from A newsletter for proactive planning... In this edition... January 2023 Issue Reduction in the dividend allowance VAT penalties – New rules Can you benefit from the trading allowance? Should I pay Class 2 NIC voluntarily? Are electric cars still a tax-efficient benefit? January 2023- Tax Diary www.compassaccountants.co.uk
PAGE 2 The dividend allowance is available in addition to the personal allowance. It allows all taxpayers regardless of the rate at which they pay tax to receive dividends up to the level of the dividend allowance free of any personal tax. This is in addition to any dividends sheltered by the personal allowance which are also received free of tax. The dividend allowance has been a useful planning tool for family companies; where family members are shareholders, paying dividends to utilise any available dividend allowance increases the profits that can be extracted tax-free. However, the dividend allowance, currently set at £2,000, is to be reduced. It will fall to £1,000 for 2023/24 and to £500 for 2024/25. The reduction will affect personal and family companies who extract profits as dividends, and also those who receive dividend income from investments in shares. Taxation of dividends Dividends have their own rates of tax, which are lower than the income tax rates. They also benefit from a dedicated allowance – the dividend allowance. Although termed an allowance, it is really a nil rate band, and dividends covered by the allowance are taxed at a zero rate. However, the allowance uses up the part of the tax band in which it falls, with dividends being taxed as the top slice of income. The dividend tax rates were increased by 1.25% from 2022/23 as part of a package of measures brought in alongside the now cancelled Health and Social Care Levy. Despite the cancellation of the levy and the reversal of the associated temporary National Insurance rises, the dividend tax rates are to remain at their 2022/23 rates whereby dividends are taxed at 8.75% where they fall within the basic rate band, at 33.75% where they fall within the higher rate band and at 39.35% where they fall within the additional rate band. Impact of reduced dividend allowance Taxpayers who receive dividend income in excess of £1,000 which is not sheltered by the personal allowance will feel the effect of the reduction in the dividend allowance. Where dividend income is at least £2,000 in 2022/23 and 2023/24, the extra tax paid by a basic rate taxpayer on their dividend income in 2023/24 is £87.50; for a higher rate taxpayer the increase is £337.50 and for an additional rate taxpayer, it is £393.50. Family companies Dividends can only be paid from retained profits and must be paid in proportion to shareholdings. A popular strategy in a family company is to use an alphabet share structure whereby each family member has their own class of share (A shares, B shares, etc.). This allows dividends to be tailored to utilise unused dividend allowances and basic rate bands. The fall in the dividend allowance will reduce the extent to which this strategy can be used to extract profits tax-free. Family and personal companies will need to review their profit extraction strategies as a result. Where company profits are more than £50,000, the corporation tax increases from April 2023 will reduce the post-tax profits available for distribution as a dividend, and the reduced dividend allowance will increase the tax payable by shareholders where those profits are extracted as dividends. These changes will reduce the post-tax profits available for use by the shareholders outside the company.
PAGE 3 VAT penalties – New rules The VAT default surcharge is being replaced with a new VAT penalty and interest regime. The new rules apply to VAT accounting periods beginning on or after 1 January 2023. Late filing penalties The new penalty regime operates on a points-based system. Each VAT return received late, including nil and repayment returns, will receive one late submission penalty point. A penalty will be charged when the points reach a certain threshold. The penalty trigger depends on the frequency with which returns are submitted. Submission frequency Annually Quarterly Monthly Penalty points Threshold 2 4 5 Period of Compliance 24 months 12 months 6 months Once the penalty threshold is reached, a penalty of £200 is charged. Further penalties of £200 are charged for each subsequent late submission. The points total can be reset to zero if all returns are submitted on or before the due date for the period of compliance and all returns due for the previous 24 months have been submitted to HMRC. Late payment penalties A penalty may also be charged if VAT owed to HMRC is paid late. The penalty depends on how late the payment is made. No penalty is charged if payment is made within 15 days of the due date. If payment is made between 16 and 30 days after the due date, a penalty equal to 2% of the VAT owing at day 15 is charged. Where payment is made 31 days or more after the due date, the penalty charged is equal to 2% of the VAT owing at day 15 plus 2% of the VAT owing at day 31. Where a time to pay agreement is agreed, penalties are calculated by reference to the date on which the arrangement is made. A further penalty is charged when the balance is cleared or a time to pay arrangement agreed. This is calculated at a daily rate of 4% a year for the duration of the debt. To allow traders time to become familiar with the new rules, late payment penalties will not be charged during the first year (1 January 2023 to 31 December 2023) where payment is made in full within 30 days of the due date. Late payment interest From 1 January 2023, late payment interest will be charged on late paid VAT from the due date until the date payment is made in full. Late payment interest is charged at a rate equal to the Bank of England bank base rate plus 2.5%. Repayment interest The repayment supplement is withdrawn from 1 January 2023. Instead, for accounting periods beginning on or after 1 January 2023, HMRC will pay repayment interest on VAT that they owe. The interest period will run from the due date (or date the VAT was submitted if this is later) to the date that payment is made in full by HMRC. Repayment interest is paid at a rate equal to the Bank of England base rate minus 1%, subject to a minimum rate of 0.5%.
