Business, tax and finance matters for company directors and business owner-managers
In this edition: Stranville John joins the Martin Aitken Group. MTD for VAT registered businesses. Business grants and support available for growing SMEs. More changes for private landlords are on the way, as well as potential reforms to Pensions Tax Relief and Inheritance Tax.
Business, tax and finance matters for company directors and business owner-managers.
Stranville John joined Caledonian Accounting Services on 4 June 2018 >read more
Securing a business grant can be the vital factor between a project happening or not happening. Or indeed a venture getting set up or remaining just a bright idea >read more
Looking for support to take your business to the next level? Business Gateway and Martin Aitken may be able to help >read more
Cash is still king: healthy profits do not always equate to a healthy cash balance >read more
Beating late payments and minimising bad debts >read more
The implications of consent for GDPR >read more
Workers' status review rolls on: low paid, zero hour's contracts and agency workers >read more
Duncan MacCaig, Audit & Accounts Manager featured in the ICAS Top 100 Young CAs 2018 >read more
VAT Registered? Are you ready or making preparations for the launch of Making Tax Digital for VAT on 1 April 2019? >read more
The dividend tax allowance fell from £5,000 to £2,000 from April 2018. Any dividends you currently take in excess of the £2,000 dividend allowance will attract an income tax liability and could mean extra tax this tax year of up to £1,143 on dividend income. Have you made suitable directors remuneration arrangements for 2018/19? >read more
Taking early advice on your tax return will avoid potential late filling penalties >read more
Property tax changes: impact likely to be felt in January 2019 >read more
More requirements to fall on private landlords and people making money renting out their main residence from 2019 >read more
Shared parental leave: equal but different, according to a recent Employment Tribunal ruling >read more
Childcare vouchers extended until October 2018 >read more
If ever there is a tax that needed a major overhaul, then Inheritance tax must be a prime candidate >read more
Our annual Tax Planning for Life navigates you through a wide range of tax planning ideas and opportunities for all stages and facets of life. Take our starter for 10 taxing questions to check if you are maximising your allowances and minimising taxes payable >download a pdf copy of Tax Planning for Life 2018-19
Retirement is often seen as the end of one chapter and the beginning of the next. Planning for it isn’t just about getting your money organised, although that’s obviously very important. What does retirement planning mean for you? >read more
Income drawdown is where you leave your pension pot invested and take an income directly from it, instead of using the money in your pot to buy an annuity from an insurance company. It's a popular choice, but there are risks and taking early advice is essential >read more
The way pension tax relief works is reportedly under review by the Treasury. The apparent proposal is focused around a new flat rate of tax relief of 25% on pension contributions, regardless of personal income tax rates. Under this scheme, a gross pension contribution of £100 would require the same of everyone – a net outlay of £75 rather than the current £80 >read more
HMRC has been forced to withdraw a pension’s calculator after it was discovered to be giving incorrect information. The online service was designed to advise high earners how much they can save into their pension within tax relief limits >read more
HMRC has published a clarification on pension contributions, following the introduction of a new set of income tax rates and bands in Scotland from 2018/19 >read more
At the start of the year, UK shareholders saw a sharp increase in dividends as global pay outs hit a record high. Global dividend pay outs soared 10.2% to $244.7bn, making it a record-breaking Q1 for shareholders across the globe >read more
Funding Growth & Ambition in Scotland's Food & Drink Industry. Martin Aitken, Clydesdale Bank and Scotland Food & Drink look at the funding options available to businesses with expansion plans and what Scotland's Food Tourism Strategy means for Ayrshire businesses. Nov 14th, 9am Clydesdale Bank offices, Ayr >find out more
Autumn Lunch & Learn Session: Cloud Accounting, Making Tax Digital for VAT. The sessions will take place on during the Autumn in Martin Aitken & Co's offices >find out more
Johnstone-based Stranville John, a well-established independent accountancy practice founded in 1998 by Steve and Janet John, joined Caledonian Accounting Services Limited (CASL), which is further associated with the Martin Aitken Group of companies, on 4 June 2018.
Stranville John clients will now have access to specialist corporate finance, business advisory and independent financial services provided by the Martin Aitken Group.
This will provide Stranville John clients with the added benefit of receiving a broader range of accountancy, tax, business growth and financial advice appropriate to their circumstances and outlook, whilst still maintaining the personal service Stranville John clients’ value.
All of the Stranville John staff will remain based in the Johnstone Office and will continue to operate under the Stranville John name.
Ewen Dyer, Managing Director, Martin Aitken & Co said that the acquisition of Stranville John by Caledonian Accounting Services was a good fit for both firms:
“Stranville John is a highly respected local firm in Johnstone with a significant track record of advising businesses and private individuals and we are delighted to welcome them to the Martin Aitken Group.
Clients of Stranville John will I am sure benefit from the one-stop-shop and broad range of business, personal and financial services we are renowned for providing to owner-managed businesses, SMEs and high net worth individuals. It also provides the Stranville John staff with access to ongoing professional development and rewarding career opportunities across our growing group of companies”.
