With many forecasters predicting a quiet budget, you would think there’s not much to report. Think again. There is a vast amount of change incorporated. This blog sets out the main changes, and some of the points for action that SMEs may want to consider….
- General taxation
1.1 Tax thresholds
The tax free threshold rises to £10,000, with a further increase to £10,500 in April 2015. The NIC threshold for both employee and employer contributions increases to £153 per week (£663 per month or £7,956 per annum)
Action: If you have adopted the traditional low salary/ dividend reward structure you’ll need to adjust the amounts to keep to the most efficient split.
1.2 Savings rate
From 2015, the Chancellor has abolished the 10% rate for the first £2,880 of savings income, has made it tax free. He has also extended the band to £5,000.
From April 2015, company owners may be able to take up to £15,500 a year tax free, by careful planning of their reward between interest on a DLA, salary and/or rent. This would save over £3,000 a year at current corporation tax rates.
1.3 Transferable allowances
Also in April 2015, it will be possible to transfer up to £1,050 of allowance from a non-taxpaying spouse or civil partner. The maximum amount is set at 10% of the basic personal allowance, so should rise each year.
Action: It becomes easier to maximise tax free income, but a fully transferable allowance would have addressed the current unfairness for families where one partner stays at home and doesn’t earn an income. Now would be a good time to review the current structure of a business to see if it facilitates the tax minimisation offered.
- Employment taxes
2.1 Employment allowance
The new employment allowance is worth up to £2,000 per year. It is limited to the amount of employer NICs payable by an employer, and has several conditions attached but will be a valuable boost to cashflow.
Action: Employers must claim the allowance on their first EPS under RTI. It will then be deducted automatically by HMRC from the amount due.
Failure to do this could lead to a delay or even total loss in getting the relief. As someone who has spent a large part of the last year correcting errors made by HMRC under the new RTI system, I face this change with more than a little dread
2.2 Low interest/ interest free loans
The limit is being doubled to £10,000 from April. Essentially to help South East commuters with the cost of their season tickets, there’s no reason why the rest of us cannot look to motivate staff by offering this as part of their deal.
Funding a new car for them may be one idea, but remember, they have to pay it back from taxed income, and you should ensure you can get the loan back should they leave your employment.
And if they have personal debts, on which they are paying interest, you could save them money in their household budget, in lieu of a pay rise.
Action: Review remuneration packages for all staff to see if this could be a tax free way of boosting their personal finances.
2.3 New child care scheme
This has received a lot of press, although it doesn’t start until April 2015. Employees are going to be able to claim tax relief on up to £10,000 of child care costs, but only if both spouses are working. If one stays at home, then you won’t qualify.
Action: Employers should review the new scheme and advise employees of the forthcoming changes. Employees should work out if they are going to better off, and if not, perhaps look to enter a scheme now before the changes are implemented.
2.4 NIC for under 21s
April 2015 will see the abolition of NICs on wages paid to under 21s, provided they don’t earn above the Upper Earnings Limit (£805 for 2014/15). While this may be welcome, it may make over 21s too expensive by comparison. For example, a 21 year old on minimum wage will cost over £273 per week from April 2015. A younger person would cost only £205 for the same working week.
Mind you, there is a 33% increase in cost on that person’s 21 birthday, so it may not be “Many Happy Returns” from employers.
Action: Employers will need to cost very carefully to ensure that the extra maturity/experience of older staff outweigh the considerable increase in costs.
2.5 Employee share schemes
The value of “free shares” that can be acquired under the Share Incentive Plan (“SIP”) is to double to £3,600. There is a similar increase in the value of partnership shares that can be bought under the scheme.
Action: review the available share schemes as part of a wider reward package review ahead of auto-enrolment. With the right product, you can actually secure savings for both employer and employee. Contact us for details.
2.6 Benefits in kind
Car and van fuel benefits are to increase in line with inflation for the next few years. Car benefit scale rates are increasing substantially, and could be as much as 37% of the car’s list price by 2016/17. Tax could be over £3,000 per year for each vehicle.
Action: review all company vehicles and work out whether you and/or your employee might be better off with a privately owned vehicle, particularly if the employer can lend up to £10,000 towards the purchase price. (See para 2.2 above).
