Specific receipts: domestic microgeneration: Income Tax exemption for domestic microgeneration
S782A Income Tax (Trading and Other Income) Act 2005
With effect from tax year 2007-08 there is an exemption from Income Tax for an individual’s income from the sale of electricity generated by a microgeneration system where:
1. the system is installed at or near domestic premises occupied by the individual, and
2. the individual intends that the amount of electricity generated by the microgeneration system will not significantly exceed the amount of electricity consumed in those premises.
For the purpose of this exemption ‘domestic premises’ means premises used wholly or mainly as a separate private dwelling.
A ‘microgeneration system’ is defined in S4 Climate Change and Sustainable Energy Act 2006.
This exemption is aimed at domestic microgeneration which is primarily intended to match the generator’s own home consumption needs. The term ‘significantly exceed’ in (b) above is not defined in Section 782A and should be considered by reference to the particular circumstances. However, in general, a householder who does not intend to generate an amount of electricity more than 20% in excess of their own domestic needs is unlikely to be regarded as intending to significantly exceed the amount of electricity consumed in their own premises.
No income tax will therefore arise on feed-in tariffs received by an individual from domestic microgeneration where the above conditions are met.
The exemption may apply where an individual installs a microgeneration system at a property which is not the individual’s main residence provided that the other domestic property is used by the individual, wholly or mainly, as a separate private dwelling and the other conditions are met.
most pensions, including state pensions, company and personal pensions and retirement annuities
interest on savings and pensioner bonds
rental income (unless you’re a live-in landlord and get £4,250 (£7,500 from April 2016) or less)
benefits you get from your job
income from a trust
dividends from company shares
So how can you pay less income tax?
Here are 10 suggestions…
Pension
When you pay into a pension you get income tax relief on your contributions .
Lets say you invest £10,000 per year of earned gross income, increasing each year by 3% for inflation and see the effect of tax relief at 40% and 20%, assuming a return on the investment of 7% (which you should get with Commercial Property Investment)
40% Tax Rate
20% Tax Rate
Year
Pension
No Pension
% Diff
Year
Pension
No Pension
% Diff
1
£10,700
£6,252
71%
1
£10,700
£8,336
28%
2
£22,470
£12,954
73%
2
£22,470
£17,272
30%
3
£35,395
£20,131
76%
3
£35,395
£26,841
32%
4
£49,564
£27,808
78%
4
£49,564
£37,078
34%
5
£65,077
£36,013
81%
5
£65,077
£48,017
36%
6
£82,036
£44,773
83%
6
£82,036
£59,698
37%
7
£100,555
£54,119
86%
7
£100,555
£72,158
39%
8
£120,754
£64,081
88%
8
£120,754
£85,441
41%
9
£142,761
£74,692
91%
9
£142,761
£99,590
43%
10
£166,715
£85,987
94%
10
£166,715
£114,649
45%
11
£192,765
£98,000
97%
11
£192,765
£130,667
48%
12
£221,070
£110,771
100%
12
£221,070
£147,694
50%
13
£251,801
£124,337
103%
13
£251,801
£165,782
52%
14
£285,140
£138,740
106%
14
£285,140
£184,987
54%
15
£321,285
£154,024
109%
15
£321,285
£205,365
56%
16
£360,445
£170,233
112%
16
£360,445
£226,978
59%
17
£402,846
£187,416
115%
17
£402,846
£249,888
61%
18
£448,731
£205,621
118%
18
£448,731
£274,161
64%
19
£498,358
£224,901
122%
19
£498,358
£299,868
66%
20
£552,006
£245,309
125%
20
£552,006
£327,079
69%
Even when you consider:
Your money is locked up till you are 55
You pay tax when you take money out of the pension
You can get 25% out of the pension tax free
The difference in growth is massive
If you do salary sacrifice you can increase the tax effect by saving national insurance too.
2. ISA
Individual Savings Accounts have been around for a few years and very soon the Help to Buy ISA will be launched
Top 10 facts and rules…
Its only available to ‘First Time Buyers’
‘First Time Buyers’ can only have one Help to Buy ISA with one provider
You can pay in £1,000 when you open the account and then save a maximum of £200 per month
The maximum government bonus is £3,000 (but you can lower amounts of bonus if you have less than £12,000)
The scheme will run for 4 years from the date it opens (Autumn 2015)
Couples can have a Help to Buy ISA each which means if they don’t want to wait 4 years could save £12,000 in 25 months where as a single saver would need 55 months
Unlike ISA’s where you open one per year, the Help to Buy ISA will continue for 4 years
You can withdraw funds but if its not to buy a home then you won’t get the bonus
More than 100,000 homes have now been bought with government backed schemes
You will be able to get them at banks and building societies
3. Salary Sacrifice
Salary Sacrifice is a very tax efficient way to give your employees benefits and the most popular benefits are Pensions and Childcare. I wrote a blog back in 2011 which explained how it can save 45.8% in tax and NI
HMRC decided on 9th April 2013 that it was time to “clarify” in their Manuals what are successful and unsuccessful salary sacrifice schemes and have added some further guidance. Their Staff are instructed not to approve schemes (Employment Income Manual EIM42772)….