Securing a business grant can be the vital factor between a project happening or not happening. Or indeed a venture getting set up or remaining just a bright idea.
But this is only part of the story.
Beauhurst, an online platform that collects data and tracks performance of high-growth businesses, recently reported that businesses that secure both grants and equity outperform those that secure only grants or equity. They tend to raise more money and achieve higher valuations.
Why might this be so?
Beauhurst attribute this success to the complimentary diligence being undertaken by the two funding sources with grant bodies such as Innovate UK focussing on products that are technologically novel, and achievable, whilst equity sources focus on businesses that have the potential to make money.
The commonality between the funder and grant provider is that your niche is extremely important, and if you don’t fit the requirements the likelihood is that your proposition will likely be rejected by the grant provider.
Grants therefore have an important role to play in not only providing funding but also endorsing propositions.
However, applying for and securing a grant is no walk in the park.
Anyone who has successfully secured a business grant from Government, or other public sector or not-for-profit sources, will tell you that the grant application process can very often be more gruelling than going through the traditional process of securing money from a lender or alternative finance provider.
The process of raising funds can be a complicated and time consuming exercise which often results in a “cocktail of funding” comprising different forms of funding from a number of sources.
One of the key funding sources, particularly for early stage businesses, can be grants such as a SMART Award. For later stage businesses seeking growth funding, grants such as Regional Selective Assistance (RSA) and Food Processing Marketing and Co-operation (FPMC) can play an important role.
The changing landscape for grants
The grants landscape is however changing and is facing a number of uncertainties.
The removal of the upfront element on the SMART scheme, for example, and the suspension of the FPMC scheme due to budget considerations create more funding challenges for businesses, particularly early stage businesses whose only other sources of finance might be friends and family and perhaps business angels.
Add into the mix the uncertainties around Brexit with certain grant and public support schemes reliant on the EU, for example, Horizon 2020 and the European Structural and Investment Funds element of SMART. One would hope that a post Brexit world will always feature grant funding given their vital role but nothing in life is certain.
Businesses are always advised to plan their fund raising strategy and in the case of grants, get their applications in well in advance of the crunch commitment date.
That message is even more pertinent now.
When looking at your growth plans, think about how grants might help you to complete your funding package or accelerate your growth plans.
Look at the innovative, economic and financial impacts of your strategy and think ahead – instead of purely looking at the immediate expansion project, think of that and the next strategic step beyond and then seek advice from bodies such as Scottish Enterprise or Business Gateway.
7/10 SMEs often walk away
According to HM Treasury research, 71% of businesses seeking finance only ask one lender and, if rejected, may simply give up on looking for the required cash injection rather than seeking alternative finance options and/or grants. Businesses in this position are potentially missing out on expansion opportunities, with the inherent knock-on detrimental impacts on Scotland’s economic growth.
If you have found yourself in this position, or if you are keen to find what grant schemes, lenders or alternative finance providers would be interested in looking at your proposition, send me a note and I’ll take you on a jog around the grant and funding park - and I’ll give you an early assessment on your likelihood of completing the run without breaking into too much sweat.
Our business advisory team has been helping Glasgow and Lanarkshire based SMEs scale-up as part of an innovative new scheme being run by the Business Gateways operated by Glasgow City Council and North and South Lanarkshire Councils.
A lack of financial management skills has been identified as an area where SMEs can often be held back as the expertise and knowledge required to take the business to the next level is not present in the business. It’s been our job to help the SMEs who approach the Councils/Business Gateway for support to bridge the knowledge gap and to lower the perceived barriers to securing external investment.
Getting a business ready for investment in terms of what a potential funder will look for, advising on the different types of funding available to SMEs – equity, debt, grants and peer-to-peer lending/crowdfunding, and establishing the regular rhythm of management reporting in the business, are amongst the key areas we have been advising on.
Funding is available to those SMEs that have a good business plan, a clearly articulated proposition, supported by robust financial projections, and a management team equipped with the commercial and financial nous required to generate the return the directors of the business and the investors are seeking.
‘Cash is King’ is a term used commonly by business advisers, investors and bankers but normally less so by those captaining the ship. Business owners often get tangled up in focusing on profit margins and return rather than considering the cash capabilities and constraints of their business. Healthy profits do not always equate to a healthy cash balance!
Regular monitoring and budgeting for working capital movement is key to the survival of any business, especially in the growth phase, but also has the added benefit of helping to forecast for the future. Efficient cash flow management can be a key part of worst case scenario ‘what-if’ situations as well as helping you to plan for that significant capital expenditure needed to grow the business.
Consider the level of debt in the business - how is that debt being serviced and how much is it costing the business each month? The equipment which is integral to business operations potentially needs replaced – how is this going to be funded? How quick are debtors settling invoices? Are all credit terms for purchases being utilised? These are some of the factors to consider when considering the variance between cash and profit.
