from A newsletter for proactive planning... In this edition... Repaying directors’ loans – Does the order matter? Beat the reduction in the additional rate tax threshold Pension payments – What tax relief is available? Basis period reform – preparing for the transition Taxation of company vans in 2023/24 Client Focus - BJH Windows February 2023- Tax Diary February 2023 Issue www.compassaccountants.co.uk
PAGE 1 Repaying directors’ loans – Does the order matter? The dividend tax rates were increased by 1.25% from 6 Directors’ loans can be tricky from a tax perspective. Specific tax charges apply where loans to director shareholders of close companies (broadly those under the control of five or fewer shareholders) are not repaid by the corporation tax due date. This is nine months and one day from the end of the accounting period. Where this is the case, the company is taxed on the outstanding loan balance at that date. The tax rate is the same as the dividend upper rate, which has been set at 33.75% since 6 April 2022. Avoiding the charge The tax charge (section 455 tax) can be avoided if the loan is repaid or written off before the corporation tax due date. This can be achieved in a variety of ways, including introducing funds into the company, declaring a dividend or paying a bonus. Dividends and bonuses can either be paid to the director, who can then use the funds to clear the loan, or they can be credited to the director’s loan account to clear the overdrawn balance. Clearing the loan to avoid the tax charge will not always be the best option – the higher and additional rates of income tax and the additional dividend tax rate are both more than the section 455 tax rate. Further, as paying dividends or a bonus will trigger a tax liability (and, in the case of a bonus, a National Insurance liability), it may be necessary for the amount of the dividend or bonus to be more than the outstanding loan balance to provide the director with sufficient funds, both to clear the loan and pay the tax on the dividend or bonus. A repayable tax Section 455 tax is unusual in that it is a temporary tax – it becomes repayable nine months and one day after the end of the accounting period in which the loan is repaid. Changing tax rates The rate at which section 455 tax is paid is the same at the dividend upper rate at the date the loan was made (rather than the date on which the section 455 tax becomes due). Thus, when the dividend upper rate changes, the section 455 tax rate changes too. April 2022 pending the introduction of the now-cancelled Health and Social Care Levy. Although the levy is not going ahead, the dividend tax rates remain at their higher level (as does the section 455 tax rate). Section 455 tax is charged at: ·33.75% for loans made on or after 6 April 2022; ·32.5% for loans made between 6 April 2016 and 5 April 2022; and ·25% for loans made before 6 April 2016 All loans are not equal The date on which the loan was made determines both the section 455 tax payable on the loan, and also the tax that is repaid if the loan is cleared at a later date. Consequently, from a tax planning perspective, the tax rate needs to be taken into account in deciding which loans to clear first. Loans can be cleared in any order. To maximise the tax savings and tax repayments, loans should be cleared in the following order: 1.Loans made on or after 6 April 2022 on which section 455 tax has yet to be paid – section 455 is payable at 33.75% on these loans. 2.Loans made on or after 6 April 2022 on which section 455 tax has been paid – section 455 tax was paid at 33.75% on these loans. 3.Loans made on or after 6 April 2016 and on or before 5 April 2022 – section 455 tax was paid at 32.5% on these loans. 4.Loans made before 6 April 2016 – section 455 tax was paid at 25% on these loans. For example, if a director has two loans outstanding – one made in October 2022 for £10,000 and one made in June 2015 for £10,000, clearing the October 2022 loan first will save section 455 tax of £3,375, whereas clearing the earlier loan will trigger a repayment of only £2,500.
