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Welcome…
To December’s Business Companion News (note the new name for our monthly newsletter).
Christmas Payroll Deadlines
It’s been a busy year for us with payrolls/ furlough claims. With the easing of restrictions over Christmas we are planning to take a proper Xmas break this year. So please email details of your December payroll to and furlough details to by Friday 18th December. We will then return your payslips and reports to you by Tuesday 22nd December to allow everyone time to be paid before Christmas. If there are any late changes they will be processed after 28th December.
Wishing you a Happy Christmas and a successful New Year!
Jennifer & Lorraine
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Avoiding the Highest Rate Tax
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Many taxpayers are caught in a hidden 60% Income Tax trap without even realising it.
The headline rates of Income Tax are 20%, 40% and 45%, but a quirk in the rules means someone earning more than £100,000 a year pays 60% on some of their income. If you earn more than £100,000 you lose £1 of your Personal Allowance for every £2 you earn over £100,000. So, if you earn more than £125,000 you lose your entire £12,500 Personal Allowance (£25,000/2=£12,500).
This means someone earning £125,000 pays £42,500 a year in tax as they lose the Personal Allowance and, as a result, more of their income is taxed at the 40% higher rate, as shown below.
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Income in this tax band
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Tax due
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Personal Allowance – 0%
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£0
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£0
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Basic Rate Income Tax – 20%
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£37,500
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£7,500
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Higher Rate Income Tax – 40%
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£87,500
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£35,000
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Total
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£125,000
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£42,500
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If the same person had earned £100,000 they would have paid significantly less tax, as they would have had their complete Personal Allowance. By earning a fifth les income the tax payer saves over a third of their tax bill.
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Income in this tax band
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Tax due
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Personal Allowance – 0%
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£12,500
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£0
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Basic Rate Income Tax – 20%
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£37,500
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£7,500
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Higher Rate Income Tax – 40%
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£50,000
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£20,000
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Total
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£100,000
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£27,500
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The extra tax is £15,000 on the £25,000 earned. The £25,000 this taxpayer earned over £100,000 is effectively taxed at a 60% rate. 60% is one of the highest rates of tax we have in this country. 60% is higher than the 45% Additional Rate tax band (above £150k pa earnings) that is currently dominating the news headlines.
These examples assume that the earnings are taken as salary. Employee NI of £5860 is also potentially payable compared to £6360 in the first case. If the bulk of the earnings are taken as dividends they are taxed as 32.5% rather than 40% which will reduce all these figures. The extra tax will drop to £12,200. Still very significant.
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Finance Bill 2021 and other changes
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| Directors’ loans – a reminder of the tax charge |
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Although there is no official Budget statement this Autumn, HMRC have published details of a series of measures affecting tax. Some of the changes will take place straight away or from April 2021, others are to be consulted on and included in draft Finance Bill 2021. The key announcements are summarised in the following paragraphs.
Capital allowances AIA extended
The Government has announced that it is extending the current temporary level of the Annual Investment Allowance (AIA) of £1,000,000 by one year covering 1 January to 31 December 2021.
Read More |
Cash transactions between a director and a personal or family company are recorded through the director’s account. At the end of an accounting period, if the director owes the company money (ie the account is considered overdrawn), and the company is close (broadly, one that is controlled by five or fewer shareholders (participators)), there will be tax consequences to consider.
Read More |
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The VAT Flat Rate Scheme – time to get in or to out?
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The Brexit shift may create an incentive to leave the VAT Flat Rate Scheme (FRS).
Consider a business engaged in exporting of goods to EU and US private customers (B2C) as well as sales to UK. Imagine the sales break down in the following ratios: USA / EU / UK 40%/30%/30% respectively. Both the EU and UK goods sales were previously liable to 20% UK VAT. But when we leave the single market this will no longer be the case.
US sales are zero rated and therefore don’t count in the conventional VAT calculation. The EU sales are currently standard rated but will become zero rated after we leave the single market.
Meanwhile under FRS the whole goods turnover is subject to VAT at 7.5%.
