THE SPRING BUDGET 2023

Dominic Thomas
March 2023 • 10 min read

Pension reforms of sorts…

If you are under 75 and have a pension, today is a better day than yesterday. You may breathe a sigh of relief; the Chancellor has done something to directly benefit you. As with all Chancellors, there is of course some politics at play. Whatever your view of the rabble at the House of Commons, we finally have a Chancellor who seems to both understand maths and has an ability for some long-term thinking as well as valuing the concept of financial independence in his Spring Budget 2023.

As a reminder, it was the Blair Government who introduced the Finance Act 2004 which ushered in new pension rules from April 6th 2006 known as A-Day and termed “Pension Simplification”. The basic premise was to simplify pension funding, enabling anyone to make payments and get tax relief, restricted by a maximum annual contribution allowance and a lifetime allowance for the value of your pensions, be they final salary or investment based. It sounded so simple, something akin to the battery level on your mobile phone.

Next month, “pension simplification” turns 18 years old. Simple is certainly not a term that anyone would consider in the same breath as pension rules. A veritable smorgasbord of metrics are needed to monitor if you fall foul of the rules.

A-DAY TURNS ADULT

Today though, Mr Hunt has abolished the Lifetime Allowance, a welcome and grown up but unexpected move (it had been hinted that it would return to the level at which the Conservative Government inherited it at £1.8m. No, it’s abolished, completely! The Lifetime Allowance, which is something everyone had to assess pension benefits against will be gone from 6th April 2023. Do not retire before then – or more accurately do not crystallise any pension until then.

ANNUAL ALLOWANCE – UP BUT STILL TAPERED

He has not however returned the Annual Allowance to the 2010 level of £255,000 but has increased it from £40,000 to £60,000. In addition, the Tapered Annual Allowance has not been scrapped, but increased from £240,000 to £260,000 from 6 April 2023. The threshold test at income of £200,000 has not been altered. In theory therefore the new standard annual allowance of £60,000 will still reduce by £0.50 for each £1 over £260,000 but stopped at £360,000 when you will get the minimum maximum annual allowance of £10,000.

By way of example, someone with income of £300,000 would be £40,000 over the £260,000 threshold and thus see the annual allowance reduce from £60,000 to £40,000.

Those of you that have taken income from a personal pension (not a defined benefit/final salary pension) will be able to continue towards a pension under the Money Purchase Annual Allowance (MPAA) which is being increased from £4,000 back to £10,000. I understand this will double up as the minimum maximum (if you see what I mean) that anyone with income over £360,000 can also contribute (gross).

NEGATIVE TURNS POSITIVE

Medics (and a few others) that on occasion have a negative pension value for the year will now be able to offset this, something that was not possible previously.

25% TAX FREE CASH IS GOING FOR BIG PENSION POTS

There is a slight “fly in the ointment”. Under pension rules tax free cash is capped at 25% of the fund value, buried in page 100 of the Budget is the statement that advisers understand but most investors do not. “The maximum Pension Commencement Lump Sum for those without protections will be retained at its current level of £268,275 and will be frozen thereafter”. In other words, the tax free cash lump sum (PCLS) link is to be broken. 25% of the current lifetime allowance is £268,275 and this is therefore being retained, meaning that whether your pension fund is more than this, you cannot withdraw more than £268,275 as a tax free lump sum. In plain a pension fund of £2m does not produce tax free cash of £500,000 (25%) but £268,275.

One other “minor” point is that those with Primary, Enhanced, Fixed or even Individual Protection from 2006, 2012 (max £450,000), 2014 (max £375,000) and 2016 (max £312,500). Therefore some people will have a higher tax free cash entitlement than the new limit of £268,275).

ISAs, JISAs, VCTs, EIS, SEIS

All as previously.

INCOME TAX, CORPORATION TAX, CAPITAL GAINS TAX, INHERITANCE TAX

As previously announced for 2023/24.

On occasion, Budget plans get revised (remember the glove puppet of a PM?) so there is a possibility that after a little more thought, pressure and checking, some of the points in the Budget might need a tweak, but in general this is a rarity.

If you have questions, that I have the realistic possibility of answering (not “where is Cloddach Bridge?” which gets a sum for refurbishment…. which I imagine is one of those times we may remark, “what, a million pounds?” (actually £1.5m) is either a lot or a little, that old price and value thing… much like the criticism that will inevitably be made of the abolition of the lifetime allowance, which is, from my perspective of working with you, a very good thing indeed.

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THE SPRING BUDGET 2023Dominic2023-12-01T12:12:35+00:00

Tax year ending

Dominic Thomas
Feb 2023 • 12 min read

Tax year ending!

