August 2024 Tax News and Updates

Welcome to the August edition of Tax E-News. We hope that you find this informative. Please get in touch with us if you wish to discuss any matters in more detail.

Beware the 60% Income Tax Trap.

It has recently been reported that over half a million taxpayers paid a marginal income tax rate of 60% in 2022/23, an increase of 23% from the previous year. This marginal rate applies when an individual’s adjusted net income falls between £100,000 and £125,140. For every £2 of income over £100,000, the £12,570 personal allowance is reduced by £1, resulting in the allowance being fully eroded at £125,140.

Planning to Mitigate the Problem

adjusted net income” is an individual’s total taxable income minus personal pension contributions and charitable donations under Gift Aid. Such payments can effectively save income tax at the 60% rate. For instance, an £80 payment to charity under Gift Aid is grossed up to £100, reducing the taxpayer’s income by £100 and saving £60 in tax if the individual’s income is between £100,000 and £125,140. If an individual’s total income is projected to be £105,000 for 2024/25, they could consider making an additional pension contribution of £4,000 before 5 April 2025, reducing their income to £100,000 and restoring their £12,570 personal allowance.

This planning is also effective for those subject to the High Income Child Benefit Charge (HICBC). The charge claws back child benefit by 1% for every £100 adjusted net income between £50,000 and £60,000.

Salary Sacrifice Arrangements Can Also Be Effective

Another way to mitigate the effects of the personal allowance restriction and the HICBC is to agree with your employer to forgo some of your salary, pay rise, or bonus in exchange for an additional employer pension contribution or an electric company car. For example, an employee earning £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 keeping them at £100,000 and retaining their personal allowance.

Sacrificing salary for an electric company car could be more tax-efficient, as the employee would currently be taxed on 2% of the list price instead of the salary foregone. On a £50,000 electric car, that would be just a £1,000 taxable benefit in kind, which for a 40% taxpayer would mean £400 in income tax.

The employing company would obtain a tax deduction for the cost of providing the benefit and would also save on the employer’s national insurance. So, it’s a win-win situation.

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 includes paying for a summer holiday club or childminder.

The account can also pay nursery fees, breakfast or after-school clubs during term time, and 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 still need to sign up should check their eligibility and apply online today.

For every £8 paid into an online account, an additional £2 is received from the government. This means parents and carers can receive up to £500 every three months (£2,000 a year for each child) or £1,000 (£4,000 a year for each child) if their child is disabled.

Money can be deposited anytime to be used immediately or whenever needed. Unused money in the account can be withdrawn at any time.

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 an average of 16 hours a week.
• Each earns no more than £100,000 per annum.
• Do not receive tax credits, Universal Credit, or childcare vouchers.

Planning a Staff Summer Barbecue?

Employers may cover the cost of certain social events for staff without creating a tax liability. This concession is now a statutory exemption, provided certain conditions are met.

The exemption applies to an “annual party or similar function” provided it is available to all employees or generally available to those at a particular location. During the COVID-19 pandemic, HMRC confirmed that a ‘function’ could include a virtual party where employers could not host a traditional party with employees physically present.

A critical condition is that the cost per head of the party or function must not exceed £150, including VAT. If an event costs more than £150, it becomes taxable in full, not just on the excess over £150.

If you have already held a Christmas party for staff, it may be possible to have another event exempted from tax, provided the combined cost per head is no more than £150 a year. If the combined cost exceeds £150 for the year, the employer can designate which events should be considered to make the best use of the exemption. For example, if the cost per head of the Christmas party was £100 and the summer event was £70, the employer can nominate the Christmas party to be covered by the exemption. Still, the £70 summer event would be taxable (not just the excess £20).

Rather than the employee being taxed on the £70, the employer can deal with the tax and National Insurance on the employee’s behalf through a PAYE settlement agreement.

Budget Date Announced

The State Opening of Parliament took place on 17 July, and the King’s Speech outlined the measures the government intends to introduce during the next session of Parliament. Aside from mentioning the proposal to remove the VAT exemption for private school fees (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 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 issued draft legislation to abolish the special tax treatment of furnished holiday lettings (FHL) from 6 April 2025 for individuals (1 April 2025 for corporation tax). This change will remove the tax advantages that current FHL landlords have enjoyed over other property businesses in four key areas:

• 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 expenditures and allowing relief when domestic items are replaced.
• Withdrawing access to reliefs from taxes on chargeable gains for trading business assets.
• This income is no longer included 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. 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.

Losses generated from a person’s FHL business will be permitted to be carried forward and be available for set off against future years’ profits of either the UK or overseas property business as appropriate.

Eligibility for CGT roll-over relief, business asset disposal relief, gift relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings will cease from 6 (1) April 2025. Regarding CGT business asset disposal relief, where the FHL conditions are satisfied in relation to a business that ceased before 6 April 2025, relief may apply to disposal within the normal three-year period following cessation.

There is also an anti-forestalling rule, effective 6 March 2024, intended to prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules.

If you would like to speak to an expert accountant regarding your capital gains tax or personal taxes, book a free consultation!

Changes to VAT on Independent School Fees

On 29 July 2024, the Chancellor announced that from 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 specifies that fees invoiced or paid on or after 29 July 2024 and before 30 October 2024 are to be treated for VAT purposes as a supply taking place on the later of:

(a) 1 January 2025, and

(b) the first day of that term.

School fees paid before 29 July 2024 will follow the VAT treatment in force at the normal tax point for these supplies, where the fee rate for the relevant term has been set and was known at the time of payment.

If any of these changes affect you, book a free consultation with us. We can help you plan for some potential impacts. More details will be available after the budget, and we will keep you informed then.

Main Tax Dates August/September 2024

Main Tax Dates August/September 2024
Date	What’s Due
01/08/2024	Corporation tax payment for the year to 31/10/23 (unless quarterly instalments apply)
19/08/2024	PAYE & NIC deductions, and CIS return and tax, for a month to 05/08/24 (due 22/08/24 if you pay electronically)
01/09/2024	Corporation tax for year to 30/11/23 (unless quarterly instalments apply)
19/09/2024	PAYE & NIC deductions, and CIS return and tax, for a month to 05/09/24 (due 22/09 if you pay electronically)