Adding employees to a workplace pension scheme

Posted on 9th March 2023 by Solutions Accountancy

Automatic enrolment for workplace pensions has helped many employees make a start on providing for their retirement with the advantage that employers and government are also contributing to their pension pot.

The law states that employers must automatically enrol workers into a workplace pension if they are aged between 22 and State Pension Age and earn more than the minimum earnings threshold. The minimum threshold has remained fixed at £10,000 since 6 April 2014. The employee must also work in the UK and not be a member of an existing, qualifying pension scheme. Employees can opt-out of joining the pension scheme if they wish.

Under the rules, employers are also required to offer their workers access to a workplace pension when a change in their age or earnings makes them eligible. This must be done within 6-weeks of the day they meet the criteria.

Under the automatic enrolment rules the employer and the government also add money into the pension scheme. There are minimum contributions that must be made by employers and employees.

Both the employer and employee need to contribute. There is a minimum employer contribution of 3% and employee contribution of 4%. This means that contributions in total will be a minimum of 8%: 3% from the employer, 4% from the employee and an additional 1% tax relief.

The contributions are based on the qualifying earnings brackets highlighted above; this means that for many employees the 8% contribution rate will not be based on their full salary.

NIC and company directors

Posted on 9th March 2023 by Solutions Accountancy

Directors are classed as employees and pay National Insurance on annual income from salary and bonuses that exceed the Primary Threshold. The annual threshold is pro-rated to £11,908 this year following the increase to £12,570 from 6 July 2022 (£9,880 from 6 April 2022 – 5 July 2022). The primary threshold from 6 April 2023 will be £12,570.

Many director shareholders take a minimum salary and any balance of remuneration as dividends. This tends to reduce National Insurance Contributions (NICs), and in some case Income Tax. The planning strategy is to pay a salary at a level that qualifies the director for state benefits, including the State Pension, but does not involve payment of NICs.

A director’s liability to NI is worked out based on their annual (or pro-rata annual) earnings. This differs from regular employees whose liability is calculated based on their actual pay period, usually weekly or monthly. Payments on account of a director’s NICs can be made in a similar way as for other employees. However, an annual adjustment must be made at the end of the tax year.

Directors, who are first appointed during a tax year, are only entitled to a pro rata annual earnings band which depends on the actual date appointed and the amount of time remaining in the tax year. Care needs to be taken in these circumstances to avoid an unexpected liability to pay NIC.

Valuing an estate for IHT purposes

Posted on 9th March 2023 by Solutions Accountancy

Inheritance Tax (IHT) is levied on a person’s estate when they die and can also be payable during a person’s lifetime on certain trusts and gifts. The rate of Inheritance Tax payable is 40% on death and 20% on lifetime gifts.

The current IHT nil rate band is £325,000 per person, below which no IHT is payable. This is the amount that can be passed on free of IHT. A reduced IHT rate of 36% (reduced from 40%) applies where 10% or more of a deceased’s net estate after deducting IHT exemptions, reliefs and the nil-rate band is left to charity.

In order to ascertain whether or not IHT is due, the executor or personal representative of the deceased must value the deceased's estate. This is done by calculating the total value of the assets and gifts of the deceased and deducting any debts. An initial estimate of the value of the estate’s value should be undertaken to help determine if there is IHT to pay. This includes ascertaining the value of any assets owned by the deceased on the day they died, an analysis of any gifts made in the 7 years prior to death and the value of trusts where the deceased had a beneficial interest.

If the estate is likely to owe tax, then accurate valuations will be required. IHT is usually due six months after the end of the month in which the deceased died. In certain cases, it is possible to pay by instalments or to make payments later with the addition of interest.

Corporation tax from 1 April 2023

Posted on 9th March 2023 by Solutions Accountancy

Barring any unforeseen changes being announced at next week’s Budget, the Corporation Tax main rate will increase to 25% from 1 April 2023 for companies with profits over £250,000. A Small Profits Rate (SPR) of 19% will also be introduced from the same date for companies with profits of up to £50,000, ensuring these companies pay Corporation Tax at the same rate as currently.

Where a company has profits between £50,000 and £250,000 a rate of Corporation Tax will apply that bridges the gap between the lower and upper limits. The lower and upper limits will be proportionately reduced for short accounting periods of less than 12-months and where there are associated companies.