The foundations of any business are built on continued cash management. Any potential shortfalls which are not identified and no appropriate action taken can have devastating effects on a company.
How quick are your customers paying you? What are your debtor days? How much cash is tied up in short term trade debtors? These are 3 points to consider in relation to your sales ledger and which can have a pendulum effect on the cash flow of any business.
There are a number of ways businesses can actively look to improve payment times and reduce the risk of bad debts:
1. Ensure credit checks are being carried out on all new credit customers before any sales are made.
2. Introduce credit limits on customer accounts and highlight at the start of any new relationship that further goods won’t be issued if the account is at the limit and won’t be released until payment has been made settling old balances.
3. Insist on payment in advance for the first order to reduce the risk of ghost orders and likely bad debts.
4. Offer incentives such as a trade discount if the account is settled within a specified period of time.
5. Ensure processes in place to actively chase outstanding debtors.
Need some help to tighten up your cash collection and debtor management controls and procedures? Get in touch with your usual adviser at Martin Aitken and we'll review your current procedures and will advise on the potential improvements required.
Since the GDPR deadline passed in a whirlwind of consent requests and preference updates on 25 May 2018, HMRC has already fallen foul of the new rules.
HMRC has revealed, in response to Freedom of Information requests, that it has taken 5.1 million taxpayers biometric voiceprints through its VoiceID scheme since January 2017. This data was collected under implied consent, with alternative methods of identification not clearly promoted. Investigation has also suggested that users can’t easily access or delete their records.
The issue has been brought to light by the advocacy group Big Brother Watch, which has submitted a complaint to the Information Commissioner’s Office (ICO) about this data harvesting.
Real choice and control
Big Brother Watch have various issues with the HMRC’s process, which serve as a timely reminder on the importance of getting GDPR right.
With voice prints being sensitive data, which are not necessarily required for dealing with tax data, the complaint to the ICO has asked if the data being collected is appropriate. Any personal data held must be limited to what is necessary, and you must be clear about what you are collecting and why.
There was no way of offering consent to data gathered under HMRC’s VoiceID scheme, and there was also no clear way to opt out and use another form of identification. Users could skip the process by saying ‘No’ three times, but would then have to go through the same process the next time they called.
Consent means offering individuals a real choice and control, so when gathering data you need to make sure you are not using implied consent. You also need to be sure you can meet the right to erasure – all individuals have the right to be forgotten, so you must be able to locate and delete any data you collect.
An organisation as large as HMRC being caught out serves as a timely reminder to make sure your GDPR processes meet the ICO’s principles.
The Institute of Chartered Accountants of Scotland (ICAS) has announced the Top 100 Young Chartered Accountants (CAs) for 2018 and we are delighted to report that Duncan MacCaig, Manager, in our Audit & Accounts team has been included in this year's best of the best listing.
Young CAs, under 35, who are excelling in their professional lives were selected by a panel of judges to represent the best of ICAS in the worlds of finance, business and professional practice.
Adrienne Airlie, Chief Executive, Martin Aitken & Co, commented: "We are delighted for Duncan that he has been recognised by ICAS in this way. It really is a super achievement and recognises the hard work, dedication and commitment he has shown throughout his career at Martin Aitken & Co as he has journeyed up through the ranks from Trainee to Manager.
This recognition has come at a wonderful time in life for Duncan, as he recently got married to his partner, Laura Lee and on the day he returned to the office from his honeymoon he found out that he had been included in the top 100 list! Safe to say that Duncan has taken all of this in his stride and got straight back on to doing what he does best: advising clients, leading audit and accounting teams and generally being an inspiration to all of those who work with him".
The recent small, but highly-publicised, strike by McDonald’s workers across some branches in the UK – the ‘McStrike’ – has again highlighted the status of low paid workers, zero hour contracts and agency workers.
With ongoing court cases around the gig economy, the government has set out new proposals to protect the rights of workers generally. These include clarification of worker status, rights for agency workers and a pilot programme for a premium addition to national minimum and national living wages.
One key area is clarification of employment status, particularly with regard to agency workers, based on reports from two government departments (the Department for Work and Pensions and the Department for Business, Energy and Industrial Strategy). A recent study from the Trades Union Congress found that 60% of agency workers were employed for more than a year in the same role in the same organisation.
Current regulations include an opt-out for equal pay for agency workers, a loophole that allows businesses to keep workers recruited through agencies on low pay. The government will now look at closing that loophole.
These moves follow the release of the Taylor review, and again address creating a ‘worker by default’ status. This would reform both a worker’s employment and tax status. Gig economy workers would automatically be classed as workers rather than self-employed, with important implications for companies such as Deliveroo and Uber.
There are additional recommendations for substantially higher fines and cost orders to be imposed on employers repeatedly taken to court for employment status cases.
