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Looking forward to the Lifetime ISA – if you are under 40

Looking forward to the Lifetime ISA – if you are under 40

Perhaps the most significant announcement in the recent Budget was the news of the Lifetime ISA. A few commentators are suggesting that many taxpayers in their 20s and 30s will ditch saving into a pension scheme and will view the Lifetime ISA as the better way to save for their retirement.

The Lifetime ISA will give a government top up of 25% of the amount invested and the ability to accumulate savings income tax free – just like a pension.

In addition, there is the ability to eventually withdraw all the funds tax free rather than 25% of a pension fund. You will however have to wait until you are 60 rather than 57 (minimum pension access age is set to rise from 55 to 57 by April 2028). Alternatively, you can access the ISA earlier for the purchase of a first home up to £450,000. You can also access earlier for any other reason but this comes at the price of losing the government top up, the accrued income associated with it and suffering a 5% penalty. The government is however considering whether Lifetime ISA funds plus the government bonus can be withdrawn in full for other specific life events in addition to buying a first home.

There is still a lot to be said for pension contributions if you are a higher rate taxpayer. The government top up for a 40% taxpayer is effectively 67% ie £6,000 of pension contribution after full tax relief provides investments of £10,000.

The biggest constraint in the Lifetime ISA will be an annual investment limit of £4,000. Many basic rate taxpayers who can afford to save more than this may well go for a strategy of utilising their Lifetime ISA allowance first and then saving into a pension. Also a couple whose aim is to buy a house together can each use a Lifetime ISA to accumulate funds for the prospective purchase.

The scheme is not scheduled to start until 6 April 2017 and it will be open to any adult under 40 from that date. Once you qualify, you can continue to save up to £4,000 each year and will receive a 25% bonus on the contributions made up to the age of 50.

It’s a pity if your 40th birthday is on the 6th April 2017.

If you would like advice on any of the above then please contact us our contact page for any further assistance. To find out more about the services that we offer, visit our Services page.












Small Company Taxation

The Office of Tax Simplification (OTS) started its life in 2010 and has a remit of attempting to simplify the tax system.

One of its recent projects is a review of the simplification of small company taxation. Small for this purpose is an incorporated business with fewer than ten employees. These ‘micro’ businesses now number approximately 4.1 million in the UK, over 1.3 million of which operate through a company structure.

The review found that among the many reasons for incorporation, the three main ones for micro companies are to limit their liability, enhance their credibility and provide a formalised structure.

Tax savings were not found to be a main driver for incorporation and this has led to one of the areas highlighted by the OTS as warranting further investigation – taxing the company owners rather than the company on a‘look-through’ basis. This would mean the shareholders being assessed to income tax and national insurance contributions on their share of the profits. Dividend distributions would not be subject to tax as the profit share would already have been charged. The OTS accepts the main argument against look-through is that it would subject profits retained by the company to full income tax/NICs and therefore reduce the funds available for investment and growth. However, for companies who tend to distribute all or most profits, it suggests the system could work and would be particularly relevant for companies which are effectively one-person businesses.

Another area worthy of further investigation, in the view of the OTS, is the development of a business structure which provides a person with the key aspects of liability protection without the need to incorporate. Such business structures exist in other countries, for example France and Chile. One model could be a ‘Sole Enterprise Personal Assets’ vehicle (SEPA). Here, the self- employed individual would not have a separate legal identity, but there would be a provision for protecting the assets of the individual. These assets could include the individual’s home, any non-business vehicles and any other substantial assets.

Government’s response

In the 2016 Budget, the government asked the OTS to develop an outline of a SEPA vehicle and a look-through system of taxation. It will be interesting to see how the OTS develops these ideas.

If you would like advice on any of the above then please contact us our contact page for any further assistance. To find out more about the services that we offer, visit our Services page.


A new breed of State Pensioners

A new breed of Pensioner.  Are you one?

Those who reached State Pension age on or after 6 April 2016 have the privilege of being the first recipients of the new, supposedly ‘flat rate’ State Pension. Although the headline flat rate has been set at £155.65 per week nearly everyone is receiving a different amount to this.

There are a number of reasons why this is so but the two main reasons relate to the old State Pension system, which featured an entitlement to additional State Pension for many and lower State Pensions for those who had been ‘contracted out’.

