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Tax-efficient savings for children

There are a number of ways to save or invest for children – some accounts are tax-efficient but rigid, others are often flexible but liable to tax. Interest earned from CTFs and Junior ISAs is paid tax-free, but the money is effectively locked in until the child is 18, at which time it belongs to the child. Standard savings accounts usually offer lower interest rates and the interest is likely to be taxable, but there will be flexibility on withdrawals and transfers, enabling the parent to keep a tight rein on the money.

Junior ISAs operate in much the same way as ordinary ‘adult’ ISAs. The maximum investment limit for 2015/16 is £4,080, so there is a real opportunity for parents and grandparents to make tax-free savings investments on behalf of their children/grandchildren. Until April 2015 it was only possible for children who did hold child trust funds (CTFs) to invest in Junior ISAs, which meant that many young savers were trapped in accounts yielding poor interest rates.

From April 2015 all children (under-18s) who are UK resident should be able to hold a Junior ISA and transfers from CTF accounts to Junior ISAs will be allowed. This change is important as it allows parents to look for a better return on their investment, pay lower charges and have more choice of products. Whether a CTF should be transferred to a Junior ISA greatly depends on whether the child currently pays tax, and whether they will save enough to pay tax on their savings when they’re 18. If it is likely that the child will save more than £15,240 (the annual ISA limit from 6 April 2015) in their first 18 years, then it is probably worth considering a Junior ISA, as these convert to full cash ISAs when the child turns 18.

Just like adults, children are also entitled to an annual personal allowance (£10,600 for 2015/16). Although Junior ISAs (and CTFs) are tax-free, unless the child stands to earn interest of more than £10,600 from other types of investment accounts, he or she should not pay tax on the interest earned in any case. Therefore, for those with modest savings, one of the most important considerations when choosing a savings plan should be the interest rate on offer and potential return on the investment.

Paying inheritance tax

Various rules exist for determining the time for payment of inheritance tax (IHT). In certain circumstances it will be possible to pay in installments, and it is even possible to settle a liability by transferring ownership of assets to the Crown (for example, a valuable painting may be donated to a national museum in lieu of an inheritance tax bill).

Unless it can be paid in installments, IHT is generally due for payment as follows:

  • Chargeable lifetime transfers: Tax is due six months after the end of the month of the transfer. But if the transfer is made between 6 April and 1 October in any year, the tax is due at the end of April the following year.
  • Estates: The personal representatives must pay the tax at the time that the IHT account is sent to HMRC, and this depends on the length of time it takes to sort out the estate.
  • PETs: Tax due on a potentially exempt transfer (PET) that becomes chargeable because of the transferor’s death within seven years needs to be paid six months after the end of the month in which the death occurs.

IHT is often due to be paid before the cash and assets left in a will are released to the beneficiaries. This means that the beneficiaries have to find the money to pay the tax elsewhere. The most obvious way to solve this problem is to take out a loan to pay the tax owed. The loan can then be paid off after cash from the estate is received or, in the case of assets, the assets are sold to raise the funds needed.

It may be worth considering a life insurance policy that will pay out on death and so cover any IHT arising on an estate. Remember, though, that HMRC may consider a life insurance policy to form part of an estate, so the plan should be set up under a trust. A fringe benefit of this is that all proceeds of the policy are paid free of tax.

Do i pay tax on tips ?

Confusion often arises regarding tips and gratuities as the tax and NIC treatment depends on how they are paid to the recipient.

Cash tips handed to an employee, or left on the table at a restaurant and retained by that employee, are not subject to tax and NICs under PAYE, but the employee will need to declare the income to HMRC – HMRC often make an adjustment to the employee’s PAYE tax code number to reflect the amount likely to be received during a tax year so any liability is collected via the payroll. By contrast, if an employer passes tips to employees that are either handed to him (or the employees) or left in a common box/plate by customers, the employer must operate PAYE on all payments made.

Tips will also be subject to PAYE if they are included in cheque and debit/credit card payments to the employer, or if they pass service charges to employees.

Amounts paid by a customer as service charges, tips, gratuities and cover charges count towards National Minimum Wage (NMW) pay if they are paid by the employer to the worker via the employer’s payroll and the amounts are shown on the pay slips issued by the employer. Tips given directly to the worker by a customer do not count towards NMW pay

HMRC Video – Paid too much or Too Little Tax?

