It’s good to share and earn a £1,000 tax free

Fotolia_45741373_XS cash

From April 2017, there will be two new tax-free £1,000 allowances – one for selling goods or providing services, and one income from property you own.

People who make up to £1,000 from occasional jobs – such as sharing power tools, providing a lift share or selling goods they have made – will no longer need to pay tax on that income.

In the same way, the first £1,000 of income from property – such as renting a driveway or loft storage – will be tax free.

Under the new allowances, from April next year individuals with property or trading income won’t need to declare or pay tax on the first £1,000 they earn from each source per year. Should they earn more than that amount they will have to declare it, but they can still take advantage of the allowance.

According to http://www.theguardian.com/money/2016/mar/21/sharing-economy-1000-tax-free-allowances-ebay-airbnb-micro-entrepreneurs

The Treasury has said that they new relief will be for “self-starters”, from mothers who supplement their income with a bake sale to those who do some trading on eBay.

A spokesman said: “Property income would come about from any income that you make from renting out a residence, home, building, property or land – so you could rent out your driveway as a parking space. You can rent out your home to tourists, which is the Airbnb bit. Or you can rent out your garden space.” He added: “Trading income covers any sale of goods or services. You could do tasks such as cleaning or odd jobs, hiring out your own equipment such as power tools, or selling goods through a website like TaskRabbit, Etsy [or] eBay.” The government claims 700,000 people will benefit from the new tax break, a figure based on self-assessment data from HMRC.

steve@bicknells.net

If you’re a Landlord get an accountant now!

Hand writing the text: Property News

Last week the Bank of England turned up the heat on Landlords.

The Bank of England expressed concerns about Buy-to-Let Investment and lending levels. New rules have been proposed that aim to tighten requirements for landlords involved in investment properties and limit the amount that can be borrowed for these types of endeavours.

This reaction comes from recent suggestions that mass buy-to-let property management could have a destabilising effect on the UK economy.

The rules put a spotlight on lenders, encouraging them to require more extensive financial information from the potential landlord before granting a mortgage.

The requirements go beyond ensuring the rental income of the property is significantly higher than the mortgage payments (the income coverage ratio), to also considering an individual’s overall financial situation.

The Prudential Regulation Authority (PRA) – an arm of the Bank – has recommended that banks and building societies take account of:

  • all the costs a landlord might have to pay when renting out a property
  • any tax liability associated with the property
  • a landlord’s personal tax liabilities, “essential expenditure” and living costs.
  • a landlord’s additional income – where this is being used to support the borrowing. This income should be “verified”.

If adopted, the new rules could reduce lending to landlords by up to 20% over the next three years.

https://debitoor.com/blog/how-use-debitoor-property-accounting

Landlords have already been hit but tax changes…

Buy to Let Stamp Duty

Prop Value Std Rate B2L Rate
< £125,000 0% 3%
£125k to £250k 2% 5%
£250k to £925k 5% 8%
£925k to £1.5m 10% 13%
Over £1.5m 12% 15%

A 3% surcharge on stamp duty when some buy-to-let properties and second homes are bought will be levied from April 2016.

This means it will add £5,520 of tax to be paid when buying the average £184,000 buy-to-let property. The new charge would have hit 160,000 buyers if it had applied last year.

But, commercial property investors, with more than 15 properties, will be exempt from the new charges.

Stamp Duty on Selling Shares is 0.5% so why aren’t more investors buying property into companies and then selling the shares in the company!

Mortgage Interest

Mortgage Interest offset against property income will be restricted

2017/18

75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19

50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20

25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21

100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayer it’s a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

Capital Gains

From April 2016, the higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10%.

There will be an additional 8% surcharge to be paid on residential property.

Capital Gains Tax on residential property does not apply to your main home, only to additional properties (for example a flat that you let out).

Wear & Tear

Landlords have been used to claiming 10% of rental income as a tax deductible wear and tear allowance, but that will change in April 2016.

The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

What could a Property Investor do to reduce the impact of these changes?

  1. Incorporation – could you save money by incorporating your residential investments, would you qualify for incorporation tax relief
  2. Pension Contributions – Pension Contributions currently receive tax relief at your rate of tax – 20% to 45% – so if you are a 40% tax payer you would need pay half the value of your 20% restricted interest into your pension to mitigate the extra tax
  3. Change of Use – would your Buy to Let be able to be converted to a Furnished Holiday Let? or another type of commercial property on which the interest restriction won’t apply
  4. Increasing the Rent – Could you charge more to cover the extra taxes?
  5. Spouse Income Tax Elections – If the property is jointly held HMRC assume a 50/50 split of the income but you can change that using Form 17 this might be useful if one of you is a basic rate taxpayer and the other a higher rate taxpayer
  6. Tax Deductible Expenses – Many landlords overlook expenses at the moment but they could become a lot more important, for example, use of your home, motor expenses, computers, travel and subsistence, phone costs etc

steve@bicknells.net

What is the optimum salary for 2016/17?

small business displayed on calculator

There have been several tax changes in the Budget:

  1. Changes to Personal Allowances –
    The Personal Allowance is the amount of income you can earn before you start paying Income Tax. This is currently £10,600 – it will already rise to £11,000 in 2016, and will now increase further to £11,500 in April 2017.

