As we have done for the last few years, I wanted to take this opportunity to set out some of the changes you will see in your tax return for 2019-20 and some of the changes being introduced from April 6th 2020.
This note is by no means comprehensive – Finance Bills, which are introduced every year after the Budget statement, run to hundreds of pages – but it hopefully covers some key points affecting many taxpayers. As always if you have any questions about anything in this note or any other taxation matters, feel free to call us.
I have changed the structure a little this year but I still have same final page showing some of the most relevant and useful tax rates and thresholds.
I began drafting this note a few weeks ago, when the impact of coronavirus was unknown. As we are ready to publish, it is clear we are in an unprecedented time. The health and safety of you and your loved ones is far more important than anything in this note. Hopefully in due course, things will return to normal and the mundane world of tax and accounting will become more relevant again.
We also have some news about our upcoming office move. After five years in Reigate, we will be moving to Dartmouth in South Devon at the end of April 2020. In this digital age, we communicate more and more by e-mail and telephone, and less by physical contact. Our new office will be located at 34 Victoria Street, Dartmouth, Devon TQ6 9SA. We hope to retain our existing telephone number and our e-mail addresses, mobile numbers and the website address will be unchanged. We will of course send formal notification to all our clients nearer the time.
1. Changes in your 2019-20 Tax return
Basics of taxation in 2019/20
I noted last year that after many years ‘tinkering’, the personal tax return has not been affected by changes in tax, other than thresholds. That structure is far from perfect as the return process struggles to cope with add-ons like Student Loan repayments, or the High Income Child Benefit charge, but the momentum towards digitalisation of the tax return has slowed. I cover that in more detail in section 4 of this report.
The thresholds for Personal Allowance, Higher Rate tax and the Highest Rate tax are now at levels that are easier to understand and explain. The tax-free Personal Allowance is £12,500, then income is taxed at the basic rate of 20% up to £50,000. Higher Rate tax of 40% applies up to £150,000, after which income is taxed at 45%.
Property Income
The most substantial changes to personal tax continue to be for property owners. 2019-20 sees the third year in which the deduction of mortgage interest on rental properties has been restricted. Only 25% of mortgage interest can be claimed as a direct tax deduction against property income. The remaining 75% is carried forward and is available to be claimed as a basic rate deduction from your overall tax charge (in the final Tax Calculation).
The purpose of the tax change is to limit the tax credit on mortgage interest to basic rate only. If you are a higher rate taxpayer, you will lose the ability to deduct mortgage interest in such a way that it could be a 40% or 45% tax deduction.
2. Tax changes for 2020-21
Thresholds for Personal Allowances and National Insurance
After the high increases in the Personal Allowance for the last few years, the levels will remain the same in 2020-21. The one threshold that has increased is for National Insurance – the level at which Employers and Employees National Insurance is charged on employment income, known as the Primary Threshold – and also sole traders – has risen to £9.500 from £8,636. This should mean an extra £100 of net income for anyone with a salary above that threshold.
Key points from the Budget
Naturally much of the focus in the Budget last week was on short-term measures to help in tackling the Coronavirus. As well as that, there were ambitious investment plans, as the new Conservative government looked to position itself very differently from the May and Cameron years.
In terms of personal tax, there were no dramatic announcements …
More bad news for Investment Property Owners
In my 2019-20 note, I set out the material changes that are coming into play from April 6th 2020 for property owners selling their properties. I will summarise these again as the changes are quite significant.
Two reliefs have been available to taxpayers who have retained ownership but wish to sell what has previously been a ‘Principal Private Residence’. One is ‘Principal Private Residence “PPR” Relief’, the other is ‘Lettings relief’.
PPR Relief takes account of the period in which you lived in a property as a principal private residence, before moving to a different property and renting the former residence out. The availability of PPR Relief means that you only pay Capital Gains Tax on the sale of the property for the period that the property was not your PPR. In addition, you have been allowed to claim the final 18 months of ownership within the PPR Relief irrespective of whether you lived there. However, that 18 month allowance is being reduced to 9 months from April 2020.
Lettings Relief has been allowed as an additional relief for up to £40,000 to reduce the tax incurred on the capital gain when selling an investment property, in respect of periods where you rented the property out. From April 2020, the conditions for using Lettings Relief are going to be limited to the rare situation where the property owner and a tenant share occupancy.
3. Tax Impact on Companies with employees in 2020/21
There are significant tax changes in 2020-21 that impact companies employing staff and in particular those working as contractors, rather than full-time employees.
The payment of Contractors income
For many years in many sectors, but notably in the building and IT industries, contractors have been paid “gross” by employers. These contractors are then responsible for settling their own tax affairs. As a general rule, this has meant that HMRC have collected less National Insurance and Income Tax than would have been the case if the contractors were employees. The Government’s IR35 rules have been designed to prevent the avoidance of tax and national insurance in cases were contractors where ‘de facto’ employees These new rules will force many private employers to take responsibility for PAYE and NI deductions, as has been the case in the public sector for two years.