The effect of marginal relief is that the effective rate of Corporation Tax gradually increases from 19% where profits exceed £50,000 to 25% where profits are more than £250,000.

The amount of Corporation Tax to pay will be found by multiplying profits by the main rate of 25% and deducting marginal relief. For the fiscal year 2023, the marginal relief fraction will be 3/200.

Why credit control is vital

Posted on 6th March 2023 by Solutions Accountancy

The ultimate financial objective of most trading companies is to convert their supply of goods and services into cash – deposits in their bank account.

However, when goods are sold on credit, and you give customers time to pay, there is a delay in the cash conversion process, and for a period of time your cash proceeds of sale stay in your customers bank account.

Credit control is the management of this process to ensure customers pay in accordance with your credit terms (30 days for example). Without effective credit control there would likely be a further delay, beyond your agreed credit terms, and the cumulative effect of these delays could cause you serious cash flow problems.

An effective way to manage credit control is to automate the issue of statements and follow up letters using your bookkeeping software. It should be possible to manage the process by setting up delivery of reminders to pay by email.

Please let us know if we can help with the set-up process.

Finally, manage the process. As well as meeting your sales and profits targets each month, be sure to include a review of your current days credit being taken by customers. If the days credit taken is higher than the days credit you have set, then action may be required to intervene and chase payment by more direct means.

Incentive to invest

Posted on 6th March 2023 by Solutions Accountancy

Next week, 15 March, the Chancellor will deliver his first Spring Budget. It will provide an opportunity to cushion companies from the effects of the Corporation Tax (CT) increase to 25% and the withdrawal of the 130% Super-Deduction; both timed for the 1 April 2023.

Although any large-scale tax cuts may be off the table, the Chancellor may still be willing to provide companies with incentives to invest.

The Super-Deduction was introduced to encourage companies to invest in qualifying equipment before the 1 April 2023 increase in CT rates to 25%.

So, what incentives could we expect?

The Chancellor could extend the 130% relief, thus offering corporate businesses an effective 32.5% tax relief (25% x 1.3). This would be a useful fiscal carrot to encourage capital investment from April 2023.
He could extend the relief to cover rented, leased or second-hand goods.
He could extend the relief to include non-corporate business owners and the self-employed.

Alternatively, he could simply increase the permanent Annual Investment Allowance above the present £1m.

The business community needs incentives to invest. Otherwise, there is a danger that firms may simply defer investment, waiting for better times, which, of course, would further reduce our competitive ability to match productivity advances by countries who are less concerned with this “wait and see” approach.

Scottish Winter Payments Support

Posted on 2nd March 2023 by Solutions Accountancy

The Scottish Winter Heating Payment is a new Scottish Government benefit that replaces the Department for Work and Pensions’ (DWP) Cold Weather Payment. It can be claimed by eligible claimants on low incomes living in Scotland from 1 November 2022. The Cold Weather Payment is paid to eligible individuals on benefits in England and Wales. Northern Ireland runs a separate scheme which mirrors the Cold Weather Payment scheme in England and Wales.

The Scottish Winter Heating Payment is not linked to a sustained period of cold weather in a specific location but is a reliable annual £50 payment. The first winter payments to around 400,000 people were processed at the end of February.

Those eligible for the Scottish Winter Heating Payment will receive it automatically, with no need to apply. It is paid through Social Security Scotland and people will get a letter to let them know they are eligible.

The Minister for Social Security Scotland said:

'The Payment will reach significantly more people than the benefit it has replaced. On average only 185,000 people received the equivalent Cold Weather Payments from the UK Government over the last seven years – whereas we will pay everyone eligible every year.

The Scottish Government is investing around £20 million per year compared with an average of £8.3 million annually paid out through Cold Weather Payment. We will also uprate the next Winter Heating Payment by 10.1%, to £55.05.'

New VAT penalty regime

Posted on 2nd March 2023 by Solutions Accountancy

The first monthly returns and payments affected by HMRC’s new VAT penalty regime are due by 7 March 2023. The new rules apply to the late submission and / or late payments of VAT returns for VAT return periods beginning on or after 1 January 2023.