    The point at which you pay the higher rate of Income Tax will increase from £42,385 to £43,000 in 2016 and to £45,000 in April 2017.

  2. Employment Allowance – The employment allowance is £3,000 but there is a restriction on it being used by single person companies.
  3. Dividend Tax -From April 2016 you’ll pay tax on any dividends you receive over £5,000 at the following rates:
    • 7.5% on dividend income within the basic rate band
    • 32.5% on dividend income within the higher rate band
    • 38.1% on dividend income within the additional rate band

    This simpler system will mean that only those with significant dividend income will pay more tax.

    The Dividend Allowance will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £5,000 of dividend income you receive.

    Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance.

These changes also make it more complicated in deciding whether to incorporate, so I have added a new calculator to help you decide http://stevejbicknell.com/tax-calculators/

The £5,000 dividend allowance is a bit confusing because its an allowance and not an exemption, so it becomes part of your overall income.

Basically, most small business owners will either choose £8,060 as a salary (free of tax an NI) or £11,000 (tax free)

Because your salary is tax deductible in companies the difference £11,000 – £8,060 = £2,940 plus 13.8% NI = £3,345.72 which saves 20% corporation tax = £669.14

There will be NI to pay 12% employee and 13.8% employer = 25.8% x £2,940 = £758.52 – £669.14 = £89.38 net tax

Beyond this you will pay income tax at 20%.

So in summary, I think the optimum salary is £11,000.

Above this you should take dividends.

This is a simplification and you should speak to your accountant about your specific tax affairs.

Steve@bicknells.net

 

 

Have you got a week 53 in 2016?

Close up of payslip

In the 2015/2016 tax year, you have a week 53 if the following applies:

Your normal pay day is a Monday or Tuesday and…

  • You last processed your weekly paid employees on Monday 28 March 2016 or Tuesday 29 March 2016.
  • You last processed your fortnightly paid employees on Monday 21 March 2016 or Tuesday 22 March 2016.
  • You last processed your four weekly paid employees on Monday 7 March 2016 or Tuesday 8 March 2016.

‘Week 53’ payments

If you pay your employees weekly, fortnightly or every 4 weeks, you might need to make a ‘week 53’ payment in your final FPS of the year.

Your payroll software will work out ‘week 53’ payments for you.

In the ‘Tax week number’ field of your FPS, put:

  • ‘53’ if you pay your employees weekly
  • ‘54’ if you pay them fortnightly
  • ‘56’ if you pay them every 4 weeks

steve@bicknells.net

Overdrawn directors accounts will now cost 32.5%

with computer

Directors often borrow from their companies and this incurs a temporary tax charge.

The rate of tax charged on loans to participators and other arrangements (currently 25%) is being specifically linked to the dividend upper rate, which will be 32.5% from 6 April 2016.

Section 455 CTA 2010 liabilities must be included in a company’s CT600 tax return. The S455 tax forms part of the calculation of tax payable by the company under Paragraph 8 Schedule 18 FA 1998.

A claim to relief under Section 458 is a claim for relief against the original tax charge for the AP in which the loan was made. The time limit for the claim is four years from the end of the financial year in which the loan is repaid, released or written off. COM53120

You must use form L2P to enable a close company which has paid tax on a loan to a participator to reclaim that tax once the loan has been repaid, released or written off.

Click here to use form LP2

steve@bicknells.net

What are the tax changes for Residential Investors?

 

Boot

But to Let Stamp Duty

Prop Value Std Rate B2L Rate
< £125,000 0% 3%
£125k to £250k 2% 5%
£250k to £925k 5% 8%
£925k to £1.5m 10% 13%
Over £1.5m 12% 15%

A 3% surcharge on stamp duty when some buy-to-let properties and second homes are bought will be levied from April 2016.

This means it will add £5,520 of tax to be paid when buying the average £184,000 buy-to-let property. The new charge would have hit 160,000 buyers if it had applied last year.

But, commercial property investors, with more than 15 properties, will be exempt from the new charges.

Stamp Duty on Selling Shares is 0.5% so why aren’t more investors buying property into companies and then selling the shares in the company!

Mortgage Interest

Mortgage Interest offset against property income will be restricted

2017/18

75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19

50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20

25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21

100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayer it’s a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

Capital Gains

From April 2016, the higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10%.

There will be an additional 8% surcharge to be paid on residential property.

