proactivepaul – Page 5

National Insurance Contributions and the UK State Pension

We are accountants and tax advisers, and we do not get involved in pension matters. However, this is what we know about the interaction between National Insurance Contributions and the UK State Pension.

If you are following our recommended director shareholder payments pattern, then your salary should be high enough to give you a National Insurance credit, even though you don’t pay Class 1 National Insurance.

A full year at this level is a “qualifying year”. This page https://www.gov.uk/state-pension/eligibility used to say:

“You might not pay National Insurance Contributions because you’re earning less than £XXX a week. You may still get a qualifying year if you earn between £YYY and £XXX a week from one employer.”

However, the rules keep changing and at the moment the “eligibility” explanation on the Government site takes you round in circles and no longer explains the position for paid employees and directors on low salaries.

If you want the relevant information, the best thing you can do is a twofold approach:

Firstly

Write (with your NI number) to . . .

National Insurance Contributions Office
Benton Park View
Newcastle Upon Tyne
NE98 1ZZ

. . . and ask for a copy of your National Insurance record for all years since [date of your sixteenth birthday] showing contributions paid and any credits received.

Secondly

Complete a Form BR19 and send it to . . .

The Pension Service
Newcastle Pensions Centre Futures Group
Mail Handling Site A
Wolverhampton
WV98 1LU

Once you have the two replies, check that the number of “qualifying years” is the same on both documents. If there is anything that you think needs attention, write to the National Insurance Contributions Office again seeking help, particularly if credits are missing for qualifying years.

Lastly, you won’t get your State Pension automatically, you have to claim it. You should receive a letter 4 months before you reach State Pension age, telling you what to do. Put a note in your diary now, for 3 months before you reach State Pension age, in case that letter doesn’t turn up.

Director shareholder payments 2016/17

In the good old days there was an easy way to work out the optimum pattern of salary and dividends for directors of small UK companies. With the advent of the Finance Bill 2016 the situation has become hopelessly complex and that prompted AccountingWeb to publish a critical blogpost. Here’s the first bit with the all important table:

If you want to see the blogpost in full you’ll have to sign up for membership of AccountingWeb. It’s a free resouce for accountants!

And, as we said in our 30 Nov 2015 blogpost, in 2016/17 we are going to have to get used to new tax bills on dividends which have not been around for donkeys years.

Back to the question of “optimum”

All things being equal (and they are probably not equal this year) we have set out below a standardised process for trying to maintain the established working practice of giving yourself a tax efficient combination of small salary and big dividend. In order to benefit from this working practice you must follow the system precisely. Failure to do so may lead to the imposition of a deduction of PAYE from your income and possibly a charge to interest and penalties if HMRC determine that any taxes are being paid late.

You must be a director of a UK limited company to do this. Your salary is paid to you for the responsibility involved in holding the office of director and not for “work done”. You must also be a shareholder in the company in order to receive dividends. It follows that all shareholders shall receive dividends in direct proportion to their shareholding. Where you are the sole shareholder and have 100% of the shares, that’s relatively straightforward. Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

The company may only pay dividends if it has a profit. If you are paying yourself sums of money out of investor funding or the corporation tax reserve or the VAT reserve (and not out of profit) then you are borrowing from your own company. This is a bad thing! HMRC may impose financial penalties on you for doing this – twice. There is one penalty for the company and a separate penalty for each overdrawn director.

Hold a monthly or quarterly meeting of the shareholders and decide what dividend can be paid. Prepare minutes of that meeting.

You need to know what the profits are, what the corporation tax bill is likely to be, and what is left over to distribute to the shareholders. Dividends are paid out of post tax profits, so you must ensure that the company has an adequate tax reserve. To allow for some flexibility you may choose to describe these amounts as “drawings” until the exact “dividend” is calculated.

Dividends are personal income and are subject to income tax in your hands. The pattern is different for different levels of income. Dividends no longer have a notional tax credit, what you get is what you’re taxed on and (unlike prior years) there is no reduction in your tax bill for notional tax credits.