PAGE 4 PAGE 2 Beat the reduction in the additional rate tax threshold For a brief period it seemed that the days were numbered for the additional rate of tax following the announcement in the ill-fated mini Budget that it was to be scrapped. Like much of the mini Budget, its planned abolition was swiftly reversed. However, this was not the end of the additional rate tax saga; the Autumn Statement delivered a further plot twist with the announcement that the additional rate threshold is to fall to £125,140 from 6 April 2023. Why £125,140? The new threshold is the point at which the personal allowance is completely lost. The personal allowance (which is frozen at its current level of £12,570 until April 2028) is reduced by £1 for every £2 by which income exceeds £100,000. The combination of the abatement of the allowance and the 40% tax rate that applies at this level means the marginal rate of tax in this band (£100,000 to £125,140) is 60%. Lowering the additional rate threshold to below £125,140 would raise the marginal rate of tax in the abatement zone above 60%. Additional rate tax landscape Until 5 April 2023, the additional rate threshold remains at £150,000. This creates the slightly anomalous effect that the marginal rate on income between £100,000 and £125,140 is 60%. Once the personal allowance has been lost, the marginal rate drops to 40% on income between £125,140 and £150,000, rising to 45% on income in excess of £150,000. From 6 April 2023, this second 40% band will be lost – the new additional rate threshold will mean that income is taxed at 45% once the personal allowance has been fully abated. Where the income in question is dividend income, it is taxed at 33.75% where it falls in the higher rate band and at 39.35% where it falls in the additional rate band. In the personal allowance abatement zone, the marginal rate is 50.6%. Planning opportunities The new lower additional rate threshold does not come into effect until 6 April 2023. This may provide the opportunity to advance income so that it is taxed at the higher rate in 2022/23 rather than at the additional rate in 2023/24. However, care must be taken not to move income from the additional rate band to the personal allowance abatement zone where the marginal rate is higher. Case study Tim is the director of T limited. He has income of £130,000 a year. He was planning on paying a dividend of £20,000 in May 2023. If he does so, the dividend will be taxed at the additional rate of 39.35%, meaning Tim will pay tax of £7,870 on the dividend. However, if retained profits permit, he could instead pay the dividend before 6 April 2023 so that it is taxable in 2022/23 rather than 2023/24. This would mean that it would be taxed at the upper dividend rate of 33.75% rather than at the dividend additional rate of 39.35%. Consequently, the tax payable on the dividend would be £6,750. Advancing the dividend would save him tax of £1,120. On the downside, the tax would be payable a year earlier. If, however, Tim has income of £100,000 in 2022/23 before paying the dividend and expects to have income of £130,000 in 2023/24 before paying a dividend, it is not worthwhile advancing the dividend payment to before 6 April 2023. If he does this, he will increase his income for 2022/23 to £120,000, meaning he will lose £10,000 of his personal allowance. The tax hit of doing so is more than paying tax at the additional rate. Consequently, it is better for him to pay the dividend on or after 6 April 2023.
PAGE 3 Pension payments – What tax relief is available? To encourage pension savings, tax relief is available on contributions made to registered pension schemes. However, there are limits on the contributions that can qualify for relief, and punishing tax charges can apply if these limits are exceeded. allowance is reduced by £1 for every £2 by which adjusted income exceeds £240,000 until the minimum amount of the allowance is reached. This is currently £4,000. This means that once income reaches £312,000, the annual allowance is at the minimum level of £4,000. Limit 1 – 100% of relevant earnings Tax relief on private pension contributions is capped at 100% of your relevant earnings or, if lower, £3,600. Relevant earnings include earnings from an employment or self-employment, benefits in kind and statutory payments. Rental income from furnished holiday lettings (whether in the UK or the EEA) counts as relevant earnings, whereas that from other lettings, such as residential lets, is treated as investment income and is not part of relevant earnings. Other investment income, such as interest and dividends, is similarly excluded. A reduced annual allowance of £4,000 also applies where someone has flexibly accessed a defined contribution (money purchase) pension scheme on reaching age 55 or above. If contributions are made in excess of the available annual allowance, the tax relief is clawed back by means of the annual allowance charge. It is the individual’s responsibility to check that they have not made tax-relieved contributions in excess of the higher of their annual relevant earnings and £3,600. Landlords and those running a business through a personal or family company can easily fall foul of this rule as their income may be high but their relevant earnings low. Contributions can be made by or on behalf of those with little or no relevant earnings up to £3,600 gross (£2,880 net) a year. Limit 2 – annual allowance The annual allowance caps tax-relieved contributions to a registered pension scheme at £40,000 a year. Where the annual allowance is not fully used in the year, the unused amount can be carried forward for up to three years. However, the current year’s allowance must be used before unused allowances from previous years. Contributions made by an employer also count towards the annual allowance. The annual allowance is reduced where both threshold income (broadly income after pension contributions) is over £200,000 and adjusted income (broadly income before pension contributions) is over £240,000. The annual Limit 3 – lifetime allowance The final cap on tax-relieved pension savings is the lifetime allowance. This is set at £1,073,100. If you think your pension savings may be nearing this limit, you should check with your pension provider before making further contributions. Where pension savings exceed the lifetime allowance, the tax relief is clawed back by means of the lifetime allowance charge. This is 55% where the excess is taken as a lump sum and 25% otherwise. Method of relief There are two ways of giving effect to the tax relief on pension contributions – relief-at-source and net pay. In a relief-at-source scheme, contributions are made from the individual’s net pay. Where contributions are deducted from pay, the employer deducts the contributions after deducting tax. The pension scheme reclaims tax relief at the basic rate of 20% from the government. If the individual is a higher or additional rate taxpayer, the difference between the marginal rate that they pay and the basic rate of 20% is reclaimed through their self-assessment tax return. Under a net pay scheme, contributions are deducted from gross pay before calculating tax. In this way, relief is automatically given at the employee’s marginal rate of tax. However, this is disadvantageous if the employee’s earnings are below the personal allowance as the top-up given under a relief-at-source scheme is lost.