PAGE 4 Can you benefit from the trading allowance? The trading allowance enables an individual to earn up to £1,000 from self-employment, the provision of casual services (such as gardening or babysitting) or from hiring out personal equipment without having to pay tax on that income or tell HMRC about it. You may also make use of it if, for example, you sell items on sites such as eBay and Depop. The £1,000 limit applies to total income from all self-employments. This means that if you have a main selfemployment and a side-line earning less than £1,000 a year, you cannot use the allowance against the sideline – the income is taxable and must be reported to HMRC with that from your main self-employment. If your income is less than £1,000 but you have made a loss, you may prefer to tell HMRC to calculate your loss in the usual way and tell HMRC about the income so that you can claim relief for the loss. This can be done either against other income of the same year or against future profits of the same business. If you are starting a new self-employment and you do not expect your income to exceed £1,000 you do not need to register for self-assessment. However, you will need to register if your income reaches £1,000 as you will need to report it to HMRC. Income exceeds £1,000 If your income exceeds £1,000 you must register for self-assessment and tell HMRC about your income. However, you may still be able to make use of the allowance. If your income is more than £1,000 you have a choice as to how you calculate your taxable profit, and can choose the way which gives the best result. The first option is to calculate your profit in the usual way, deducting allowable expenses from your income. The second option is to deduct the trading allowance of £1,000 rather than the actual expenses. This will be beneficial where your actual expenses are less than £1,000. Whichever option you choose, you will need to tell HMRC about your income on your self-assessment return and pay tax on it. Exclusions The trading allowance cannot be used for a tax year in which you receive trading income from: ·a company that you own or control or which is owned or controlled by someone close to you (such as a family or personal company); · a partnership where you, or someone connected to you, is connected to the partners (for example, from a partnership where one of your children is a partner); ·your employer, or your spouse or civil partner’s employer.
PAGE 4 PAGE 5 Should I pay Class 2 NIC voluntarily? Entitlement to the state pension and certain contributory benefits depends on an individual having paid, or been credited with, sufficient National Insurance contributions. To qualify for the full singletier state pension, an individual needs 35 qualifying years. A reduced state pension is paid where a person has less than 35 qualifying years, but at least 10. There are different Classes of National Insurance contribution and the Class paid depends on whether an individual is employed or self-employed. A further Class, Class 3, can be paid voluntarily where an individual wants to top up their contribution record. Self-employed earners Although self-employed earners are required to pay both Class 2 and Class 4 National Insurance contributions once their profits reach the relevant thresholds, it is only the payment of Class 2 that counts towards their state pension entitlement. Class 2 contributions are weekly flat-rate contributions which must be paid by self-employed earners whose earnings exceed the relevant threshold. For 2022/23 and later tax years, Class 2 National Insurance contributions are payable once profits exceed a new threshold, the lower profits threshold. This is aligned with the lower profits limit for Class 4 contribution and for 2022/23 is £11,908. This means that the starting point for Class 2 and Class 4 contributions is now the same. Where profits are at or above this level, the contributor must pay Class 2 contributions. For 2022/23 these are at rate of £3.15 per week. Class 2 contributions are paid through the self-assessment system with tax and Class 4 contributions. Where the earner has been selfemployed throughout 2022/23 Class 2 contributions for the year are payable in a lump sum of £163.80 (52 weeks at £3.15 per week) by 31 January 2024. Where earnings from self-employment are between the small profits threshold, set at £6,725 for 2022/23, and the new lower profits threshold, for 2022/23 onwards the self-employed earner is treated as having paid Class 2 contributions at a zero rate. The effect of this is that the year counts as a qualifying year for state pension and benefit purposes despite the earner having paid no actual Class 2 contributions. This places a self-employed earner with low earnings in a similar position to an employed earner with low earnings. For 2021/22 and previous tax years, Class 2 contributions were payable at the usual weekly rate once earnings reached the small profits limit. A self-employed earner with profits below the small profits threshold does not benefit from notional contributions, and unless they pay another Class or receive National Insurance credits, they will need to pay sufficient voluntary contributions for the year to be a qualifying year. While a self-employed earner whose earnings are below the small profits threshold is not obliged to pay Class 2 National Insurance contributions, they are entitled to. This opens up a low cost route to securing a qualifying year, as paying Class 2 contributions at £3.15 per week for 2022/23 is far cheaper than paying voluntary Class 3 contributions at £15.85 per week – an annual saving of £660.40. Is it worthwhile? Whether paying Class 2 contributions is worthwhile will depend on an individual’s circumstances. If they already have 35 qualifying years, or expect to do so without making voluntary contributions by the time that they reach state pension age, there is nothing to be gained from paying Class 2 contributions voluntarily. You can check your state pension entitlement via the HMRC app or online at www.gov.uk/check-state-pension. Where a person also has a job and will pay Class 1 National Insurance contributions on earnings equal to 52 times the weekly lower earnings limit (£6,396 for 2022/23), they will secure a qualifying year from the payment of Class 1 contributions. Likewise, if an CONT ON PAGE 6