The government also pledged to consider piloting a low pay premium for workers on zero and non-guaranteed hours contracts. This would involve a higher minimum wage for such workers, in answer to calls from the Low Pay Commission, to address the earnings gap suffered by those in such positions.
Finding the balance between retaining flexibility and increasing the rights and pay of this sector of the workforce will require legislation that ensures neither workers nor employers are penalised.
With less than eight months to go to the first launch of Making Tax Digital (MTD) for VAT registered businesses (VATable turnover of at least £85,000): are you ready for the change?
From 1 April 2019 those businesses who are affected will be required to register for MTD, maintain a digital record of their VAT transactions and file MTD-compliant VAT returns direct from their own software.
If your business will be using the MTD system next year, you must use approved accounting software which allows you to send regular income tax updates to HMRC.
If you are using basic spreadsheets at the moment, you should get in touch with us to discuss an MTD-compliant alternative especially if your business’s accounting year end is not coterminous with your VAT quarters, as you may have no option but to switch accounting systems part-way through an accounting year – which can be an onerous task.
Keeping digital records will not mean businesses are mandated to use digital invoices and receipts but the actual recording of supplies made and received must be digital. It is likely that third party commercial software will be required. Software will not be available from HMRC.
The use of basic spreadsheets to store your records and manually entering and/or tweaking your submissions in HMRC’s website will not be an option from 1st April 2019. Moving to MTD-complaint software in advance of the deadline will also set your business in good stead when other taxes, such as Income Tax and Corporate tax, must also be submitted to HMRC digitally by April 2020.
HMRC has been busy approving software suppliers ahead of the first Making Tax Digital (MTD) deadline in April 2019.
The latest additions to HMRC’s list of approved software suppliers means there are now 27 providers to choose from. Until recently there were only a few suppliers on the list, but HMRC has confirmed it is working with 150 suppliers in total, and that 40 aim to have their software ready during the first phase of the pilot.
If you haven’t already done so, you should contact your existing accounting software supplier to find out if they will be MTD approved before the deadline.
If you don’t get a satisfactory response, or if would like advice on compliant MTD software and accounting systems, then get in touch with our Cloud Accounting Manager, Kim Matheson and she will talk you through the options available to you.
The dividend tax allowance fell from £5,000 to £2,000 from April 2018. Any dividends you currently take in excess of the £2,000 dividend allowance will attract an income tax liability and could mean extra tax this tax year of up to £1,143 on dividend income.
Many owner managed businesses (OMBs) will find themselves disadvantaged by this change. If you haven’t already considered changing the way in which you balance your income and dividend payments, consider the following.
Married couples and civil partners should make sure they spread their taxable portfolios between them, where possible, to ensure they fully utilise each of their dividend allowances, personal allowances and basic rate bands.
Taxpayers will see a tax increase on dividend income received above £2,000 this year. This makes sheltering taxable investments in an ISA all the more important as withdrawals from an ISA are tax-free and there is no CGT. The current personal ISA allowance is £20,000.
Before you decide what is best for you, get in touch with us and we’ll help you look at the tax impacts on all the options available to you.
New statistics obtained under a Freedom of Information request have revealed that HMRC cancelled over a third of the late-filing penalties levied in 2014 and 2015.
These figures arrive as HMRC send out the first of their annual reminders to prepare and submit your annual tax return. HMRC statistics show that 750,000 people (6.5%) missed the deadline for 2016/17. Anyone missing the deadline faces an immediate £100 penalty, whether or not they have tax to pay, and after three months you incur additional penalties of up to £10 per day.
The best solution is to file on time and avoid any penalties, but the large number of fines being cancelled suggests many people had a ‘reasonable excuse’ for HMRC. Some guidance on what qualifies as a reasonable excuse is available from Gov.uk, for example:
- your partner or another close relative died shortly before the tax return or payment deadline.
- you had an unexpected stay in hospital that prevented you from dealing with your tax affairs;
- you had a serious or life-threatening illness;
- your computer or software failed just before or while you were preparing your online return;
- you experienced service issues with HMRC online services;
- a fire, flood or theft prevented you from completing your tax return;
- there were postal delays that you couldn’t have predicted;
- you experienced delays related to a disability you have.
You have until the end of October 2018 to submit a paper tax return and 31 January 2019 if you file your return online. According to HMRC, 9.92 million out of 11.43 million tax returns for 2016/17 were filed online by 31 January 2018, while 0.77 million were made on paper.
For more information on any of the above, please contact us. There is no deadline, but the sooner you act, the easier next year’s tax return will be.
When it comes to preparing your Tax Return and calculating your correct tax position there are a number of factors that must be considered before submitting your Return to HMRC.
Ensure that you have included all your income received in the tax year. This includes Employment Income, Self-Employed profits or losses and Investment Income.
If you are employed your P60 and P11d, received from your employer, will include the information your require. Even though your salary has been taxed at source, this still needs to be included in your Tax Return as all income and gains must be disclosed to HMRC.
