Tax E-News – August 2024
Welcome to the August edition of Tax E-News. We hope that you find this informative. Please contact us if you wish to discuss any matters in more detail.
BEWARE THE 60% INCOME TAX TRAP
It has recently been reported over half a million taxpayers paid a marginal income tax rate of 60% in 2022/23, up by 23% from the number in 2021/22. This marginal rate applies where an individual’s adjusted net income falls between £100,000 and £125,140, where every £2 income over £100,000 reduces the £12,570 personal allowance by £1, such that it is fully eroded at £125,140.
Planning to mitigate the problem
The definition of “adjusted net income” is the individual’s total taxable income less personal pension payments and charitable payments under Gift Aid. Such payments can effectively save income tax at 60%. For example, an £80 payment to charity under gift aid is grossed up to £100 and the taxpayer’s income is reduced by £100, thus saving £60 tax where the individual’s income is between £100,000 and £125,140. […]
Salary sacrifice arrangements can also be effective
Another way to mitigate the effects of the personal allowance restriction and the HICBC would be to agree with your employer to forgo some of your salary, pay rise, or bonus for an additional employer pension contribution or an electric company car. For example, an employee on £96,000 a year might be entitled to a £10,000 bonus. They could agree with their employer to have £6,000 of the bonus paid into their pension (tax-free, provided the £60,000 pension annual allowance isn’t exceeded) with the remainder of the bonus just keeping them at £100,000 and retaining their personal allowance. […]
USE TAX-FREE CHILDCARE ACCOUNT TO PAY FOR SUMMER HOLIDAY CLUBS
Tax-Free Childcare accounts can be used to pay for approved childcare for children aged 11 or under, or 16 if the child has a disability. This can include paying for a summer holiday club or childminder.
The account can also be used to pay nursery fees, to pay for breakfast or after school clubs in term-time, as well as out of school activities.
Opening a Tax-Free Childcare account is quick and easy and can be done at any time of the year. Families who have not yet signed up should check their eligibility and apply online today. […]
Eligibility
Families could be eligible for Tax-Free Childcare if they:
- have a child or children aged 11 or under. They stop being eligible on 1 September after their 11th birthday. If their child has a disability, they can receive support until 1 September after their 16th birthday;
- earn, or expect to earn, at least the National Minimum Wage or Living Wage for 16 hours a week, on average;
- each earn no more than £100,000 per annum; and
- do not receive tax credits, Universal Credit or childcare vouchers.
PLANNING A STAFF SUMMER BARBEQUE?
Employers may meet the cost of certain social events for staff without creating a tax liability. This used to be a concession but is now a statutory exemption provided certain conditions apply.
The exemption applies to an “annual party or similar function” provided it is available to all employees or available generally to those at a particular location. During the Covid-19 pandemic HMRC confirmed that a ‘function’ could include a virtual party, where employers were unable to host a traditional party at which employees would have been physically present. […]
BUDGET DATE ANNOUNCED
The State Opening of Parliament took place on 17 July and the King’s Speech set out the measures that the government intends to introduce during the next session of parliament. Other than a mention of the proposal to remove the VAT exemption for private school fees (which we covered in a previous edition of this newsletter), very little was said about measures that will affect tax for businesses and individuals. Instead, we must wait for the Labour government’s first budget in order to learn about their tax plans. The budget is set to take place on 30 October 2024.
PROPOSED REPEAL OF THE SPECIAL TAX TREATMENT OF FURNISHED HOLIDAY LETTINGS
The government has now issued the draft legislation to abolish the special tax treatment of furnished holiday lettings (FHL) with effect from 6 April 2025 for individuals (1 April 2025 for corporation tax). This change will remove the tax advantages that current FHL landlords have received over other property businesses in 4 key areas by:
- applying the finance cost restriction rules so that loan interest will be restricted to the basic rate of Income Tax;
- removing capital allowances rules for new expenditure and allowing relief when domestic items are replaced;
- withdrawing access to reliefs from taxes on chargeable gains for trading business assets; and
- no longer including this income within relevant UK earnings when calculating maximum pension relief.
After repeal, former furnished holiday let properties will form part of the person’s UK or overseas property business and be subject to the same rules as residential property businesses.
Transitional rules
Where an existing FHL business has an ongoing capital allowances pool of expenditure, they can continue to claim writing-down allowances on that pool — any new expenditure incurred on or after the operative date must be considered under the property business rules
After the changes, former FHL properties will be part of the person’s UK or overseas property business as appropriate. That property business will then include the amalgamated profits and losses of all the properties in that business. […]
CHANGES TO VAT ON INDEPENDENT SCHOOL FEES
On 29 July 2024, the Chancellor announced that as of 1 January 2025, all education services and vocational training supplied by a private school, or a connected person, for a charge will be subject to VAT at the standard rate of 20%. Boarding services provided by a private school, or a connected person, will also be subject to VAT at 20%.
Draft legislation issued on 29 July 2024 also provides that fees invoiced or paid on or after 29 July 2024 and before 30 October 2024 are to be treated for the purposes of the charge to VAT as a supply taking place on the later of—
(a) 1 January 2025, and
(b) the first day of that term. […]