than 50 years’
  • accountant’s fees;
  • office costs, such as stationery, paper, printing and postage;
  • advertising costs;
  • phone calls; and
  • rent where the property is sub-let.

Points to watch

If you use vehicles for your business, you can use simplified expenses to work out what you can deduct. This is based on a mileage rate of 45p for the first 10,000 business miles in the year and 25p per mile for any further business miles.

If you have incurred finance costs, such as mortgage interest relief, these cannot be deducted in working out profits. Instead, relief for 20% of the costs is deducted from the tax that you pay. 

National ins

National Insurance contributions for 2021/22

The 2020/21 tax year starts on 6 April 2021. From that date, new thresholds apply for National Insurance purposes.

Employees and Employers

Employees pay primary Class 1 National Insurance contributions on their earnings, while secondary Class 1 contributions are payable by their employees.

Employees come within the ambit of Class 1 National Insurance contributions once their earnings reach the lower earnings threshold. This remains at £120 per week for 2021/22 (£520 per month; £6,240 per year). However, contributions are paid at a notional zero rate between the lower earnings limit and the primary threshold. While this does not cost the employee anything, it ensures that the year is a qualifying year for state pension and contributory benefit purposes. 

Once an employee’s earnings reach the primary threshold, they must start paying employee Class 1 National Insurance contributions. For 2021/22, the primary threshold is set at £184 per week (£797 per month; £9,568 a year). Contributions are payable on earnings between the primary threshold and the upper earnings limit at the main primary rate of 12%. For 2021/22, the upper earnings limit is set at £967 per week (£4,189 per month; £50,270 per year). Contributions on earnings above the upper earnings limit are payable at the additional rate of 2%.

Employer contributions are payable at the secondary rate of 13.8% on all earnings above the secondary threshold. There are three thresholds. The main threshold is the secondary threshold, which applies to employees aged 21 and over who are not apprentices under the age of 25. As for 2020/21, the secondary threshold and the primary threshold are not aligned – for 2021/22 the secondary threshold is set at £170 per week (£737 per month; £8,840 per year).

A higher secondary threshold applies to employees under the age of 21 and apprentices under the age of 25, and secondary contributions are only payable on earnings in excess of the threshold. For 2021/22 both thresholds are set at £967 per week (£4,189 per month; £50,270 per year) – the same as the upper earnings limit applying for employee contributions. Employees and apprentices in these categories pay employee contributions on earnings above the primary threshold.

The rate of employer only Class 1A contributions (on benefits in kind and taxable termination payments and sporting testimonials) and Class 1B contributions (on items included within a PAYE Settlement Agreement) remains at 13.8% for 2021/22.

Self-employed

The self-employed pay two classes of contributions – Class 2 and Class 4 – if their profits exceed the relevant thresholds.

Class 2 contributions are payable at £3.05 per week for 2021/22 (unchanged from 2020/21) on earnings in excess of the small profits threshold, set at £6,515 for 2021/22. Where earnings are below the small profits threshold, Class 2 contributions can be paid voluntarily to maintain the earner’s contribution record.

Class 4 contributions are payable at the main rate of 9% on profits between the lower profits limit, set at £9,568 for 2021/22, and the upper profits limit, set at £50,270 for 2021, and at the additional rate of 2% on earnings in excess of the upper profits threshold.

Voluntary contributions

Individuals can make voluntary contributions Class 3 to maintain their contributions record. These are payable at a weekly rate of £15.40 for 2021/22. Where the option is available to pay Class 2 voluntarily, this is a much cheaper option.

Vacation,And,Secondary,Homes,-,Mortgage,Concept,-,Two,Miniature

Sale of a second home or investment property

Unlike a gain on the sale of a main residence, which qualifies for private residence relief (as long as the associated conditions are met), any gain that arises on the sale of a second home or an investment property (such as a buy-to-let property) will be liable to capital gains tax. Since 6 April 2020, different rules apply to residential capital gains as compared to gains on other chargeable assets.

Report the gain

Residential property gains not covered by private residence relief must now be reported to HMRC within 30 days on the date of completion. To do this, it is necessary to set up a Capital Gains Tax on UK property account on the Gov.uk website and use this to report the gain. However, if the gain is reported on a self-assessment return before the end of the 30-day limit, the gain does not also need to be reported via the online service.

A penalty of £100 is charged for a failure to report the gain within 30 days.

Pay the tax

A payment on account of the tax due on the gain must also be made to HMRC within 30 days of the completion date. This is the best estimate of the capital gains that is due at that point in time. To calculate the amount due, the following should be taken into account:

  • the annual exempt amount (unless already used on a previous property gain in the same tax year);
  • any losses realised prior to completion (unless already utilised on a previous capital gain); and
  • the likely rate of tax – this will be 18% if total taxable income and gains for the year are less than the basic rate band and 28% to the extent that they exceed this. The gain is treated as the top slice when working out which tax band it falls into.