Trading losses can be “offset” against other income in the tax year which could reduce your tax liability. There are rules regarding any offset which we can discuss with you if required.
You should receive Certificates of Interest from your Bank which will show any Bank Interest received on savings in the tax year and this must included in your Tax Return. If you have closed any bank accounts during the year, you may still have received interest on this account before closure and therefore this must also be included in your Tax Return. Remember that interest on ISAs are tax free and do not need to be included.
There are tax reliefs that are available to be claimed which will potentially reduce your tax liability. Personal Pension Contributions and Gift Aid Contributions will increase your Basic Rate Band and you will therefore receive tax relief if you are a higher rate tax payer.
One of the key attractions of investing in property, as opposed to other assets, is that the interest on borrowings to buy property is tax-deductible against the income generated. However, from April 2017 this became restricted.
The outcome of this will be most keenly felt by some landlords who may well find they will move from being a basic rate tax payer to a higher rate tax payer.
As landlords will not have to submit a tax return for the last tax year until January 2019, there is a risk that some will not have assessed how these changes will impact on them.
Landlords will no longer be able to deduct all of their finance costs e.g. mortgage interest from their property income. They will instead receive a basic rate reduction from their income tax liability for their finance costs. Since April 2018 only 50% of the finance costs can be deducted and 50% will be given as a basic rate reduction. From April 2019 only 25% can be deducted and 75% given as a basic rate reduction, and from April 2020, all finance costs incurred by the landlord will be given as a basic rate tax reduction.
Full relief continues to be available for companies, which, on the face of it, may make potential incorporation of property businesses more attractive. The corporation tax rate is broadly similar to the basic rate of income tax, but is scheduled to fall in the coming years.
Let's compare: hold residential property personally vs hold in a company? >download an excerpt from Tax Planning for Life 2018-19
Fresh requirements will increase the complexity for landlords and people making money renting out their main residence from 2019.
The Finance Bill 2018/19 draft legislation has been published ahead of November’s Budget. For those keeping an eye on property taxes, it includes the following.
(1) A new ‘shared occupancy test’ will be applied to rent-a-room from 6 April 2019. The relief currently exempts up to £7,500 a year of income from tax, but from next year this will no longer apply if the entire property is rented out for the tenancy period. This will mean an end to letting out your home tax free during sporting events, such as Wimbledon, to fund a holiday.
(2) The window for filing and paying stamp duty in England will be cut to just 14 days from the date of sale from 1 March 2019. It is likely that Scotland and Wales will follow suit and this rule will apply to their property transaction taxes as well.
(3) Capital gains tax (CGT) due on taxable gains on residential property sales must be paid within 30 days of the sale, and a tax return must be completed from 6 April 2020. If adjustments are required, they must be made via a self-assessment return.
Various measures have been introduced over recent years to make things more difficult for private rental landlords. New rules and requirements imposed include: a new tighter expenditure-based regime replacing the wear-and-tear allowance for furnished lettings; the phased replacement of full income tax relief on finance interest costs with a basic rate tax credit; a 3% stamp duty/LBTT surcharge for second residential properties; and an 8% capital gains tax surcharge on residential property.
The effect of these changes is visible as new buy-to-let sales are dropping, and large numbers of landlords are reportedly looking to sell rental property.
The most notable feature of the July 2018 Royal Institute of Chartered Surveyors (RICS) Residential Market Survey is the continued reduction of new property being put on the market in the lettings sector across Scotland, with a net balance of 10% of respondents seeing a fall rather than a rise in new landlord instructions.
This is 10th consecutive quarter in which this indicator has recorded a negative number in Scotland. However, demand for rented property continues to rise according to RICS members. This imbalance has led to nearly half of surveyors expecting rents to rise by around 2% in Scotland over the next three months
With the new requirements affecting property disposals, it may be worth reviewing your arrangements ahead of the above deadlines. If you would like advice on the available allowances, or tax implications of any purchase/sale, please talk to us about your options before taking any action.
Maternity leave pay cannot be compared to shared parental pay, according to a recent ruling from the Employment Appeal Tribunal (EAT).
Maternity leave is meant to pay for the health and wellbeing of a new mother who is recovering from childbirth. The EAT ruling has reaffirmed the importance of the requirement that new mothers must take at least two weeks off work after giving birth.
The provision of maternity leave and pay is a surprisingly recent addition to employment rights. First legislated in 1975, it was extended to all working women only in 1993. Ten years later, male employees caught up with the introduction of paid statutory paternity pay.
Shared parental leave was only introduced in 2015 and has been the subject of several legal challenges. Whether taken by either a new mother or father, it is intended to help parents with childcare.
In the case concerned, Mr M Ali v Capita Customer Management, Mr Ali argued he was subject to sex discrimination because he was not offered additional paternity leave equivalent to enhanced maternity leave. Mr Ali was only entitled to two weeks’ leave at full pay, and shared parental leave after that paid at statutory rates.