Capital Gains Tax on residential property does not apply to your main home, only to additional properties (for example a flat that you let out).

Wear & Tear

Landlords have been used to claiming 10% of rental income as a tax deductible wear and tear allowance, but that will change in April 2016.

The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

What could a Property Investor do to reduce the impact of these changes?

  1. Incorporation – could you save money by incorporating your residential investments, would you qualify for incorporation tax relief
  2. Pension Contributions – Pension Contributions currently receive tax relief at your rate of tax – 20% to 45% – so if you are a 40% tax payer you would need pay half the value of your 20% restricted interest into your pension to mitigate the extra tax
  3. Change of Use – would your Buy to Let be able to be converted to a Furnished Holiday Let? or another type of commercial property on which the interest restriction won’t apply
  4. Increasing the Rent – Could you charge more to cover the extra taxes?
  5. Spouse Income Tax Elections – If the property is jointly held HMRC assume a 50/50 split of the income but you can change that using Form 17 this might be useful if one of you is a basic rate taxpayer and the other a higher rate taxpayer
  6. Tax Deductible Expenses – Many landlords overlook expenses at the moment but they could become a lot more important, for example, use of your home, motor expenses, computers, travel and subsistence, phone costs etc

steve@bicknells.net

 

 

 

Travel and Subsistence tax restrictions starting in April 2016

Oh no!

It’s estimated that 430,000 contractors will be affected by the new rules!

Under the new rules certain groups of workers will no longer be able to claim tax relief on travel and subsistence expenses, specifically:

  • Those employed via umbrella companies (employment intermediaries).
  • If you personally provide services to another person.
  • The draft legislation confirms that limited company contractors are not affected by this new restriction, except for any contract work they carry out which is caught by the IR35 rules.

We expect that the new rules will prevent claims for routine travel but allow exceptional travel. For example say you normally work in London that would be excluded but they you have to go to a meeting in Birmingham, that trip should be allowed.

steve@bicknells.net

 

 

Trivial Benefits are tax free!

Businessman looking at a small present with a magnifying glass

At last!

From the 6th April 2016 a trivial benefits exemption will become law and set at limit on the benefit of £50 per employee per benefit.

There will be an annual cap of £300 for directors and other office holders of close companies and members of their families and households who are employees of the company.

Its designed for seasonal gifts, flu jabs, small gifts, flowers etc.

  1. It can’t be cash, or cash vouchers.
  2. The employer must bear the cost (salary exchange won’t work)
  3. It must not be in recognition of services or part of a contractual agreement

For years the definition of ‘trivial benefit’ has been undetermined and it was a massive grey area but now we have some definite rules to work to.

Steve@bicknells.net

Contractors in the Public Sector will have to pay more tax!

Retro Drama Woman

In the Budget 2016 George Osborne announced that as from April 2017 it will be the duty of the Public Sector to make sure Personal Service Companies and Intermediaries pay the correct tax.

The government announced at Budget 2016 that it will reform the intermediaries legislation (known as IR35) for public sector engagements. It will do this by moving the liability to pay the correct employment taxes from the worker’s own company to the public sector body or agency / third party paying the company. In partnership with stakeholders, HM Revenue and Customs will develop a new tool that will make the decision on whether or not the rules should apply as simple as possible and provide certainty. A formal consultation will be published later. [Technical Note]
The organisations checking intermediaries will include:
  • Government departments, legislative bodies, armed forces
  • Local government
  • NHS
  • Schools and further and higher education institutions
  • Police
  • The British Museum, BBC, Channel 4
  • Transport for London
  • Publically owned bodies

It will be the engagers duty calculate the deemed employment income.

Here are 3 examples…

PSC 1

 

PSC 2

Will this lead to higher taxes for contractors? will they be converted to employees?

steve@bicknells.net

Home Buyers have saved £657m in SDLT!

One family house for sale

In the 12 months since December 2014 when new SDLT rules came into place home buyers have saved an estimated £657m in Stamp Duty (SDLT).

The Autum Statement 2014 announced the following change to Stamp Duty.

• No stamp duty will be paid on the first £125,000 of a property
• 2% will be paid on the portion up to £250,000
• 5% is paid for the portion up to £925,000
• 10% is paid on the portion up to £1.5m
• 12% is paid on anything above that

HMRC have a handy calculator, here is link

http://www.hmrc.gov.uk/tools/sdlt/land-and-property.htm

New analysis released by HMRC shows that the benefits of this reform have been felt across the country, with homebuyers saving an estimated total of:

  • £24 million in the North East or £900 for the average house
  • £90 million in the North West or £700 for the average house
  • £74 million in the East Midlands or £500 for the average house
  • £131 million the South West or £4,800 for the average house
  • £38 million in Wales or £800 for the average house

steve@bicknells.net