Exchequer Weblog

Revenue and Customs (HMRC) has changed some of the bank accounts it uses to receive tax payments and repayments of overpaid tax credits. The bank accounts used for receiving VAT payments and for paying in NICs for class 2 (self-employed) and class 3 (voluntary contributions) have not changed yet, but most other taxes include PAYE and Corporation Tax are affected.

If your bank account remembers the regular payments you make, check that the bank sort-code and account number agree with the details shown on the your latest PAYE payslip or self-assessment tax demand before your press the ‘pay’ button. You can check the bank account details for the type of tax you are paying on the Taxman’s web site here:-

http://www.hmrc.gov.uk/payinghmrc/bank-account-checker.htm

If you pay your tax by direct debit you don’t have to make any changes.

It’s time to start work on those tiresome forms (P11D) to report expenses and benefits paid to employees and directors in the year to 5 April 2009. The deadline for submitting the forms to the Tax Office, and for giving copies to your employees, is 6 July 2009.

If you have a dispensation for business expenses in place with your local Tax Office your life is made easier, as expenses falling in the categories specified in the dispensation can be left off the P11D forms. However, taxable benefits such as company cars must be reported and the taxable benefit calculated.

Most reportable business expenses consist of travel and subsistence costs. In the past the Taxman has been happy to include the cost of tickets in a dispensation, but he would rarely agree to a flat allowance to cover meals. Now the Taxman has proposed a scale rate of tax free payments for meals taken while travelling in the UK after 6 April 2009 with the following conditions:

• - Breakfast - £5 - Starting earlier than usual and leaves home early before 6am.
• - One meal - £5 - Away from home or office for 5 hours or more.
• - Two meals - £10 - Away from home or office for 10 hours or more.
• - Evening meal - £15 - Working later than usual and finish after 8pm.

These rates only apply where the employer has agreed to stick to the scale rates within his dispensation agreement with the Tax Office. This is another good reason for getting a dispensation in place, or updating the one you have.

We are now into the new tax year and you may be recording the first salary payments for 2009/10. When you calculate the amount of NI due don’t forget to record how much pay for each employee falls above the new Upper Accruals Point (UAP). This is set at £3,337 per month, just below the Upper Earnings Limit (UEL) of £3,656 per month.

For employees who are not in a contracted-out pension scheme, the UAP makes no difference to the amount of NICs they pay. The reduced rate of NICs paid by contracted-out employees now stops at the UAP rather than at the higher UEL, so these employees who earn more than £3337 per month will pay more NICs in 2009/10 than in 2008/09.
There is also a hidden penalty for all employees. Previously earnings above the UEL did not count towards state benefit entitlements, now all earnings above the UAP will not count for state benefits. The UAP has been frozen at £3337 per month (£770 per week) and will not be increased by inflation, so the amount of contributions that is counted for state benefits is capped from now on.

The 60% tax rate will apply to the portion of taxable income falling between £100,000 and approximately £113,000, due to the gradual reduction in the basic personal allowance between these thresholds from 6 April 2010.

The 50% rate of tax will apply to the portion of taxable income over £150,000, also from 6 April 2010. This adds up to a top rate of 51% including the additional rate of NI paid by both employees and the self-employed. It’s worth noting that the 1% NI rate will become 1.5% from 6 April 2011, and all the other rates of NI will also increase by 0.5 percentage points from the same date.

Where your accounts year ends on 30 April, as many long-established partnerships do, the profits made in the year starting 1 May 2009 are taxed in 2010/11, when the combined 51% rate kicks in above £150,000. Therefore, if you are self-employed the profits you make from 1 May 2009 onwards could be subject to tax and NI at 51%.
A useful way to reduce higher rate tax at the margins has been to make pension contributions, which have attracted tax relief at the taxpayer’s highest margin rate, as long as the annual allowance (£245,000 for 2009/10) was not exceeded. The bad news is this tax relief will be gradually decreased down for those with income over £150,000 from 6 April 2011. There are also anti-avoidance provisions which mean any attempt to change the pattern of pension contributions from 22 April 2009 will in ineffective for those earning £150,000 or more. However, there is no mention in the Budget Notes of any restriction for those with income between £100,000 and £113,000.

If you are likely to be in this income range for 2010/11 you could use the following strategies to reduce your total taxable income:

• - Pay personal pension contributions into a registered pension scheme.
• - Get your employer to pay pension contributions into your pension scheme and reduce your gross salary proportionately.
• - If your spouse has a lower marginal tax rate, transfer income generating assets such as shares, let property or bank deposits into your spouse’s sole name.
• - Make gift-aided charity contributions.

The last two bullet points will also work for those with total income over £150,000.

If you run your business through your own company you can restrict your taxable income to below the £100,000 or £150,000 thresholds, by reducing your salary and dividends and leaving any surplus funds in the company. A self-employed person is taxed on the total profits the business makes whether or not the funds are extracted from the business.

If you are self-employed, incorporating your business at this time will allow you to control your marginal tax rate more effectively in the future. Now is the ideal time to consider incorporating your business and Exchequer Business Services can carry out this process on your behalf for just £58.00 including all fees and VAT.

Exchequer Business Services