These are: the first 6 weeks: 90% of average weekly earnings (AWE) before tax; and the remaining 33 weeks: £145.18 or 90% of AWE (whichever is lower)
The ruling should be welcomed by both mothers-to-be and employers, as there have been conflicting cases on the issue. The decision offers a safeguard to women planning to start a family. Employers offering enhanced maternity pay but only statutory shared parental pay should also be reassured.
However, employers could consider matching shared parental leave to their enhanced maternity pay. By offering employees the chance to share childcare responsibilities you can provide them with much needed flexibility at a busy time of life. Which can contribute to better staff retention and corporate continuity.
As well as raising staff morale, allowing mothers to return to work more quickly can help encourage equality in the workplace, and could help an organisation close its gender pay gap. It can also help bring a similar equality to home life, and help new fathers spend more time raising their child.
The workplace childcare vouchers scheme will close to new entrants on 4 October 2018, after the government extended the deadline. The scheme was due to close from 6 April 2018 and the change was announced just before this deadline, despite concerns over the scheme’s closure being debated in Parliament in January.
Workplace childcare vouchers are being replaced by the government’s tax-free childcare scheme, which was introduced from April 2017. The government will fund 20% of childcare costs per child each year, up to £10,000 – a maximum of £2,000 – under tax-free childcare.
Parents already using childcare vouchers will be able to carry on after the deadline, if they remain with their current employer, and their employer continues to offer the scheme. Up to £2,916 of childcare vouchers can be provided each year. Directly contracted employer childcare arrangements will also remain open to new entrants until 4 October 2018.
Some people using childcare vouchers will not be able to move to tax-free childcare, for example:
(1) If only one parent works – both parents usually need to be working to qualify for tax-free childcare.
(2) Earnings are insufficient – minimum average earnings of 16 hours at the national minimum/living wage are normally required.
(3) If either partner earns £100,000 or more a year.
(4) The children are aged between 12 and 15 – tax-free childcare is normally only available for children aged 11 or younger.
Childcare vouchers are usually provided under a salary sacrifice arrangement, saving the employer 13.8% of national insurance contributions, with employees also benefiting from tax savings. No such tax advantages apply to tax-free childcare.
You can check how much you could get towards childcare using the calculator on the Gov.uk website - https://www.gov.uk/childcare-calculator.
If ever there is a UK tax that needed a major overhaul, then Inheritance Tax (IHT) must be a prime candidate. Many families will be delighted to hear that the Chancellor, Philip Hammond, has written to the Office of Tax Simplification (OTS) asking them to put forward proposals for the reform of IHT “to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible.”
His letter asked the OTS to look at the technical and administrative issues associated with IHT, the process of submitting returns and paying the tax. Mr Hammond also called for a review of the issues surrounding estate planning, and whether the current framework causes ‘distortions’ to taxpayers’ decisions regarding investments and transfers.
Increasing property prices give rise to higher IHT
In the 2016–17 tax year, HMRC raised a hefty £4.84bn in IHT, brought about largely by rising property prices that are seeing more and more families drawn inexorably into the tax net, despite doing nothing more than owning their own home.
IHT has certainly made several aspects of financial planning more complex. With the Bank of Mum and Dad currently a major source of funding for house purchases for first-time buyers, the operation of the seven-year rule is becoming a key issue that needs careful consideration in effective tax planning. The annual tax-exempt gift allowance of just £3,000 arguably needs a major overhaul, as does the out of date amount of £5,000 that can be given away to offspring on their marriage.
Since the advent of pension freedoms in 2015, it has become more tax-efficient to pass on a pension than an ISA, meaning that some people have found themselves viewing their retirement savings in a whole new light.
More controversial still was the recent introduction of the Residence Nil Rate Band (RNRB) which is both complex in its application and divisive in its outcomes. Former MP and now TV personality, Ann Widdecombe, was particularly incensed that under RNRB rules she wouldn’t be able to benefit by leaving her home to her niece, as the regulation only covered direct descendants, which she doesn’t have.
Raising the threshold across the board
Given the individual threshold for IHT has remained at £325,000 since 2009, many would argue that, rather than adding another layer of complication such as the RNRB, the simplest and fairest thing to have done would have been to increase the Nil Rate Band to a limit that bore some correlation with the rise in house prices. Hopefully, that’s one of many thoughts currently crossing the minds of the team at the OTS.
Retirement is often seen as the end of one chapter and the beginning of the next. Planning for it isn’t just about getting your money organised, although that’s obviously very important.
Depending on your circumstances, you may want to take the opportunity to completely change your lifestyle, move home, start a new business, travel the world, learn a new skill or simply put your feet up. And like all big projects in life, the more time you can invest in thinking it through, the better the outcome will be.
Managing your money
Getting financial planning advice before accessing your pension pot can go a long way to help alleviate financial worries later on in life. With longevity increasing, more people than ever will spend longer in retirement than previous generations.