Payment can be made online via the taxpayer’s Capital Gains Tax on UK property account. Interest is charged if the tax is not paid within the 30-day window.

The overall capital gains tax position for the tax year will depend on other disposals in the year. If other disposals are made in the year, the position is recalculated after the end of the year on the self-assessment return. Any additional tax falling payable must be paid by the normal capital gains tax due date of 31 January after the end of the tax year. If the eventual liability for the year is less than the amount paid on account in respect of property gains, a repayment of the excess will be made. A repayment may arise if, for example, a loss is made on shares following the disposal of the property.

Practical tip

When selling a second home or an investment property, remember to work out the capital gain and to report it to HMRC and pay the associated tax within 30 days of the completion date.

Happy,African,Couple,Husband,And,Wife,Choose,House,Removal,Service

Tenant in common v joint tenants

Under English law, there are two ways in which property can be owned jointly – as tenants in common or as joint tenants. The way in which the property is owned can have tax implications.

Tenants in common

Where a property is purchased as tenants in common, each owner owns a specified share of the property. There is no requirement that the ownership shares are equal. Each person’s share will normally reflect their contribution to the purchase price of the property. As tenants in common own a specified share of a property, they can sell their share independently. On death, their share passes to their estate to be distributed in accordance with the terms of their will.

Where property is owned jointly by unrelated persons, it is often owned as tenants in common. However, it may also be beneficial for married couples and civil partners to hold property in this way, particularly if the property is let.

Joint tenants

Where a property is owned as joint tenants, the owners together own all of the property equally. Any transfer of ownership needs to be signed by all parties, and as all parties have an equal interest in the property. Any sale proceeds are split equally. Under the survivorship rules, should one joint tenant die, the property passes automatically to the surviving tenant(s), and becomes wholly owned by them.

Tax considerations

If the property is let out, the income split for tax purposes depends on whether the joint owners are married or in a civil partnership or not. Where they are not, the income is usually split in accordance with their underlying shares, but the joint owners have the option to agree any income split among themselves.

However, where the property is owned by spouses or civil partners, each is taxed on 50% of the income, regardless of how it is owned. If this is not beneficial and the property is owned as tenants in common in unequal shares, the couple can make an election on form 17 for the income to be taxed in accordance with their actual ownership shares. These can be changed by taking advantage of the no gain/no loss capital gains tax rules to effect a more beneficial income split. However, where the property is owned as joint tenants, the only permissible income split is 50:50. Where a 50:50 split does not give the best result, consider owning the property as tenants in common.

For capital gains tax purposes, where the property is owned as joint tenants, the gain will be split equally between the joint tenants. However, any gain arising on a property owned as tenants in common will be allocated and taxed in accordance with each owner’s share. Each tenant in common can also sell their share independently of a sale of the property as a whole.

On death, where a joint tenant dies, the property automatically passes to the surviving tenant(s). However, where a property is owned as tenants in common, each owner can pass on their own share – it does not go to the other automatically. Their share forms part of their estate.

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Gift aid – Beware if your income falls

Where a Gift Aid declaration is made, the recipient charity or community amateur sports club can claim back basic rate tax on the donation. The donation is treated as made net of basic rate tax, meaning that for every £1 donated, the charity can claim back 25p, or to put it another way, a donation of £80 is worth £100 to the charity.

There is good news for higher and additional rate taxpayers too – they can claim the difference between the rate at which they pay tax and the basic rate of tax, either through their self-assessment tax return, or if they do not complete a tax return, by asking HMRC to amend their tax code. For example, if a higher rate taxpayer made a donation of £100, the charity will claim back £25 – so the donation is worth £125 to the charity. The taxpayer receives relief at 40% on the gross donation of £125, i.e. £50, of which £25 is given at source (the taxpayer pays £100 for a £125 donation). The remaining £25 is claimed back by the taxpayer.

Funded by tax paid

The tax that is claimed back by the charity is funded by the tax paid by the donor. This is fine where the donor has paid more tax in the year than is claimed back by charities and community amateur sports clubs on donations.

However, a problem can arise if the donor’s income falls, such that they are not a taxpayer or pay less tax than is claimed back on the donation. Where this is the case, HMRC can seek to recover the tax reclaimed by the charity from the donor.

Example

Amy is self-employed hairdresser. She makes a donation of £20 each month to an animal rescue charity. She makes a Gift Aid declaration so the charity can reclaim tax at the basic rate on the donation.