PAGE 4 Basis period reform – Preparing for the transition As part of the move to Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA), the basis period rules are being reformed. Despite the delay to the MTD for ITSA start date – which will now take effect from April 2026 rather than April 2024 – the reform of the basis period rules is to go ahead as planned. Nature of the reform Under the reform, sole traders and unincorporated businesses will, from 2024/25 onwards, be taxed on the profits of the tax year (the tax year basis) rather than, as now, on the profits for the accounting period ending in the tax year (the current year basis). If profits are prepared to a date other than 5 April or 31 March (which is deemed to be equivalent to 5 April), the profits from two accounting periods will need to be apportioned to correspond to the tax year. Accounting dates falling between 1 and 4 April are also treated as being equivalent to the tax year. To enable traders to move from the current year basis to the tax year basis, 2023/24 is a transitional year. Making the transition Where an unincorporated business does not prepare accounts to 31 March or 5 April (or a date in between), the profits assessed in 2023/24 will cover more than a single accounting period. The basis period for a continuing trade (i.e. one which commenced before 2023/24 and did not cease in 2023/24) starts on the day after the end of the basis period for 2022/23 and ends on 5 April 2024. The basis period comprises up to three elements: ·the standard part; ·the transition part; and ·days following a late accounting date. Not all parts will be applicable in all cases. In addition, relief will be given in 2023/24 for any overlap profits arising on commencement or a change in accounting date which have not yet been relieved. The standard part is the first 12 months of the basis period. This period starts the day after the end of the - CONT ON PAGE 5
PAGE 5 basis period for 2022/23. This will usually be the 12 months to the accounting date ending in 2023/24. If the standard part ends before 31 March 2024 (as will be the case if the accounting date does not fall in the period from 31 March to 5 April), the basis period for 2023/24 will include a transition part as well as the standard part. If it ends on or after 31 March 2024 but before 5 April 2024, the trader is taxed on profits to the accounting date (referred to as a late accounting date); there is no need to calculate the transition element. However, an election can be made to disapply this rule and for the profits for the period from the late accounting date to 5 April 2024 to be taxed in 2023/24. The transition part is the period that begins immediately after the standard part and ends on either: ·5 April 2024; or ·the late accounting date. If the trader has overlap profits which were taxed twice either on commencement or on a previous change of accounting date, these are relieved in calculating the profits assessed in 2023/24. Example A trader prepares accounts to 30 June. The basis period for 2022/23 on the current year basis is the year to 30 June 2022. In the 2023/24 transitional year, the standard part is the period from 1 July 2022 to 30 June 2023 and the transition part is the period from 1 July 2023 to 5 April 2024. Spreading Unless the accounting period matches the tax year, more than 12 months’ worth of profits will be assessed in the 2023/24 transitional year. To prevent the trader suffering an unusually high tax bill for 2023/24, the profits for the transition part, less any overlap relief, are spread over five tax years. The effect of this is that 20% of this amount is assessed in 2023/24 in addition to the standard part, and 20% is added to the profits assessed on the tax year basis in each of the tax years 2024/25, 2025/26, 2026/27 and 2027/28. The trader will have higher tax bills in each of those years. Where beneficial, the trader can elect for some or all of the spread profits to be taxed in an earlier year. This may be the case where the trader’s marginal rate is lower in an earlier year. Change of accounting date To prevent the need to apportion profits from more than one accounting period to arrive at the profits for the tax year, consideration could be given to changing the accounting date to 31 March or 5 April.