HMRC have released a new video to explain what you will need to do as a UK Tax Payer if you think that you have paid too much or too little tax.

If you’ve overpaid or underpaid your tax during the tax year, HMRC will notify you by letter between now and October 2015. The letter is called a P800 tax calculation and will detail any taxable income and tax paid in the tax year. It will also detail whether you have paid the correct tax or under/over paid your tax in the year too.

Please see the Video below for more information:

Rent a room

In the Summer Budget 2015, the government announced that the level of rent-a-room relief will be increased from the current level of £4,250 to £7,500 from April 2016. This means that from 6 April 2016, an individual will be able to receive up to £7,500 tax-free income from renting out a room or rooms in their only or main residential property. The relief also covers bed and breakfast receipts as long as the rooms are in the landlord’s main residence.

To qualify under the rent-a-room scheme, the accommodation has to be furnished and a lodger can occupy a single room or an entire floor of the house. However, the scheme doesn’t apply if the house is converted into separate flats that are rented out. Nor does the scheme apply to let unfurnished accommodation in the individual’s home.

The rent-a-room tax break does not apply where part of a home is let as an office or other business premises. The relief only covers the circumstance where payments are made for the use of living accommodation.

If additional services are provided (cleaning and laundry etc.), the payments must be added to the rent to work out the total receipts. If income exceeds £4,250 a year in total, a liability to tax will arise, even if the rent is less than that.

There are two options if the individual is receiving more than the annual limit a year:

– the first £4,250 is counted as the tax-free allowance and income tax is paid on the remaining income
– renting the room is treated as a normal rental business, working out a profit and loss account using the normal income and expenditure rules

In most cases, the first option will be more advantageous.

The principal point to bear in mind is that those using the rent-a-room scheme cannot claim any expenses relating to the letting (e.g. insurance, repairs, heating).

To work out whether it is preferable to join the scheme or declare all of the letting income and claiming expenses via self-assessment, the following methods of calculation need to be compared:

– Method A: paying tax on the profit they make from letting worked out in the normal way for a rental business (i.e. rents received less expenses).
– Method B: paying tax on the gross amount of their receipts (including receipts for any related services they provide) less the £4,250 exemption limit.

Method A applies automatically unless the taxpayer tells their tax office within the time limit that they want method B.

Once a taxpayer has elected for method B, it continues to apply in the future until they tell HMRC they want method A. The taxpayer may want to switch methods where the taxable profit is less under method A, or where expenses are more than the rents (so there is a loss).

The individual has up to one year after the end of the tax year when their income from lodgers went over £4,250 to decide the best option to take.

Tax Free Child Care

Tax-free childcare is part of the government’s long-term plan to support working families and will provide up to 1.8m families across the UK with up to £2,000 of childcare support per year, per child, via a new online system. It was originally planned that the scheme would launch in Autumn 2015, but, as a result of a direct legal challenge from a small group of childcare voucher providers, development of the scheme was suspended. However, the Supreme Court has recently ruled that government proposals for delivering tax-free childcare are lawful, which means that the scheme can go ahead and is now expected to launch in 2017. Here are some of the key points of the scheme:

– the scheme will be available for children up to the age of 12, and for children with disabilities up to the age of 17
– to qualify for tax-free childcare, parents will have to be in work, earning just over an average of £50 a week and not more than £150,000 per year. Unlike the current rules for employer-supported childcare, eligibility for tax-free childcare is not dependant on the employer offering the scheme
– self-employed parents will be able to qualify for tax-free childcare. For newly self-employed parents, there will be a ‘start-up’ period during which there will be no minimum income level requirement
– the scheme will be available to parents on paid sick leave and paid and unpaid statutory maternity, paternity and adoption leave

Anyone wishing to use the scheme will need to open an online account via the government website (www.GOV.uk) and pay in money to the account to cover the cost of childcare with a registered provider.

The government will top up accounts with 20% of childcare costs, up to a total of £10,000 – the equivalent of up to £2,000 support per child per year (or £4,000 for disabled children). So, for every 80p invested, the government will top up with a 20p contribution.

HMRC will re-confirm a claimant’s circumstances every three months via a simple online process.

