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Welcome…

To February’s Business Companion News.

We have launched our new Website with a bright new logo and lively colours and design! Go to our url www.simpleaccounting.co.uk.  Have a look around and tell us what you think. 
 

February 2024

• How the Government uses pensions to collect more tax

• How to book an HP Agreement

• New ‘one pension pot for life proposal

• Changes to National Minimum Wage (NMW) and Living Wage (NLW) from April

 
How the Government uses pensions to collect more tax
With all the hype over pensions it is easy to forget that they are essentially just a tax saving scheme.  If it wasn’t for taxation we would just want the money now – and make the private savings we thought were necessary for the future.  For example they are good for well-organised 40% taxpayers whose income after retirement reduces to basic rate band of only 20%.  They get relief of 40% by pausing their income…. But suffer only 20% relief when the pension fund pays up.

The government, give them their due, simply want you to save for a retirement yourself.   The government wants to reduce pressure to pay more benefits or a higher state pension; payments that in future years might prove unaffordable.  In doing so they tell you that the pension is tax free.  They even claim that they are subsidising your pension by giving you a top up from the HMRC for any investment that you make.  

But of course this isn’t really true.  All they are really doing is using the tax money that you have paid on your income to top up your pension. They are giving you the income tax that you have already paid (usually through PAYE).  This has all sorts of weird effects.  National Insurance is usually imposed on pension contributions…. So the pension contribution is not as tax-free as you might think.  Also there are counter productive effects on the low paid.  You can lose 20% tax on the pension contributions you make personally if you are a higher rate tax payer and simply fail to declare these on a tax return.

Now I have come across another paradox.  For the bulk of your life the contributions you make will be at basic rate (currently 20%).  However people tend to be richer in later life.  They earn more income either from savings, investments or working later than the date the pension becomes due.  It is therefore entirely possible that when your pensions crystalise you will be a higher rate (40%) taxpayer.  In other words the savings you made from your hard-pressed income in your youth saved you 20% relief.  But once the savings are finally paid to you in your well-paid seniority you will suffer 40% tax on the receipt.    
So doing what the government suggests actually damages you.  .
How to book an HP (Hire Purchase) agreement
New ‘One Pension Pot for Life’ proposal
If you have a business purchase of an asset (eg machine, van) it can be tricky to think about the entries you should make in your books.  A suggested method for a £30k asset subject to VAT on HP with a £7k initial deposit and fixed interest of £6k over the term.  Instalments of £583 pm are due over a five year term.

1.    Enter the total bill for the asset as a capital purchase Dr £30k 9-xxxx  (Capital purchases), Dr £6k 2-xxxx 9Input VAT) ; Cr 2-xxxx £36k (Purchase ledger).
2.    Note that this is being financed/paid off by a long term HP loan separately:  Dr 2-xxxx £36k (Purchase ledger)  Cr 2-9xxx  (Long term loan HP)
3.    Initial deposit/payment £7k: Dr £7k  2-9xxx  (Long term loan HP) ; Cr £7k 1-2xxx (Bank)
4.    Interest on HP agreement overall; Dr 9-xxxx Interest Paid ; Cr 2-9xxx  (Long term loan HP).
This should leave the balance on the HP account as £35k. This is then paid over the term at £583 monthly.  £583 x 12m x 5 years = £35000.  
5.    60 Instalments: Dr £483 2-9xxx  (Long term loan HP) ; Cr £483 1-2xxx (Bank)
For those of you who employ staff, you should be aware of requirements surrounding workplace pensions. New proposals would give savers a legal right to require a new employer to pay pension contributions into their existing pension pot. A consultation has been launched by the Government. If later approved, a new system of ‘one pension pot for life’ would be born.

It would mean individuals can choose their pension provider rather than having one selected by their employer. One of the aims of the proposal is to tackle the issue of lost pension pots, estimated at 2.8 million by the Pensions Policy Institute. The reform aims to prevent the loss of pensions when changing jobs, providing a consolidated view of contributions.

This could easily add to the excessive and disproportionate workload that employers are already suffering to service what are often quite modest pension payments.  We are intending to cover this increased workload for our Business Companion clients but separate payments may be required.
Changes to National Minimum Wage (NMW) and National
Living Wage (NLW) from April
Make sure that you will be paying at least the National Minimum Wage (NMW) to your employees from April.

The National Minimum Wage rate (NMW) is a legally-enforced standard that ensures employees are paid what they deserve. The National Living Wage (NLW) is a higher amount and from April the age at which workers qualify to receive the NLW will be lowered from 23 to 21. This means that the NMW for workers aged 21 and above will be the same as the NLW.

The NLW will be increased by £1.02 to £11.44 per hour from 1 April 2024, an increase of 9.8%. The NMW is also set to increase by more than £1 per hour. The NLW and NMW rates effective from 1 April 2024 are shown below:

Age       Rate per hour    Increase (£)    Increase (%)
21+ (NLW)        £11.44          £1.02              9.8%
18-20 (NMW)     £8.60           £1.11            14.8%
16-17 (NMW)     £6.40           £1.12            21.2%
Apprentice         £6.40           £1.12            21.2%

This is the largest ever increase to the statutory hourly minimum and is forecast to result in a boost to annual earnings worth over £1,000 for those working under full-time contracts. The Government has estimated that there are over 2 million taxpayers currently eligible for the NLW who will benefit from this increase.

It’s important not to confuse the NLW with the Living Wage. The fundamental difference is that the National Living Wage is a compulsory statutory requirement, whereas the Living Wage is a charity campaign and it’s not legally enforceable..
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