The important point for everyone who is planning for their retirement is to have an up to date pension forecast. An online version is in its testing stage at check-state-pension. This page provides details of other ways of obtaining a forecast.

All you then have to do is understand it! At the start of this year the Work and Pensions Committee raised concerns that the details sent out to individuals regarding when they will receive their State Pension and its expected value were insufficiently clear and could be misunderstood. However it is clearly far better to be in receipt of this information than have no information at all.

If you would like advice on any of the above then please contact us our contact page for any further assistance. To find out more about the services that we offer, visit our Services page.

Employee and Benefits Reporting Regime

A new employee and benefits regime has been introduced. There are exemptions for certain expenses which replaces the need to report these items on P11Ds but only if the business satisfies itself that the employee would be entitled to full tax relief on expenses reimbursed to the employee.

A new regime

For many years the established treatment for employee incurred expenses has been to treat the expenses as earnings with the employer reporting them on the annual form P11D and then to allow an employee to make a claim for tax relief to the extent that the expenses were business expenses. Dispensations were invented as a way of streamlining the process. Employers could apply to HMRC to dispense with the need to report certain expenses on the P11D and so remove the need for employees to make claims.

The dispensation was only given where HMRC were satisfied that the employee would have been entitled to full tax relief on that payment or benefit. Whilst many employers did apply and use dispensations, many smaller or unrepresented employers did not participate.

The new exemption

From 6 April 2016 businesses will no longer be able to apply for a dispensation and all existing dispensations came to an end. Instead, a new exemption has been introduced which effectively means that businesses will not have to pay tax and NIC on paid or reimbursed expenses payments or put them on a P11D. In other words the introduction of the new exemption places the onus on employers to determine whether employee expenses are fully deductible for tax purposes.

Types of expenses

The main types of expenses to which the exemption applies are:

  • travel and subsistence expenses
  • fees and subscriptions
  • business entertainment

All other non-allowable expenses will still be reportable on a P11D and/or subject to PAYE (and possibly NIC). Employees will still be able to claim tax relief in respect of unreimbursed business expenses.

The new exemption does not apply to expenses or benefits provided under a relevant salary sacrifice arrangement. This includes any arrangement where an employee gives up the right to receive earnings in return for tax free expenses payments or where the level of their earnings depends on the amount of any expenses payment.

Conditions of the new regime

In order for an employee reimbursed expense to be treated as an exempt payment, an employer needs to put himself in the position of the employee. The employer then asks himself the question – would that expense have qualified for full tax relief to the employee (were it not for the amount being exempt)? There is no explicit requirement in law for a checking system (but see scale rates later) but to answer the question above an employer will, in practice, have to operate a checking system.

An employer should consider:

  • setting out a corporate policy of which type of expenses are reimbursable and the need for those expenses to be reasonable
  • requiring the completion of a standard expense claim form
  • the need for any expense claim to be supported by a receipt
  • making checks on expense
  • requiring a senior person to authorise the

One would expect HMRC to be looking for a checking system and that there is evidence an expense has actually been incurred by the employee (hence the need for receipts).

What about scale rates?

The dispensation system allowed amounts based on scale rates to be paid or reimbursed, instead of the employee’s actual costs in certain circumstances. Scale rates are generally for travel and subsistence expenses and consist of round sum allowable amounts for specific  circumstances.

Two key types of scale rates were available for use by an employer:

  • ‘benchmark’ rates and
  • ‘bespoke’

As part of the changes, these options are still available as detailed below.

Benchmark rates

Benchmark rates are a set of maximum reimbursement rates for meals. These round sum amounts have now been included in Regulations and can be used by employers for payment or reimbursement of employees expenses where relevant qualifying conditions are met.

These rates apply only if the employee incurs expenditure in the course of ‘qualifying business travel’ as follows:

  • one meal allowance per day paid in respect of one instance of qualifying travel, the amount of which does not exceed:
    1. £5 where the duration of the qualifying travel in that day is 5 hours or more
    2. £10 where the duration of the qualifying travel in that day is 10 hours or more, or
    3. £25 where the duration of the qualifying travel in that day is 15 hours or more and is on-going at 8pm or
  • an additional meal allowance not exceeding £10 per day paid where a meal allowance (a) or (b) is paid and the qualifying travel in respect of which that allowance is paid is on-going at 8pm.

