from A newsletter for proactive planning... In this edition... Extracting further profits in 2023/24 Making pension contributions before 6 April 2024 Relevant motoring expenditure and NIC – Are you due a refund? Register to payroll benefits in kind NMW from April 2024 – Make sure you comply Tax Diary - February 2024 February 2024 Issue www.compassaccountants.co.uk
COMPASS ACCOUNTANTS PAGE 2 As the end of the tax year approaches, it is prudent for those operating their business as a personal or family company to review the profits extracted so far in the tax year and to consider whether it is beneficial to take further profits before the end of the tax year. There are various ways in which profits can be extracted, and not all routes are equal from a tax perspective. When extracting profits, it makes sense to do so as tax efficiently as possible, while meeting any non-tax considerations that may need to be taken into account. For example, while it may be tax efficient to pay a salary or dividend to a family member, there may be non-tax reasons for not doing so. Option 1: Salary and bonuses Where the personal allowance of £12,570 is available in full, it is tax efficient to pay a salary or bonus up to this level. As the personal allowance is equal to the primary Class 1 National Insurance threshold for 2023/24, there will be no employee National Insurance to pay. If the employment allowance is available, there will be no employer’s National Insurance to pay either. However, remember, personal companies where the sole employee is also a director are not entitled to the employment allowance. If the employment allowance is not available, employer’s National Insurance is payable at 13.8% on the excess over £9,100. If you have not paid a salary or bonus of £12,570 yet this tax year and have the funds available to extract from your company, you may wish to consider paying the shortfall before 6 April 2024. Option 2: Dividends Dividends can only be paid from retained profits, and if you have sufficient retained profits, you may wish to pay a dividend before the end of the tax year, particularly if shareholders have not used their dividend allowance, which is £1,000 for 2023/24 and available to all taxpayers regardless of the rate at which they pay tax. The dividend allowance falls to £500 from 6 April 2024, so it may make sense to take dividends before that date if they would be tax-free in 2023/24 but taxed in 2024/25. CONT ON PG 3
PAGE 3 Remember, unless you have an alphabet share structure, dividends must be paid in proportion to shareholdings. Option 3: Pension contributions It can be very tax efficient for your company to make contributions to your pension scheme on your behalf, particularly if you have not used your annual allowance for the current year, or have unused allowances from the previous three years. The lifting of the lifetime allowance charge paves the way to make further contributions if your pension pot has reached £1,073,100. Your company is able to deduct the contributions in calculating its taxable profits. Option 4: Benefits in kind You can also take advantage of tax exemptions to extract profits in the form of tax-free benefits. For example, you can make use of the trivial benefits exemption to provide treats costing no more than £50. Remember, tax-free trivial benefits for company directors are capped at £300 per tax year. Option 5: Do nothing If you do not need to use your profits outside your company and would pay further tax on any profits extracted, you may prefer to leave them in your company for now. You also need to ensure that you have sufficient funds available in your business to meet your business costs. Making pension contributions before 6 April 2024 As the end of the tax year approaches, it is prudent to review your pension contributions for the year and consider whether it is worth making further contributions before 6 April 2024. Remember, any annual allowances brought forward from 2020/21will be lost if not used by this date. The amount of taxrelieved contributions that can be made in any tax year to a registered pension scheme is limited by both your earnings and your available annual allowances. Earnings cap Tax-relieved personal contributions to a registered pension scheme are capped at 100% of earnings for the year or, if higher, £3,600 (gross). This can be limiting for company directors who extract the majority of their profits as dividends, as dividends do not count as earnings for these purposes. However, contributions made by an employer (including those by the director’s personal or family company) are not limited by the earnings cap and can be tax efficient. Annual allowance The second limit on tax-relieved pension contributions is the annual allowance. Both individual and employer contributions count towards the allowance. The allowance is set at £60,000 for 2023/24. However, where both threshold income (broadly income excluding pension contributions) exceeds £200,000 and adjusted net income (broadly income including pension contributions) exceeds £260,000, the allowance is reduced by £1 for every £2 by which adjusted net income exceeds £260,000 until the allowance reaches £10,000. CONT ON PG 4