Bank transfers

Separate bank transfers are required in order to distinguish salary from drawings (lest HMRC allege that it’s all salary). It makes life easier if you use separate bank transfers for primary, secondary (etc) drawings as well.

Basic rate taxpayers

For people whose monthly income does not exceed 3,582.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 3,582 and 8,332.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,332.

There are graduated changes for annual incomes between 100,000 and 150,00 and the 45% rate of income tax also kicks in. The personal allowance is also withdrawn after your annual income exceeds 100,000 and so if you fit this picture, this final table is for you.

Tax Planning

In all cases, and especially in relation to that last table, we can provide an accurate tax forecasting service which fine tunes the optimum level of dividend to suit your income level, your savings, marital status, child benefit position and (for residents in Wales and Scotland) your country. It’s a premium service detailed on our prices page.

Let us know if we can help.

Meal allowances

It’s long been a policy of ours that all employee expense claims (and directors’ expense claims) should be supported by receipts, proving that the relevant expenditure has taken place, and that employee’s claim is for a legitimate business expense. That’s set out in our guide:

Claiming back expenses from your own Limited Company

We don’t need to see every receipt from Pret a Manger for £2.99 sandwiches, but we want the reassurance that you the client make a point of keeping your staff (and yourself) within the rules.

So, here is something that we hadn’t expected, “The Income Tax (Approved Expenses) Regulations 2015” which became law in Dec 2015.

The new regulations give a set of maximum reimbursement rates for meals which will qualify for tax exemption. These come into effect from 6 Apr 2016 and (broadly) apply when the employee is travelling on business.

They are in addition to the cost of the travel and (within limits) do not require supporting receipts. The regulations provide that a sum is calculated and paid or reimbursed in an approved way if it is paid or reimbursed to an employee in respect of meals purchased by the employee in the course of qualifying travel (a ‘meal allowance’).

One meal allowance per day can be paid in respect of one instance of qualifying travel, where that amount does not exceed:

• £5 where the duration is five hours or more;
• £10 where the duration is ten hours or more; or
• £25 where the duration is fifteen hours or more and is ongoing at 8pm.

An additional meal allowance not exceeding £10 per day can be paid in the first two situations where the qualifying travel (in respect of which that allowance is paid) is ongoing at 8pm.

What does this mean?

For a start, it means being away form your normal place of work for “five hours or more” rather than enduring travel of “five hours or more”.

It also means that I am going to continue to keep all my receipts for subsistence and claim the actual amount I incur. That can often be more than £25, given the places where I tend to go and eat. My annual visit, from London to Brighton for dConstruct every September leads to a lot of subsistence costs, so I will continue using what is known as the “receipted basis”, keeping my restaurant receipts and claiming back what I actually spend. If you and your staff want to use the flat rate allowances set out above, then you need to ensure there is a system where travel away from the office is diarised, times are noted and the correct amount is claimed.

Wriggle Room and Late Filing Penalties

Do you have a penalty notice from HMRC relating to the late filing of a 2013/14 or 2014/15 Self Assessment tax return?

Then you may be interested in a working practice which HMRC introduced recently, because they don’t have enough staff to check “reasonable excuse” claims. And whatsmore, they have extended the meaning of “reasonable excuse” which used to be limited to things like . .

Death of a close relative
Burglary
Flood

. . . to include a number of lesser reasons which they previously refused to accept. So “reasonable excuse” now includes . . .

Computer failure
Service issues with HMRC online services
Postal delays

However, these new concessionary rules apply only to 2013/14 and later penalties. Furthermore, you will not secure the cancellation of such a penalty notice until the following two conditions have been satisfied:

The SA tax return for that year has been received by HMRC.
The taxes due for that year have been paid.

Quite why they arbitrarily draw the line between 2013/14 and older years we don’t know. There’s a bit of recent case law which may help though. It’s about being treated fairly by HMRC and if you have an older penalty which might be cancelled under the new working practice, let us know and we’ll try to help.

