from A newsletter for proactive planning... In this edition... Payments on account – Who needs to pay and how are they calculated? Struggling to pay tax – What should you do? Income from savings – What is tax-free Overlap profits – What are they and when is relief given? Do I need to top up my pension? Client Focus - Deane Interiors- Meet Daniel Swatton... December 2021 Issue www.compassaccountants.co.uk
PAGE 2 The self-assessment tax return for 2020/21 must be filed online by midnight on 31 January 2022 if a late filing penalty is to be avoided. The exception to this is where a notice to file a return for 2020/21 was issued after 31 October 2021, in which case the filing deadline is three months from the date on which the notice to file was issued. Any remaining tax and National Insurance for 2020/21 must also be paid by midnight on 31 January 2022. This is also the deadline for making the first payment on account of the 2021/22 liability. Payments on account are due by 31 January in the tax year and by 31 July after the tax year; 2021/22 payments on account must be paid by 31 January 2022 and 31 July 2022. Where the eventual liability is more than that paid on account, the balance must be paid by 31 January after the end of the tax year, together with any Class 2 National Insurance due for the year. If the liability has fallen, the excess can be offset against future liabilities (for example, payments on account for the following year) or, where this is not possible, refunded. Option to reduce payments on account Requirement to make payments on account You will need to make payments on account for 2021/22 if your tax and Class 4 National Insurance liability for 2020/21 was at least £1,000, unless you paid at least 80% of what you owe under deduction at source, for example, under PAYE. Calculating the payment on account When calculating your payments on account for 2021/22, the starting point is your tax and Class 4 National Insurance liability for 2020/21. It is assumed that the liability remains roughly constant year on year. Consequently, the payments made on account will collect an amount equal to the previous year’s liability. Each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability. Class 2 National Insurance contributions are not taken into account in working out payments on account. If you think that your liability for 2021/22 will be lower than for 2020/21, you can opt to reduce your payments on account. This may be the case if, for example, you have lost a key customer or are struggling to recruit staff or secure supplies. There are various ways in which you can tell HMRC that you want to reduce your payments on account. This can be done by signing into your online personal tax account and using the ‘reduce payments on account’ option or by completing form SA303 and sending it to HMRC. You can also tell HMRC that you want to reduce your payments on account in the ‘other information’ box on the self-assessment tax return. You will need to specify what you want to pay and the reason for the reduction. However, beware of reducing the payments on accounts below that which you will eventually owe – while this may help your cashflow temporarily, you will be charged interest on the difference between what you should have paid and what you have paid.
PAGE 3 The January self-assessment payment deadline is not well timed, falling as it does in a month when people may be already struggling to pay their Christmas credit card bills. However unpalatable the 31 January tax deadline is, it is not one that should be ignored. Paying in instalments Taxpayers who are within self-assessment will need to pay any remaining tax due for 2020/21 by midnight on 31 January 2022, and also any Class 4 and Class 2 National Insurance liabilities for 2020/21. ·you have filed your latest self-assessment tax return; ·you owe less than £30,000; ·you are within 60 days of the payment deadline; and ·you plan to pay back what you owe within the next 12 months or less. Where their tax and Class 4 National Insurance liability for 2020/21 was at least £1,000 and less than 80% of their liability was collected at source, such as via PAYE, the first payment on account must also be paid by midnight on 31 January 2022. If you are struggling to pay what you owe, what can you do? Contact HMRC. Ignoring the problem will not make it go away; rather, it will make it worse. If you think that you are going to struggle to pay what you owe in full by the 31 January 2022 deadline, you should set up a time to pay agreement or contact HMRC as soon as possible, and ideally before 31 January 2022. However, if you miss this deadline, all is not lost and you may still be able to set up or agree an instalment plan. It may be possible for you to pay what you owe in instalments by setting up a time-to-pay agreement. You can do this yourself online via your Government Gateway account if: If you do not meet all of the above conditions, you will not be able to set up an instalment payment plan online. However, you may be able to agree one with HMRC. To do this, you will need to call the Self-Assessment Payment Helpline on 0300 200 3822. The line is open from Monday to Friday from 8am to 4pm. If you cannot pay another type of tax, for example, corporation tax, you should instead call HMRC’s Payment Support Service on 0300 200 3835. The lines are open from Monday to Friday from 8am to 4pm. When making the call, make sure that you have the following information to hand: ·your unique taxpayer reference and National Insurance number;