There are not many weeks left of the 22/23 tax year, which ends on Wednesday 5^th April. As a brief reminder of the key issues, I have done a quick summary … if you are not sure of what you have used or what you can use, please get in touch with us as soon as you can.

PENSIONS

Everyone under the age of 75 can contribute £2,880 into a pension and get basic rate tax relief, irrespective of any income. This is as close as it gets to ‘money for nothing’
The annual allowance of £40,000 applies to those with incomes of £3,600 – £240,000. You and an employer may contribute up to 100% of your earned income (capped at £40,000) between you
Those earning over £240,000 need to be careful; your allowance reduces by £1 for every £2 of income over £240,000 until it reaches £4,000 – which includes any employer payments

ISAs – INDIVIDUAL SAVINGS ACCOUNTS

Any adult can invest up to £20,000 over the course of the tax year into an ISA which grows free of income tax and capital gains tax
Those aged 18-40 can use a Lifetime ISA allowance of £4,000 if this is for a deposit on a first ever home. The Government will add £1,000

CAPITAL GAINS

If you are selling an asset / investment (which would include rebalancing them) this triggers capital gains. The 22/23 allowance is £12,300 of gains before you pay any tax, but this is falling in 23/24 to just £6,000 and then £3,000 the following tax year. So if you are going to do this anyway, I would encourage you to get on with it – perhaps you have some shares that you don’t really want …
Trusts also pay capital gains, but only have half of the personal allowance, so even more incentive to take profits and rebalance
You can delay payment of capital gains tax using some investments (ask/see below)

INCOME

If your income exceeds £100,000, you begin to have your personal allowance of £12,570 reduced by 50p for every £1 above £100,000. The personal allowance is the amount of income taxed at 0%. So it would be prudent to have bonuses paid into pensions for example
Dividends – the first £2,000 of dividends is tax-free in 22/23
Interest for non or basic rate taxpayers is 0% on the first £1,000 of interest (savings allowance) and £500 for higher rate taxpayers. Additional rate (45%) taxpayers don’t get the allowance. As some deposit accounts now pay 3% or 4%, you may be drawn into this (a higher rate taxpayer only needs £16,666 in savings earning 3% interest of £499. You need to declare all income to HMRC through self assessment
If you really must insist on a cash ISA (please only for ‘short-term parking’ of money) then this would ensure the interest is tax-free, but rates on cash ISAs are much lower than savings accounts now
If you are not using your full personal allowance and have investments that provide taxable income, this may be a sensible moment to trigger income that uses your allowance
If you rent a room in your home, there is a tax-free rent-a-room allowance of £7,500

ANNUAL GIVING

You can gift £3,000 to any individual without recourse to tax by the recipient or your estate. If you do any substantial giving please put a scan of a signed note of this on our portal
If you are feeling generous, you are also permitted to gift your newlywed children £5,000 or grandchildren £2,500

SPOUSE ALLOWANCES

If you have a spouse who does not earn up to the personal allowance of £12,570, you can elect to have 10% of this (£1,257) added to your own allowance
Spouses also can benefit from sharing assets and effectively doubling exemptions and allowances

ALTERNATIVES & HIGH-RISK INVESTING

It is generally thought that VCTs, EIS and SEIS are really for more sophisticated investors, about 3% of the population. All are long term in nature – meaning 6-10 years. Unlike your portfolio elsewhere (which – if we are managing it – will be an enormous portfolio of global equities), these are very small by comparison. Do not do these on your own unless you know your Sharpe ratio from your Beta. Unlike the above, the investments below can experience permanent loss:

Venture Capital Trusts

Tax-free income from your investment
Tax-free capital gains
Tax relief of 30% on your initial investment (tax reducer)

Enterprise Investment Schemes

30% tax relief on your investment
The ability to defer owed capital gains tax
Loss relief
Exempt from inheritance tax

Seed Enterprise Investment Schemes

50% tax relief on your investment
Reduce your due capital gains tax bill by 50% immediately
Exempt from inheritance tax

DON’T FORGET

Income taxes are tiered. Each slice of your income is taxed at a different rate.

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £150,000	40%
Additional rate	over £150,000	45%

Please remember that HMRC will apply penalties for late payment and fines for non-payment which can result in the very worst of punitive measures – a custodial sentence.

As ever, be sure of two things – death and taxes. Neither are terribly welcome.