Budget Day Bombshell?

We are indebted to Richard Dyson of The Daily Telegraph for this news on pensions. Though we stress that it’s a forecast and not an absolute certainty.

A tax break set to be axed within weeks

And at the same time, we need to remind you that we are not authorised to provide pensions advice, but we can tell you about tax law and possible changes to it. If we are to believe everything which we read in the Press, which we hear in Accounting Bulletins and which we learn on our CPD courses, then the March 2016 Budget is going to squeeze middle Britain like never before.

Matt Cartoon
Pension adviser: “Have you considered befriending a wealthy despot?”

George Osborne has already announced that new punitive tax rates will be applied to dividend income from 6 April 2016 and that buy to let landlords will be hit with restrictions on tax relief. Now, it seems that higher rate taxpayers who have private pensions will also be hit.

If you’re a higher rate tax payer investing in pensions, and you’re used to getting 40% (or 45%) tax relief on pensions, then you may be shocked to see that tax relief reduced to 20%. Let’s assume you’re a 40% taxpayer. Up to now, for every £1,000 you added to your private pension, you gained an instant 20% boost as The Exchequer would add £250 to your pension pot, and your pension provider would then have £1,250 to invest on your behalf. Then, a few months down the road, you do your Self Assessment Tax Return, you get back (in your hand effectively) another 20% (being another £250), because your tax bill is reduced by that amount.

That means that your pension provider has a pot of £1,250 which cost you £750 of your money. That’s how 40% tax relief works.

Now if, as seems likely, the Chancellor changes the rules on 16 March 2016 then you may find that your tax relief is restricted to 20% and thus your pension provider will have a pot of £1,250 which in future costs you £1,000 of your money.

Richard Dyson of the Telegraph suggests you pour your money into pensions now, before this forecasted measure is introduced. Our view is that, if you were going to be investing in your pension anyway, in 2016/17 and later years, then you could potentially get more tax relief by bringing forward that investment and doing it in 2015/16 and preferably before Budget Day on 16 Mar 2016.

Is there any alternative? Well perhaps yes! For those of you who are a director and shareholder of a UK limited company, get your company to invest in a pension, rather than do it yourself. All things being equal, your company will get tax relief at its company rate, and your personal income from the company can come down to match the contributions. That way, you’ll find that rather than funding your pension out of your own taxed income, you’ll have a lower income, a lower tax bill, and your company will have a lower tax bill too!

Dividend Tax 2016/17

Significant changes to the taxation of dividends will take effect from 6 April 2016

Planned changes:

10% notional tax credit being scrapped
Introducing a tax free Dividend Allowance of £5,000
Then, dividends tax rates will be set at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

In short, this means that the majority of owners of small limited companies, who take a small salary and large dividend, will see a significant increase in their personal tax bill. With the exception of the first £5,000 tax free band, the tax rate on dividends, whatever your income level will increase by 7.5%.

First £5,000 – 0%
Balance of basic rate band– increase from 0% to 7.5%
Higher rate – increase from 25% to 32.5%
Additional rate – increase from 30.6% to 38.1%

There are discussions in accounting circles about the best ways to minimise the impact of this, but it’s generally accepted that anybody who currently takes a small salary and a large dividend (which takes them exactly to the threshold of the higher rates of tax) is going to see their income tax bill increase by about £1,800 per year.

Self Assessment Tax Returns for all

This will also mean that some company directors who have so far escaped having to complete a Self Assessment tax return (because there was never any personal tax to pay under the old regime) will now be required to file a personal return every year. That’s a separate service which we offer, and whilst you can do your own return if you choose, you may wish to opt for the peace of mind that comes from having it done professionally. We offer two levels of service for this, with the premium service providing you with quarterly updates, tax planning and forecasts, so that you are always forewarned about future bills.

Let us know if this is something that you’d be interested in.

Buy To Let – new tax rules

Two new sets of rules come into force over the next few years.