PAGE 4 ·your VAT registration number if you are VAT-registered; ·your bank account details; and ·details of any previous payments that you have missed. HMRC will take into account what you are able to pay in full, your monthly income and outgoings, any savings and investments that you have and what you can afford to repay each month. If you have savings or investments, you will be expected to use these to clear your tax bill. There is no set length for a time-to-pay agreement – it will depend on how much you can afford to pay each month to clear the tax that you owe. The payments are usually made by direct debit, and once the agreement is in place, it is important that payments are not missed and future liabilities are paid on time. You can pay more than the agreed amount if you are able to clear the debt more quickly. If you do not make the payments, or HMRC will not agree to a time-to-pay agreement, you will be expected to pay what you owe in full. HMRC may use their debt collection powers if you do not do this. Income from savings – What is tax-free? Not all types of income are equal from a tax perspective, or company bonds, life annuity payments and some life and savings income enjoys dedicated allowances, tax rates and reliefs which allow a taxpayer to enjoy some or all of their savings income tax-free. insurance contracts. Interest from tax-free savings accounts does not count towards the allowance. Personal allowance The personal allowance for both 2021/22 and 2022/23 is set at £12,570. Any savings income that is sheltered by the personal allowance can be enjoyed tax-free. Savings starting rate Individuals whose non-saving income is low may also benefit from the special starting rate of tax on savings income of up to £5,000. This is set at 0%, meaning savings income which falls within the starting rate band is received tax-free. Personal savings allowance Taxpayers who pay tax at the basic or higher rates of tax also receive a dedicated savings allowance – the personal savings allowance. For both 2021/22 and 2022/23 this is set at £1,000 for basic rate taxpayers and at £500 for additional rate taxpayers. The personal savings allowance is available in addition to the personal allowance. The availability of the savings starting rate depends on the amount of taxable non-savings income that a person receives in a tax year – the more non-savings income that a person has, such as employment income or a pension, the less they are able to benefit from the savings zero rate. Taxpayers who pay tax at the additional rate do not benefit from a personal savings allowance. The personal savings allowance is available to shelter interest from bank and building society accounts, saving and credit union accounts, unit trusts, investment trusts and openended investment companies, peer-to-peer lending, trust funds, payment protection insurance, Government If a person has non-savings income of £12,570 or less, their income will be covered by their personal allowance. Where this is the case, they will be able to benefit from the full savings starting rate band of £5,000, and receive savings income of £5,000 tax-free in addition to any savings covered by their savings or personal allowance or received from tax-free accounts, such as ISAs. CONTINUED ON PAGE 5
PAGE 4 PAGE 5 Overlap profits – What are they and when is relief given? Under the current rules for determining which profits of an unincorporated business are taxed in a particular tax year, some profits may fall to be taxed twice in the opening years of a business. These profits are known as overlap profits. Once the business is up and running, the profits that are currently taxed for a particular tax year are those for the accounting period that ends in the tax year. This is known as the current year basis. For example, if an established sole trader prepares accounts to 30 June each year, he or she will be taxed on the profits for the year to 30 June 2021 in the 2021/22 tax year, as this is the period that ends in that tax year. If the business chooses to change their accounting date once the business is up and running, there may be further overlap profits, or relief may be available for profits taxed twice in the early years. As part of the move to Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA), the basis period rules are to be reformed. Where overlap profits exist and have yet to be relieved, relief for those profits will be given in the transitional year. Overlap profits in the opening years In the opening year of an unincorporated business, the profits are taxed as follows. Year 1 2 Profits assessed Date of commencement to following 5 April · If there is an accounting date in Year 2 which is less than 12 months from commencement – first 12 months. · If there is an accounting date in Year 2 which is at least 12 months from commencement – 12 months to the accounting date. · If there is no accounting date in Year 2 – profits of the tax year (from 6 April at start of tax year in Year 2 to following 5 April). Year 3 Profits assessed 12 months to the accounting tax ending in the tax year Example 1 Maud is a sole trader. She started trading on 1 June 2016. She prepares accounts to 30 April each year. In the opening years, the