The changes in legislation have given those about to retire far greater freedom when it comes to using their pension pot, but freedom brings with it greater individual responsibility. Low interest rates and periods of market volatility can make income planning for the future a difficult task without professional advice.
It is generally agreed that spending in retirement tends to follow a u-shaped curve. People often spend more money in the early, more active years of their retirement, with spending decreasing in the middle years and increasing again later in life when additional care and medical expenses are more likely to be required.
Budgeting for your lifestyle
It makes sense to begin drawing up a budget for your retirement that covers your likely income needs. There are various factors to consider. You may have income from employment, equally you could choose to give up work altogether and tick off the items on your bucket list. You may decide to downsize from a family home to a smaller retirement apartment that is cheaper to run and means you can extract some equity to bolster your income.
You may want to help children or grandchildren financially by paying school fees or helping them with a deposit for a home of their own. You will also have to plan for a time when you might need to pay for help around the house, and for the likelihood of needing medical and nursing care in your later years. Taking professional advice can help by creating a roadmap for your financial future.
The good news is that more of us are reaching our 100th birthday, but two million elderly people in the UK have a care-related need and it is estimated that four million will need daily help by 2029.
If you find yourself needing care, your local authority must calculate the cost of your care and assess how much you have to contribute from your own resources. Currently, anyone in Scotland with assets over £27,250 must pay the full cost of their care. Tariff income applies between the lower and upper limits of £17,000 and £27,250. Different figures and eligibility rules apply to England and Wales.
Many people simply use their savings and investments to pay their fees, and we can advise you on the best way to do this. There are also property-related options such as equity release that can help you access the money tied up in your home, or a deferred payment agreement where your local authority helps with the cost of care and recoups the money when your property is sold. There are also specialist long-term immediate care plans that are purchased with a lump sum and in return pay a guaranteed income for the rest of your life.
Income drawdown is where you leave your pension pot invested and take an income directly from it, instead of using the money in your pot to buy an annuity from an insurance company. As the rest of your pension pot remains invested, it will continue to benefit from any investment growth.
Since pension reforms were introduced in April 2015, more and more retirees have opted to take flexible withdrawals from their pension funds, and the Financial Conduct Authority has reported that drawdown has become much more popular, with twice as many pots moving into drawdown than into annuities.
Understanding the risks
Whilst drawdown offers great flexibility, there are risks that you need to be aware of. Unlike an annuity, the amount you could draw as income isn’t guaranteed. Your pension fund remains invested which means that you are exposed to share price movements as markets rise and fall. This makes it even more important to take good independent professional advice. Without it you could find your income level falls and you might even risk running out of money at some point.
In drawdown, there are risks involved both in taking out too little and too much. If you draw too little you might not have sufficient to cover your living expenses, taking out too much could have tax implications and also restrict your remaining pension pot’s ability to provide an income throughout your retirement. This is where your financial adviser can provide valuable input, helping you plan your drawdown strategy and ensuring that it’s kept under regular review.
Although it’s no longer obligatory to take an annuity at retirement, they still have benefits to offer. It is possible to put a portion of your pension pot into an annuity to provide a regular guaranteed amount for the rest of your life. Some people choose to do this to ensure they cover their core living costs.
HMRC has been forced to withdraw a pension’s calculator after it was discovered to be giving incorrect information. The online service was designed to advise people how much they can save into their pension within tax relief limits.
Royal London discovered that the calculator was giving incorrect results for people looking at their carry forward allowance for the tax years 2017/18 and 2018/19. You can normally contribute £40,000 a year into your pension with tax relief and the carry forward rules allow you to bring unused allowances forward from previous years.
Recent changes to the law have meant that anyone earning over £150,000 has a lower annual allowance, and it was these people who potentially received incorrect advice from the calculator. Some were informed that they had already exceeded their annual allowance for contributions. The example given by Royal London was a customer who was advised they had a contributions limit of £10,000, when they actually had £35,000.
The calculator only went live at the start of the tax year, which means there is still a lot of time left for people to make the most of their annual allowance. So whilst the issue is embarrassing for HMRC, it shouldn’t have serious consequences for the individuals affected.
However, it also serves as a reminder that it is important to update your finances regularly, instead of just reviewing matters at year end. Pension contributions are a tax-efficient way of saving money for high-earners.
The calculator has now been withdrawn, but if you have been searching for such information recently, please get in touch with your usual contact at Martin Aitken Financial Services to discuss your situation or if you have any queries around your pension withdrawals.
HMRC has published a clarification on pension contributions, following the introduction of a new set of income tax rates and bands in Scotland from 2018/19.
These changes have created various issues as the numerous other rules affected by income tax have not yet been updated. One such example is tax relief on pension contributions. Pension contributions are deducted from gross pay – before income tax is deducted – with tax relief given at the marginal rate. As such, the new set of rates and bands complicates things for HMRC.