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Tax year endingJemima Thomas2023-12-01T12:12:37+00:00

Tax deadline: 31 Jan 2023

Dominic Thomas
Jan 2023 • 8 min read

THE TAX DEADLINE – 31 JAN 2023

As I write the 31 January 2023 tax deadline is fast approaching. Hopefully if you are self employed or have some taxes to pay, you have set aside the funds to pay your dues to HMRC. Few of us like paying taxes, yet we all know how vital they are. Some people brag about how little tax they pay, even scoffing as they “stick it to the system” including the male that managed to convince Americans in the United States to elect him as President.

We have our own politicians with tax problems of course. This is nothing new. The complexity of international taxes and in particular offshore tax havens makes it all rather fuzzy, let alone some of the nefarious companies in which investments are held.

I suspect that you are affluent enough to be concerned about the custodial penalty if you fail to pay your taxes, not poor enough to dismiss it and not rich enough to presume you will be able to pay for the legal representation to keep you safely excluded.

Whether we like them or not, and I do appreciate that sometimes it feels as though we are simply working for HMRC, but tax pays for lots of our societal benefits. Roads to justice, welfare to pensions, care and healthcare, education and defence. Certainly there is a lot wasted and we seem set to remain locked in a battle of ideologies about how to make the system fairer and popular.

Our role is to ensure that you don’t pay tax unnecessarily. For example, consider wanting to withdraw £10,000 to spend from your investments.

Whilst we live in an imperfect world where Chancellors, Prime Ministers and Governments are quickly replaced, much like the rules and policies that they introduce we do our best to minimise taxes, which have an enormous impact on your investments.

Tax had a bigger impact on returns

Whilst journalists get very vexed by charges on investments, in the 2022/23 tax year there are lots of different rates of tax, these get altered regularly. Currently tax rates include 0%, 8.75%, 10%, 18%, 20%, 25%, 28%, 33.75%, 39.35%, 40%, 45%, 55% or 60% tax to draw money from your investment, this rather puts things into perspective. We attempt to minimise tax so that you do not pay it needlessly.

The table below shows the enormous difference in the amount you would actually have to withdraw in order to end up with £10,000 post taxes. Irrespective of how you vote, these are accurate tax rates for 2022/23.

TAX RATE	GROSS WITHDRAWAL	TAX PAID	NET YOU KEEP
0%	£10,000.00	£0	£10,000
8.75%	£10,958.90	£958.90	£10,000
10%	£11,111.11	£1,111.11	£10,000
18%	£12,195.12	£2,195.12	£10,000
20%	£12,500.00	£2,500.00	£10,000
25%	£13,333.33	£3,333.33	£10,000
28%	£13,888.89	£3,888.89	£10,000
33.75%	£15,094.34	£5,094.34	£10,000
39.35%	£16,488.05	£6,488.05	£10,000
40%	£16,666.66	£6,666.66	£10,000
45%	£18,181.82	£8,181.82	£10,000
55%	£22,222.22	£12,222.22	£10,000
60%	£25,000.00	£15,000.00	£10,000

The above table ought to indicate how important it is to have the right advice and a good understanding of the UK tax system of allowances, reliefs and exemptions. Sadly we cannot rely on Government to simplify taxes or even maintain levels predictably.

Clearly using investment products and solutions that prevent tax or enable you to minimise it through careful management makes a lot of sense.

As the new tax year 2023/23 approaches (6th April) many of us will likely find ourselves paying rather more tax.

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Tax deadline: 31 Jan 2023Dominic2023-12-01T12:12:38+00:00

TAX TRUTHS – A PARTY OF TAX CUTTING?

TODAY’S BLOG

NEW TAXES CLAIM £50BN AHEAD OF NI RISES

I’m going to assume that you are old enough to know that what a political party says and what it does are not the same thing at all. Here in the UK we tend to vote for the “least bad” option, at least, thats the only way I make sense of it.

New levies imposed on businesses over the last decade have raked in more than £50bn for the Treasury, as the UK’s tax burden rises to its highest level since the 1950s. The bank levy, apprenticeship levy, soft drinks tax and a range of other charges have all contributed to the public purse, according to analysis by Thomson Reuters.

It comes as National Insurance is set to rise in April 2022, adding 1.25 percentage points to the tax levied on employers and on their workers’ pay packets. These new taxes have proven themselves to be a successful way to bring in billions of pounds in a relatively short space of time. The new National Insurance surcharge is sure to be a success from a public purse perspective, but will add considerable financial and compliance stresses to both businesses and individuals.

The extra National Insurance fee, which will be known as the health and social care levy from 2023-24, is set to raise around £17bn per year, outweighing even the largest of the previous new taxes.

Here is a link to NI rates for 2022/23

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TAX TRUTHS – A PARTY OF TAX CUTTING?Dominic2023-12-01T12:12:52+00:00

SELF EMPLOYED V LTD CO.