You (HMRC) may get requests for advice:
on how to set up a salary sacrifice arrangement, or
on whether draft documentation will achieve a successful salary sacrifice.
You (HMRC) should not comment on either of these areas. Salary sacrifice is a matter of employment law, not tax law. The nature of an employee’s contract of employment is a matter for the employer and employee.
The specific updates are:
EIM42750 – Salary Sacrifice – updated – this contains the examples of schemes
EIM42777 – Contractual arrangements – this has interesting comments on childcare and pensions
4. Employment Expenses
As an employee you can claim tax relief for expenses incurred in doing your job, for example business mileage, cycling on business, hotels, meals, business phone calls, in fact anything as long as its business related
If your claim is less than £2500 you can make your claim using Form P87 http://www.hmrc.gov.uk/forms/p87.pdf if its more than £2500 you will need to complete a Self Assessment Return (you need to phone HMRC to request a Self Assessment Return – contact details below), if you know your UTR number you can register and file your Self Assessment Return on line.
5. Dividends
When you take dividends has never been more critical due to changes in the Summer Budget 2015, so if you have distributable reserves you might want to take more dividends this tax year, try the Dividend Calculator above to see how much difference it could make.
6. Tax break for Couples
A new tax break as launched this week from 6 April 2015, which will be eligible to more than 4 million married couples and 15,000 civil partnerships.
The Allowance means a spouse or civil partner who doesn’t pay tax – therefore is not earning at all or is earning below the basic rate threshold (£10,600) – can transfer up to £1,060 of their personal tax-free allowance to a spouse or civil partner – as long as the recipient of the transfer doesn’t pay more than the basic rate of income tax.
7. Tax Free Benefits
Getting tax free benefits will save you lots of tax, here some ideas…
Pensions – Up to £40k can be paid in to you pension scheme by your employer (2015/16) and you can use carry forward to pay in even more
Childcare – Up to £55 per week but check the rules to makesure your childcare complies (HMRC Leaflet IR115) – these rules are changing soon.
Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £121,200 or above.
9. Green Company Car
A calculator is available here: http://www.hmrc.gov.uk/calcs/cars.htm and rates are shown in the table below for zero emission vehicles and some of the lower CO2 vehicles.
10. Check your P800
The P800’s are likely to contain errors because:
Large amounts of data are manually input
Estimates especially for Bank Interest and Investment Income
So check the following carefully:
P60 – you get this at the end of each tax year
P45 – you get this when you leave a job
PAYE Coding Notice
P11D Expenses and benefits
P9D Expenses payments and income from which tax cannot be deducted
Bank and Building society statements
Pension Tax Deductions
Its expected that around 3 million people will be asked to pay more tax and around 2 million people will have overpaid.
Depending on the level the Scottish Parliament sets the rate at Scottish taxpayers may pay a different rate of Income Tax to the rest of the UK.
Some of the Income Tax collected under the Scottish rate will fund the Scottish government and the rest will fund the UK government.
The Scottish rate of Income Tax doesn’t apply to income from savings such as building society interest or income from dividends. This rate will stay the same for all taxpayers across the UK.
The Scottish government is expected to announce the proposed Scottish rate of Income Tax for the tax year 2016 to 2017 in its autumn 2015 draft budget.
HM Revenue and Customs (HMRC) will collect the Scottish rate of Income Tax on behalf of the Scottish government.
Identifying Scottish taxpayers
It’s where you live, not where you work, that decides whether you’re a Scottish taxpayer.
You’ll pay the Scottish rate of Income Tax if:
you’re resident in the UK for tax purposes, and
your main residence for most of the tax year has a Scottish postcode
HMRC will contact potential Scottish taxpayers before April 2016. If the address HMRC holds for you is in Scotland you’ll be classed as a Scottish taxpayer. It’s your responsibility (not your employers’) to notify HMRC if you change your address.
Your April 2016 tax code will begin with the letter ‘S’ to show you’re a Scottish taxpayer.
If you pay your Income Tax through your wages (known as Pay As You Earn) HMRC will advise your employer to treat you as a Scottish taxpayer so you don’t need to do anything.
Nicola Sturgeons’ rhetoric suggests she is planning to revive Labour’s ailing fortunes in Scotland, where it was all but wiped out in the general election, by veering Left and attempting to regain the party’s traditional working class support.
Among the policies she said she supported were a 50p top rate of income tax for people earning more than £150,000 and removing independent schools’ charitable status.
