Category: Income Tax

Lower Tax On Savings Income

Due to the Personal Allowance most people can benefit from paying no tax on interest on their savings. There is also a Starting Rate for Savings for those on low income.

In the current tax year, anyone with taxable income of less than £17,500 will have no tax to pay on their savings income – interest received. This figure is calculated by adding the £5,000 starting rate limit for savings (where 0% of the interest is taxable) to the current £12,500 personal allowance. However, this £5,000 starting rate limit for savings will be reduced by £1 for every £1 of non-savings income in excess of £12,500. Accordingly, when non-savings income amounts to £17,500 all savings income will be taxable.

https://www.gov.uk/apply-tax-free-interest-on-savings

There is also a Personal Savings Allowance (PSA) which means that for basic-rate taxpayers the first £1,000 interest on savings income is tax-free. For higher-rate taxpayers the tax-free personal savings allowance is £500. Anyone earning over £150,000 does not benefit from the PSA.

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Interest from savings products such as ISA’s and premium bond wins do not count towards the limit. Taxpayers with tax-free accounts and higher savings can continue to benefit from the relevant PSA limits.

Banks and building societies no longer deduct tax from your account interest as a matter of course. Taxpayers who still need to pay tax on savings income will need to declare this as part of their annual Self-Assessment tax return.

Taxpayers that have overpaid tax on savings interest can submit a claim to have the tax repaid. Claims can be backdated for up to four years after the end of the current tax year. The deadline for making claims for the 2016-17 tax year is 5 April 2021.

If you are looking to know more about this, feel free to book a free consultation with us.

One of the measures announced by HMRC to support businesses during coronavirus pandemic was the introduction of service of Time To Pay for those affected by COVID-19.

https://www.gov.uk/government/news/self-assessment-customers-to-benefit-from-enhanced-payment-plans

Businesses and self-employed people in financial distress and with outstanding tax liabilities may be eligible to receive support with their tax affairs by accessing this service.

An online payment plan was available to set up installment arrangements for paying tax liabilities up to £10,000. This limit has now been increased to £30,000 from 1 October 2020.

HMRC estimates around 95% of Self-Assessment customers who are due to make payments on 31 January 2021 could qualify to implement a Time To Pay arrangement using the self-serve, online Time To Pay facility, without needing to speak to an HMRC adviser.

Taxpayers that want to use the online option must meet the following requirements:

• Have no outstanding tax returns
• No other tax debts
• No other HMRC payment plans set up.

The debt needs to be between £32 and £30,000, and the payment plan needs to be set up no later than 60 days after the due date of a debt.

Taxpayers using self-serve Time To Pay will be required to pay any interest on the tax owed. Interest will be applied to any outstanding balance from 1 February 2021.

Taxpayers with Self-Assessment Tax payments of over £30,000, or who need longer than 12 months to pay in full, may still be able to set up a Time To Pay service arrangement by calling the Self-Assessment payment helpline.

If you are looking for more information; book a call with us.

Deadline For Paper Self-Assessment Filing

For the taxpayers who file their personal tax return on paper, the deadline for paper Self-Assessment returns submitting is 31 October 2020. Due to the impact of coronavirus, HMRC allowed taxpayers were to delay their second payment on account for the 2019-20 tax year (due on 31 July 2020) until 31 January 2021.

It has also been announced that most the taxpayers will be able to benefit from a separate the additional 12-month extension from the HMRC on the “Time to Pay” self-service facility for this payment on account and also for other payments due in January 2021 extending the deadline until January 2022. https://www.gov.uk/self-assessment-tax-returns/deadlines

If you are still submitting paper tax returns, we would recommend that you consider the benefits of submitting the returns electronically. This includes gaining an additional three months (until 31 January 2021) in which to submit your return. You will also receive instant confirmation that a return has been filed and not need to rely on postal service.

Late submission of a Self-Assessment return will become liable to a £100 late filing penalty. The penalty usually applies even if there is no liability or if any tax due is paid by the relevant deadline.

If you received a letter informing you to submit a paper return after 30 July 2020, then you have an extended deadline which runs for three months from the date you received the letter in order to submit a paper return.

Making Tax Digital (MTD) for Income Tax is coming up in near future. Making Tax Digital (MTD) will fundamentally change the way businesses, the self-employed and landlords interact with HMRC. 

Making Tax Digital rules apply to the following:

• A UK resident;
• One who is registered for Self Assessment and their returns and payments are up to date;
• One who is sole trader with income from one business only or a landlord who rents out UK property (or both).