PAGE 6 Taxation of company vans in 2023/24 A tax charge may arise under the benefit in kind legislation Ordinary commuting is normal home-to-work travel. In where a company van is available for an employee’s private addition, the employee (or the employee’s family) must not use. If fuel is also provided for private journeys, a separate fuel benefit tax charge arises. The van and fuel benefit charges for 2023/24 have now been announced. Van benefit charge The van benefit charge only arises if the company van is not an electric van and private use of the van is not limited to home-to-work travel. The amount is set each tax year and increased in line with the increase in the consumer price index. The taxable amount is £3,960 for 2023/24, up from £3,600 for 2022/23. The rise means that a basic rate taxpayer will pay £792 a year in tax and a higher rate taxpayer will pay £1,584 on the benefit of their company van for 2023/24. have actually used the van for private use other than for ordinary commuting. The business travel requirement is met if the van is made available to the employee mainly for business use. If this test is met, the van benefit charge does not apply. Electric vans The charge for an electric van is nil. Consequently, employees with electric company vans can, where permitted to do so by their employer, use their company van for unrestricted private use without any associated tax charge. This makes an electric company van a tax-free benefit. Restricted private use It is possible to have a company van and to use it for hometo-work travel without incurring a tax charge as long as the ‘restricted private use’ conditions are met. This test has two parts – the ‘commuter use requirement’ and the ‘business travel requirement’. Fuel charge A separate van fuel charge applies if a van charge arises in respect of the van and the employer meets the cost of fuel for private travel. This is set at £757 for 2023/24, up from £688 for 2022/23. Consequently, the perk of ‘free fuel’ will cost a basic rate taxpayer £151.40 in tax for 2023/24. For a higher rate taxpayer, the tax cost is £302.80. The commuter use requirement is met if the terms on which the van is made available to the employee prohibit private use other than for ordinary commuting journeys or journeys that are substantially the same. There is no charge if fuel is provided for home-to-work travel and the restricted private use requirement is met. Likewise, there is no charge if the employer meets the cost of electricity for private travel in an electric van.
PAGE 7 Client Focus- BJH Windows and Add a heading Conservatories As a Portsmouth based family run business, BJH Windows had humble beginnings, having been launched from the shed of founders, Brian and June Hamilton. Fast forward 45 years, and the business has evolved to be a well-established and highly respected local company, now run by Brian and June’s son, Alan Hamilton. “The business has come a long way in the 45 years since it was launched.” said Managing Director, Alan. “Over the years, we have adapted and introduced new offerings and products and now, whilst we still supply and install windows and conservatories, we also offer sculptured frames, orangeries, replacement conservatory roofs, bifolding doors, French doors, composite doors, roller shutter garage doors- and much more.” Having worked with the firm since he was at school, Alan learnt all aspects of the trade from designing and fitting to glass cutting. He now steers the business with fellow Director, Colin Giles. Alan took over the running of the business when his father sadly passed away in 1993, and has been Managing Director for the last 30 years. Over these years the company has continued to build momentum now employing 20 members of staff including Alan’s Mother June, who is a silent Director, and his brother Richie, who works in the company warehouse. The business runs from a large site in Farlington, Portsmouth and includes a showroom that displays ten conservatories and a huge array of different window and door products, the company office, and a large warehouse. “We mainly provide domestic services” adds Alan, “but we do also work on commercial properties too, and cover areas across the South of England including Hampshire, West Sussex and Surrey.” Sustainability Most recently, BJH Windows has seen an increased interest in its products that promote sustainability and insulate homes more efficiently. “With the increase in the cost of living and hike in energy prices we have seen a huge interest in our energy efficient products. For example, we are the only distributor in the South for an Austrian company we work with, called Internorm. “Internorm offers luxury, high performance windows and doors that provide thermal efficiency, soundproofing and security. Internorm’s products offer insulation levels that have allowed us to provide windows for passive homes- which are buildings which use far less energy than traditional homes, while maintaining a comfortable temperature all year round- they are basically warmed from body heat alone. This product fits perfectly into the need for sustainability and the need to lower energy levels.” CONT ON PAGE 8
PAGE 8 Keeping it in the family With its beginnings firmly rooted as a family business, BJH Windows and Conservatories looks to continue as such, whilst Alan’s son prepares to graduate in 2024, before joining the firm. “My son is currently studying a business degree, and is in his final year. He hopes to join us when he leaves which will be great. When he finishes his degree he’ll do all the necessary training, learn about the products, before helping to run the business. It will be good to have a new, younger outlook on the business, and of course it will be a great pleasure for us to hand the reigns over to a third generation member of our family.” Working with Compass As a new client of Compass Accountants’, Alan explains how BJH Windows discovered and appointed the accountancy firm’s services. “We tend to stick with our service providers for a long time, but our former accountant retired, and the firm he worked for was bought out by a bigger corporate. A couple of my friends had mentioned Compass and recommended them highly, and I must say, since we got them on board they have been great. They are very approachable, are always available and ready to help, whenever we have needed them. We are a family business, so we don’t want a larger organisation, or big conglomerate- we want a company we know well, that offers a more personal service and is local and part of our community. Compass have already impressed us -in fact we’ve recommended their services to other people ourselves.” If you would like to learn more about BJH Windows and Conservatories- you can visit their website at www.bjhwindows.co.uk – or if you would like to visit the company showroom, head to: BJH Windows Ltd, Fitzherbert Road, Farlington, Portsmouth, Hampshire, PO6 1RU
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