I want to talk about how you might get some funds to use for whatever, but I need to flag up the Autumn Statement and HMRC’s plans for “Making Tax Digital”.
We’ve got through the party conference season, not without a few mishaps – notably in the ranks of UKIP and Labour, but the Conservatives are also showing signs of a re-think of how they ran the things in the days of Cameron and Osborne. We’ll know more about this on November 23, the Autumn Statement when the new chancellor presents his ideas and gives an update on how the economy is doing. There have been hints that austerity may be somewhat relaxed to compensate for expected Brexit problems, but we don’t know how this is likely to feed through into the mix of taxation and government spending.
MAKING TAX DIGITAL (MTD)
HMRC is still consulting on how this is going to work, but we have some fairly daunting ideas of what to expect in the final version. The basic concept is that businesses will send in their accounts every quarter instead of every year and pay tax quarterly. This relies on everyone having their accounts in software that can submit the data to HMRC, just as payroll details are automatically sent in every month.
Many businesses are indeed using software to help them keep track of how they’re doing – programmes like Xero (see the icon below – it’s what I often recommend – but “other brands are available”, as they say). But this is often excessive for a small business. A simple cashbook and a list of invoices may be adequate, either manually or in a spreadsheet. But this won’t be good enough for HMRC’s quarterly returns.
So surely it will only apply to larger businesses with dedicated internal accountants and IT systems? Well no! It’s planned to catch all businesses with annual sales of over £10,000 – even people with rental properties with income higher than this (that’s gross income, not what you receive net of agent’s fees etc.), and it’s supposedly from April 2018. Minor concessions – businesses at the smaller end will have a year‘s grace. And they will be able to send in accounts produced on a receipts and payments basis rather than including stock, debtors and creditors – maybe with a correcting adjustment at the year end – but the returns will still have to be online.
Some of our clients are already into the routine of quarterly management accounts, linked to the need to produce VAT returns, so they won’t be much affected – we can follow through into the quarterly accounts submission without so much extra work. But these are in the minority, and only the largest landlords would produce quarterly accounts.
On the plus side, of course it’s good to keep tabs on how your business is doing, particularly in more complex cases – but to produce this in some sort of formal report is excessive for someone who simply receives monthly or quarterly rent. They’re well aware of what’s happening.
HMRC stresses the advantages of the “keeping tabs” idea, but the obvious advantage for them is that it lets them know how much tax to expect from you. But there’s more: the intention is for us all to pay tax quarterly – long before we need to now. Again, HMRC look for the positive spin – paying as they go makes it easier for people. No nasty large tax bills later when they might have inadvertently spent the money.
I’ll keep you informed as we hear more – but it sounds like HMRC yet again creating more problems for most business people.
YOU’D LIKE MORE MONEY?!
Have you ever met anyone who wouldn’t? Most people don’t have much spare cash. spare. Chance would be a fine thing! In the last two months when I talked about investments in property I used £75,000 as a (rather optimistic) starting point but perhaps you’d like to work towards it – maybe to help with a deposit on a house or to use as an investment. Can I give you any signposts to help you in your quest?
The immediate answer – “It depends on your circumstances” – isn’t vey helpful. But of course it’s true. We can imagine a number of main scenarios;
- You’re hoping for an inheritance
- Business owners
- You’ve got a good idea
I’ll keep the last two for another time, to avoid mental overload this month!
You’re an employee
You have little flexibility for your income (unless you take on another job or run a home business in the evenings!), but you may be able to save towards a lump sum of this sort. The easiest method is to have a regular standing order to a savings account immediately you receive your salary. If it isn’t in your bank account, you can’t spend it. (Of course this is too simplistic, but it works for some people.) And if the savings account is in a slightly inaccessible bank, so much the better. (There’s a theory that “we’re less likely to pull from our savings if they’re stored in a bank with a name that makes it sound geographically far away.” (Claudia Hammond – Mind over Money: The Psychology of Money and How to Use It Better))
Another approach is to use your pension. If you stash money away into your personal pension account, HMRC tops it up by another 25% of what you paid in. So pay £80, and HMRC gives and other £20 into your pension pot. If you’re a higher rate tax payer, you can get back another £20 via your tax return. (Too complicated for now – I can explain more if you’d like a reminder,)
Pensions are a wonderful way of saving. I’ll reserve their full wondrousness for another time, (the cumulative rolling-up of value, the possible help with IHT, the details of higher rate tax relief, etc.) but I just want to mention the tax-free lump sum. When you start to take your pension, you can take 25% of the value of the pot tax-free. This is any time from age 55. You don’t actually have to be retired – you can receive a pension while you carry on working. As you can imagine, this 25% can be very valuable! Many people use it to finish paying off the mortgage on their home, but if you don’t need to do this you can think about other things – like investment in residential or commercial property for example, as discussed in the last two months of these newsletters. BUT – it may still be best to leave it to grow tax-free in your pension pot. Something to discuss with your financial advisor.
If you’re a pensioner…
Your income is more restricted than when you had a salary. If you have no employment income, the most you can pay into a pension is £2,880 (and this is only up to the age of 75) – so your 25% tax-free lump sum is inevitably going to be somewhat limited. However, your outgoings are likely to be lower, and many pensioners have built up funds in a variety of bank accounts, perhaps because they don’t like having all their funds in one basket. (The shadow of Northern Rock still lingers over many people.)
As savers are all painfully aware, you get almost nothing for money help in ban account, no matter what sort of “super savings extra reserve” label they might like to give it. On this basis, perhaps it’s worth considering using the money for something else… Depending on your age, a buy-to let mortgage may still be possible, so long as there’s a decent deposit.
You’re hoping for an inheritance
It’s difficult talking to people in terms that imply that they’re likely to die before you. But sometimes it’s obvious, and the older person – who nevertheless is hoping to carry on for a good while yet –would be glad to give away some surplus assets to thwart the taxman. If they live for 7 years after the gift, it will be a Potentially Exempt Transfer (a “PET”) – and there’ll be no inheritance tax to pay on the amount gifted. If it had stayed in their estate until death, it may well have been sadly taxed at 40% before it passed to their deserving relatives..
I think most people would be wary about taking a pre-inheritance gift of this sort and investing it in anything even slightly risky. I repeat what I’ve asked before – who knows what’s going to happen in property values, and commercial property is probably harder to predict than residential property. But it may be relevant for some people.