Chamberlains Newsletter October 2017
Welcome to the October 2017 newsletter from Chamberlains
None of us like to pay more tax than we need, and we try to find ways to legitimately minimize it. Much of what you’ll read in these newsletters is about tax allowances, reliefs and strategies to help. However, most of us will have to pay various sorts of tax and it can be confusing to know how much, why and when. So perhaps it would be useful to give a bit of help… And finally I’ll mention the Budget and pensions.
MAIN TYPES OF TAXES
The spread of the main taxes in the current tax year is as follows, according to the authoritative Institute for Fiscal Studies:
Income tax 25% of total taxes collected
National Insurance 19%
Property taxes (council tax and rates) 9%
Corporation tax 8%
Capital taxes (incl stamp duties, CGT and IHT) 5%
Other taxes 16%
I’ll concentrate on the top two, income tax and national insurance, which account for nearly half on their own – 44%. They are mostly collected together via payrolls or tax returns. National Insurance contributions give certain rights to pensions and benefits, but NI and Income Tax can almost be considered as two sides of the same tax. People have in the past suggested that they should be combined, (this was once a LibDem policy) but politicians understandably shied away from a higher headline rate of combined income tax, even though it would have been more “honest”. (But you and I may be some of the few left who are interested in true facts nowadays, in this era of supposed FAKE NEWS!)
These two taxes work to some extent in parallel – the more you earn the more you’ll pay in both. Income is free from NI until £8,164 and from Income Tax until £11,500, after which NI is 12% for employee and 9% self-employed people, and Income Tax is 20% (a daunting headline of 32% for employees). Employers pay a further 13.8% NI on income above £8,164 – so combined NI is well above the more obvious Income Tax.
That continues until £45,000, after which NI drops to just 2% but Income Tax rises to 40%. Employer’s NI continues indefinitely at 13.8%. After £100,000 people start to lose their tax-free band and above £150,000 they pay 45% Income Tax.
As an employee it’s hard to reduce your income tax, but you may remember from other newsletters that higher rate taxpayers can benefit from pension contributions and gifts to charities. Certain types of investment (eg. EIS schemes) can also reduce tax. As a self-employed person, you pay lower NI and there’s an opportunity to offset more expenses against income.
But if you have your own business and operate as a limited company, you can pay yourself a combination of salary and dividends – dividends are not subject to NI and are taxed at a lower rate. It’s not quite so straight forward as this, because you have to bear in mind the tax paid by the company – corporation tax – so your friendly accountant normally helps to work out the optimum strategy.
Please let me know if you’d like more help with this.
WHEN TO PAY
Most employees don’t have to worry about payment – their monthly payslip shows that their employer has already deducted the relevant tax and NI. The employer pays this on to HM Revenue & Customs half way through the next month, or quarterly if it’s only a small payroll. But if employees have other sources of income, they may need to complete a tax return. The deadline for this is 31 January following the end of the tax year, ie. the previous 5 April, and any extra tax due is payable by the same date. The same deadline and payment applies self-employed people.
But of course it’s not quite so simple. HMRC likes to receive payments on account. It works as follows. Let’s suppose that in 2016/17 your normal income tax was £12,000 on your salary, but there was also £10,000 tax on a new rental property. The £12,000 will probably have been deducted during the year, so just £10,000 tax needs to be paid by 31 January 2018. So far, so good.
However, HMRC will assume that you’ll have the same income in 2017/18, so they’ll ask for two payments on account – £5,000 on 31 January 2018 and another £5,000 on 31 July 2018. In this way, you’ll have paid the full £10,000 for 2017/18 by 31 July 2018. On the same basis, you’ll continue to pay £5,000 each half year, and you shouldn’t need to pay any more the following January. The trouble is the initial £15,000 in January 2018 – which can be a nasty surprise.
The “lump” is very clear in a table:
January 2018 £15,000
July 2018 £5,000
January 2019 £5,000
July 2019 £5,000, etc
Of course, most people’s income isn’t as simple as this (otherwise you might not need an accountant!) It will vary from year to year, so we may wish to change the payments on account. The rule is that you can reduce them if you have good reason to believe that your liability will fall, but there’s no need to increase them if you expect it to increase.
In our example, if you know that the 2017/18 tax on rent will be only £6,000 (perhaps you had some repairs to the property to offset against the income, we could apply to reduce the Payments on Account (POAs) to £3,000 each. Alternatively, we could stay with the January £5,000 but try to complete the tax return before July 2018 so that we be sure of the true position – and we can reduce the July POA to £1,000. We might wish to do this to make sure that we don’t reduce the POA too far – if it turns out to be lower than it should have been, we need to pay interest on the underpayment.
If, on the other hand, we expect the tax liability to be higher than £10,000, we don’t need to do anything. We can keep the POAs at just £5,000 – no need to pay the taxman more than he asks for. But if the POAs are higher than the total liability, you can always get a refund.
HOW TO PAY
HMRC normally send you a payslip, but if you don’t get one, you can always go to their website for instructions. The best place is here: https://www.gov.uk/pay-self-assessment-tax-bill . HMRC have recently let us know that they’re reducing the number of ways to pay – from 15 December 2017 you can’t pay at the Post Office, and from 13 January 2018 you won’t be able to pay by personal credit card. They try to persuade everyone to pay by bank transfer of some sort – cheques are seen as expensive to process and occasionally prone to getting lost.
A key thing, whichever way you pay, is to make sure you give the right reference – your 10-digit UTR (Unique Tax Reference) or, failing that, your NI number. If you give the wrong number (and it occasionally happens), your payment will go into a pool (or maybe a large lake) of unallocated money, and it can take a good while to sort out.
Again, please ask me if you have any questions about this.
We’re nearly due another Budget – you may remember that they’ve changed it back to an Autumn Budget again. It’s on 22 November. I’m not going to offer any predictions, but some people are getting worried about tax relief on pension contributions. I’ve talked about this on many occasions, but, briefly, higher rate taxpayers do rather well under the current arrangement. They can get £100 into their pension scheme at a cost of just £60. There’s a fear that the Budget will bring them back to basic rate level – where they’d pay in £80 to get their £100. This would gain the Chancellor some much-needed tax so, given the lack-lustre economy and how expensive Brexit’s beginning to look, he might be tempted.
If you’d like to think about this some more, you’ll need to hurry – the pension payment would need to be made before the Budget.
We’d got behind on this – but the ones for 2017 are now all on the website – see the link below.