No more “10% Wear and Tear” allowance

The allowance is being abolished. Starting on 6 Apr 2016, landlords who rent out furnished accommodation will no longer be able to claim the flat rate 10% allowance every year, and instead will be permitted only to claim the actual costs of like-for-like renewals and replacements.

Restriction of loan interest relief

Over a three year period, starting on 6 Apr 2017, the amount of tax relief you can claim for loan interest paid, will be gradually reduced so that by 6 April 2020 landlords who let out residential property (in their own name) will no longer be able to claim the full amount of loan interest relief.

Taken to extremes this may mean that you end up paying tax based on your gross rents, rather than on your rental profit. Let’s consider this hypothetical case of a property being let out in the 2020/21 tax year. We’ll assume that there is an annual income from rent of £25,000 and that the loan interest on an enormous mortgage also comes to £25,000 per year. For simplicity’s sake we will assume that there are no other allowable costs.

Under the current 2015/16 rules the loan interest of £25,000 is set against the rental income of £25,000 leading to a taxable profit of NIL and a tax bill of NIL.

Under the 2020/21 rules the loan interest of £25,000 is disallowed in full, meaning that the rental income of £25,000 (and the absence of other costs) will lead to a taxable profit of £25,000. Assuming a tax rate of 40% that potentially means an income tax bill of £10,000. And having used up your £25,000 of rental income to pay the lender the interest of £25,000 you are faced with a real profit of NIL on which HMRC can still legally demand tax. To soften the blow, there is a restricted relief (see table below) equivalent to basic rate tax relief. However, the result is a real tax bill of £5,000 on a real profit of NIL.

Nobody knows how you’re going to find a £5,000 tax payment if all the income was spent on loan interest!

Beware that some property web sites are saying that the “restricted interest relief” means that basic rate taxpayers won’t be affected. However, they will be affected if the amount of the “Taxable profit”, not the “Real profit”, takes them into the higher rates of tax (see table below). In the past, tax computations used the “Real profit” figure in order to work out which rate band you were in. From now on the legislation is changing so that the tax computations will use the “Taxable profit”.

That’s a subtle but important difference which some property web sites have failed to understand. To put it another way (and subject to transitional rules) your tax rate bands are now established before loan interest is factored in, rather than after loan interest is factored in.

Look carefully at the “real profit” line and the “taxable profit” line in this five year projection:

OK, so this is all hypothetical, but substitute your own figures into that table and you’ll see that almost all residential property landlords will end up paying more tax. The exception will be for landlords who already own a property outright and pay no interest. They will presumably already be used to paying tax on their rental income and will notice no material difference. And, any landlords with pitiful rental income and pitiful other income (who stay wholly within the basic rate band) will also be unaffected.

In the three intervening years 2017/18 and 2018/19 and 2019/20 the 100% withdrawal of the allowably of loan interest will be phased in, in 25% tranches, meaning that in:

2017/18– 25% of the loan interest is disallowed, with a basic rate tax reduction applied to that 25%
2018/19– 50% of the loan interest is disallowed, with a basic rate tax reduction applied to that 50%
2019/20– 75% of the loan interest is disallowed, with a basic rate tax reduction applied to that 75%
2020/21– 100% of the loan interest is disallowed, with a basic rate tax reduction applied to that 100%

There is no similar rule for companies which let out residential properties, and the current incarnation of the new rules applies only to individual landlords. As a result, landlords with an existing portfolio and who are likely to have additional tax to pay under the proposals have to consider how best to cope with this measure – whether to:

Sell up, or
Transfer the property into a limited company (which would involve paying Stamp Duty Land Tax and potentially Capital Gains Tax on the sale – as well as arranging a new mortgage), or
Do nothing and pay any additional tax.

Beware that a number of Property Websites may now be offering solutions which lead to you incorporating a limited company. As things stand, that will mitigate the problem, but as things stand, there is nothing to prevent The Chancellor from applying similar rules to limited companies in his next Budget!

