from A newsletter for proactive planning... In this edition... NIC cuts and what they mean for you Income tax rates and allowances for 2024/25 Make the most of your ISA allowance Reform of the High-Income Child Benefit Charge Training costs and the self-employed Tax Diary - April 2024 April 2024 Issue www.compassaccountants.co.uk
PAGE 2 NIC cuts and what they mean to you As widely predicted, in his 2024 Spring Budget, the Chancellor announced a 2% cut in the main rates of Class 1 and Class 4 National Insurance contributions. We explain what employees and the self-employed will now pay in 2024/25. Employees The main rate of primary Class 1 National Insurance contributions, which are payable by employed earners on earnings between the primary threshold and the upper earnings limit, fell from 12% to 10% with effect from 6 January 2024. The rate was due to remain at 10% for 2024/25 but has now been reduced by a further 2% to 8%. This latest cut will save employees up to £754 in Class 1 National Insurance contributions in 2024/25 As a result of the latest cut, employees will now pay primary Class 1 contributions at a rate of 8% on earnings between the primary threshold, set at £242 per week (£1,048 per month; £12,570 per year), and the upper earnings limit, set at £967 per week (£4,189 per month; £50,270 per year) and at a rate of 2% on earnings in excess of the upper earnings limit. Employed earners whose earnings are between the lower earnings limit of £123 per week (£533 per month; £6,396 per year) and the primary threshold are treated as paying notional contributions at a zero rate which gives them a qualifying year for state pension purposes. Employers Employers did not benefit from a rate cut and the secondary rate remains at 13.8% for 2024/25. Self-employed At the time of the 2023 Autumn Statement, the Chancellor announced that the main rate of Class 4 National Insurance contributions would fall by 1%, from 9% to 8%, with effect from 6 April 2024. A further 2% cut was announced in the Spring Budget, reducing the main rate to 6%. As a result, for 2024/25, self-employed earners will pay Class 4 National Insurance contributions at 6% on profits between £12,570 and £50,270 and at 2% on profits in excess of £50,270. Self-employed earners with profits between the small profits threshold, set at £6,725, and the lower profits limit of £12,570 are awarded a National Insurance credit to provide them with a qualifying year for state pension purposes. Class 2 contributions have been abolished for 2024/25 onwards. However, self-employed earners with earnings below £6,725 can make voluntary contributions at the 2023/24 rate of £3.45 per week to preserve their state pension entitlement.
PAGE 3 Income tax rates and allowances for 2024/25 The 2024/25 tax year starts on 6 April 2024. Although many of the rates and thresholds are the same as for 2023/24, there are some changes. Income tax. The income tax rates for 2024/25 for England, Northern Ireland and Wales are set out in the table below. RATE Band of taxable income BASIC RATE 20% £1 to £37,700 HIGHER RATE 40% £37,701 to £125,140 ADDITIONAL RATE 45% Over £125,140 The income tax rates applying to the non-savings non-dividend income of Scottish taxpayers are set by the Scottish Government. Personal allowances The personal allowance for 2024/25 remains at £12,570. Once adjusted net income reaches £100,000, it is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. This means that individuals with adjusted net income of £125,140 and above do not receive a personal allowance. The marriage allowance, which allows an individual to transfer 10% of their personal allowance (as rounded up to the nearest £10) to their spouse or civil partner as long as neither pays tax at a rate in excess of the basic rate, remains at £1,260 for 2024/25. The married couple’s allowance, available where at least one spouse or civil partner was born before 6 April 1935, is set at £11,080 for 2024/25. The allowance is reduced where income exceeds £37,000 by £1 for every £2 by which adjusted net income exceeds £37,000 until the minimum amount of the allowance is reached. This is set at £4,280 for 2024/25. Effect is given to the married couple’s allowance in the form of a 10% tax reduction. Dividends All individuals, regardless of the rate at which they pay tax, are entitled to a dividend allowance. This is set at £500 for 2024/25. Dividends not sheltered by the dividend allowance or any unused personal allowances are treated as the top slice of income and taxed at the appropriate dividend tax rate. This is the ordinary dividend rate of 8.75% where the dividend falls in the basic rate band, the dividend upper rate of 33.75% where the dividend falls in the higher rate band and at 39.35% where the dividend falls in the additional rate band. Savings Basic and higher rate taxpayers are entitled to a savings allowance. For 2024/25, this is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers do not receive a savings allowance. Savings income falling within the savings starting rate band of £5,000 is taxed at 0%. The starting rate band is reduced by every £1 of taxable income. Capital gains tax For 2024/25, the capital gains tax annual exempt amount is £3,000.Capital gains are taxed at 10% where income and gains do not exceed the basic rate band of £37,700. Where income and gains exceed the basic rate band, capital gains are taxed at 20%. Higher rates apply to gains on residential property. For 2024/25, these are, respectively, 18% and 24%.