This means that contractors who have set up companies to receive the gross income and then pay themselves via a minimal salary and then dividends (attracting lower rates of tax) over and above that, may end up paying more in tax, even if much of that tax is deducted at source.
Entrepreneurs’ Relief
Entrepreneurs’ relief was introduced to incentivise owner-managers to grow a business. It works by reducing Capital Gains Tax (CGT) to a flat rate of 10%, rather than the higher rate 20%, on the first £10m of gains from selling a company. To claim the relief, the vendor must meet qualifying criteria such as owning business assets for more than 2 years or owning more than 5% of the company. The thinking was that these business owners would re-invest the net funds in new expanding businesses.
Entrepreneurs’ relief has come under criticism because in many cases as it has enabled one-man companies – set up to avoid IR35 in the first place – to close down their Company by extracting remaining funds on the cheap, by paying only 10% Entrepreneurs’ Relief on capital remaining in the entity that would otherwise be taxed through Income Tax. Despite rumours of its demise ahead of the March 2020 Budget, the only change introduced was to reduce the gain threshold from £10m to £1million.
Minimum Wage and Auto-enrolment
Any business employing staff needs to be aware of evolving tax and pension requirements for staff. Firstly, they must be aware of the minimum wage requirement, which will be £8.72 per hour for anyone over 25 from April 2020.
Secondly, employers must understand the Auto-Enrolment rules, where employees over 22 years of age, earning more than £512 per month must be offered a Workplace pension, where employees set aside 4% of their net salary and employers add an additional 3% to the salary. Over time, this should enable workers to build up an additional pension to complement the State Retirement pension. Employees can elect to opt out of such a scheme but the default position is for each employee to auto-enrolled.
Employers Allowance, which is a credit against Employers National Insurance, has been at £3,000 for several years but rises to £4,000 in 2020/21.
4. The Digitalisation of the Tax Return
Last year, I noted that a lot of business time and effort would be expended on the implementation of Making Tax Digital for VAT. This has meant that we have had to collect client data on a real-time basis in order to prepare and submit VAT Returns in a digital format to HMRC within 5 weeks of the VAT quarter end. The digital format must include the underlying transaction data making up the totals in the 9 VAT boxes – previously only the 9 boxes needed to be populated.
There were inevitable teething troubles – with an unwieldly and convoluted sign-up process, but there have been advantages once those initial obstacles were overcome. We now receive more client information during the year, which enables us to offer more tax planning advice, and reduces the rush to get client papers ahead of filing deadlines.
The initial implementation of Making Tax Digital was to be for Income Tax – in fact the tax return as we know it was due to be retired in the next year or two. MTD for Income Tax appears to be on hold now, which in some ways is a shame.
Why has the digitalisation of the Tax Return not progressed?
There are other competing priorities for government resources, and with Brexit and now the still unknown impact of the Coronavirus, the overhaul of the tax system has not reached the top of the priority list.
As with all systems implementations, one thing leads to another. At the moment, there are separate systems infrastructures for Self-Assessment (‘CESA’) and for PAYE and National Insurance (‘NPS’). This means that some taxpayers have two tax returns prepared each year, one in each of the systems
Having two separate systems can naturally cause confusion, as is highlighted by these examples:
• Class 2 National Insurance is paid by Self-Employed workers earning more than £6,365 per year. Our Tax Return software assumes that Self-Employed workers are registered for Class 2 NI. However, details of Class 2 registration is maintained on NPS, and where Class 2 registration is not logged by HMRC, they exclude that NI from the calculation. That can have knock-on effects if a Self-Employed worker wants to claim benefits, like Maternity Allowance.
• There is no real-time interface between the Tax Return system and PAYE Coding. PAYE codes are adjusted during the year on receipt of a tax return, but only up to December 31. Taxpayers consistently filing tax returns each January might operate with out-of-date PAYE coding for years.
Another frustration for a some of our clients is that there is no direct interaction between HMRC and the Student Loan company system. HMRC have a tag to note where Student Loans are outstanding, so that Student Loan repayments are made where a taxpayer earns above the repayment threshold (£19,390 in 2020/21). But HMRC do not have real-time details of when a Student Loan has been repaid in order to stop those deductions.
Similarly, there is no interface with the Department for Work and Pensions, who record Child Benefit payments. Taxpayers (and/or their partners) claiming Child Benefit have to give some or all of that Child Benefit back if they earn £50,000 or more in a financial year. If the Child Benefit is excluded from the form, it can take a year or more for the process of chasing up the reclaim of Child Benefit to be completed. This could be mitigated by an automated link between DWP and HMRC systems.
Some small progress has been made in the last two years. Provided we have agent authorisation in place, we can request HMRC’s view of P45 and P60 data for client’s Employment and Pensions Income. This can be a very useful first step in the pre-population of tax returns. However, the ‘success rate’ in getting that data is nowhere near 100%, and was possibly lower in 2018-19 than the previous year.
5. Agent inter-action with HMRC on your behalf
Finally, I want to remind you of some examples of how we, as agents, can interact with HMRC on your behalf, once we have filed an “authority to act” form with HMRC.