Lastly, with effect from 6 Apr 2023, landlords will have to provide quarterly reports of their income and expenses. That creates the paradoxical situation where the 2022/23 SA return will not be due until 31 Jan 2024 but the later “first quarter report” for 6 Apr – 5 Jul 2023 will presumably be due sooner, and most likely within one calendar month of the quarter end, meaning that it becomes due on 5 Aug 2023. That’s how quarterly VAT returns work, and we’re guessing that’s how “quarterly lettings returns” will work too.

Footnote 1

This report was modified on 4 Dec 2015 to show how the restricted interest relief works.

We also learnt on 4 Dec 2015 that major banks (and finance houses) are sufficiently worried by these new rules (and a possible loss of business), that they are looking at ways to facilitate landlords to move from private ownership to corporate ownership of residential properties. There are no “products” on the market yet, but they may come.

Footnote 2

This report was modified on 22 Jul 2020 because HMRC has delayed the implementation of MTD for landlords to 6 Apr 2023.

Where is BX9 1BX? What happens to HMRC post?

Have you had a letter from HMRC with the new BX9 1BX address? Did you write back to it? What happened to your letter?

BX9 1BX is an artificial post code and it’s not on the Royal Mail database. It’s a mail handling facility operated by HMRC in Bexley, Kent. Letters are opened and scanned and electronically dispatched to other HMRC offices. Occasionally, bulky items are forwarded as originals (using internal mail) to the HMRC office which is to deal with them.

In Jun 2006 we adopted a policy of sending all communications to HMRC by Special Delivery, because they fail to handle phone calls well, and they tend to lose ordinary mail. They also routinely fail to sign for Recorded Delivery letters so it has to be Special Delivery. When all of the offices consolidated a few years back, we resorted to using this main address for nearly all the mail we send to HMRC:

HM Revenue and Customs
Benton Park View
Newcastle Upon Tyne
NE98 1ZZ

That’s another mail handling facility just like the one in Bexley. Interestingly, the HMRC web site tells couriers to always use the Newcastle address.

You can check that web page here. Incidentally, the NE98 1ZZ postcode is on the Royal Mail database.

So this letter really amused us:

Perhaps somebody should let Mrs L Whittle know?

The Pensions Regulator Letter

Proactive is not authorised to give pensions advice, and the comments here are a guide to complying with new legislation. It is not a guide to pensions!

The Government decided in about 2012 to shake up UK pension provision, and as a result, a lot of smaller businesses have to comply with the new laws from 2015 or 2016. It appears that they launched a campaign in Spring 2015, sending letters like this example, to the smallest of UK employers.

Oddly, if the new legislation does not apply to you, then you still have to comply with the new legislation, by telling The Pensions Regulator that the new legislation does not apply to you! That’s law makers for you! The key question to consider is “do I have any eligible employees”? The long answer is to be found on the The Pensions Regulator web site.

The short answer is “if you have staff with a contract of employment and a decent wage” then you probably have to provide some pension arrangements. The key in all this is “contract of employment” and if this is an issue for you then you may need a dedicated payroll service.

What if you are a director of your own company, with no employment contract and a very basic salary? We found another short answer (well not exactly short, but shorter) on the Accounting Web UK forum.

That means two things:

Proactive can continue to provide you with basic payroll services.
You have to notify The Pensions Regulator that the new legislation does not apply to you.

If you visit the page below on the Regulator’s website you will find a pre-populated email to send to them which should ensure the record is updated to show that the small business is not an employer.

http://www.thepensionsregulator.gov.uk/employers/what-if-i-dont-have-any-staff.aspx

For those of you who don’t like to rely on form to email solutions like that one, here’s the text of the standard message which you can use to send your own email to customersupport@autoenrol.tpr.gov.uk or send a Recorded Delivery or Special Delivery letter on your business letterheaded paper to the address shown.

~~The Pensions Regulator~~	The Pensions Regulator
~~PO Box 16314~~	Napier House
~~Birmingham~~	Trafalgar Place
~~B23 3JP~~	Brighton
	BN1 4DW

I confirm that [add your company name here] is not an employer for the purposes of automatic enrolment for the following reason.