TODAY’S BLOG

SELF EMPLOYED v LTD COMPANY

Those of you that run a small business or provide a professional service are typically either self-employed or operate a small Limited company. The main legal advantage of a Limited company is that any liability is limited to the company and the Director cannot be harassed for funds owed to creditors should the business fail. The company is a legal entity in it own right.

The Chancellor’s plan to increase the main corporation tax rate from 19% to 25% in April 2023 has once again brought into focus the question of whether it makes sense to incorporate your business if you are currently self-employed. Although tax alone should not be the determinant, it can be a major factor in many instances.

CRUNCHING THE NUMBERS

The first point to note is that the 25% rate will generally only apply for companies with profits of at least £250,000. Up to £50,000 of profits, the current corporation tax rate of 19% will continue, albeit labelled a small companies’ rate. In between those limits, the tax rate will be 19% on the first £50,000 of profits and 26.5% on the excess. This can mean that if you incorporate when your profits are modest, you may regret the move if your business starts to make more money.

How you draw income from your company will determine your overall tax bill. In the examples below, we have assumed:

All of the profits will be drawn. This makes the picture consistent with the self-employed alternative under which all profits are taxed.
You draw a salary of £8,840 a year from your company. At this level neither you nor your company will have any National Insurance Contributions (NICs) to pay.
All your profit, after deducting your salary, is taxed at corporation tax rates and then paid to you as a dividend.
The first £2,000 of your dividend is free of tax thanks to the dividend allowance, but still counts as part of your total income for tax purposes.

	SELF EMPLOYED	LTD CO 2021	LTD CO 2023
Gross Profit	£75,000	£75,000	£75,000
less salary	–	<£8,840>	<£8,840>
Taxable profit	£75,000	£66,160	£66,160
less corporation tax	–	<£12,570>	<£13,782>
net profit = dividends	–	£53,590	£52,378
less National Insurance	<£4,316>	–	–
less Income Tax	<£17,432>	<£6,629>	<£6,235>
Net Income	£53,252	£55,801	£52,378

Gain/loss if incorporated		+£2,549	+£1,731

So, let’s consider the same scenario, but with larger numbers, double at revenue of £150,000…

	SELF EMPLOYED	LTD COMPANY 2021	LTD COMPANY 2023
	£	£	£
Gross Profit	£150,000	£150,000	£150,000
Less Salary	–	£8,840	£8,840
Taxable Profit	£150,000	£141,160	£141,160
Less Corporation Tax	–	<£26,820>	<£33,657>
Net Profit – dividends	–	£114,340	£107,503
Less National Insurance	<£5,816>	–	–
Less Income Tax	<£52,460>	<£30,616>	<£27,362>
Net Income	£91,724	£92,564	£88,981
Gain/loss from incorporation		+£840	-£2,743

The higher profit level highlights the impact of the corporation tax change: at £75,000 the corporation tax bill increases between 2021 and 2023 by 9.6%, but at £150,000 the bill jumps by 25.5%.

MORE IS MORE

If the corporation tax increase goes ahead – and there are voices suggesting it might be tweaked nearer the time – then on tax grounds the case for incorporation will be weakened, particularly at higher profit levels. However, as mentioned above, tax is not the only consideration.

ACTION

The numbers above are for two specific profit levels. Comparative calculations are complicated by the phasing out of the personal allowance, so there is no straight line between the £75,000 and £150,000 results.

The corporation tax move is another step on the slow path to rationalising the taxation of earnings between employees, the self-employed and owner directors. For a review of your personal situation and the tax saving opportunities available now, please talk to us.

For what its worth (nothing) if I were Chancellor, I’d have standard rates of tax irrespective of where the income is derived. This would make tax much more transparent, straight-forward and easier for everyone to understand. The problem lies in the will of Government.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

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SELF EMPLOYED V LTD CO.Dominic2023-12-01T12:13:00+00:00

THE AUTUMN BUDGET 2021

TODAY’S BLOG

THE AUTUMN BUDGET 2021

In terms of your personal finance, not a lot has changed. Indeed, most of the announcements merely confirmed previous announcements, such is the way of our politicians. As a reminder, the next tax year begins on 6th April 2022. The main changes for most are really for those that receive dividends or pay National Insurance

iNCOME TAX RATE ON DIVIDENDS	2022/23	2021/22 (NOW)
Basic rate taxpayer	8.75%	7.50%
Higher rate taxpayer	33.75%	32.50%
Additional rate taxpayer	39.45%	38.10%
Rate for Trusts	39.35%	38.10%

National Insurance for employers increases from 13.8% to 15.05% which basically makes it more expensive to employ people. Employees will also pay rather more at the main rate, rising from 12% to 13.25% and then at the upper or higher rate increased from 2% to 3.25%. Remember the thing about National Insurance is that there is a threshold for the main rate after which you simply pay a flat, reduced rate (currently 2% but increasing to 3.25%). The self-employed main rate increases from 9% to 10.25%. Self-employed people do not fully enjoy the same benefits for their NI payments.