Where circumstances change, and the parent no longer wishes to pay into the account, it will be possible to simply withdraw any funds that have built up. However, where funds that have already attracted tax relief are withdrawn, the government will also withdraw its corresponding contribution.

There are no particular rules regarding when and how much can be saved in the new accounts. The scheme is designed to give as much flexibility as possible regarding savings. This means that parents can build up a balance in their account to use at times when they need more childcare than usual, for example, over the summer holidays. 

Automatic Enrolment… Are you ready ?

The Pensions Regulator has introduced a Staging Date Calculator that will inform small businesses when they are due to begin their Automatic Enrolment duties.

The staging date is set in law as of 1st April 2012 and is the date your automatic enrolment duties come into effect for you. You must be prepared for this date.

You or your client will need to enter your Employers PAYE Reference and you will then be able to find out your individual staging date. The link below will take you to the calculator.

http://www.thepensionsregulator.gov.uk/employers/staging-date.aspx

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Emergency Budget 2015 – What to expect

Osborne admits the Summer budget is “unusual” but sees no point in hanging around following the Conservative’s General Election victory. He has declared that he “does not want to wait to deliver on the commitments” laid out in the Party’s election manifesto.

In a recent speech to the Confederation of British Industries he said the July budget would be for ‘working people’ with a “laser-like’ focus on making the UK economy more productive.So what can we expect from the first post-coalition Conservative budget of the decade?

One of the main Conservative pledges was not to increase VAT, Income Tax or National Insurance Contributions during the next 5 year Parliament term so workers could keep more of their hard-earned cash. So it is likely that this so-called Tax Lock will be legislated in the Summer Budget.

 Indeed, depending on how bullish Osborne feels and to what extent he wants ‘working people’ to be boosted, he may commit much earlier than expected to plans of raising income tax personal allowance to £12,500 a year and the 40% tax threshold from £42,385 to £50,000.
However these may be held back for the more difficult ‘rainy days’ of mid-Government.Osborne is likely to seal the commitment to raise the inheritance tax threshold to £1 million for married couples and civil partners.

With an aim of eradicating the public deficit by 2018-19 the Chancellor will no doubt have focus on ‘cash grabbing’ alongside the giving and public spending cuts.

The amount of pension tax relief available to the highest earners may be reduced to £10,000 from the present £40,000 a year either instantly or more likely from April 6 next year, and don’t rule out a rise in Capital Gains Tax as occurred in the post-election budget of 2010.

We will almost certainly see the introduction of the tax-free minimum wage law where the personal allowance will be set at a level that ensures that those working 30 hours a week on the national minimum wage are not subject to income tax.

Tax perks for landlords in the form of offsetting the cost of mortgage interest may also be axed.

Expect more action on curbing “aggressive” tax avoidance, especially the annual tax charges paid by non-doms and a continued cracking down on corporate tax evasion, such as failure to disclose offshore income, by imposing larger penalties.

But what about other areas of business and the curious case of productivity?

Despite a generally improving economy and unemployment, at the end of 2014, figures were still below pre-recession levels and it is an area Osborne is desperate to improve. More money for infrastructure and education is part of solving the puzzle but ensuring that businesses work better is another area of focus.

Expect the Chancellor to keep corporation tax levels at 20% and at least give an indication of what the new “significantly higher” permanent annual level of Annual Investment Allowance will be. We already know it is not going to return to its basic £25,000 from the current £500,000 level but more clarity will help businesses including SMEs invest. Also look for better access to research and development credits for SMEs.

The ICAEW has called on the Independent Office of Tax Simplification to be given the resources it needs to deliver on tax simplification such as the “complexity and length of the tax code”. It also wants the pension auto-enrolment process for SMEs to be simplified and explore a National Insurance Contribution exemption for apprentices of all ages.

Expect the Chancellor to talk about pension auto-enrolment given its high profile but those other wishes may have to wait.

Osborne may however also revisit a proposal to bring in a statutory tax exemption for trivial benefits in kind on spends up to £50. It had been expected to form part of the Finance Bill 2015 but was dropped pre-election. The exemption would have been for items such as tea and coffee or Christmas gifts.

Like Christmas, be prepared to expect the unexpected on Budget Day. We will be here after the speech to run through the announced changes and look at the ramifications for all.

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