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VAT Taken/ Recovered / Net
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Goods Retailing FRS 7.5% before 1st Jan 2021:
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£100k – FRS is applied on all sales
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£7,500
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FRS 7.5% from 1st Jan 2021:
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£100k – FRS is applied on all sales
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£7,500
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Conventional VAT before 1st Jan 2021:
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Output tax:
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20% applied to UK sales of say £30k
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£5,000
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20% on EU sales of say £30k
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£5,000
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0% (zero rate) on US sales of say £40k
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£0
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Input tax:
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Recovery of VAT on all VAT able costs £12kpa
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(£2,000)
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Net VAT payable
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£8,000
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Conventional VAT after 1st Jan 2021:
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Output tax:
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20% applied to UK sales only of £30k
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£5,000
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0% (zero rate) on EU sales
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£0
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0% (zero rate) on US sales
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£0
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Input tax:
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Recovery of VAT on all costs £12kpa
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(£2,000)
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Net VAT payable
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£3,000
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Thus it becomes clear that FRS may have been better in the past, but a bad idea after 1/1/21.
There is an opposite phenomenon with Business to Business sales (B2B) of services (eg IT Support). Imagine the same numbers.
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Services B2B FRS 7.5% before 1st Jan 2021:
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£60k – FRS is applied on UK/EU sales only (US outside scope)
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£4,500
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FRS 7.5% from 1st Jan 2021:
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£30k – FRS is applied on UK sales only (both US and EU are outside scope)
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£2,250
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Conventional VAT before 1st Jan 2021:
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Output tax:
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20% applied to UK sales of say £30k
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£5,000
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0% on EU sales of say £30k (zero rate reverse charge)
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£0
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0% on US sales (outside the scope of VAT)
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£0
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Input tax:
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Recovery of VAT on all costs £12kpa
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(£2,000)
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Net VAT payable
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£3,000
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Conventional VAT from 1st Jan 2021:
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Output tax:
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20% applied to UK sales of say £30k
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£5,000
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0% on EU sales (outside the scope)
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£0
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0% on US sales (outside the scope)
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£0
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Input tax:
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Recovery of VAT on UK sales only £20kpa
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(£2,000)
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Net VAT payable
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£3,000
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In this case FRS was a bad idea in the past, but may be a good idea after 1/1/21.
One relief is that the departure from the EU will remove the need for the EC Sales list.
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| December questions and answers |
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| December key tax dates |
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 Q. I am currently in the process of purchasing a property which includes a separate granny annex. Since there is only one title number for the whole property, can I apply for stamp duty land tax multiple dwelling relief (MDR)? Answer
Q. Ten years ago my husband inherited a share of his father’s property when he died as a joint owner with his partner. My father-in-law’s Will specified that his surviving partner could continue living in the property for as long as she wanted. Both my husband and my deceased father-in-law’s partner are on the deeds for the property. The partner has recently died and the property is empty. Will my husband have to pay capital gains tax on his share when it is sold, even though he could not live there because the partner was in residence? Answer
Q. I have a new employee who has only been with me for two weeks. Yesterday the employee called in sick. Do I have to pay statutory sick pay (SSP)? Answer |
 14 – HMRC deadline – last date for submitting November Furlough Claims under the new Extended scheme (new applicants may claim)
19/22 – PAYE/NIC, student loan and CIS deductions due for month to 5/12/2020
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 Please contact us if we can help you with these or any other tax or accounts matters.
In addition, if there’s anyone else who you think would benefit from the newsletter, please forward the email to them or ask them to contact us to be added to the newsletter list. |
 If you are not already a client and are interested in becoming one, we would love to discuss how we can help and provide you with a competitive quote for our services.
See details of our Business Companion Service. |
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Simple Accounting Limited offers a cost effective Business Companion service to business owners who use MYOB, Acclivity, Mamut, Xero, Quickbooks or FreeAgent.
‘All clients using these software packages can benefit from our support. Visit our website http://www.simpleaccounting.co.uk for a look at the resource on offer.’ |
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