MAIN ALLOWANCES

For those of you using your pensions, the annual allowance remains at £40,000 but if you have begun drawing income from investment-based pensions it is restricted to £4,000 the delightfully named “Money Purchase Annual Allowance” or MPAA. The Lifetime Allowance (the total value of your pensions permitted before excess charges) remains frozen as previously indicated at £1,073,100. This is equivalent to a pension income of £53,655.

ISA and JISA limits remain as they were (£20,000 and £9,000) which are fairly substantial allowances but indicate a “kick the can down the road” policy of Government worrying about tax in the future. Capital Gains Tax (CGT) allowances and rates remain as they are (which is daft).

If you own a second property or inherit one, the capital gains rate and requirement for payment are important to understand. However, one small improvement is that you now have 60 days to pay the liability rather than 30 (with immediate effect). I imagine one of Rishi’s friends was offloading and was worried about an extra charge (surely not!).

As for inheritance, the nil rate remains at £325,000 per person and those with children inheriting the family home the residential nil rate band adds a further £175,000. However, this is tapered when an estate is worth more than £2m.

In short, for all the bluff and thunder and 200 pages, not much is in it for you and I. Remember – death and taxes.

Dominic Thomas
Solomons IFA

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THE AUTUMN BUDGET 2021Dominic2023-12-01T12:13:01+00:00

RISING COST OF A SECOND HOME

TODAY’S BLOG

RISING COST OF A SECOND HOME

Second home owners face a clampdown over a tax loophole that can save them money by claiming the properties are available for holiday lets. Currently around 60,000 properties classed as holiday lets are liable for business tax rather than council tax, which in the vast majority of cases currently means paying nothing at all. The Treasury said it would “ensure that owners of properties that are not genuine businesses are not able to reduce their tax liability by declaring that a property is available for let but make little or no realistic effort to actually let it out”. It was announced as part of a raft of consultation documents on tax published by the Treasury which also included plans to shake up air passenger duty (APD).

SOLOMONS IFA RISING COSTS OF A Holiday Home

THE TAXMAN COMETH

The holiday lets move relates to properties in England which the owner declares are intended to be made available to let 140 days in the coming year, making them liable for business rates rather than council tax. In about 96% of cases, they have such a low rateable value that they qualify for small business rates relief which means they pay nothing at all.

There is currently no requirement for checks to verify that the properties are actually commercially rented out.

Following a consultation launched in 2018, the government said it would now legislate to tighten the rules. Also included in the series of consultations were proposals to cut down on inheritance tax red tape, reducing the paperwork families need to fill out. The government also published an interim report on its review of the business rates system – long the subject of calls for change from the retail sector – detailing responses from some firms. But a final report will not be published until the autumn.

Dominic Thomas
Solomons IFA

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RISING COST OF A SECOND HOMEDominic2023-12-01T12:13:08+00:00

THE BUDGET 3 MARCH 2021

TODAY’S BLOG

THE BUDGET 03 MARCH 2021

The House of Commons was unusually civil during the Chancellors Budget Statement largely because hardly anyone was there due to social distancing and making the task rather easy to identify who is behaving like a spoiled child. Normally the Speaker has a harder job. As for the Budget – well, it’s a good job I am not a betting man.

The Chancellor believes that support over the pandemic will run to £407bn in various forms. This needs to be repaid if future generations are not to be saddled with debt forever, thereby hampering how future Governments can help them.

I did warn that taxes would rise, I thought capital gains tax would be the most obvious tax to increase. It has not. The only actual increased tax rate is Corporation Tax, which impacts business owners running profitable businesses (with profits over £250,000). Corporation tax will rise from 19% to 25% – that’s an increase of 31%. It may surprise you to learn that only 10% of businesses claim to make profits over £250,000.

Almost everything else stayed the same – but staying the same really means changing. Of course, this knock-on effect means reduced profit to share out in the larger businesses (like those you invest in via a fund) so returns may be dampened – but then this is simply a UK issue and most of your equity holdings are not in the UK now (your portfolio is global).