PAGE 4 Make the most of your ISA allowance Rising interest rates mean that individuals may now be paying tax on their savings income which previously they received it tax free. Where this is the case, it is prudent to consider the options available to earn savings income tax free. ISAs feature on this list. Savings allowance for basic and higher rate taxpayers Individuals who pay tax at the basic or higher rate are entitled to a savings allowance. For 2024/25, the savings allowance is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers. When interest rates were low, many taxpayers did not need to think about tax-free savings accounts as the savings allowance was sufficient to cover any interest that they earned. With higher interest rates, this may no longer be the case. For example, a higher rate taxpayer with savings of £20,000 would only receive interest of £400 a year at an interest rate of 2% which would be covered by their savings allowance of £500. However, if the taxpayer was now receiving interest of 5% on their savings of £20,000, the interest would be £1,000 a year of which only £500 would be covered by the allowance, leaving the remaining £500 taxable. Additional rate taxpayers do not receive a savings allowance. ISAs Individual Savings Accounts (ISAs) are tax-free savings accounts. There are four different types of ISAs: 1. 2. 3. 4. cash ISA; stocks and shares ISA; innovative finance ISA; and lifetime ISA. Individuals have an annual ISA allowance which they can invest in one or more of the different ISAs. The limit applies to the amount invested across all four ISAs in the tax year. For 2024/25, the limit is £20,000. The individual can choose how to allocate this. For example, an individual could invest £10,000 in a cash CONT ON PG 5
PAGE 5 ISA and £10,000 in a stocks and shares ISA in 2024/25. However, investments in a lifetime ISA are capped at £4,000 a year but this counts towards the annual £20,000 ISA allowance. There is no tax to pay on interest on cash in an ISA or income (such as a dividends) or capital gains on investments held within an ISA. Cash ISA Banks and building societies offer cash ISAs which, as the name suggests, are accounts that hold cash only. National Savings and Investments also offer cash ISA products. Interest on cash in an ISA is tax-free. Where interest from savings accounts exceeds the personal savings allowance, consideration could be given to moving some of the cash to an ISA to allow the interest to remain tax-free. New UK ISA At the Spring Budget, the Chancellor announced that the Government would be launching a new UK ISA which would provide savers with the opportunity to earn tax-free savings income while investing in UK companies. The UK ISA will have its own £5,000 allowance which would be available in addition to the existing £20,000 ISA allowance. The Government are consulting on what this may look like. Financial advice It is important to take financial advice from a qualified professional before making investments. Stocks and shares ISA Investments in a stocks and shares ISA can include shares in companies, unit trusts and investment funds, corporate bonds and government bonds. However, it is not possible to transfer stocks and shares already owned outside an ISA into a stocks and shares ISA with the exception of those awarded under an employee share plan. Innovative finance ISA An innovative finance ISA is one that contains peer-topeer loans rather than cash or stocks and shares. Lifetime ISA A Lifetime ISA can only be opened by someone aged 18 and over but under 40. A person can invest up to £4,000 a year in a Lifetime ISA until they reach the age of 50. The first payment must be made before they reach the age of 40. The Government add a bonus of 25% (capped at £1,000 a year). Money can only be withdrawn to buy a first home or on reaching age 60, or if the saver is terminally ill with less than 12 months to live. If withdrawals are made in other circumstances, a withdrawal charge of 25% applies, clawing back the Government bonus. CONT ON PG 3
PAGE 6 Reform of the High-Income Child Benefit Charge The High-Income Child Benefit Charge (HICBC) is a tax charge that operates to claw back child benefit where the claimant and/or their partner have adjusted net income in excess of the clawback threshold. For 2023/24 and previous years, this was set at £50,000. The HICBC was equal to 1% of the child benefit paid for every £100 of adjusted net income in excess of £50,000. Once income reached £60,000 the HICBC is equal to the child benefit paid for the year. Where both the claimant and their partner have income in excess of £50,000, the HICBC is levied on the partner with the higher income. Higher thresholds from 6 April 2024 The threshold triggering the HICBC is increased to £60,000 from 6 April 2024. From that date, the clawback rate is reduced to 1% of child benefit for every £200 by which adjusted net income exceeds £60,000. This means that the charge is equal to the child benefit for the year once adjusted net income reaches £80,000. The increased threshold and reduced clawback rate mean that, for 2024/25, child benefit for the year is not lost unless the higher earning partner has income of £60,000; and as long as their income does not exceed £80,000, some child benefit will be retained. Example Gemma and George have two children. Gemma looks after the children and does not have an income in either 2023/24 or 2024/25. George has adjusted net income of £70,000 in each year. In 2023/24, George is liable to the HICBC equal to the child benefit received in the tax year. However, for 2024/25, George’s HICBC charge is only equal to 50% of their child benefit. His income exceeds the £60,000 threshold by £10,000. At a rate of 1% for every £200 of income above £60,000, this equates to a charge of 50%. Move to household income At present, the trigger for the HICBC is individual income not household income. This creates some anomalies. For example, for 2023/24 and earlier years, a couple where each partner had adjusted net income of £49,999 (combined income of £99,998) retain their child benefit in full, whereas a couple where one partner has no income and the other has income of CONT ON PG 7