[please select one option from the list below and delete the others]

There is only one director and there are no other staff working for the company.
The only people working for the company are directors and none of them have an employment contract.
The only people working for the company are directors and only one of them has an employment contract.
The company does not or no longer employs any staff because it has ceased trading/is terminally insolvent eg has gone into liquidation/has been dissolved.

The letter code for the company is: [add your letter code here]

The PAYE scheme(s) reference is: [add your PAYE reference(s) here]

The Companies House number (where applicable): [add your Companies House number (if you have one) here]

The name, email address, address and telephone number of contact at the company: [add these details here]

You may already have enough email to deal with, so rather than send an email (which automatically provides them with an email address for you) send them a letter by Special Delivery as a number of our clients have suggested!

Director shareholder payments 2015/16

There is an established working practice whereby directors of small limited companies (typically “one man” limited companies) reward themselves with a combination of small salary and big dividend. The point of doing this is to stay within the law, and to hand over the smallest possible sum of money to HM Revenue & Customs. In order to benefit from this working practice you must follow the system precisely. Failure to do so may lead to the imposition of a deduction of PAYE from your income and possibly a charge to interest and penalties if HMRC determine that any taxes are being paid late.

Most importantly, you must consider all of your personal income in order to determine the optimum level of income from your own company. This report assumes that you have no other income and are seeking the most efficient arrangement for your director shareholder payments in 2015/16 whilst still staying within the law.

You must be a director of a UK limited company to do this. Your salary is paid to you for the responsibility involved in holding the office of director.

You must also be a shareholder in the company in order to receive dividends. It follows that all shareholders shall receive dividends in direct proportion to their shareholding. Where you are the sole shareholder and have 100% of the shares, that’s relatively straightforward. Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

The company may only pay dividends if it has a profit. If you are paying yourself sums of money out of investor funding (and not out of profit) then you are borrowing from your own company. This is a bad thing! HMRC may impose financial penalties on you for doing this – twice. There is one penalty for the company and a separate one for each overdrawn director.

Hold a monthly or quarterly meeting of the shareholders and decide what dividend can be paid. Prepare minutes of that meeting.

Dividends are personal income and are subject to income tax in your hands. Owing to peculiar rules about tax credits and the taxation of dividend income, you may pay no additional income tax if you are a basic rate taxpayer. If you are likely to reach the threshold for higher rate tax you may need to prepare an additional personal tax reserve as set out below.

The pattern for basic rate taxpayers is this:

By combining a monthly salary of 671 and a dividend of 2,574 your personal income (totalling 3,245) will be on the threshold of the 40% higher rate band for income tax. If you have sufficient funds and are prepared to suffer higher rates of income tax, then you may choose to follow a pattern, which takes your income to £100,000 an no more (so as to preserve your entitlement to the personal allowance).

Using a combination of a monthly salary of 671 and a dividend of 6,965 your personal income will total 7,636 (grossed up for tax purposes that’s 8,333) and that will bring you to an annual income of £100,000. Out of the 7,636 you will need to set aside a personal tax reserve of 1,097 for some future tax bill. As personal taxes are calculated by reference to all of your annual income, and as many people have to comply with a regime of six monthly payments on account, it is necessary to prepare individually tailored tax forecasts. We do this (included in the fee) for clients who opt for “Self Assessment – Higher Rate Taxpayers” on our prices page. It is not included in the “Self Assessment – Simple filing service”.

There are graduated changes for annual incomes between 100,000 and 150,00 and the 45% rate of income tax also kicks in. The personal allowance is also withdrawn after 100,000 and so if you fit this picture, this final table is for you.

If you are a 40% rate or 45% rate taxpayer, then you will need to set aside a proportion of your income in order to pay your income tax bill under Self Assessment. For example, in this final table, for every secondary amount of £8,866 which you take, put 25% of that into your personal tax reserve. Then for every tertiary amount of £1,000, put 40% of that into your personal tax reserve.