It has been just over a year since I last drafted my previous note to our clients, and it has been quite the year.
You may realise that this note has been sent almost two months later than last year. This is a deliberate change. We want this note to act as a prompt to remind you that we are ready to begin work on your 2020-21 tax return, and accompanying this note is a personalised checklist, which we hope will help you get papers ready sooner rather than later.
Looking back on the last year (and a bit)
At the start of 2020 our main focus was to get through the January busy season then to make our office move to Devon as smooth as possible. We had an office ready to move into, our lease in Reigate was coming to an end and everything seemed on schedule.
In the evening of March 22 last year, the Prime Minister announced a lockdown, by that stage an inevitable conclusion after the dramatic increases in Covid-19 infections in the UK. The then little-known new Chancellor Rishi Sunak’s post-election triumphant budget speech was already out of date, and his department was about to be re-directed to work on the Coronavirus Job Protection Scheme and the Self-Employment Income Support Scheme (‘SEISS’).
And so it was at a time when we were supposed to be physically moving further away from our clients, we found ourselves in contact more than ever – not so much in person of course, but by phone, e-mail and video calls. It had become the year of furlough schemes, bounceback loans and zoom calls.
It sounds so cliched to say that you have to keep up with advances in technology, but that has become more important than ever. While the roll-out of the SEISS was a surprising success, agents were not permitted to make applications on behalf of clients and so our clients found themselves having to deal with technological advances as well. I wonder how many new Government Gateway accounts were set up last May?
These new grants have kept us busy throughout the year, and we have been lucky that we have a small office in an area of the UK with very low incidence of Covid, and our working days have been normal, even though the focus of our work has changed.
Of course, we are conscious that for very many of you it has been a strange, stressful and difficult year. Very few businesses were unaffected, although many were able to return to work once the initial lockdown was eased in June last year. We know some clients whose line of business (live performance, sports coaching) have been unable to re-open at all.
HMRC have been responsive by introducing online tax repayment plans to enable tax to be repaid in instalments beyond the usual 31 January deadline. We have already made a number of reduced payment on account claims for Self-Assessment clients for both 31 January and 31 July 2021 payments.
The last few months have felt like things are getting back to normal, and we have seen the introduction of two significant changes to the tax regime:
- IR35 for contractors in the private sector, which sees staff on long-term contracts for one company, must be paid through PAYE Schemes rather than Gross. This means that responsibility for paying tax switches from the Employee (the contractor) to the Employer.
- Reverse Charge VAT in the Construction Sector, where sub-contractors who usually charge VAT to contractors are asked to “reverse” the VAT, transferring responsibility for payments of VAT to main contractors.
The reduction in Stamp Duty has boosted the housing market, and for those selling rental properties, that means that any Capital Gains Tax due must be paid within 30 days of completion. HMRC have introduced an online portal for CGT to be paid, and agents can assist taxpayers with that.
Looking forward to the joys of ‘ITSA’
Back in those early days of 2020, who would have known how common the terms furlough and zoom call would become? Looking to the future, I already know the term that will haunt us in 2023 – “ITSA” the acronym for Income Tax for Self-Assessment. A fairly innocent sounding term, but it will be of huge significance for many of you reading this.
Earlier I stressed the importance of keeping up with technology, and that will continue to be true, because in July 2020 HMRC announced a 10 Year digital roadmap. The first significant change is planned from April 2023. From that date, taxpayers who complete the Self-Employment or Property sections of their tax return and have a turnover of more than £10,000, will switch to quarterly digital reporting. That will mean not just making five tax returns a year, but making those returns in a digital format. That’s ITSA! I will cover that in more detail later in this note.
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 2020-21 and some of the changes being introduced from April 6th 2021.
Planning for your 2020-21 Tax return
Our Request for Information for your 2020-21 Tax Return
One of the changes we wanted to make was to make this note part of the introduction to the new tax year and to act as a prompt to begin to get paperwork together, and this note will not be accompanied by a bill, but a checklist for your 2020-21 tax return.