Due to the Covid-19 pandemic, Amy was unable to work for much of 2020/21. She was unable to claim support under the SEIS scheme as she only started her business in January 2020. Her earnings for 2020/21 fell to £8,000. Previously, she had always earned around £20,000.

As her earnings for 2020/21 are less than the personal allowance of £12,500, she does not pay any tax for 2020/21. Therefore, there is no tax to fund the tax claimed back by the charity of £60 (25% (£20 x 12). HMRC could seek to recover this from Amy.

Tips

Where regular donations are covered by a Gift Aid declaration review these and cancel the Gift Aid declaration if it looks as if income may fall below the personal allowance or be prepared to pay any shortfalls resulting from Gift Aid. For one-off donations, only complete the Gift aid declaration if income is such that sufficient tax will be paid to cover that claimed on the donation.

WFH

Claim expenses for additional costs of working from home

As the 2020/21 tax year draws to a close, many employees will have spent much if not all of the last year working from home. While the tax system enables employers to pay employees a tax-free allowance of £6 per week (£26 per month) to cover the additional household costs of working from home, employees with less generous employers can also benefit to a degree by claiming tax relief for the extra household costs that they incur as a result of working from home.

How much?

Employees can make a claim for £6 per week (£26 per month) without the need to provide evidence to prove that they have incurred additional costs of working at home. However, if the actual additional household costs are higher (and the employee is able to provide evidence to substantiate this if asked), they can claim the higher actual amount.

Relief is given at the taxpayer’s marginal rate of tax. Thus, an employee making a claim for a full year of £312 (12 x £26) will receive tax relief of £62.40 if they are a basic rate taxpayer, £124.80 if they are a higher rate taxpayer and £140.40 if they are an additional rate taxpayer.

How to claim

There are various ways in which a claim can be made.

If the taxpayer completes a self-assessment tax return, a claim can be made in their tax return.

HMRC have also set up an online claim site, which is available on the Gov.uk website.

Claims can also be made on form P87. This too is available on the Gov.uk website.

Financial,Concept,Meaning,Business,Interruption,Insurance,With,Sign,On,The

Business interruption insurance – Are pay-outs taxable?

Business interruption insurance provides cover for losses as a result of events that close or severely disrupt the business. Policies may cover a loss of profits that arise as a result of the ‘interruption’. They may also meet fixed costs that the business has to continue to meet despite being closed.

Many businesses who had been forced to close as a result of the Covid-19 pandemic and associated lockdown measures and who attempted to make a claim on policies that they believed provided cover for the associated loss of profits found that their insurers did not agree. The sticking point was the wording of the policy where this excluded diseases unless specifically named.

To provide clarification for policyholder and insurers, the Financial Conduct Authority (FCA) took a test case. The high court found mostly in favour of the policyholders. On appeal, the Supreme Court ruling in January furthered strengthened the policyholders’ position. As a result of the Supreme Court ruling, around 370,000 small businesses may receive a pay-out.

Tax implications

HMRC’s general stance is that if the premium was tax deductible, any insurance receipts are taxable. Businesses would have been able to deduct the cost of business interruption insurance premiums as long as the cost was incurred wholly and exclusively for the purposes of the business.

Where a policy pays out an amount to cover the loss of profits during the period when the business was shut, the receipt is treated as trading income. Payments to cover costs are also taxable if a deduction is allowable for the cost.

Where accounts are prepared on the cash basis, the insurance receipt is taken into account in the accounting period in which it is received.

However, if the accounts are prepared on the accruals basis (as would be the case for a company), the receipt should be matched to the period to which it relates, for example, the accounting period in which the lockdown giving rise to claim fell. However, where there was doubt as to whether a payment would be made, as was often the case in relation to Covid-19 claims, the critical time would be the time when it became clear that a payment would be made. This may be the period in which the date of the Supreme Court ruling occurred.

Ir35,Finance,Concept.,United,Kingdom,Tax,Law,,Tax,Avoidance.

IR35 and off-payroll working

Prior to 6 April 2021, workers who provide their services to a private sector organisation through an intermediary, such as a personal service company, need to consider whether the IR35 rules apply to them. This will be the case if the nature of the engagement is such that if they provided their services directly to the client rather than through their personal service company, they would be an employee of the client.

Where an arrangement falls within the scope of the IR35 rules, the worker’s intermediary needs to determine the deemed employment payment on 5 April at the end of the tax year. The intermediary must account for tax and National Insurance (employee’s and employer’s) and pay it over to HMRC.

Since 6 April 2017, workers providing services to a public sector body through an intermediary have not needed to consider IR35. Instead, under the off-payroll working rules, responsibility for determining whether the worker would be an employee if the services were supplied directly falls on the public sector body. If the worker would be classed as an employee were this the case, tax and National Insurance must be deducted from payments to the worker’s intermediary, and paid over to HMRC, together with the associated employer’s National Insurance.