PAGE 7 £60,000 lose all their child benefit in the form of the HICBC. For 2024/25, a couple each with adjusted net income of £59,999 (combined income of £119,998) retain their full child benefit, whereas a couple where one partner has no income and the other has income of £80,000 lose all their child benefit in the form of the HICBC. To address this unfairness, the government announced a move to a system based on household income from April 2026. Important to claim Where the HICBC applies, the claimant can elect not to receive child benefit. However, to preserve the associated National Insurance credit, it is important that child benefit is still claimed. This will provide qualifying years for state pension purposes, something that is particularly important if the claimant does not have sufficient income from employment or self-employment to secure a qualifying year. Training costs and the self-employed A sole trader or proprietor of an unincorporated business may incur training costs. The tax treatment of those costs depends on whether the costs are regarded as ‘revenue’ or ‘capital’ expenditure. HMRC have revised their guidance in this area, expanding the range of training for which a deduction is available. Old rules Previously, HMRC only treated training costs as revenue expenditure where they updated existing knowledge or expertise. Any training that provided the proprietor with a new skill was deemed to be capital expenditure with the result that the proprietor was unable to deduct the costs in computing their taxable trading profits. New rules HMRC now accept that expenditure incurred by the owner of a business on training courses undertaken by them is revenue expenditure if the course of learning: ·updates existing expertise or knowledge; or ·provides new knowledge or expertise. This means that costs incurred on training to acquire new skills or knowledge to keep pace with technological advances or changes in industry practice will usually be allowable where they relate to the proprietor’s existing business area. They also accept that courses that are ancillary to the owner’s main business area, for example, an introductory bookkeeping course, may also be classed as revenue expenditure depending on the facts of the case. Expenditure on training unrelated to the owner’s existing business, such as that which would allow them to branch CONT ON PG 8
PAGE 8 out into a new area, is unlikely to be allowed as a deduction. This is illustrated by the decision reached by the Special Commissioners in a case in which a taxpayer who traded as an English tutor and as an advisor in bringing appeals before various tribunals was denied a deduction for the cost of resitting examination fees that would have provided him with a diploma in law. The deduction was denied as the course was a ‘bridging course’ to equip him with new skills to allow him to move into new areas of practice which the Special Commissioners found to be capital expenditure. Application HMRC’s updated guidance contains examples to illustrate when a deduction for training costs would be forthcoming and when it would be denied. Allowable expenditure would include: costs incurred by a wedding photographer on an online refresher course using photo editing software; the costs of an introductory bookkeeping course incurred by a plumber to help him run his business better; the costs of an e-commerce and website development course incurred by a potter currently selling his pottery on a local stall which will enable him to move his business online; costs incurred by a web designer in completing a short course in AI which will provide her with new expertise in an upcoming area of technology related to her business; the costs incurred by a gas fitter on training in connection with installing heat pump systems as these skills are likely to be needed to future-proof his business; the costs of a nutrition course incurred by a personal trainer as her clients expect her to have a basic understanding of nutrition and this knowledge can be used in developing training plans; and the costs of a beginners’ course on drawing illustrations undertaken by an author who writes children’s books she sells online as this will improve the books she creates and save the costs of an illustrator. By contrast, the following costs are likely to be disallowed: the costs of a course to become a driving instructor incurred by someone who is unemployed and wishes to become a driving instructor as the costs do not relate to an existing business; the costs of a sports science degree incurred by the owner of a sportswear shop selling branded clothing as the knowledge acquired will not specifically help him to sell sportswear; the costs of a tattooing course incurred by a freelance make-up artist as they are not related to her existing business; and the costs of a painting and decorating course incurred by a taxi driver who wants to move into the painting and decorating business as the course is not related to his current business.
PAGE 9 TAX DIARY APRIL 2024 1 April 2024 – Due date for corporation tax due for the year ended 30 June 2023. 19 April 2024 – PAYE and NIC deductions due for month ended 5 April 2024. (If you pay your tax electronically the due date is 22 April 2024). 19 April 2024 – Filing deadline for the CIS300 monthly return for the month ended 5 April 2024. 19 April 2024 – CIS tax deducted for the month ended 5 April 2024 is payable by today. 30 April 2024 – 2022-23 tax returns filed after this date will be subject to an additional £10 per day late filing penalty for a maximum of 90 days. 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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