Under the new regime, there are separate penalties for late VAT returns and late payment of VAT as well as a new methodology to the way interest is charged. This replaces the old default surcharge regime and for most taxpayers should represent a fairer system.

The new system is points-based. This means that taxpayers will incur a penalty point for each missed VAT submission deadline. At a certain threshold of points, a financial penalty of £200 will be charged and the taxpayer will be notified. The threshold varies depending on the required submission frequency (monthly, quarterly, annual). For quarterly VAT returns, the penalty points threshold will be 4 points. The penalty points will reset to zero following a period of compliance, for quarterly returns this requires 12-months of compliance. There are also time limits after which a point cannot be levied.

In addition, the new system sees the introduction of two new late payment penalties. A first payment penalty of 2% of the unpaid tax that remains outstanding 16-30 days after the due date. The second payment penalty increases to 4% of any unpaid tax that is 31 or more days overdue. To help with the introduction of the new system, HMRC has confirmed that will not be charging a first late payment penalty for the first year of the new regime (1 January – 31 December 2023) once the debt is paid in full within 30-days of the payment due date or if a payment plan is agreed.

Late payment interest will be charged from the date a payment is overdue, until the date it is paid in full. Late payment interest is calculated as the Bank of England base rate plus 2.5%.

Still time to claim Marriage Allowance

Posted on 2nd March 2023 by Solutions Accountancy

HMRC is reminding married couples and those in civil partnerships that there is still time to sign up for marriage allowance before the end of the current tax year (5 April 2023) if they are eligible and haven’t yet claimed.

The marriage allowance applies to married couples and those in a civil partnership where a spouse or civil partner does not pay tax or does not pay tax above the basic rate threshold for Income Tax (i.e., one of the couples must currently earn less than the £12,570 personal allowance for 2022-23).

The allowance works by permitting the lower earning partner to transfer up to £1,260 of their personal tax-free allowance to their spouse or civil partner. The marriage allowance can only be used when the recipient of the transfer (the higher earning partner) does not pay more than the basic 20% rate of Income Tax. This would usually mean that their income is between £12,570 to £50,270 in 2022-23. The limits are somewhat different for those living in Scotland.

This transfer could result in a saving of up to £252 for the recipient (20% of £1,260), or £21 a month for the current tax year. In fact, even if a spouse or civil partner has died after 5 April 2018, the surviving person can still claim the allowance (if they qualify) by contacting HMRC’s Income Tax helpline.

If you meet the eligibility requirements and have not yet claimed the allowance, you can backdate your claim to 6 April 2018. This could result in a total tax-break of up to £1,242 if you can claim for 2018-19, 2019-20, 2020-21, 2021-22 as well as the current 2022-23 tax year. In fact, even if you are no longer eligible but would have been in any of the preceding years then you can still claim your entitlement.

Tax when you sell shares

Posted on 2nd March 2023 by Solutions Accountancy

Capital Gains Tax (CGT) is normally charged at a simple flat rate of 20% when you sell shares unless they are in a CGT free investment such as an ISA or qualifying pension.

If you only pay basic rate tax and make a small capital gain, you may only be subject to a reduced CGT rate of 10%. Once the total of your taxable income and gains exceeds the higher rate threshold, the excess will be subject to 20% CGT. There is also an annual CGT exemption. This means that in the current tax year you can make £12,300 of gains before paying any tax. The allowance applies to each member of a married couple or civil partnership.

The usual due date for paying any CGT you owe to HMRC when you sell shares is the 31 January following the end of the tax year in which a capital gain was made. This means that CGT for any gains crystalised before 6 April 2023 will be due for payment on or before 31 January 2024.

It is also important to note that the annual exempt amount applicable to CGT is to be more than halved from April 2023. The exempt amount will be reduced from £12,300 to £6,000 from April 2023, before a further reduction to £3,000 from April 2024. This means that taxpayers with small gains should consider the benefits of crystalising these gains before 6 April 2023 in order to fully utilise the £12,300 allowance for 2022-23.

The normal way to report a gain on the sale of shares is to complete the relevant sections of your Self-Assessment tax return in the tax year after the gain was made. When calculating your gain, you can deduct certain costs of buying or selling shares such as stockbrokers’ fees or Stamp Duty Reserve Tax when you bought the shares.