The new Scottish income tax rules, which took effect on 6 April 2018, feature two extra bands compared to the rest of the UK. A new ‘starter rate’ of 19% applies to income above the personal allowance of £11,850 up to £13,850, and a new ‘intermediate rate’ of 21% applies to income between £24,001 and £43,430. The Scottish government has also increased their higher rate to 41% and their top rate to 46%.
HMRC has confirmed that it will extend the tax relief to cover the new and increased rates of 21%, 41% and 46%, meaning that pension contributions will continue to get tax relief at the marginal rate. For income falling in to the starter rate band, HMRC will give pension schemes relief at 20%, matching the UK basic rate of income tax.
This will be welcome news to employees and pension scheme administrators in Scotland. With Wales set to gain partial control of income tax in April 2019, HMRC has also confirmed it will be looking at how best to handle future changes from devolved administrations.
Wherever you live, it’s another reminder to review and make the most of your pension contributions.
The way pension tax relief works is reportedly under review by the Treasury. The apparent proposal is focused around a new flat rate of tax relief of 25% on pension contributions, regardless of personal income tax rates. Under this scheme, a gross pension contribution of £100 would require the same of everyone – a net outlay of £75 rather than the current £80.
Pension tax relief is currently given based on your personal income tax rate, which means most people get basic rate relief at 20%, but high earners can get 40% or 45%.
The 25% rate would be a tax cut, in effect, for anyone paying only basic rate tax, but could also potentially save the Exchequer around £4 billion a year. Increasing the flat rate to 28% would cost the Treasury the same as today’s mix of 20%, 40% and 45% reliefs, according to estimates from the Resolution Foundation.
With the government looking for an extra £20.5 billion in funding for the NHS, it isn’t surprising that pension reliefs are under consideration. Tax relief on pension contributions cost the Exchequer £38.6 billion in 2016/17, according to HMRC’s latest estimate, as well as over £16.2 billion of national insurance contribution (NIC) relief on employer contributions.
The government has eroded the value of pension relief over recent year by reducing the annual allowance: it is now £40,000, but in 2010/11 was as high as £255,000. While these more radical changes to tax relief would be politically sensitive – and the Chancellor has already experienced a backlash after his proposed increase of NICs in 2017 – the Treasury Select Committee has recommended the government give it “serious consideration”.
With the government needing to find money from somewhere, and more voices calling for a move away from full tax relief, a significant change to pension reliefs may be inevitable.
At the start of the year, UK shareholders saw a sharp increase in dividends as global pay outs hit a record high. Global dividend pay outs soared 10.2% to $244.7bn, making it a record-breaking Q1 for shareholders across the globe.
According to investment firm Janus Henderson, dividend payments to shareholders in the UK in the first quarter of the year grew by over 21% to $18.7bn (£16.4bn) from $15.4bn (£13.5bn) in Q1 last year.
The report outlined that this figure was lifted by a variety of factors, including; a special dividend from Sky, the addition of new companies to the index and British American Tobacco’s first quarterly dividend. Adjusted underlying growth, taking these factors into account, was a more modest 4.2%.
Continental Europe registered dividend growth of 3.9%, whilst an 8% increase in pay outs was experienced in the US, boosted by President Trump’s corporate tax cuts. In the first three months of the year, US companies increased dividend payments by 5.2% to a record $113bn, with financial, healthcare and tech stocks recording the highest growth. Shareholders have benefited as corporate profitability rises.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
The information contained within the newsletter is for information purposes and doesn’t constitute to financial advice. The purpose of this newsletter is to provide technical and general guidance and should not be interpreted as a personal recommendation or advice.
Dates for your diary
If you are looking to raise funding for your business in the next 12 months and are keen to find out more about the potential options available, and how to go about attracting investors, then this session is for you.
Fiona Richmond, Scotland Food & Drink will also outline the food tourism strategy and what it means for Ayrshire businesses as well as discussing the trends and developments in the industry which could fuel lenders and investors appetites to provide fresh capital to Scottish food, drink and hospitality businesses.
- Mark Wilson, Clydesdale Bank
- Fiona Richmond, Scotland Food & Drink
- Euan Ferries & Tricia Haliday, Martin Aitken & Co
Where: Clydesdale Bank, Ayr Office, 43 Alloway Street, Ayr KA7 1SP
Kim Matheson, Cloud Manager, Martin Aitken & Co is hosting lunch and learn sessions at our offices during October & November.
The session will cover:
- Cloud accounting solutions: what packages are available to suit your business.
- Digital applications: which apps will help you to run and manage the business, projects and day to day finances.
- Transitioning to the cloud - what's involved, getting set up and training for staff.
- Making Tax Digital for VAT.
- Reporting, management information and forecasting.
The sessions will be held from 12.30pm-1.30pm in Martin Aitken & Co's offices.
How can we help?
If you would like advice or information on any of the issues highlighted within this edition, please get in touch with your usual Martin Aitken & Co or Martin Aitken Financial Services contact to arrange an appointment.