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20

March 2019
RAYMOND CARTER & CO: APRIL 2019 TAX UPDATE FOR CLIENTS

RAYMOND CARTER & CO: APRIL 2019 TAX UPDATE FOR CLIENTS

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 2018-19 and some of the changes to tax coming in from April 6th 2019.

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.


1. Changes in your 2018-19 Tax return

The last few years have seen some material changes in the treatment of taxable income on the Self-Assessment tax return. There have been changes in the taxation of:

  • Dividends – the withdrawal of the tax credit and the introduction of the dividend allowance;
  • Interest – now paid gross and only taxed above thresholds of £500 or £1,000;
  • Savings in general with the introduction of the Nil Rate for Savings up to £5,000 for basic rate taxpayers who have taxable income of £16,850 or less;
  • Property Income, as previous reliefs have been withdrawn or reduced;
  • Married Couple, worth £230, where one spouse has unused Personal Allowance;

Things are calming down a little now on the personal tax front. There are, of course, a few changes but nothing as fundamental as in previous years.

Higher tax on Dividend Income

Tax on dividend income will increase in 2018-19 as the tax-free Dividend Allowance threshold falls from £5,000 to £2,000. A basic rate taxpayer with taxable income above £16,850 and dividend income above £5,000 will typically pay an extra £225 in tax. A higher rate taxpayer with dividend income over £5,000 will pay an extra £975.

Whether this change was introduced to penalise Owner-managed companies who typically pay themselves via low salary and high dividends or stealthily to tax prudent savers who have built up a share portfolio, it will raise considerable tax revenue for HMRC. It is worth remembering that the ISA Allowance is £20,000 per person per annum, so if you have scope to transfer shares to an ISA – where dividend income is outside the tax regime – you should!

Property Income continues to have relief reduced or withdrawn

HMRC continue to focus on Property income, not simply to raise tax revenue, but to carry out the policy of making ot harder for ‘Buy to let’ or Non-domiciled Property owners driving up prices in the housing market.

George Osbourne may have moved on to many other jobs since his demise as Chancellor, but his legacy remains. He launched the original campaign ‘Making Tax Easier’, promising to abolish the tax return. As with his plans to win the 2016 Brexit referendum, he has failed rather miserably. While there has been limited progress in terms of digitalising of personal tax information, the tax return process will remain in place for the foreseeable future.

The failure to make “Tax Easier” is best shown, I think, by the taxation of mortgage interest on property income. In 2018-19, we will be in the second year of the new relief process. This will mean that only 50% of mortgage interest paid on an investment property can be claimed as a tax deduction (in the Rental Income section of the tax return). The other 50% is carried forward and is available to be claimed as a basic rate deduction from your overall tax charge (in the final Tax Calculation).

I have spent a year trying to explain this and judging by most people’s reaction I have failed dismally. The confusion is perhaps greater when I explain to clients who are not higher rate taxpayers that the net effect of the tax change is nil – you pay the same amount of tax as under the old rules.

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.

Some Positive Effects of Digitalisation

I mentioned that we have seen some improvements as a result of digitalisation. For most of those clients, with whom we have an ‘authority to act’ with HMRC, we are check Employment and Pensions income details provided by clients to HMRC’s own records. This check is not available until August – after the P11D deadline – and did not work perfectly in all cases in 2017-18, for example for taxpayers receiving more than one pension - but it does reduces the risk of errors being made on tax returns.

2. Tax changes for 2019-20

Good news on Personal Allowances

The headline news is good news. From April 2019, the Personal Allowance rises to £12,500 and the level at which higher rate tax of 40% kicks in rises to £50,000 (from £46,350 in 2018-19). Those receiving Employment or Pension Income via PAYE should see a rise in net monthly income in April as a result.

More bad news for Investment Property Owners

In 2019-20 the attention on those with property income comes from a different direction – Capital Gains Tax.

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

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. That 18 month allowance is being reduced to 9 months from April 2020.

Lettings Relief

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. From April 2020, the conditions for using Lettings Relief are going to be limited to where the property owner and a tenant share occupancy.

Other Changes

There are other initiatives being introduced which may be significant for those affected:

  • The conditions for claiming Entrepreneurs Relief on the sale of shares in a business are being tightened;
  • Separate Tax rates are being introduced in Wales as has been the case in Scotland for a couple of years;
  • Companies are being greater scope to claim full tax write off on capital expenditure – the Annual Investment Allowance is rising from £200,000 to £1million.

On the horizon in April 2020, new rules regarding the treatment of IR35 contractor income in the private sector come on board. For many years in many sectors, but notably in the building and IT software development industry, contractors have been paid “gross” by employers. These contractors have 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 from these contractors than would have been the case if the contractors were employees. The new rules will force many private employers to take responsibility for PAYE and National Insurance deductions, as has been the case in the public sector for two years.

3. Making Tax Digital for VAT

The main focus for accountants, tax agents and many businesses this year will be the long-awaited (and/or feared) introduction of ‘Making Tax Digital for Business” from April 2019.

If you are not registered for VAT you might want to look away now. But, given that Making Tax Digital for Income Tax is looming, although ‘no sooner than April 2021’, you may want to read on to get an idea of what joys await.