PAGE 4 Where the allowance is not used in full in a tax year, it can be carried forward for three years. However, allowances from an earlier year can only be used where the current year’s annual allowance has been used in full. Allowances not used within this timeframe are lost. If you have made contributions to the level of your annual allowance for 2023/24, further contributions can be made to utilise any unused allowances from 2020/21, 2021/22 and 2022/23. The unused allowances for an earlier year are used before those of a later year. The annual allowance for 2020/21 to 2022/23 inclusive was set at £40,000; threshold income was £200,000; the adjusted net income abatement threshold was £240,000 and the minimum allowance for the year was £4,000. It is important that the correct figures are used when calculating allowances available from earlier years. Where a pension has been flexibly accessed by a contributor who has reached age 55, a reduced annual allowance applies to prevent recycling of contributions to benefit from further tax relief. This allowance (the money purchase annual allowance) is set at £10,000 for 2023/24. It was £4,000 for 2020/21 to 2022/23 inclusive. If tax-relieved contributions are made in excess of the available annual allowance, the excess tax relief not due is clawed back by means of an annual allowance charge. No lifetime allowance charges The abolition of the lifetime allowance charge from 6 April 2023 (and the lifetime allowance itself from 6 April 2024) provide an opportunity for those whose tax-relieved pension savings have already reached £1,073,100 to make further contributions without incurring a punitive tax charge. However, where pension savings exceed £1,073,100 when accessed, the tax-free lump sum is capped at £268,275 (being 25% of this figure). Take advice In deciding whether to make further pension contributions before the end of the tax year, it is advisable to take financial advice. Relevant motoring expenditure and NIC – Are you due a refund? For tax purposes, where an employee uses their own car for work, mileage allowances can be paid tax-free up to the approved amount, which is simply the business mileage for the year multiplied by the approved rate (which for cars and vans is set at 45p per mile for the first 10,000 business miles in the tax year and at 25p per mile for any subsequent business miles). Similar but not identical rules apply for National Insurance, and amounts classed as ‘relevant motoring expenditure’ (RME) are disregarded from the computation of earnings for National Insurance purposes as long as they do not exceed the qualifying amount. As National Insurance is calculated on a non-cumulative basis, the qualifying amount is the business miles in the earnings period multiplied by the approved rate, which for cars and vans is 45p per mile regardless of the number of business miles in the tax year. Tribunal decision In a recent decision, the Upper Tribunal found that the type of payments that can fall within the definition of RME was wider than the definition applied by- CONT ON PG 5
PAGE 5 HMRC. More specifically, the tribunal found that the definition of RME was not limited to payments for actual use of the car; it also applied to payments in relation to potential and anticipated used of the employee’s car for business purposes. This means that where an employee has been paid a car allowance, the amount that is disregarded for National Insurance purposes may be higher than previously believed by HMRC – the allowances count as RME and should have been disregarded for National Insurance purposes up to the qualifying amount. Consequently, National Insurance contributions may have been paid where under the revised definition of RME they would now not be due. For example, if an employee is paid a monthly car allowance of £300 and in one month undertakes 500 miles, the qualifying amount is £225 (500 x 45p). Therefore, £225 of the allowance should now be disregarded for National Insurance purposes. Under the narrow definition previously applied by HMRC, the car allowance was not treated as RME and the full amount was treated as earnings for National Insurance purposes. Claiming a refund Employers who have paid National Insurance which under the wider definition of RME would not have been due may be able to correct the position via Real Time Information (RTI). Where this route is taken, claims must be substantiated on a pay-by-pay period basis. HMRC will require the following evidence: a list of employees included in the claim, together with their National Insurance numbers; evidence of the business mileage undertaken by each employee; the amount of the car allowance payments received by these employees; details of any other RME payments received by the employees (such as mileage payments); and the primary and secondary Class 1 National Insurance contributions that are being reclaimed. Where it is not possible to correct an overpayment through RTI, claims can be made in writing to HMRC using the reference ‘Relevant Motoring Expenditure’. The claim must include the details listed above, together with an explanation as to why a correction cannot be made through RTI. Employers paying car allowances to employees who use their own cars for business should review their records to see if they are entitled to a refund.