The checklist is based on information included in last year’s tax return – perhaps P60 forms from your employer or pension provider, or a certificate of interest from your bank.
It will not include new sources of income or new taxable deductions, such as personal pensions or charitable donations, so please consider those as well as gathering the “usual” papers.
The tax return and the tax computation for 2020/21 will be broadly similar to last year. The tax-free Personal Allowance remains at £12,500, after which 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%.
The Dividend Allowance of £2,000, Basic Rate Interest threshold of £1,000 and Starting Rate for Savings of £5,000 are also unchanged.
Mortgage Interest can no longer be offset against rental income, but should still be included on the tax return as up to 20% of that interest can be claimed as a tax credit for most taxpayers.
SEISS Grants on the tax return
For those that have received any or all of the first three SEISS grants, these will be separately disclosed on the tax return – and HMRC should be able to cross check that information with SEISS Grant applications and payments.
The SEISS scheme was rolled out before the penalties for wrongful disclosure were set out. The rules for qualifying have changed through the year as well, as the definition of what been “affected” by the lockdown actually meant . Where you believe that you may have made a wrongful application you can repay within 90 days without penalty.
We have not seen the penalty process in action yet, but it looks like HMRC are strengthening their legal position in the event of investigations into claims by asking taxpayers to affirm on their tax return whether SEISS Grants have been correctly or incorrectly claimed.
Tax changes for 2021-22 and Beyond
Thresholds for Personal Allowances and National Insurance
The final page of this report shows some of the key tax rates and thresholds for both 2020/21 and 2021/22. The Personal Allowance rise from £12,500 to £12,570 while the threshold at which income is taxed at the higher rate of 40% rather than the basic rate of 20% has risen to £50,270.
Capital Gains Tax
There were rumours that the chancellor would look to lower tax-free thresholds or increase rates of Capital Gains Tax as part of the March 2021 budget. This did not happen. Instead, the Chancellor announced that CGT Rates and thresholds will remain in place until 2026. Perhaps the Chancellor is hedging his bets, hoping that the tax can be raised through income tax and corporation tax, without needing to collect more from CGT.
Inheritance Tax
The threshold for paying Inheritance Tax for individuals is now be £500,000 and £1million for surviving spouses, who are transferred all assets by their spouse. Like CGT, IHT rates and thresholds have been frozen until 2026. Instead HMRC will focus on improvements to the reporting process, so that all IHT forms can be submitted digitally from 2022.
Making Tax Digital for Income Tax from April 2023 – ‘ITSA’
One of the questions that people may have asked as both the furlough scheme and SEISS grants were rolled out and then extended several times was “how are we going to pay for all this”?
In the recent budget in early March, the only tax rises that were announced was a rise in Corporation Tax, and there is a focus on getting business up and running as lockdown hopefully comes to an end, and life returns to normal.
However, HMRC will be looking to collect higher levels of tax from property landlords and the Self-Employed from April 2023, when a regime of quarterly digital reporting is introduced. This change has been given an acronym – ITSA (Income Tax Self Assessment), and is, in theory at least, a logical step in the automation or replacement of the tax return, announced with great fanfare by George Osbourne many years ago.
The implementation of ITSA will be similar to the roll-out of Making Tax Digital for VAT, which took place two years ago. The business case for both projects is that HMRC believe there is a “tax gap” caused by “inefficient recording” of non-bank transactions, and that by forcing tax reporting in a digital format, based initially on bank statements, that will reduce the opportunity for that inefficient recording and more tax should be collected as a result.
How will these proposed changes affected the Self-employed and property landlords in scope?
These changes mean is that filling in boxes on the Property and Self-Employment sections of an annual tax return will be replaced by a quarterly digital report, which will include the underlying details of each transaction making up each category total. In many cases our clients already provide us with the requisite information for your tax return, but that information will now need to be transformed into a digital format on a much more timely basis.
The MTD for VAT implementation had demonstrated the importance of Accounting Software, and the likes of Quikbooks, SAGE and Xero have become more widely used as a result. These companies see the opportunity for business expansion that ITSA presents and will be looking to develop their software accordingly.