Bespoke rates

These are rates negotiated and specifically agreed with HMRC in writing. If the business wants to pay bespoke rates for meals or other types of expense, it can apply to HMRC. HMRC have issued a specific form:

Transitional arrangements for bespoke scale rates apply, meaning that employers can continue to use any existing rates agreed since 6 April 2011, up until the fifth anniversary of that agreement subject to re- confirming specified information to HMRC.

Conditions for using approved rates

Employers must have a checking system in place if approved benchmark or bespoke rates are used to ensure that the employee is incurring and paying amounts in respect of expenses of the same kind and that tax relief would be allowed. Exemption is also conditional on neither the payer, nor anyone operating the checking system, suspecting or reasonably being expected to know or suspect that the employee had not incurred an amount in respect of the expense.

HMRC have issued guidance on what checking systems they will expect employers to operate. We can assist you with this matter or in applying for bespoke rates so please contact us on our contact page for more information.

Business mileage rates

The key travel and subsistence expenses for many employees are their costs in using their own car or van for business travel. Many employers and their employees use the statutory mileage allowances known as ‘authorised mileage allowance payments’ (AMAPs). These are scale amounts that employers can pay to employees using their own vehicle for business travel. For cars and vans, the scale rate is 45p per mile for up to 10,000 miles in the tax year and 25p per mile above this.

AMAPs are a separate statutory regime and do not come within the new exemption regime.

For employer provided vehicles the fuel advisory rates can be used to reimburse fuel costs incurred in travelling on business. These rates are updated quarterly throughout each tax year.

Qualifying travel expenses

Qualifying travel is a necessary condition for both travelling and subsistence expenses to be treated as an exempt expense (and also in the use of business mileage rates for cars and vans). A business journey is one which either involves travel:

  • from one place of work to another or
  • from home to a temporary workplace or vice

However, journeys between an employee’s home and a place of work which he or she regularly attends are not business journeys. These journeys are ‘ordinary commuting’ and the place of work is often referred to as a permanent workplace. This means that the travel costs have to be borne by the employee.

The term ‘temporary workplace’ means that the employee attends the place for a limited duration or temporary purpose. However, some travel between a temporary workplace and home may not qualify for relief if the trip made is ‘substantially similar’ to the trip made to or from the permanent workplace. ‘Substantially similar’ is interpreted by HMRC as a trip using the same roads or the same train or bus for most of the journey.

There will be many variations of types of journeys undertaken by employees so ensuring that it is a business journey is critical especially as the term ‘travel expenses’ includes the actual costs of travel together with any subsistence expenditure and other associated costs that are incurred in making the journey such as toll or congestion charges. Detailed further guidance is available in booklet 490 at

Recent development

From 6 April 2016 new legislation affects the application of the travel expenses and subsistence rules for workers who provide their services through an ‘employment intermediary’ such as a recruitment agency, umbrella company or personal service company.

Where a worker personally provides services to a client through an employment intermediary and the manner in which the worker provides the services is subject to, or to the right of, supervision, direction or control by any person, then each assignment is considered to be a separate employment. Therefore travel and subsistence costs related to those assignments will not qualify for tax relief.

For personal service companies, it is only contracts within IR35 which are subject to the expenses restriction. There is also a general exception for services provided wholly in a client’s home. If you consider this new development affects you then please  contact us on our contact page for further guidance.

The effect of the new regime is that all employers should have checking processes in place regardless of whether they use scale rates or specific reimbursement. If there is a lack of evidence that amounts paid to employees represent business expenses, the business may incur penalties for errors in completion of P11Ds. In some cases if the expenses are non-business expenses the employer may be responsible for PAYE and NIC underpayments. Please contact us our contact page for any further assistance or advice. To find out more about the services that we offer, visit our Services page.


The new regime for dividends and interest

From 6 April 2016, there is a new regime for dividends and interest. New dividend and savings allowances are introduced together with revised rates of taxation on dividends. In a changing landscape for personal tax, it is crucial to understand the opportunities and pitfalls in the new regime.

What is the new regime?

Dividend income

When dividends are received by an individual on or after 6 April 2016 the amount received is the gross amount subject to tax, with the previous 10% tax credit now having been abolished. In addition, a Dividend Allowance (DA) means that the first £5,000 of dividends are charged to tax at 0%. Dividends received above this allowance are taxed at the following rates:

  • 7.5% for basic rate taxpayers
  • 32.5% for higher rate taxpayers
  • 38.1% for additional rate taxpayers.

Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the £5,000 allowance. Dividends are treated as the top slice of income. So personal allowances and the basic rate tax band are first allocated against other income.


Mr A has non-dividend income of £40,000 and receives dividends of £9,000. The non-dividend income is taxed first. Of the £40,000 non-dividend income, £11,000 is covered by the Personal Allowance, leaving £29,000 to be taxed at the basic rate. The basic rate band for 2016/17 is £32,000 so this leaves £3,000 of dividend income that is within the basic rate limit before the higher rate threshold is crossed. The DA covers the £3,000, leaving £2,000 of the DA to be used for the dividends in the higher rate band. The remaining £4,000 of dividends fall in the higher rate tax band and are therefore taxed at 32.5%.

Savings income

For 2016/17 some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. However this rate is not available if non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit. A new Savings Allowance (SA) is available from 2016/17 onwards, with savings income within the SA taxed at 0%. The amount of SA depends on the individual’s marginal rate of tax. An individual taxed at the basic rate of tax has an SA of £1,000 whereas a higher rate taxpayer is entitled to an SA of £500. Additional rate taxpayers receive no SA.

Savings income includes:

  • interest on bank and building society accounts
  • interest on accounts with credit unions or National Savings and Investments
  • interest distributions from authorised unit trusts, open-ended investment companies (OEICs) and investment trusts
  • income from government or corporate bonds
  • most types of purchased life annuity

Is savings income received net or gross of tax?

This is much more complicated than you may think.

The introduction of the SA will mean that the majority of taxpayers will not pay tax on their savings income. The government has therefore removed the requirement (from 6 April 2016) for banks and building societies to deduct tax from account interest they pay to customers.

Some types of interest have always been received without tax deduction at source and will therefore continue to be paid gross. Interest on corporate bonds listed on the London Stock Exchange is paid gross for example. However, in 2016/17 basic rate tax will still be deducted at source from some forms of savings income such as interest distributions from unit trusts and OEICs. The government proposes to remove this requirement from April 2017.

Maximising your entitlement to the allowances

There are winners and losers from the new dividend regime but the Chancellor stated in his budget speech that “85% of those who receive dividends will see no change or be better off”. How do the changes impact on different levels of taxpayers?

A basic rate taxpayer with dividend income up to £5,000 is no worse off with the new DA but any dividends received above this level lead to a higher tax charge as prior to April 2016 their tax liability was covered by the dividend tax credit.

For higher and additional taxpayers, there is an initial tax benefit for dividends over £5,000 but as dividends increase there is a higher level of tax than under the previous rules. The tipping point for a higher rate taxpayer occurs when dividends received reach £21,666, as past this amount the new regime results in a higher tax charge. For additional rate taxpayers, the same principle is true but the amount at which the change occurs is £25,400.

Given the lower amount of SA, higher and additional rate taxpayers could seek to maximise their use of the DA by moving investments out of interest bearing investments to ones which pay out dividends. This could be through direct shareholdings or through dividend distributing equity funds in unit trusts or OEICs.

In addition, assets held for capital growth could be transferred to dividend paying investments. Any gains realised by the investors on the sale of assets would be exempt up to the CGT exemption which is £11,100 for 2016/17. Further gains over this amount are only charged to tax at 20% for higher and additional rate taxpayers now that the CGT rates have been reduced in the 2016 Budget.

Pitfalls in the new regime

Interaction between DA and SA

If the amount of dividends an individual receives is covered by the DA but those dividends would have meant that they were higher rate taxpayers without the DA, then this would affect the amount of SA they would receive.

Maximising interest could come at a cost

Taxpayers may be seeking high interest rates to maximise the use of the savings allowance. However, the savings allowance is a cliff-edge test, so if interest income on savings takes a taxpayer into the higher rate band the amount of the allowance will reduce to £500 and similarly will fall to nil for additional rate taxpayers.


In 2016/17, Mr C has non-savings income of £42,000 and savings of £40,000 on which he is earning 2.5% per annum. The interest income is therefore £1,000, giving total income of £43,000. As he is a basic rate taxpayer the whole £1,000 will be tax free.

If Mr C managed to get a higher rate of 2.7% on his savings, the interest would then be £1,080, taking his overall income to £43,080. As a higher rate taxpayer, only £500 of the interest would be tax free. Of the remaining £580, £500 would be taxed at 20% and £80 at 40% giving a tax charge of £132. The additional interest income carries a 165% tax charge!