PAGE 6 Register to payroll benefits in kind Employers can opt to deal with taxable benefits in kind through the payroll (known as ‘payrolling’) rather than reporting them to HMRC after the end of the tax year on the employee’s P11D. However, this is only possible if the employer is registered to payroll the benefits. This must be done before the start of the tax year for which the benefits are to be payrolled. It is not necessary to register the benefits every year – once registered for payrolling, benefits remain registered until deregistered. This too must be done before the start of the tax year for which the deregistration is to have effect. Nature of payrolling Where a benefit is payrolled, the taxable amount of that benefit is treated like extra salary paid to the employee in instalments with the employee’s regular salary or wage. For example, if an employee has a company car with a cash equivalent value of £4,800 and is paid monthly, the employee would be treated as if they had received extra pay of £400 each month. This is included in their gross pay for tax purposes. The tax is worked out on the total gross pay (including the payrolled benefits), and deducted from the employee’s cash pay. As most taxable benefits are liable to Class 1A National Insurance rather than Class 1, the taxable amount of the payrolled benefit is not included in gross pay for National Insurance purposes. Instead, the employer must include payrolled benefits in the calculation of their Class 1A liability on form P11D(b), which must be submitted to HMRC by 6 July after the end of the tax year. At present, all benefits can be payrolled with the exception of employment-related loans and living accommodation. Registering new benefits As the start of the 2024/25 tax year approaches, employers should review the benefits that they want to payroll in that tax year. If there are any benefits that are to be payrolled for the first time, the employer will need to register to payroll those benefits before the new tax year starts on 6 April 2024. This can be done online using HMRC’s payrolling employees’ taxable benefits online service (see www.gov.uk/guidance/paying-your-employees-expenses-and-benefitsthrough-your-payroll). It is also prudent to review benefits already registered for payrolling to check that you still want to payroll those benefits in 2024/25. If not, the registration will need to be cancelled before 6 April 2024. This too can be done using HMRC’s payrolling employees’ taxable benefits online service. Looking ahead In their January 2024 simplification update, HMRC revealed that payrolling will become mandatory from April 2026. If you are still reporting expenses and benefits after the year end on the P11D, you may wish to consider moving to payrolling ahead of the 2026 mandation date. This will save the task of filing P11Ds too (although a P11D(b) will still be required).
PAGE 7 NMW from April 2024 – Make sure you comply Employers must pay their workers at least the statutory minimum wage for their age. Depending on the age of the worker, they may be entitled to the higher National Living Wage (NLW) or the National Minimum Wage (NMW) for their age band. It is important to note that the right to be paid at least the statutory minimum applies to ‘workers’, the definition of which is wider than employees. The NLW and NMW are increased from April each year. In addition, the qualifying age limit for the NLW is reduced from 1 April 2024. Lower age limit for the NLW Currently, workers aged 23 and above are entitled to be paid the NLW. This is the highest rate of the NMW. From 1 April 2024, the age limit is reduced, and all workers aged 21 and above must be paid at least the NLW. New rates The NLW and NMW rates applying from 1 April 2024 are set out in the table below. Rate National Living Wage – workers aged 21 and above £11.44 per hour National Minimum Wage – workers aged 18 to 20 £8.60 per hour National Minimum Wage – workers aged under 18 but above school leaving age £6.40 per hour Apprentice rate £6.40 per hour
PAGE 8 Currently, the NLW is set at £10.42 per hour and is payable to workers aged 23 and above. Workers aged 21 and 22 are entitled to receive a NMW of £10.18 per hour. The NMW is set at £7.49 per hour for workers aged 18 to 20 and at £5.28 per hour for workers who have reached school leaving age but who are under the age of 18. The apprentice rate is also £5.28 per hour. The apprentice rate is payable to apprentices under the age of 19 and also to those who are aged 19 and over and in the first year of their apprenticeship. Accommodation offset Where the worker is provided with accommodation, the minimum amount of pay is reduced by the accommodation offset. This is currently £9.10 per day (£63.70 per week). It is increased to £9.99 per day (£69.93 per week) from 1 April 2024. Giving effect to the increases It is important that employers comply with the NMW legislation; penalties for non-compliance are high. It is not necessary for the worker to be paid the NLW/NMW for every hour they work – what matters is that on average they receive the NLW/NMW for the hours worked in a pay reference period. For example, if a worker aged 35 is paid weekly and works a 40-hour week, from 1 April 2024 they must be paid at least £457.60 for the week’s work. Although the new rates apply from 1 April 2024, they do not need to be paid from that date if it falls in the middle of a pay reference period. Rather, the new rates must be paid from the start of the first pay reference period to begin on or after 1 April 2024. For example, if the worker is paid weekly on a Friday, the new rates must be paid from the week commencing 6 April 2024. However, if the worker is paid for the month on the last day of the calendar month, the new rates must be paid from 1 April 2024. As well as increasing the rates, employers will need to ensure that workers aged 21 and 22 receive at least the NLW from 1 April 2024.
PAGE 9 TAX DIARY FEBRUARY 2024 1 February 2024 – Due date for Corporation Tax payable for the year ended 30 April 2023. 19 February 2024 – PAYE and NIC deductions due for month ended 5 February 2024. (If you pay your tax electronically the due date is 22 February 2024) 19 February 2024 – Filing deadline for the CIS300 monthly return for the month ended 5 February 2024. 19 February 2024 – CIS tax deducted for the month ended 5 February 2024 is payable by today. 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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