But the Tories said her blueprint would “send Scotland back to the 1970s” and warned it would merely result in an exodus of “wealth creators” south of the Border.
It will be interesting to see what the Scottish Parliament does to tax rates and whether or not its a success for Scotland.
You pay National Insurance contributions to qualify for certain benefits including the State Pension.
You pay National Insurance if you’re:
16 or over
an employee earning above £155 a week
self-employed and making a profit of £5,965 or more a year
The Office of Tax Simplification is currently beginning a process of looking at merging National Insurance with Income Tax.
ACCA’s head of tax Chas Roy-Chowdhury warned that an alignment of NI and income tax rates would be crucial prior to a merger taking place.
Whilst This is Money reported…
Middle and high earners could see their tax bills jump under radical plans to merge income tax and National Insurance, a tax expert has warned.
People taking home £50,000 a year could be £230 worse off, but low earners on £20,000 would save more than £530, and those on £30,000 would come out around £380 ahead, according to snap research by Tilney Bestinvest on the potential tax shake-up.
Chancellor George Osborne wants to reduce ‘complexity’ in the tax system to make it clearer exactly how much people have to cough up, and has ordered the Office of Tax Simplification to see if there is a case for change.
This change is also likely to lead to changes to Pension tax relief reform, Your Money reported…
The government has already announced a consultation on the pension tax relief system, and I believe that a merger of income tax and NI would likely result in the floated idea of a pension with ISA-like tax treatment. This is because at present, a basic rate taxpayer gets 20% tax relief on pension payments but surely this would increase to 32% under a combined system. It seems illogical to increase tax relief at a time when they are actually trying to reduce the cost to the Exchequer. An equal tax treatment of ISAs and pensions could be a prelude to merging the two, potentially drawing ISAs into some form of limetime allowance.
The Tax Payer’s Alliance have been campaigning and it looks like the Chancellor, George Osborne, has agreed that the first step is to re-name National Insurance as “Earnings Tax”. The change is to be proposed in legislation this week.
This story was reported in the Telegraph on 23rd February. There is also an interesting article on Tax Research UK (Richard Murphy).
You pay National Insurance contributions to build up your entitlement to certain state benefits, including the State Pension.
You pay National Insurance if you’re:
16 or over
an employee earning above £149 a week
self employed and making a profit over £7,755 a year (Class 4) plus £2.70 per week Class 2 NI (you may not have to pay any Class 2 NI if your profits are below £5,725)
If you’re employed, you stop paying Class 1 National Insurance when you reach the State Pension age.
If you’re self-employed you stop paying:
Class 2 National Insurance when you reach State Pension age (or up to 4 months after this to pay off any contributions you owe)
Class 4 National Insurance from the start of the tax year after the one in which you reach State Pension age
Income Tax is whole different ball game. Whilst I can see its simpler to have one tax the changes that would be required to achieve it would be huge!
On the 6th April 2014 the personal allowance will increase to £10,000 (up £560) which means you can earn £10,000 before you pay income tax.
But you might want to keep your earnings below the NI Threshold, in previous years the employers and employee’s NI thresholds have been out of alignment but from 6th April 2014 they will be aligned, which means that earnings over £153 per week (£7,956 per year) will attract both 12% employees’ NI and 13.8% employers’ NI. For earnings above £805 per week (£41,865 per year), the employees’ NI rate drops to 2% but the employers’ NI rate remains unchanged.
So to avoid Income Tax and NI you would need to earn below £7,956.
But, there is some good news, from April 2014 there is a new ’employment allowance’ of £2,000 which you can offset against your employers NI.
The Chancellor George Osborne presented the Autumn Statement to the House of Commons on 5th December 2013 and things are getting better, economic growth forecasts for this year have more than doubled from 0.6% to 1.4% but the austerity plan is set to continue.
Here is a summary of the key announcements:
Business Rates
Business rate increases in England will be capped at 2% in 2014/15 (they were set to increase by 3.2%) and businesses will be able to pay over 12 months rather than 10.
The Retail Sector will also get a £1,000 discount in 2014/15 and 2015/16, this applies to pubs, cafes, restaurants and charity shops with a rateable value below £50,000.
A reoccupation relief of 50% is being introduced for up to 18 months on premises that have been empty for a year or more and it will apply from 1st April 2014 to 31st March 2016.
Small Business Rate Relief has been extended to April 2015 under the scheme small businesses with a rateable value of £6,000 or less can get 100% relief, the relief is scaled down to zero on rateable values of £12,000 and there is a lower multiplier on rates between £12,001 and £17,999.
Income Tax
As previously announced the personal allowance will be £10,000 for the tax year 2014/15.
From April 2015, a spouse or civil partner who is not liable to income tax will be able to transfer £1,000 of their allowance to a basic rate tax paying spouse and as a result save £200 in tax.