THE SAME DOES NOT MEAN NO CHANGE

Pensions, Capital Gains, Inheritance tax all remain unchanged, which means that as incomes or the values of assets rise, the excess taxes begin to hurt rather more.

Those approaching retirement have the spectre of a 5-year freeze of the Lifetime Allowance at £1,073,100. Anything above this sees the excess taxed at 55% – so more likely. How much and how you can contribute to pensions is also frozen, as it is for ISAs and Junior ISAs. These are probably the “nice to have” problems if you are running a business that is struggling or have an income that has fallen dramatically due to the pandemic.

Your Personal allowance (income you can have at 0% tax rate) rises by £70 on 6th April to £12,570 but then stays at that level for 5 years. Higher rate and Additional Rate tiers also remain frozen. What this really means is that if your income rises due to inflation or promotion etc, you will pay more tax.

The most notable help to younger generations is the Apprentice Scheme and the re-opening of 95% mortgages by lenders, who have been given Government guarantees. There may be some window dressing here, a borrower will still be made to jump through a variety of hoops to prove that they can become an owner (or more accurately, a borrower) rather than a renter, with a 5% deposit. Those that have taken advantage of the reduce Stamp Duty ending in March, have a little longer to complete their purchase.

If you are asking me what I would have done differently, (you aren’t) well there is a very long list and most of it involves simplifying pensions and tax rates. Complexity enables some to thrive and others to become rather entangled. HMRC are due to have a whopping £180m spent on further technology to help ensure you report your taxes correctly with fairly dire consequences for those that do not. I do hope that the track and trace lot are not “awarded” the HMRC technology contract.

DETAIL IS A DEVIL

Politicians rely on our short-term memories, they must do otherwise so few would ever be re-elected. When you cut through the words it is best to look at the numbers. These are some key forecasts that I have pulled from the Budget Statement (which you can see here).

How you view life will likely influence how you select data from the table above (which is all lifted directly from the Budget) I have only shown the year on year changes as a percentage and drawn attention to some of the data (of which there is a lot!). Long story short, we will be paying more income tax. The Chancellor seems to be expecting unemployment to increase by 500,000 over the next 2 years before reducing, but still above current levels. Inheritance tax receipts peak in the coming tax year perhaps reflecting the consequences of the fatalities from the virus.

The property market looks predicted to return to normality shortly, but really picking up next year. Council tax looks likely to increase rather faster than inflation. Fuel duties will begin to rise, and oddly over the next 12 months, once hopefully this is over, duties from alcohol actually fall in 2021/22 (which I think is odd unless you have all been knocking back the booze over the last year or so more than normal with a plan to cut back). Air Passenger duty has rather obviously collapsed and will likely return to pre-pandemic levels in 4-5 years time, that’s quite a slow recovery.

Corporation tax will really bite in 3-4 years time. Business rates also begin to pick up, which when combined with loan repayments and more VAT, I imagine that some business owners may be looking at cost reductions. There may well be “pent up demand” and a good supply of labour, the Chancellor is understandably encouraging investment in growth, through new technology and digital business combined with Apprenticeships. It (business growth and development) is certainly what needs to happen, but whether it will remains to be seen.

Every Budget has lots of assumptions about the future, but you will be paying more tax, so use the allowances you can.

Dominic Thomas
Solomons IFA

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THE BUDGET 3 MARCH 2021Dominic2023-12-01T12:13:09+00:00

TAX YEAR END 2020/21 PLANNING

TODAY’S BLOG

TAX YEAR END 2020/21 PLANNING – OVERVIEW

It probably goes without saying, but the tax year end is something that we are always mindful of. There has already been a lot of coverage in the media about what the Chancellor might do. We get to find out on 3rd March 2021. The reality is that due to the pandemic and enormous spending by the Government (and some very expensive contracts awarded to Conservative party donors), there is a obvious pressure to refill the public purse.

Last year, Autumn arrived without an Autumn Budget. To be fair, the Chancellor, Rishi Sunak, had already presented one 2020 Budget – in March – and the pandemic made forecasting for 2021/22 all but impossible. The result was that, for the second year running, the Budget was deferred to the Spring. Whether Mr Sunak’s reading of the economic runes will prove any easier on 3 March 2021 is a moot point.

It is equally difficult to assess what the Chancellor might do in his second Budget. On the one hand, he will be ending the current financial year with a record-breaking government deficit of around £400bn. On the other hand, he will be wary of trying to fill the large black hole with the near inevitable tax increases until an economic recovery is well under way. It could be one of those Budgets where the bad news is announced but has a deferred start date or is, at least initially, targeted at the more affluent.