PAGE 6 individual receives National Insurance credits, for example, because they are registered for child benefit for a child under the age of 12, it will not be worthwhile paying voluntarily Class 2 National Insurance contributions. However, where a person has less than 35 qualifying years and is looking to build up their state pension entitlement, serious consideration should be given to paying Class 2 contributions. At 2022/23 rates, each additional qualifying year increases the state pension by £5.29 per week. For a cost of £3.15 a week, this is definitely worthwhile. Are electric cars still a tax-efficient benefit? As well as a mechanism for collecting revenue, the tax system is also used to encourage certain behaviours and discourage others. One example where this is evident is in the way in which company cars are taxed. To encourage company car drivers and their employers to make environmentally-friendly choices, the taxable amount increases as the car’s CO2 emissions increase. The financial incentive to opt for an electric or ultra-low emission car is significant – a higher rate taxpayer will pay tax of just £240 on an electric company car costing £30,000, while the tax hit on a car with the same list price but emissions of 160g/km or more is £4,440. Tax advantages of electric cars The tax system confers a number of tax advantages on electric and ultra-low emission cars. For 2022/23, 2023/24 and 2024/25 electric cars are taxed on 2% of their list price. The charge for ultra-low emission cars depends on their electric range, with the charge for cars in the 1—50g/km emissions bracket ranging from 2% for those with an electric range of at least 130 miles to 14% for those with an electric range of less than 30 miles. At the other end of the scale, the charge for petrol cars with CO2 emissions of 160g/km and above is 37% of the list price. Employers can also pay for the electricity for private mileage in an electric company car without the employee suffering a fuel benefit charge as HMRC do not regard electricity as a ‘fuel’ for these purposes. By contrast, if fuel is provided for private mileage in a petrol or diesel company car, a fuel benefit charge arises, found by multiplying the appropriate percentage for the car’s CO2 emissions by the multiplier for the year. As this is set at £25,300 for 2022/23, rising to £27,800 for 2023/24, the potential savings of going electric are again significant. Employees using their own electric car for work can also benefit, as if their employer has workplace charging facilities, they can charge their car at work without any tax consequences. CONT ON PAGE 7
PAGE 7 Employers too benefit from choosing electric cars for their car fleet as they are able to claim a 100% first-year capital allowance if they purchase electric cars. A first-year allowance of 100% is also available for electric charge points until 31 March 2023 (corporation tax) and 5 April 2023 (income tax). Companies can also benefit from the 130% super-deduction on charging points where the expenditure is incurred before 1 April 2023. Electric cars are exempt from vehicle excise duty until April 2025. Looking ahead In the 2022 Autumn Statement, the Chancellor announced that some of the tax advantages for electric cars are to be reduced. The OBR estimate that by 2025 at least half of new cars will be electric; consequently, there is less need for tax incentives (while the Government will still need to preserve their revenue stream). From April 2025, the appropriate percentage for electric cars and ultra-low company cars is to be increased, rising by one percentage point for each of the tax years, 2025/26, 2026/27 and 2027/28. This means that electric cars will be taxed on 3% of their list price in 2025/26, on 4% of their list price for 2026/27 and on 5% of their list price for 2027/28. Despite the increases, an electric company car remains a tax efficient benefit – assuming the higher rate remains at 40% in 2027/28, the tax bill for a £30,000 electric car will still only be £600.
PAGE 8 TAX DIARY JANUARY 2023 Thursday 19th January 2023 - PAYE and Class 1 quarterly cheque payment to be cleared Thursday 19th January 2023- Deadline for receipt of contractor's monthly return Sunday 22nd January 2023- PAYE and Class 1 quarterly electronic payment to be cleared Sunday 22nd January 2023- PAYE and Class 1 monthly electronic payment to be cleared Tuesday 31st January 2023- Online Self Assessment Tax Return Deadline For further information on any of the stories in this month’s newsletter, or for any other matter that Compass Accountants can assist you with, please contact us on 01329 844145 or contact@compassaccountants.co.uk To subscribe to the newsletter, so that each edition is delivered to your inbox, go to www.compassaccountants.co.uk and add your contact details. Compass Accountants, Venture House, The Tanneries, East Street, Titchfield Hampshire. PO14 4AR
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