State Pension Age
By 2020 it will be 66, by 2028 it will be 67 and by mid 2030’s 68, then in 2040’s 69.
Capital Gains Tax
The annual exempt amount will be £11,000 for individuals for 2014/15.
But there was an exemption for principle private residence letting for 36 months and from 6th April 2014 it will be reduced to 18 months.
Consultation will start in April on non-residents paying capital gains on property disposals.
Individual Savings Account (ISA)
The limit will rise to £11,880 for 2014/15 and of this £5,940 can be invested in cash ISA’s
Mortgage Guarantee Scheme
The scheme started in October will run for 3 years and end in January 2017.
Buyers will only need a 5% deposit and the government and the funder will guarantee 15% of the loan in return for a fee.
IR35
Legislation will be tightened from April 2014.
Anti-avoidance
A range of measures were discussed in addition to IR35 and these included:
Partnership Tax
Controlled foreign companies
Charities
High risk tax avoidance schemes
Dual contracts
Other headline measures
Employers NI for under 21’s to be scrapped in 2015
Rolling back green levies to allow an average saving of £50 on energy bills
Free school meals for infants
Scrapping of 1% above inflation rail fare increases
Electronic tax discs
Abolition of next years 2p per litre fuel duty rise
Real Time Information (RTI) has now been with us for a few months and once you get used to Full Payment Submissions (FPS) and Employer Payment Summaries (EPS) its not too bad.
HMRC recently reported:
With over 1.4 million PAYE schemes successfully reporting in real time, the launch of PAYE Real Time Information (RTI) continues to go well. The vast majority of employers (83% of small & medium size employers and 77% of more than 1 million micro employers) have started reporting in real time, but we are aware that there are still some employers who have not started yet.
Given time you might even get to Love doing your RTI Payroll as much as Suzie Humphreys…
Here are some things that I have learnt that you might find helpful:
Split FPS Submissions
You can only submit each employee once for each payment period but you can make more than one Full Payment Submission, this is useful if you have Monthly and Weekly payrolls, or a late starter you have process after the FPS has been submitted, or if you split your payroll by seniority and different staff process sections.
Hashtag and Paying by BACS
At the moment if you pay employees by Direct BACS using systems such as Nat West Payaway the Direct BACS submission needs to include a Hashtag to enable HMRC to match the payment with the FPS, however, if you don’t use Direct BACS and you just pay by Online Banking, Bankline, BACS or CHAPS or any other method you don’t need the Hashtag. I am sure that will change!
Starters and Leavers
When you enter a new employee HMRC are notified on the first FPS that they appear on and you must no longer use a P46 to get starter information you need to us the new HMRC Starter Checklist
P45’s are just for the Employee to refer to and are useful to show to their new employer, don’t send them to HMRC. HMRC are notified of leavers on the FPS.
CIS
If you have deductions under the Construction Industry Scheme you need to enter them on the EPS to reduce the amount of tax payable.
NI Holiday
NI Holidays for new companies end in September 2013 but until then need to be entered on the EPS. Form E89 is used to keep track of how much has been claimed.
Here are some more useful tips and facts on RTI:
Relaxation of Rules for Small Companies
HM Revenue & Customs (HMRC) recognise that some small employers who pay employees weekly, or more frequently, but only process their payroll monthly may need longer to adapt to reporting PAYE information in real time. HMRC have therefore agreed a relaxation of reporting arrangements for small businesses.
HMRC is planning to extend the temporary relaxation for employers with fewer than 50 employees to April 2014. This relaxation means that these businesses are still required to report through the new system, but are able to do so once a month (but no later than the end of the tax month (5th)), rather than each time they pay their employees. This gives small businesses that pay weekly (or more frequently), but who only run their payroll at the end of the month, some extra time to adjust to the new requirements.
Annual Schemes
Many micro businesses such as one person companies are switching to annual payrolls.
An annual scheme must meet all of the following requirements:
all the employees are paid annually
all the employees are paid at the same time/same date
the employer is only required to pay HMRC annually
Once a business is registered as an annual scheme, an Employer Payment Summary (EPS) is not required for the 11 months of the tax year where no payments are made to the employees.
But currently HMRC are unable to process requests to become Annual.
HMRC are working to rectify this position and will publish a further ‘What’s New’ message to announce when this is ready.
Late Filing Penalties
If you do not report the final payment made to an employee, for the tax year 2013-2014, by19 May in the following tax year you will be charged a late filing penalty.
Penalties are calculated on the basis of £100 per 50 employees and accrue for each month (or part month) that a return remains outstanding after 19 May.
If you fail to report this information by 19 May, or tell HMRC no return was due by sending an EPS, they will write to you (and your authorised agent if you have one) advising that a penalty may already have been incurred and that you must report this information as soon as possible to prevent the penalty building up any further.