- Pension taxation
Perhaps the biggest surprise in this year’s budget were the changes to pension funds. The cut in limits had been announced in advance, but the extra flexibility on taking the pension was a welcome surprise.
3.1 Contribution and fund limits
The annual amount of tax relieved contributions is cut from £50,000 to £40,000 from April 2014. The lifetime limit is also cut, by 1/6th, from £1.5M to £1.25M. The cut in annual limit might affect those who have a final salary scheme and who receive a big pay rise or a promotion to a higher paid post. A pay rise of as little as £2,500 could result in a tax charge that takes away some of the pleasure of getting it in the first place.
If you have a final salary pension scheme, ask your employer to find out if you’ll have to pay the tax on the deemed annual increase in fund value, when offered any significant pay rise.
3.2 Taking your pension
The Chancellor made so many proposals today (19 March 2014), that he needs a separate Act of parliament to legislate it all. On the whole, it is very good news. You will no longer have to take an annuity on or before the age of 75. Neither will you face the penal tax charge of 55% if you choose to take more than the tax free lump sum. You’ll be taxed at your marginal rate, which will be much lower for most people.
3.3 Small pension posts
If your pension savings total less than £30,000, you will be able to take the whole amount tax free. The current limit is about £18,000. If your total funds are worth more than £30,000, you’ll still be able to take up to three in total if individually, they are worth less than £10,000 each. The previous limit was £2,000.
3.4 Income drawdown
The limits have been improved here as well, with a reduction in the income needed to qualify (to £12,000 from £20,000) and an increase in the amount you can take (from 125% of the equivalent annuity to 150%).
Action: Although the changes take effect from 27 March 2014, legislation is required. In any event, it is even more important to take independent advice, as the breadth of options has increased significantly.
We can recommend a good financial adviser from our panel.
4 Business taxation
4.1 Capital allowances
Up to £500,000 of qualifying capital investment can be written off against profits in the year in which it is incurred. The increase (from £250,000) takes effect from April 2014. Previously, we were expecting the limit to drop back down to £25,000, but this is not enough to make major investments.
Action: Review your investment plans, and if tax relief is a vital factor in affordability, consider making the investment before April 2015, when the relief may be cut.
4.2 R&D tax credits
Most businesses invest in R&D, most without realising it. The amount of expenditure that can be offset against profits (current or future) is 200% of the actual amount that qualifies. This can be surrendered for a cash payment. In the 2014 budget, the percentage cash refund is increased from 11% to 14.5%, for expenditure incurred on or after 1 April 2014.
Action: Review your business to see what, if any, expenditure qualifies, or ask us to conduct the review for you.
4.3 Corporate tax rates
The “main” rate of Corporation Tax drops from 23% to 21% from 1 April 2014. Having an inefficient group structure, or a series of associated companies has thus become less expensive. The marginal rate of tax will fall from 23.75% to 21.25%.
Action: There is now very little “damage” in terms of extra tax in setting up numerous companies all controlled by the same individual or group. A review of business strategy should be done to identify whether the “hiving off” of activities into separate companies may be of benefit.
4.4 Other changes
Improvements to various investment schemes (e.g. SEIS) have been made.
Action: Review these schemes as part of your overall investment/tax mitigation strategy. We hold joint meeting for clients with an IFA to cover the broadest possible spectrum of options, so call if this is of interest.
4.5 Partnership taxation
Although this is termed as anti-avoidance, the imposition of employment taxes on salaries partners in LLPs, and the cancellation of tax motivated profit share allocations in all partnerships, may hit innocent partnerships. Where profits have been allocated on a commercial basis, perhaps in line with a partnership agreement, HMRC should hold back from imposing a tax charge.
Action: review your partnership profit sharing arrangements and structure to ensure it is commercially defensible. Review the new legislation when it is published and make amendments if you feel vulnerable.
4.6 VAT registration limits
These are increased to £81,000 (from £79,000), with the deregistration limit increasing by £2,000 as well, to £79,000.
Action: Review your business transactions to see if you still need to be VAT-registered, or if you can gain an advantage by using one of the Vat schemes available (e.g. flat rate scheme, cash accounting or annual accounting).
- Future changes
There’s a lot of changes already planned in for 2015 and 2016, so watch our social media output for details!
Numbers (UK) Limited
19 March 2014