For many years, VAT-registered businesses have completed regular, usually quarterly, returns, simply by typing (or even writing) numbers in nine boxes and submitting them to HMRC. These returns must be submitted and any tax owing paid within five weeks of the end of the VAT period.

For VAT periods beginning after 1 April 2019, the nine boxes and five week deadlines remain unchanged. What is changing, however, is the method of populating the nine boxes and the way that data is transmitted to HMRC.

The nine boxes will need to be populated by aggregating digitally stored transaction data for the VAT period, then submitted via an “API” - a digital transfer of data.

You may have seen adverts where you can magically take pictures of your invoices on your phone and that makes you compliant. Oh that it were so simple! The technology being advertised is genuine and it does work. But it takes smart users, smart customers and a great deal of effort to set up and maintain.

Some businesses will find the transition fairly straightforward. We have been using Xero accounting software for a few years now for several of our VAT registered clients, and used properly it is extremely effective. If you can capture the necessary transaction information for your VAT return in a digital format, the technology will do all the aggregation and calculation you need.

However, many agents believe that HMRC have under-estimated the effort that some businesses will require to get their business records in a digital format. HMRC might respond by noting that without a deadline for compliance, businesses may never upgrade their records. (In the official blurb, HMRC argue that businesses “will soon see the benefits of digitalisation”, but that is a secondary objective for HMRC – they think they will collect more tax by reducing the opportunities for undisclosed cash business).

An MTD pilot was launched in the autumn to little fanfare at a time when agents are focussing on meeting the Self-Assessment deadlines. By the start of January less than 1% of businesses have joined the pilot.

There will need to be a bedding down period of the new IT infrastructure for Making Tax Digital before the significant task of adding Income Tax to the scope of MTD begins. We can expect that Property Income will be an initial focus as that is another area where HMRC may believe there has been historic under-payment of tax.

All this effort does require government resources, and as I draft this note, there is still uncertainty as to the next steps on Brexit and what the timing of those steps will be. Only once there is clarity on Brexit will HMRC and other government departments be able to know what resources are available to them. Interesting times…

4. Agent inter-action with HMRC on your behalf

Before I remind you of some of the inter-action that we can have on your behalf with HMRC, I wanted to give you a quick round up of some issues arising with HMRC in respect of our clients in the last 12 months.

  • Half-yearly HMRC Statements of Liabilities were sent late for many customers ahead of the 31 July payment deadline;
  • Taxpayers with Student Loans being paid off were being asked to pay unnecessary excess tax because of a lack of systems integration between HMRC and the Student Loan Company;
  • Company Directors were asked to make prior year tax returns even though no dividend income had been declared;
  • HMRC Software errors referred to as ‘exclusions’ where HMRC makes incorrect tax calculations in particular scenarios (usually involving dividend income above the £5,000 Allowance plus Lifetime chargeable gains)
  • A bug where incorrect underpaid tax through PAYE coding was asked to be disclosed on tax returns

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.


  • 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.


 

5. Key Tax Rates for 2018-19 and 2019-20


In these tables we are publishing some key tax rates for both 2018-19 and 2019-20. The 2018-19 rates will be relevant for the next Self-Assessment Tax Returns due for submission by 31 January 2020. The 2019-20 rates will be relevant for any income and expense you have from 6 April.

 

2018-19

Upcoming Tax Return

2019-20

Upcoming tax year

Notes

INCOME TAX & SAVINGS

 

Personal Allowance

£11,850

£12,500

Up to £100,000

20% Basic Rate Upper Limit

£46,350

£50,000

Dividend Tax Rates

Rates applicable to both years

First £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

£4,260

£20,000

£4,368

(Lifetime ISA is £4,000 in both years)

PROPERTY

 

Stamp Duty

Rates applicable to both years

0-£125k - Nil

£925k - £1.5m - 10%

£125k - £250k: 2%

Over £1.5m – 12%

£250k - £925k – 5%

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

1185L

1285L

NI thresholds:

- Class 1 Employee

- Class 1 Employer

12% - {between £702 &

13.8% { £3,863 per month

12% - {between £719 &

13.8% {£4,167 per month

Optimal NI free salary:

2018-19: £8,424

2019-20: £8,632

National Living Wage

£7.83 per hour

£8.21 per hour

if 25 or over

Workplace pension threshold

£6,032

£6,136

Contribution Rates: 5% / 3% from April 2020

Corporation Tax Rate

19%

19%

18% from April 2020

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

£11,700

£5,850 for Trusts

£12,000

£6,000 for Trusts

CGT Rates

20%/28%** higher rate

10%/18%** basic rate

20%/28%** higher rate

10%/18%** basic rate

** +8% for Residential Property

INHERITANCE TAX

IHT Rate

40%

40%

Nil Rate Band

£325,000

£325,000

Residence Nil Rate Band

£125,000 - April 2018

£150,000 - April 2019

£175,000 in April 2020.

PENSIONS

STATE PENSION

Basic State Pension

Up to £125.95 per week

£129.20 per week

Single-Tier State Pension

£164.55 per week

£168.60 per week

PERSONAL PENSIONS

Annual Allowance

£40,000

£40,000

Lifetime Allowance

£1,030,000

£1,055,000