From 6 April 2021, the off-payroll working rules, as they apply where the end client is a public sector body, are being extended. From that date, they will also apply where the end client is a medium or large private sector organisation. The changes will affect workers providing their services through an intermediary.

When agreeing an engagement from 6 April 2021 onwards, the worker should check the size of the end client so that they know which set of rules are in point.

End client is a medium or large private sector organisation

Where the end client is a medium or large private sector client, from 6 April 2021, the worker no longer needs to consider the IR35 rules. Instead, under the extended off-payroll working rules, the end client must determine whether the worker would be an employee if they provided their services directly to the end client, rather than via an intermediary. 

The end client must provide the worker with a copy of the determination (the status determination statement). The worker should check this. If they don’t agree with it, they should tell the end client. The client must then reassess the status determination and let the worker know within 45 days whether the original determination stands, or issue a new one.

If the nature of the engagement is such that the worker would be an employee if the services were provided directly, the fee payer will adjust the invoice from the worker’s intermediary to exclude VAT and the cost of any recharged materials to arrive at the deemed employment payment, and deduct tax and National Insurance from the payment to the worker’s intermediary. This will have a cash flow implication – the worker’s intermediary will no longer receive payments gross.

The worker will receive credit for the tax and National Insurance paid against that due on payments made by the worker’s intermediary to the worker.

End client is a small private sector organisation

The extended off-payroll working rules do not apply to small private sector organisations. 

Consequently, the position is the same on or after 6 April 2021 as it is now. The worker’s intermediary must continue to consider whether the IR35 rules apply, and operate them if they do.

End client is a public sector organisation

There is also no change from 6 April 2021 where the end client is a public sector body. As now, the public sector body must assess whether the off-payroll working rules apply and issue a status determination to the worker. If the engagement falls within the rules, they must deduct tax and National Insurance from payments to the worker’s intermediary.

Budget,2021,On,White,Background,Concept,For,Budget,Year,2021.

2021 Spring Budget

Here are some of the key points from one of the most anticipated Budget in UK history:

Business support

The Furlough scheme has been extended up to September 2021, employees will continue to receive 80% of their monthly wage of hours not worked subject to the £2,500 gross maximum. Employers will be expected to pay 10% of the hours not worked from July 2021 and in August and September 2021, 20% of the wage of hours not worked.

The Self Employment Income Support scheme has also been extended up to September 2021. For the fourth grant, HMRC requires a 2019.20 tax return to have been filed. The rest of the criteria is the same as that of the third grant.

Extension of the Film & TV Production Restart scheme in the UK, with an additional £300 million pounds to support theatres, museums and other cultural Organisations in England through the Culture Recovery Fund.

The reduced rate of VAT of 5% for hospitality, accommodation and attractions has been extended up to the end September 2021, then 12.5% until March 2022.

Eligible businesses will benefit from business rates reduction. 100% relief until June 30 2021, then 66% relief until March 2022 capped at £2 million per business for properties that were required to close on 5 January 2021, or £105,000 per business for other eligible properties.

Temporary extension of losses carry- back for businesses 

Businesses that have incurred trading losses in financial years 2020-21 and 2021-22 will be able to carry back losses of up to £2 million to the previous 3 years. Normally, businesses are allowed to carry losses back for the previous 12 months.

Recovery Loans

A new Recovery Loan scheme to make loans available between £25,001 and £10 million, to help businesses of all sizes has been announced. This is set to run until 31 December 2021. The government will guarantee 80% of the loan amount.

Capital allowances

From April 2021 to March 2023, businesses investing in qualifying new assets (Plant and machinery) will benefit from a 130% first year allowance.

The Annual investment allowance will remain at 100%. up to 31 December 2021

 Help to grow

The government will subsidise 90% of the cost of management courses to help Small business upskill. Conditions apply of course.

The government will subsidise productivity software for Small businesses up to 50% for a maximum cost of £5,000.

Rates and Thresholds

The personal allowance has been increased to £12,570, the basic rate will apply to the next £37,700 of income and the higher rate of tax will apply to income from £50,271. These amounts will then be frozen until April 2026.

There will be no increase to the VAT registration threshold until April 2024.

The Capital gains annual exemption has also been frozen until April 2026.

Inheritance tax thresholds will be kept at their current levels until April 2026.

Corporation Tax rates set to increase from April 2023.

This is set to increase up to 25% for businesses with profits of £250,000 and over. It will increase incrementally for businesses with profits between £50,000 – £250,000.

A small business rate has been introduced which will remain at 19% for businesses with profits of below £50,000.