Check your coding

Where savings income exceeds the SA, there will be tax to pay on the excess. HMRC have indicated that they will normally collect this tax by changing individual’s tax codes. To allow them to do this they will use information from banks and building societies. However in some cases HMRC have been overestimating the amount of interest people are likely to earn and adjusting their coding accordingly. So it is worth checking coding notices when they come through.

Gift Aid donations

The new allowances could also affect taxpayers who make Gift Aid  donations. A charity can reclaim the tax on a Gift Aid donation only if the individual has paid the amount of tax being reclaimed. Prior to April 2016 this would also have included dividend tax credits and tax deducted at source on interest income.

With the introduction of the SA and DA, any income within these allowances is not taxed so the tax reclaim by the charity does not relate to tax paid. Where this happens the individual is responsible for ensuring that the donation is covered and HMRC have powers to recover any shortfall from the taxpayer.

So people with lower levels of income and dividends or savings below the DA or SA amounts who make Gift Aid donations could be affected. Individuals will need to withdraw any Gift Aid declarations that they have made to ensure that they do not get hit with a tax bill.

Planning for spouses

The new regime may also mean it is time to look at the allocation of investments between husband and wives or civil partners. If just one partner has investments generating dividends or savings it could be beneficial to transfer part of the investments to the other partner to ensure they receive income which utilises their DA or SA. Any transfer of assets between husbands and wives or between civil partners who are living together can be made without any capital gains tax being charged.

With savings rates generally being at about 1.5% – 2% utilising the £1,000 basic rate SA would mean having interest earning assets of between £50,000 and £66,667. For dividends, assuming an average yield of 3%, the investment level would be £166,667 to fully utilise the £5,000 DA.

What about ISAs?

ISAs are not affected by the above changes so any dividends or interest arising on investments within an ISA remain tax free. Although the total amount an investor can save in an ISA is currently £15,240 this amount will increase to £20,000 from April 2017.


With more allowances available to taxpayers it is important to make sure full use is being made of the tax free amounts. There are a number of areas in this briefing where you may need specific advice depending on the circumstances so please do not hesitate to contact us on our contact page.  To find out more about the services that we offer, visit our Services page.

No more inheritance tax on main residence?

UK Property

No more inheritance tax on main residence? 

The ‘residence nil rate band’ commences in April 2017 which may enable a family home to be passed on tax free on death.

At present, IHT is charged at 40% on the ‘estate’ of an individual in excess of the IHT nil rate band of £325,000. Married couples and registered civil partners can pass any unused nil rate band on death, to one another.

An estate includes both the value of chargeable assets held at death plus the value of any chargeable lifetime gifts made within seven years of death (though there may be a discount on the 40% tax for certain life gifts). The chargeable value of assets and gifts is the value after deducting any liabilities, reliefs and exemptions that apply.

From 6th April 2017, an additional nil rate band is introduced for each individual to enable a ‘family home’ to be passed wholly or partially tax free on death to direct descendants such as a child or grandchild. A step-child, adopted child or fostered child is regarded as a direct descendant. The ‘residence nil rate band’ (RNRB) will initially be £100,000 in 2017/18, rising to £125,000 in 2018/19, £150,000 in 2019/20, and £175,000 in 2020/21. It is then set to increase in line with the Consumer Price Index from 2021/22 onwards. The additional band can only be used in respect of one residential property which does not have to be the main family home but must at some point have been a residence of the deceased. Restrictions apply where estates are in excess of £2 million which is considered later.

When does a transfer qualify?

It should be noted that transfers made during lifetime to individuals or trusts cannot generally benefit from the RNRB unless the value of the property is still included in the deceased’s estate due to it being ‘a gift with reservation’. This is where the home has been legally gifted but the donor still benefits from the property such as living in the property tax free. Transfers into a trust on death cannot benefit unless a direct descendant has a specific type of interest in the trust known as an immediate post-death interest or disabled person’s interest.