Every year there is speculation about tax relief reducing or ending. Every year. Every year I largely ignore the speculation. However this year, to be blunt, the changes to taxes are more likely than any in the last 3 decades. There are some things that we can consider together. In truth as the Budget is 3rd March, time is against us. Whilst normally we expect Budget announcements to forewarn of rules for the following April, George Osborne was one of the few Chancellors to initiate immediate pension changes. You have been warned. As the tax year end is on the Easter Bank Holiday, the reality is that the last week of March is really your deadline. If you make allowance for slow post, many working from home, the normal efficiency of a tax year end is arguably “not as normal”… so the sooner you take action on anything important the better.

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PENSIONS

A change in the personal tax relief on pension contributions from marginal income tax rates to a single flat rate is a regular pre-Budget rumour. That could mean a cut from a maximum rate of relief of 45% (46% in Scotland) to perhaps a flat rate of 20%-25%. Higher and additional rate taxpayers would thus lose out.

Depending upon where the Treasury pitched the flat rate, it could save billions while making most pension contributors – basic rate taxpayers – better off or at worst unaffected. Even without the revenue benefit, the result has a clear appeal to a government that regularly talks of ‘levelling up’.

Last year Mr Sunak increased the cost of pension tax relief by adding £90,000 to the two income thresholds that govern the tapering of the annual allowance. That could mean in 2020/21 you have an opportunity to make a higher contribution than in previous tax years. In any case, it is worth checking whether you have scope to take advantage of unused annual allowances from the past three years (back to 2017/18) at current rates of tax relief.

ISAs – INDIVIDUAL SAVINGS ACCOUNTS

Plans to put a cap on ISAs were reportedly considered by the Treasury in 2013, an idea that was recently revised by the Resolution Foundation in a paper examining ways to repair public finances. As with reforming pension contribution relief, the main impact would be on those who pay tax at more than the basic rate. For most basic rate taxpayers, the combined effect of the personal savings allowance, dividend allowance and CGT annual exemption is to render ISAs of little relevance.

If you pay tax at more than the basic rate, all types of ISA offer a quartet of tax benefits:

Interest earned on cash or fixed interest securities is free of UK income tax.
Dividends are also free of UK income tax.
Capital gains are free of UK capital gains tax (CGT).
ISA income and gains do not have to be reported on your tax return.

In addition, if you are eligible, the Lifetime ISA (which the Resolution Foundation said should be scrapped) gives a 25% government top-up on contributions. The overall total contribution limit for ISAs has been frozen since April 2017 at £20,000 (of which the Lifetime ISA ceiling is £4,000). However, the limit for Junior ISAs was more than doubled to £9,000 in last year’s Budget.

CAPITAL GAINS TAX

In July 2020,Rishi Sunak asked the Office of Tax Simplification (OTS) to review Capital Gains Tax (CGT). The request came out of the blue but arrived at a time when increasing the CGT tax take was being discussed by several think tanks. It had also been proposed in the 2019 Election manifestos of both Labour and the Liberal Democrats. Mr Sunak would not be the first Chancellor to ‘borrow’ money-raising ideas from the Opposition.

The OTS published the first of what will be two reports on CGT reform in November. Its suggestions included:

‘More closely aligning Capital Gains Tax rates with Income Tax rates’, which could mean more than a doubling of the current tax rates in some instances.
Reducing the level of the annual exemption from the current £12,300 to an ‘administrative de minimis’ of between £2,000 and £4,000.
Removing the rule which gives a capital gains tax uplift on death. As a result, if you inherited an asset its base value for CGT purposes would be that of the deceased, not the value at the date of death.

That trio of measures, which could be introduced with immediate effect on 3 March, is a good reason to review the unrealised gains in your investments as soon as possible. Although it is no longer possible to sell holdings one day and buy them back the next to crystallise capital gains, there are options which can achieve a similar effect, such as making the reinvestment via an ISA or a pension.

INHERITANCE TAX

A report on CGT is not the only OTS document on capital taxes occupying the Chancellor’s in tray. On taking over the job last February, he inherited a pair of reports on Inheritance Tax (IHT) which had been commissioned by Philip Hammond. These had been expected to feed through into last year’s Spring Budget. They may still do so in the forthcoming Budget, possibly alongside – and complimentary to – CGT reforms. The consequence could be a radical restructuring of capital taxation.

Ahead you should consider using the three main IHT annual exemptions:

1. The Annual Exemption Each tax year you can give away £3,000 free of IHT. If you do not use all of the exemption in one year, you can carry forward the unused element, but only to the following tax year, when it can only be used after that year’s exemption has been exhausted.