• Agent Hotline – we have access to an HMRC Agent Helpline where calls tend to be answered much quicker than the more public helplines. Depending on the type of request, it is often easier for us to call directly.
• Amend and Update PAYE Codes – HMRC habitually amend PAYE codes after the submission of the prior year tax return has been filed. This often involves the ‘early’ collection of tax on dividend income, rental income and property income. For those who have been in Self-Assessment for many years and are happy with the routine of paying Self-Assessment tax twice a year, we can push back on PAYE code changes on your behalf.
• Negotiate payment of taxation in instalments – HMRC are entitled to impose penalties and interest when tax is unpaid beyond the due dates of 31 January and 31 July. We can step in and help to negotiate repayment plans so that penalties and interest are minimised. In the March 2020 budget, the Chancellor promised to dedicate more resources to negotiating ‘Time to Pay’ for all taxpayers.
• Reduction in payments on account –Where taxpayers have more than £1,000 in Income Tax and Class 4 National Insurance in a given tax year not deducted at source, they will be asked to pay 50% of that tax as a payment on account for the next tax year. If you believe that your income in the next tax year will be lower, then we can agree a lower payment on account with HMRC. It is worth noting that if the final tax turns out to be higher than the lower payment on account, HMRC will charge interest on the difference.
• Assisting you in HMRC Investigations – Where HMRC have an enquiry into a submitted tax return, they will copy us in on any correspondence that they have with you, so that we can assist in the drafting of the response.
6. Key Tax Rates for 2019-20 and 2020-21
In these tables we are publishing some key tax rates for both 2019-20 and 2020-21. The 2019-20 rates will be relevant for the next Self-Assessment Tax Returns due for submission by 31 January 2021. The 2020-21 rates will be relevant for any income and expense you have from 6 April.
2019-20Upcoming Tax Return | 2020-21Upcoming tax year | Notes | |
| INCOME TAX & SAVINGS | |||
| Personal Allowance | £12,500 | £12,500 | Up to £100,000 |
| 20% Basic Rate Upper Limit | £50,000 | £50,000 | See ** below |
| Dividend Tax Rates | Rates applicable to both yearsFirst £2,000: 0%Basic Rate: 7.5%Higher Rate: 32.5%Highest Rate: 38.1% | Unused Personal Allowance can increase the 0% band | |
| Personal Savings Allowance(‘PSA’) | Rates applicable to both years£1,000 of interest tax free for Basic rate taxpayers£500 for Higher Rate taxpayers | ||
| Nil Rate for Savings | £5,000 | £5,000 | If taxable income is below £16,850 |
| ISA Allowance (per person)Junior ISA | £20,000£4,368 | £20,000£9,000 | (Lifetime ISA is £4,000 in both years) |
| PROPERTY | |||
| Stamp Duty | Rates applicable to both years0-£125k – Nil£125k – £250k: 2%£250k – £925k – 5%£925k – £1.5m – 10%Over £1.5m – 12% | With +3% for second homes / investment | |
| Rent-a-Room | £7,500 | £7,500 | |
| COMPANIES AND EMPLOYERS | |||
| Employment Allowance on Employers NI | £3,000 | £3,000 | per Company |
| Standard PAYE code | 1250L | 1250L | |
| NI thresholds:- Class 1 Employee- Class 1 Employer | 12% – {between £719 &13.8% { £4,167 per month | 12% – {between £719 &13.8% {£4,167 per month | Optimal NI free salary:2019-20: £8,6322020-21: £9,500 |
| National Living Wage | £8.21 per hour | £8.72 per hour | if 25 or over |
| Workplace pension threshold | £6,136 | £6,240 | Contribution Rates: 5% / 3% from April 2020 |
| Corporation Tax Rate | 19% | 19% | |
| VAT | |||
| VAT Threshold for registration | Over £85,000 | Over £85,000 | De-registration: below £81,000 |
| Flat Rate Scheme(VAT a fixed rate of turnover) | Register if turnover is below £150,000 | Up to £230,000 turnover | |
| CAPITAL GAINS TAX | |||
| Annual Allowance | £12,000£6,000 for Trusts | £12,300£6,150 for Trusts | |
| CGT Rates | 20%/28%** higher rate10%/18%** basic rate | 20%/28%** higher rate10%/18%** basic rate | ** +8% for Residential Property |
| INHERITANCE TAX | |||
| IHT Rate | 40% | 40% | |
| Nil Rate Band | £325,000 | £325,000 | |
| Residence Nil Rate Band | £150,000 – April 2019 | £175,000 – April 2020 | |
| PENSIONS | |||
| STATE PENSION | |||
| Basic State Pension | Up to £129.20 per week | £134.25 per week | |
| Single-Tier State Pension | £164.55 per week | £168.60 per week | |
| PERSONAL PENSIONS | |||
| Annual Allowance | £40,000 | £40,000 | |
| Lifetime Allowance | £1,055,000 | £1,073,000 |