Effect of the new reliefs on spouses

Each individual has a main nil rate band and a RNRB. This means that up to £1 million of a married couple’s estate could be taken outside the scope of inheritance tax if the full nil rate bands (£325,000 + £175,000 x 2) are available to each spouse. Any unused nil rate band may be transferred to a surviving spouse or civil partner. The amount transferred is expressed as a percentage of the amount unused at the first death. For example if on the death of the first spouse 50% of either the main nil rate band or the RNRB was unused then the estate of the second spouse would have 150% (own plus 50% from spouse) at the rates existing at the second spouse’s death. It is possible where a remarriage occurs to inherit unused portions of a RNRB from more than one previous spouse but a person cannot claim more than their own plus 100% in total of the RNRB of other spouses.


Robert dies in July 2017. His share in the family home is valued at £90,000 which he leaves to his daughter. The rest of his estate passes to his spouse Janet. Janet dies in 2020/21 with an estate worth £750,000 including her share in the family home worth £130,000. Her estate is inherited by her children. No lifetime gifts were made by either spouse.

On Robert’s death £100,000 of RNRB is available of which £90,000 is used (90%) leaving 10% available to carry forward to Janet. On Janet’s death the RNRB is now worth £175,000. Janet’s estate will be able to claim a RNRB of £192,500 (100%+ 10% x £175,000) representing her own RNRB and 10% from Robert. As her share in the property is worth less than this, the claim is limited to £130,000.

Death of spouse before 6 April 2017

The RNRB does not commence until 6 April 2017. Where a person dies before then, their estate will not qualify for the relief. For spouses the rules are modified. Where the first spouse’s death occurs at any time before 6 April 2017, a default amount of £100,000 is deemed to be available for carry forward to a person who was their spouse at that time. This will then be uplifted for use by the second spouse on their death as demonstrated above.

The impact of a high value estate

If the net value of a death estate (after deducting liabilities but before reliefs and exemptions) is over £2 million, the RNRB is reduced by £1 for every £2 that the amount exceeds the £2 million taper threshold. For 2017/18, the first year of operation, this means that a person with an estate of more than £2.2 million will not benefit. By 2020/21 the limit will be £2.35 million. For spouses it applies on each death estate calculation. This reduction only applies where the estate at death exceeds the limit. It does not include lifetime transfers within seven years of death.

Claiming the relief

Broadly, a claim must be made by the person’s personal representatives within two years from the end of the month in which the person dies or, if later, three months beginning with the date on which the personal representatives first act. Other people may claim within extended time limits.

A claim can be withdrawn within one month of whichever of those time limits applies.

The proposed ‘downsizing’ relief

The provisions above passed through Parliament in 2015. It is also proposed that the RNRB will be available when a person downsizes or ceases to own a home on or after 8 July 2015 where assets of an equivalent value, up to the value of the RNRB, are passed on death to direct descendants. This element will be included in Finance Bill 2016. A number of situations are envisaged including situations where the home has been gifted or sold prior to death.


A widower sells his home worth £400,000 and gifts the cash to his children in May 2020. He moves into rented ‘later living’ accommodation. His available RNRB is £350,000 (as he has inherited £175,000 from his spouse). He has potentially lost the chance to use £350,000 which could have applied had he not sold his home.

When he dies in February 2021, within 7 years of the gift, his estate is worth £600,000 and is split between his four children. As there is no qualifying residence in his estate, it cannot use RNRB directly. But the estate is still eligible for £350,000 of RNRB.

We would be happy to advise you on your RNRB or any other inheritance tax issues. If you require any assistance or further information about the above please do not hesitate to contact us on our contact page.  To find out more about the services that we offer, visit our Services page.


Do you have tax efficient investments?


Do you have tax efficient investments?

There are a wide range of investments available and we consider some of the main ones with special tax rules.

1.Individual Savings Accounts

Individual Savings Accounts (ISAs) provide an income tax and capital gains tax free form of investment. The maximum investment limits are set for each tax year, therefore to take advantage of the limits available for 2015/16 the investment(s) must be made by 5 April 2016. An individual aged 18 or over may invest in one cash and one stocks and shares ISA per tax year. The overall total investment is £15,240.

The new Help to Buy ISA offers incentives for those saving for their first home. Available since 1 December 2015, the account enables first-time buyers to save monthly deposits of up to £200, with an opportunity to deposit an additional £1,000 when the account is first opened. The government will then provide a 25% bonus on the total amount invested, including interest, capped at a maximum of £3,000 on savings of £12,000, which is tax free. The bonus can only be put towards a first home located in the UK with a purchase price of £250,000 or less or up to £450,000 in London.

2. Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)

Both the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) allow income tax relief on new equity investment (in qualifying unquoted trading companies). For EIS that is 30% relief on investments of up to £1 million and for SEIS up to 50% relief on £100,000. CGT exemption is given on qualifying shares held for at least three years.

Capital gains realised on the sale of any chargeable asset (including quoted shares, holiday homes etc) can be deferred where gains are reinvested in EIS shares.

A capital gain may be relieved potentially saving up to 14% CGT where a qualifying investment is made in the SEIS.

3. Venture Capital Trusts (VCT)

A Venture Capital Trust (VCT) invests in the shares of unquoted trading companies. An investor in the shares of a VCT will be exempt from tax on dividends (although the tax credits are not repayable) and on any capital gains arising from disposal of shares in the VCT. Income tax relief at 30% is available on subscriptions for VCT shares up to £200,000 per tax year so long as the shares are held for at least five years.

If you require any assistance or further information about the above please do not hesitate to contact us on our contact page.  To find out more about the services that we offer, visit our Services page.

Why you should consider pension planning before the tax year end

Why you should consider pension planning before the tax year end.

There are many opportunities for pension planning but the rules are complicated and there have been significant changes recently so do check the position before making any decisions.

The rules currently include a standard lifetime allowance of £1.25 million. This figure has to be considered when key events happen such as when a pension is taken for the first time. There is also an annual allowance of £40,000 which sets the maximum amount which can be invested with tax relief into a pension fund. The annual allowance includes employer pension contributions as well as contributions by the individual. Any contributions in excess of the annual allowance are potentially taxable on the individual. Due to changes aligning ‘pension input periods’ with the tax year, some individuals may escape a tax charge if annual contributions in 2015/16 are below £80,000 and significant contributions were made before 9 July 2015.

In addition, many individuals may have unused annual allowances from previous years which can be utilised. Where pension savings in any of the last three years were less than the annual allowance, the ‘unused relief’ is brought forward for use in the current tax year. 

Tip 1 – Unused annual allowances are only carried forward for three years but cannot be utilised before the current year’s annual allowance is used up. But once the allowance for the current year is used, the unused allowance from three years prior is used first. Bear this in mind if a substantial pension contribution is being considered.

Tax relief is available on pension contributions at the taxpayer’s marginal rate of tax. Therefore a higher rate taxpayer can pay £100 into a pension scheme at a cost of only £60. An additional rate taxpayer can pay £100 in at a cost of only £55. Indeed for some individuals, due to the complexity of the tax system, the effective relief may actually exceed 45%.

All individuals, including children, can obtain tax relief on personal pension contributions of £3,600 (gross) annually without any reference to earnings. Higher amounts may be paid based on net relevant earnings. There is no facility to carry contributions back to the previous tax year.

Directors of family companies should consider the advantages of the company making employer pension contributions. Additionally, if a spouse is employed the company could make reasonable contributions on their behalf.

From 6 April 2016 the standard lifetime allowance is to be reduced to £1 million. For those with significant pension savings it may be possible to protect an increased pensions entitlement by utilising Fixed or Individual protection. Please contact us for details on our contact page if you require assistance.

From 6 April 2016 the annual allowance will be tapered for those with adjusted annual incomes (including pension contributions) over £150,000. For every £2 of income over £150,000 an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000

Tip 2 Individuals with expected incomes above £150,000 should be considering using their available current year annual allowance and unused allowances from the previous three years.

We would be happy to advise you on your pensions position. If you require any assistance or further information about the above please do not hesitate to contact us on our contact page.  To find out more about the services that we offer, visit our Services page.

Profit extraction issues

 Profit extraction issues and the new regime

A key advantage of trading as a company is that the owners, who are generally both shareholders and directors, only suffer tax and NIC on any profits extracted from the company, so any profits retained in the company are sheltered from personal tax rates. If funds are required to reinvest into the business or to repay debt, the only immediate tax hit is the corporation tax charge of 20%.

However we all need funds for our personal outgoings so there will be another level of taxation when the profits are extracted won’t there? This is where planning comes into play. Dividends are often used in combination with remuneration to obtain the most tax effective extraction of profits when the business is carried on through a company. For many years it has been attractive to pay a small salary to allow the tax efficient use of the personal allowance, to provide a corporation tax deduction for the company but not to pay NIC. This means a salary of £8,060 in 2015/16, corresponding to the primary NIC threshold (and 2016/17 as the threshold has not changed). The payment of this level of salary also provides a qualifying year entitlement to the state pension.