2. The Small Gifts Exemption You can give up to £250 outright per tax year free of IHT to as many people as you wish, so long as they do not receive any part of the £3,000 exemption.

3. The Normal Expenditure Exemption The normal expenditure exemption is potentially the most valuable of the yearly IHT exemptions and one most likely to be reformed. Currently, any gift is exempt from IHT provided that:

a. you make it regularly;

b. it is made out of income (including ISA income); and

c. it does not reduce your standard of living.

If you have the surplus capital available, you should also think about making large lifetime gifts. This could include gifting investments, thereby also using your CGT annual exemption. One of the OTS reform suggestions was the abolition of the normal expenditure rule and the introduction of an annual limit of IHT-free lifetime gifts.

Dominic Thomas
Solomons IFA

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TAX YEAR END 2020/21 PLANNINGDominic2023-12-01T12:13:10+00:00

TAXED INCOME ?

TODAY’S BLOG

TAXED INCOME?

We have all applauded those that work in the NHS to help reduce deaths and improve recovery of anyone suffering from COVID19 or frankly any other life-threatening condition. We have also become aware of our reliance on people, who are not terribly well paid, but ensure that our local food is picked, packed, stocked, stacked and delivered and or course countless other services.

We have marvelled at the amount of money raised by a man aged 99 who celebrated his 100th birthday and was honoured for his efforts. These are all good things, but it must surely leave you wondering why the extra money is needed to pay for the NHS. Blaming multinationals like Amazon is all too easy, perhaps we need to reflect on our own tax system.

Here is my problem – we know that taxes are required, but we also know that the State wastes money. We all have an opinion on who, what, why and how our taxes should be made available to. My job is to help you to ensure that your money outlasts you. I do this by using investments, getting you to think and plan ahead for all manner of possibilities and I use the prevailing legitimate tax system properly.

£2,500 A MONTH – THE NEW BASE LINE?

The Government seem to believe that most people can survive on £2,500 a month (taxable), that’s £30,000 a year. In practice excluding national insurance, that would be a net income of roughly £26,500 with basic rate tax paid of £3,500. I have also excluded any pension payments or charitable giving. You will recall that there is a personal allowance of £12,500 (0% income tax) for those with income below £100,000.

By way of simply showing how an adviser can achieve this level of income for you (tax free) here are some options. Doing them all would far exceed the target £26,500 income, but hopefully you will see my point.

If aged 55 but not yet drawing a State Pension. You could crystallise £16,665 of an investment-based pension. This would generate £4,166.25 as tax free cash and £12,498.75 as taxable income, but as it is within the £12,500 threshold there would be no income tax to pay. However you would then find yourself restricted to a maximum £4000pa of new contributions to pensions (called the Money Purchase Annual Allowance or MPAA).
Alternatively, you could simply crystallise £106,000 of an investment based pension, take 25% (£26,500) as tax free cash and leave the balance to grow.
An investment portfolio will regularly have gains (that’s the point after all). A growth of say 5% over a year on a fund of £234,000 can use £12,300 of the capital gains tax allowance – 0% tax. Trigger a larger gain and the gains above £12,300 are taxed at a lower rate of 10% or maybe 20% (but not if you do these other things).
Perhaps rent a room for a tax free £7,500 a year
Draw 5% of your capital back from an investment bond, so a Bond of £100,000 would provide £5,000
Any money drawn from ISAs would be tax free, but taking say £8,535 from an ISA would take the total “income” from all these to £50,000 and not a penny of income tax would be paid.

EARNED INCOME IS TAXED MORE

Yet if this was earned income in 2020/21 income tax of £7,498.20 would be due with a further £4,860 of National Insurance a total of £12,358.20 leaving a net income of £37,641.80. This is makes full use of the basic rate tax, any income above this would be taxed at 40% or 45%.

The point I am making is that how much tax is paid is very much dependent on where your money is and how it is generated. It’s certainly the case that not everyone has these sums of money (which are likely to have been taxed before). However, this is only the basic stuff and exposes the problem of a complex tax system that punishes those earning income far more than those with capital.

IF YOU ARE NOT A CLIENT

If you are reading this and not a client, do not conclude that the above is advice to you, it is not. The calculations that we do can be complex and relate to each individual situation, never rely on generic information about money, except for spend less than you earn.

Dominic Thomas
Solomons IFA

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk
Call – 020 8542 8084

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PRIVACY POLICY | DATA PROTECTION

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk Call – 020 8542 8084

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Are we a good fit for you?

Take Survey

PRIVACY POLICY | DATA PROTECTION

TAXED INCOME ?Dominic2023-12-01T12:13:17+00:00

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