History suggests that the implementation may end up being delayed by a year or two, but remember how quickly HMRC were able to develop software for the furlough scheme and SEISS. So I would urge clients to prepare ahead of time. There are several things that you can do:
- Make sure that you have a dedicated business bank account for your self-employment or property – this can then be linked to accounting software via bank feeds or monthly statements;
- Try to retain all sales invoices, supplier invoices, letting agent statements or business expenses in a digital format, and stored digitally using products like Dropbox or Googledrive;
- Even better invest in business specific software that can be linked to accounting software.
Please feel free to ask where we can help, and we can get the process up and running well ahead of time.
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 used to be answered quicker than the more public helplines. Resources at HMRC have been re-assigned in the last 12 months, but hopefully this service will return to normal soon.
- Amend and Update PAYE Codes – PAYE codes for the current year are often changed after the submission of the prior year tax return. This can mean more tax being collected via coding of pensions or salary. For those in Self-Assessment we can ask for PAYE code changes to be reversed via the helpline
- 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 tax return, they will include the agent on any correspondence, so that we can assist in the drafting of the response.
- Mortgage applications – For many years accountants have assisted clients in applications for mortgages. These involve the provision of tax computations (in the approved HMRC SA302 format) and HMRC Tax Year overviews
Key Tax Rates for 2020-21 and 2021-22
In these tables we are publishing some key tax rates for both 2020-21 and 2021-22. The 2020-21 rates will be relevant for the next Self-Assessment Tax Returns due for submission by 31 January 2022. The 2021-22 rates will be relevant for any income and expense you have from 6 April.
2020-21 Upcoming Tax Return | 2021-22 Upcoming tax year | Notes | |
| INCOME TAX & SAVINGS | |||
| Personal Allowance | £12,500 | £12,570 | Up to £100,000 |
| 20% Basic Rate Upper Limit | £50,000 | £50,770 | See ** below |
| Dividend Tax Rates | Rates applicable to both years | Unused Personal Allowance can increase the 0% band | |
| First £2,000: 0%Basic Rate: 7.5% | Higher Rate: 32.5%Highest Rate: 38.1% | ||
| Personal Savings Allowance | Rates applicable to both years | ||
| (‘PSA’) | £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 years | ||
| 0-£125k – Nil | £925k – £1.5m – 10% | With +3% for second | |
| £125k – £250k: 2% | Over £1.5m – 12% | homes / investment | |
| £250k – £925k – 5% | properties | ||
| Rent-a-Room | £7,500 | £7,500 | |
| COMPANIES AND EMPLOYERS | |||
| Employment Allowance on Employers NI | £4,000 | £4,000 | per Company |
| Standard PAYE code | 1250L | 1257L | |
| NI thresholds:- Class 1 Employee- Class 1 Employer | 12% – {between £791 &13.8% {£4,167 per month | 12% – {between £797 &13.8% {£4,189 per month | Optimal NI free salary:2020-21: £8,7362021-22: £8,840 |
| National Living Wage | £8.72 per hour | £8.91 per hour | if 25 or over |
| Workplace pension threshold | £6,240 | £6,240 | Unchanged in 2021/22 |
| Corporation Tax Rate | 19% | 19% | Rising from April 2023 |
| VAT | |||
| VAT Threshold for registration | Over £85,000 | Over £85,000 | De-registration: below £81,000 |
| Flat Rate Scheme(based on turnover) | Register if turnover is below £150,000 | Up to £230,000 turnover | |
| CAPITAL GAINS TAX | |||
| Annual Allowance | £12,300£6,150 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 | £175,000 – April 2020 | £175,000 | |
| PENSIONS | |||
| STATE PENSION | |||
| ‘Old’ Basic State PensionNew State Pension | £134.25 per week£175.20 per week | £137.60 per week£179.60 per week | |
| PERSONAL PENSIONS | |||
| Annual Allowance | £40,000 | £40,000 | |
| Lifetime Allowance | £1,073,100 | £1,073,100 | Frozen until 2026 |
** Income Tax rates are slightly different in Scotland and Wales now.