When the new tax regime for dividends is introduced on 6 April 2016 many director-shareholders will find that the tax bill on the dividends will be higher than is the case for the 2015/16 tax year. So does this change the strategy of low salary and the balance as dividends?

We now have draft legislation for the new regime which explains the finer points of the proposals and how the new £5,000 Dividend Allowance interacts with other tax rates. The Dividend Allowance does not change the amount of income that is brought into the income tax computation. Instead it charges the first £5,000 of dividend income at 0% tax – the dividend nil rate. This means that:

  • the payment of low salary below the personal allowance will allow some dividends to escape tax as they are covered by the personal allowance
  • the £5,000 allowance effectively reduces the available basic rate band for the rest of the income.

The practical effect of the new regime is that a strategy of low salary and the balance of income requirements taken as dividends will still be a tax efficient route for profit extraction for many director- shareholders. However many will be paying more income tax.

What if the director-shareholder has savings income?

The main category of savings income is interest received. We now know how the receipt of savings income interacts with dividend income. Unfortunately the interaction is potentially very complicated. Savings and dividend income are treated as the highest part of an individual’s income. Where an individual has both savings and dividend income, the dividend income is treated as the top slice.

There are two tax breaks which can apply to savings income. One is new for 2016/17 – the Personal Savings Allowance (PSA). The practical effect of the PSA is to provide a potential £200 tax saving for basic rate and higher rate taxpayers. As this is a fairly small amount the PSA does not fundamentally change the approach to profit extraction.

The other tax break on savings income – the 0% starting rate of tax on savings income up to £5,000 – has survived the changes being made to the taxation of dividends and the PSA. This tax break is potentially worth £1,000 as it taxes the income at 0% rather than 20%. These rates are not available if ‘taxable non-savings income’ (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit. But dividends are taxed after savings income and thus are not included in the individual’s ‘taxable non- savings income’.

So if a director-shareholder only takes a salary of £8,060, any interest would first be allocated against the balance of the personal allowance (which is £11,000 for 2016/17) and then will be taxed at 0% up to the starting rate limit. The PSA may then give a further tax saving depending upon the total income of the director-shareholder.

Where does the interest come from? The director-shareholder may have interest from savings accounts, retail bonds quoted on the London Stock Exchange or loans made via ‘peer to peer’ sites. Or they may have provided loans to their company. Many have not charged interest on such loans but there is now an added incentive to do so.

If you require any assistance or further information about profit extraction issues please do not hesitate to contact us on our contact page.  To find out more about the services that we offer, visit our Services page.

Top tax saving tips for family companies

Top tax saving tips for family companies

If the payment of bonuses to directors or dividends to shareholders is under consideration, give careful thought as to whether payment should be made before or after the end of the tax year. The date of payment will affect the date tax is due and probably the rate at which it is payable.

For many director-shareholders, the tax cost of receiving a dividend next tax year will be higher than the receipt of a dividend this year.

Tip 1

If you do not currently extract all the company profits as a dividend you may wish to consider paying higher dividends before 6 April 2016 to utilise the current lower dividend tax rates.

However, other tax issues may come into play, for example the loss of the personal tax allowance if your total ‘adjusted net income’ exceeds £100,000. There will also be non-tax issues such as the availability of funds or profits in the company to pay the dividend.

Tip 2

Consider the payment of a pension contribution by the company. This is generally tax and NIC free for the employee (but see Pensions section). Furthermore, the company should obtain tax relief on the contribution, provided the overall remuneration package is justifiable.


It is common in family companies for a director-shareholder to have ‘loan’ advances made to them by the company (eg personal expenses paid by the company). These are accounted for via a ‘director’s loan account’ with the company which may become overdrawn.

Where the overdrawn balance at the end of an accounting period is still outstanding nine months later a tax charge arises on the company equal to 25% of the loan. Where the balance is repaid there is no tax charge.

Complex rules exist to catch certain arrangements, for example where loan balances are repaid but shortly afterwards the company provides another loan to the shareholder. These rules do not apply where there is a genuine repayment through the award of a valid bonus/dividend.

If you require any assistance or further information about the above please do not hesitate to contact us on our contact page.  To find out more about the services that we offer, visit our Services page.