following profits were taxed. Tax Year 2016/17 2017/18 2018/19 Profits assessed 1 June 2016 to 5 April 2017 1 June 2016 to 31 May 2017 12 month to 30 April 2018 In both year 1 and year 2, the profits for the period from 1 June 2016 to 5 April 2017 are assessed. There are her overlap profits. If accounts are prepared to 5 April (or to 31 March which is treated as equivalent to 5 April), there are no overlap profits. Change of accounting date – Overlap profits Overlap profits may arise on a change of accounting date if the new accounting date is less than 12 months from the end of the previous accounting period. This is illustrated by the following example. Example 2 Albert has been a sole trader for many years preparing accounts to 30 September each year. In 2020, he changed his accounting date to 30 April. The new accounting date of 30 April 2020 is less than 12 months from the previous accounting date of 30 September 2019. The profits assessed in 2019/20 and 2020/21 are as follows: CONTINUED ON PAGE 6
PAGE 4 PAGE 6 Tax Year 2019/20 2020/21 Profits assessed Year to 30 September 2019 12 months to 30 April 2020 As a result of the change of accounting date, the profits for the period from 1 May 2019 to 30 September 2019 are taxed twice. These are overlap profits. Change of accounting date – overlap relief If on a change of accounting date, the new accounting date is more than 12 months from the old accounting date, and the trader has overlap profits which have yet to be relieved, overlap relief may be given on the change of accounting date. Overlap relief is given by deducting the overlap profits from the profits for the tax year in which the change of accounting date occurs. However, the relief is restricted by reference to the number of days in the overlap period and the number of days for which the basis period for the tax year in which the change of accounting date exceeds 12 months. Example 3 Maud, from example 1, changes her accounting date to 30 October in 2021, preparing accounts for 18 months to 30 October 2021. Her overlap profits are for the period from 1 June 2016 to 5 April 2017 – a period of 309 days. Her new accounting period exceeds 12 months by 184 days. Assuming her overlap profits are £30,000, she will be able to claim overlap relief of 184/309 x £30,000, i.e. £17,864 on her change of accounting date. Overlap relief is restricted to 184 days. Overlap relief in final year Under the current rules, if overlap profits have not been relieved when the business ceases, relief is given by deducting the overlap profits from the profits assessed in the final tax year. Basis period reform The basis period rules are being reformed, moving to a tax-year basis from 2024/25. The 2023/24 tax year will be a transitional year in which relief for any unrelieved overlap profits will be given.
PAGE 7 Do I need to top up my pension? A full single tier state pension is payable to people who have 35 qualifying years. Individuals who have less than 35 qualifying years, but at least 10 qualifying years are entitled to a reduced state pension. A person builds up qualifying years by paying sufficient National Insurance contributions and/or receiving National Insurance credits. Anyone who will not have sufficient qualifying years to secure a full state pension can top up their pension by making voluntary National Insurance contributions. Obtain a state pension forecast You can check your state pension forecast online at www.gov.uk/check-state-pension. If you are unlikely to receive a full state pension when you reach state pension age, you may wish to consider whether it is worthwhile to make voluntary contributions. Qualifying year If you are an employee, a year will be a qualifying year if you have earnings that are at least equal to 52 times the lower earnings limit for the tax year. For 2021/22, the lower earnings limit is £120 per week, and 52 times this is £6,240. You do not need to have earnings of more than the lower earnings limit for every earnings period, but must have earnings of at least £6,240 for 2021/22 for that year to be a qualifying year. If you are self-employed, you earn qualifying years by the payment of Class 2 National Insurance contributions for the full taxpayer. This cost £3.05 per week for 2021/22. You may also earn qualifying years as a result of National Insurance credits. These are given, for example, to people who have claimed child benefit in respect of a child under the age of 12 (even if they have chosen not to receive it), who are caring for someone or who are sick or disabled and receiving (or eligible to receive) Employment and Support Allowance. Full details of the credits that are available can be found on the Gov.uk website (see www.gov.uk/nationalinsurance-credits). Paying voluntary contributions If you will not have sufficient qualifying years to secure a full state pension by the time that you reach state pension age, you may wish to look at paying voluntary contributions. There is a dedicated category of National Insurance contribution for this purpose – Class 3. For 2021/21, the weekly rate of Class 3 contribution is £15.40. If you are self-employed but do not need to pay Class 2 contributions as your profits are below the small profits threshold (£6,515 for 2021/22), you can opt to pay these voluntarily. At £3.05 per week for 2021/22, this is significantly cheaper than paying Class 3 contributions.