The regime started in April 2019 for VAT purposes but only for VAT registered businesses with a turnover above the VAT threshold. The further rollout of MTD will start in April 2022 when MTD will be extended to all VAT registered businesses with turnover below the VAT threshold of £85,000. https://www.gov.uk/government/collections/MTD-for-vat

This will be followed one year later, from 6 April 2023, when MTD for Income Tax is introduced. The rules will apply to taxpayers who file income tax self-assessment tax returns for business or property income over £10,000 annually.

https://www.gov.uk/government/collections/MTD-for-income-tax

Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the MTD service for Income Tax. Under the pilot, qualifying landlords and sole traders (or their agents) can use software to keep digital records and send Income Tax updates instead of filing a Self-Assessment tax return.

Every 3 months users will electronically send a summary of their business income and expenses to HMRC. At the end of their accounting period, users will need to finalise their business income and expenses and submit a final declaration (replacing the Self-Assessment tax return). This is where you will also be able to submit information about any personal income and claim reliefs.

The cash basis scheme helps landlords, sole traders and other unincorporated businesses to benefit from a simpler way of managing their financial affairs for their property business. The scheme is not open to limited companies and limited liability partnerships. The entry threshold for the cash basis scheme is £150,000 and qualifying businesses can stay in the scheme until their business turnover reaches £300,000. 

Since the 2017-18 tax year, it has been the default basis for most property businesses that are run by individuals or partnerships with income for the tax year of £150,000 or less. A landlord can elect to opt out of the scheme in which case they can continue to use generally accepted accounting practice (GAAP) to calculate their taxable profits. 

HMRC’s property income manual lists the following list of circumstances when the cash basis is not available to a property business. 

• A: The property business is run by a company, limited liability partnership (LLP), trustees or a corporate firm (a partnership with at least one non-individual member).
• B: Receipts that would be brought into account under the cash basis for the tax year exceed £150,000. This amount must be proportionally reduced if the property business is only carried out for part of the tax year.
• C: If the property business is being carried on jointly with a spouse or civil partner, the same basis must be used by both individuals, unless they make a declaration under S837/ITA 2007 that they are beneficially entitled to the income in unequal shares.
• D: Business premises renovation allowance has been claimed, and a balancing event in the tax year gives rise to a balancing adjustment.
• E: An election is made to use GAAP because the person believes that traditional accounting is more appropriate. The election must be made within one year of the filing date for that tax year.

https://www.gov.uk/government/publications/calculation-of-profits-of-property-businesses/income-tax-simplified-cash-basis-for-unincorporated-property-businesses

As a general rule, the fall-back position for couples who live together with their spouse or civil partners is that property income – where the property is owned in joint the names – is divided 50:50. This is the regardless of the actual ownership structure. However, where there is unequal ownership and the couple wants the income taxed on that basis a notification must be sent to HMRC together with proof that the beneficial interests in the property are unequal. This is done using Form 17 published by HMRC.

A Form 17 declaration can only be made by spouses or civil partners that are living together and own property in unequal shares with the income being allocated in proportion to those shares. Couples that are separated or in some other type of union cannot make a Form 17 declaration. The declaration is only valid if both partners agree. If one spouse/partner does not agree then the income will continue to be treated on a 50:50 basis even if the ownership structure is different.

A Form 17 declaration stays in place until there is either a change in the status of the couple i.e. separation or divorce or a change in the ownership structure. If either of these occurs the 50:50 income split will reapply.

There are a number of scenarios where a form 17 cannot be used, such as where a husband and wife or civil partners own property as the beneficial joint tenants, for commercial letting of furnished holiday accommodation, and for partnership income.

Where property is held in an unequal split, making a form 17 declaration can have a tax advantage where, for example, the majority owner of the property pays tax at a lower marginal rate than their partner.

The settlement legislation rules are intended to prevent an individual from gaining a tax advantage by entering into arrangements which divert his or her income to another person who is liable at a lower rate of tax or is not liable to Income Tax.

Where a settlor has retained an interest in a property, the income arising is treated as the settlor’s income for all tax purposes. A settlor can be said to have retained an interest if the property or income may be applied for the benefit of the settlor, a spouse or civil partner.

In general, the anti-avoidance settlement legislation can apply where an individual enters into an arrangement to divert income to someone else and in the process, tax is saved.

These arrangements must be:

• bounteous, or
• not commercial, or
• not at arm’s length, or
• in the case of a gift between spouses or civil partners, wholly or substantially a right to income.

However, there are a number of everyday scenarios where the settlements legislation does not apply. In fact, after much case law in this area, HMRC has confirmed that if there is no ‘bounty‘ or if the gift to a spouse or civil partner is an outright gift which is not wholly, or substantially, a right to income, then the legislation will not apply.

The settlements legislation is tax law that aims to prevent high earning taxpayers from making use of the tax allowance of a lower earning spouse, partner, family member or friend. … HMRC lost the case, which provided contractors with certainty about the settlements legislation’s exemption for spouses and civil partners.