Welcome to the July 2019 newsletter from Chamberlains
We’ve started a new year at Chamberlains – our accounts year end is 31 May – and we’ve now been in existence for more than 12 years. We’ve been growing steadily, at a rate that we can manage without disruption. In other words, we’ve generally managed to maintain good service to our clients without too many delays. As part of this, we’ve gradually been taking on more staff, and the current roll-call is as follows:
Paul Chamberlain (Me – partner – started the business in 2007)
Chris Lowry (partner, joined January 2017)
Keith Olding, Vikki Barnard and Nikki Crumbie (qualified managers)
Shelene Crane (office manager)
Yali Xu and Nigel Ratcliffe (part-qualified accountants)
And, when needed, we can also call on Linda Chamberlain and Nick Wylde for help, both being experienced qualified accountants.
You can see pictures for most of us on the website here.
A couple if questions – Firstly, what do I mean by “qualified”? Answer: it’s a short-hand way of saying that they’ve passed all their accountancy and tax exams with the ICAEW (Institute of Chartered Accountants in England and Wales).
And secondly, where do we put all these people? That’s perhaps more interesting. We’d previously managed by juggling where people work and by interlocking times when they do so, but we’ve now got some more space. The next-door office here at Tanshire Park became free and we talked nicely to our landlords. It’s all done now, and you’ll see quite a different office if you come to see us – about twice the space, much lighter somehow, and generally better to work in. You can see some pictures on the Tanshire Park blog here
TAX RETURNS – SAME INCOME BUT MORE TAX?
The politicians are keen to tell us that we’re getting more personal allowances, ie. more tax-free income, so you’d hope that you’d pay less tax. The basic personal allowance for income tax was £11,500 in 2017-18 and £11,850 in 2018-19, for example – this would save £70 at basic rate tax of 20%. However, this can be outweighed by increased tax in other ways. In 2017-18 you could receive £5,000 tax-free dividends per shareholder, but this was reduced to £2,000 from 2018-19 – an extra charge of £225 on the £3,000 at the ordinary rate of 7.5% for dividends. Even more significantly, I should perhaps remind you about changes in what interest you can deduct in working out taxable rental income – worth a separate section of its own!.
BUY-TO-LET INTEREST CHANGES
I’ve written about these before, but the bite is now becoming more painful because they’re being brought in over four years. In the good old days, mortgage interest on a property simply reduced the rental profit and you paid less tax. But now they’ve made it much more complicated. Only part of the interest is allowed as an expense to reduce the net rental income to be taxed. The remainder reduces the tax at 20%. This causes problems if any of your income is taxed at 40% – you pay 20% tax on this portion.
The other main problem is that your overall income is no longer reduced so much by the interest paid – so your overall income may now reach into 40% tax, in which case you end up paying more tax as described above. At current rates of interest, this may be bearable, but if rates increase or if you have several properties, things may get difficult.
For example, if in 2016/17 your non-rental income was £40,000 and your rental income was £3,000 after deducting £10,000 mortgage interest. Your taxable income was £43,000, so you paid all your tax at 20%.
By 2020/21, 100% of the interest is treated in the new, “bad” way. If everything stays the same, your taxable income is now £53,000 (ie. £40,000 + £3,000 + £10,000), so you’ll probably pay tax at 40% on the amount over £50,000. But you’ll only get a deduction of 20% for the interest, so your tax bill will be £600 higher (£3,000 x 40% minus £3,000 x 20%). We don’t know tax rates and bands for sure, but it will probably be in this region, unless there’s a change of government… And this sort of thing doesn’t normally get better!
This may seem manageable, and it may not be a problem at these levels. However, there are worse positions, particularly if you have several properties. Moreover, your taxable income can affect things other than tax – it’s used to determine how much child benefit is receivable and how much student loan needs to be repaid.
BEWARE THE TAXMAN!
You may remember that Chamberlains provide a service to support you if the dreaded taxman decides to look into your affairs. HMRC have growing data resources – information received automatically from banks, investment managers, estate agents, etc., including foreign sources of income. Their software allows them to cross-reference information on tax returns filed by individuals with other information at its disposal, and it’s improving all the time. Mistakes on tax returns are, therefore, more likely to be picked up than ever before, increasing the chance of taxpayers being investigated and potentially prosecuted..
In addition, if something just looks odd,(not an omission, but a significant change by comparison with the previous year or less income than they’d expect from the kind of activities you’re involved in) they can easily ask about it. There may be nothing wrong, but we still have to spend time explaining things – and we’ll probably need to charge extra for doing so. We’ll need to collect extra information from you, maybe research the issue, liaise with them, etc. to fight them off – not always straightforward and it all takes time. Fortunately, we offer a peace-of-mind service to our clients – for a modest annual fee we can look after it for you with no charge for the extra work involved if the taxman decides to give you special attention. If you’d like to know more, look at our special website : http://chamberlainsaccountancy.clientweb.site/ or give me a ring. The new subscriptions start from 1 August. I’ll send out invoices to those who had them last year; if you would like one, please let me know.