PAGE 8 Client Focus- Deane Interiors In this month’s Client Focus, we chat to Daniel Swatton- a Compass Client- and the Managing Director of Fareham based Deane Interiors… Deane Interiors is a family-run, local company specialising in made to measure furniture and storage solutions. Based in Fareham, they have been providing custom made wardrobes, fitted bedrooms, bespoke dressing rooms and unique storage solutions for over 22 years but the company was founded long before that. Managing Director, Daniel Swatton explains: "It was Anne who originally bought the business from David Deane, who launched it back in 1979. Back then, David was a one-man band, but Anne took over when he retired in 1999, and she ran the business from a small unit on a trading estate in Fareham." Since then, Deane Interiors has gone from strength to strength and today, it employs 21 people, whilst still upholding the same passion and family values Anne started with, over two decades ago. "Over the years, the company has undergone various changes, but we've always maintained a family ethos." says Daniel. "The biggest changes we have seen is the growth of our housebuilder sector, which we started back in 2008. Housing developers regularly approached us, but we decided not to work in that sector. However, we later reassessed our services, and a developer team was created to provide and sustain the demand after we became a B2B supplier." "We now support upwards of forty different home development companies, including Berkley Homes, Bargate Homes, Drew Smith and Bewley Homes. Today, our B2B market accounts for almost half of our turnover." CONTINUED ON PAGE 9..
PAGE 9 The majority of Deanes work is, however, with its retail clientele, in bespoke home furniture and storage solutions, a market that is also everexpanding. "We have also seen great variation in our home design projects. At the start of the pandemic, we saw demand increase and quickly pivoted to cope with the extra interest. We have also seen our reach grow and now service clients as far as London and Kent. With higher budgets comes a great opportunity to show what we can do. We have worked on home offices and pantries, cinema rooms and wine cellars- we've probably covered everything, but wardrobes, bedrooms and dressing rooms are still our most popular solution." MANAGING DIRECTOR OF DEANE INTERIORS- DANIEL SWATTON Keeping it in the family. Deanes is a true family firm, with mother and son, Anne and Daniel working together to make the company what it is today. Having started working for the company fresh out of college, Daniel has been a part of Deane Interiors for almost as long as the business has been in the family, stopping only in 2013 to develop his own business ventures. In 2018 Daniel returned to the family business and quickly implemented some fundamental changes that created foundations for the next growth phase. Anne decided she wanted to move to part-time, and Daniel took on the role of Managing Director. Since then, Daniel has continued to take the business forward. "Knowing the ins and outs of the company really works to your advantage." said Daniel, "I first started working in the workshop making cabinets, but I've done everything here. In fact, I don't think there's a job I haven't done at Deane Interiors! Having that broad understanding of how everything works gives you a realistic outlook in terms of what can and cannot be achieved and that's been very useful for me as Managing Director." Business during the pandemic Over the years, Deane Interiors has seen three showroom refurbishments, multiple brand updates and over 15,000 unique projects. Its strong brand and reputation has led to continued growth and success, and despite the problematic outbreak of Covid-19, the year 2020-21 was no exception. "Covid has brought with it a huge number of challenges, however we have managed to get over them. Despite the hurdles, the year has still been good for us. Like all businesses, we are now looking forward to a more stable market, so we can continue to organically grow." ANNE- DESIGN DIRECTOR, FOUNDER OF DEANE INTERIORS CONTINUED ON PAGE 10...
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