Utilising your pension to cut inheritance tax

Pensions usually fall outside of your estate.

Inheritance tax was thought to be ripe for reform in last year’s Autumn Budget but, as it happened, it was left untouched for another tax year. 

What that means is the £325,000 nil-rate band has been in place since 2009, while the 40% standard rate of tax that can apply on any amount above that figure goes back even further than that. 

This form of death duty is levied on our estates, which consist of any property, money and possessions. 

While we don’t pay it ourselves, it can take a sizable chunk out of what your beneficiaries receive, especially if you are not in control of your estate. 

Deadline looms for new hospitality and leisure grants

Eligible businesses in England have until the end of this month to apply for the new Omicron hospitality and leisure grants.

The Treasury announced more support for hospitality, leisure and accommodation businesses before Christmas last year.

Chancellor Rishi Sunak said at that time the new grant scheme was part of a new support package worth £1 billion.

That followed hospitality and leisure firms being hit by a collapse in bookings amid consumer concerns over the spread of Omicron.

According to Hospitality UK, many of these businesses reported lost trade in December 2021 – often their most profitable month – of 40-60%. 

Treasury’s pensions tax relief bill soars past £42bn

The costs involved with providing pensions tax relief are predicted to have increased to £42.7 billion in 2020/21, according to HMRC. 

Forecasts for the 2020/21 tax year showed another steady annual rise, following estimates of £41.3bn in 2019/20 and £38.2bn in 2018/19. 

The 2020/21 figure of £42.7bn was split between £22.9bn in income tax and £19.8bn in National Insurance contributions.

Taxpayers receive this relief at their marginal rate of income tax, meaning those in the basic-rate band get 20% relief, rising to 40% and 45% in the higher and additional-rate bands.

Meanwhile, employer contributions to occupational schemes got £21.1bn in relief during 2019/20, £8.6bn of which went to the public sector. 

Omicron-hit employers can reclaim statutory sick pay

Small and medium-sized employers can reclaim money from the Treasury to cover statutory sick pay (SSP) paid to employees with COVID-19.

Chancellor Rishi Sunak reintroduced the SSP rebate scheme last month, after it initially closed on 30 September 2021.

It forms part of a series of measures announced to support businesses affected by the new wave of COVID-19 infections caused by the Omicron variant. 

The scheme means employers with fewer than 250 employees can get SSP reimbursed for COVID-related absences, for up to two weeks per worker.

HMRC waives penalties again for late self-assessment

Anyone who missed last month’s self-assessment deadline has until 28 February 2022 to file their tax returns online before being fined. 

HMRC said last month that fines would not be enforced on taxpayers who missed the 2020/21 deadline at midnight on 31 January 2022. 

The tax authority said COVID-19 had piled added pressure on individuals and tax advisers to beat the original deadline for online submissions.

It is the second successive tax year that such a decision has been taken on self-assessment penalties, due to the pandemic.

Year-end tax guide 2021/22

Throughout 2021/22, COVID-19 has continued to dominate. Millions of employees and directors on payroll were furloughed, and the self-employed continued to rely on grants available via the income support schemes.

Arranging your financial affairs as tax-efficiently as possible before the start of the new tax year on 6 April 2022 is arguably more important than ever – particularly with rising inflation expected to put household finances under even more pressure in 2022/23. 

Ask yourself, have you maximised all of your tax-free allowances? Have you claimed all reliefs available?

This guide will help you to answer these questions and more, with summaries of the tax rates, allowances and reliefs that apply to businesses and individuals for the remainder of 2021/22.

Each section comes with a set of planning points, too, which you can use as a checklist to ensure you consider all of the key areas. And, of course, you can contact us if you have any questions or want to discuss your tax planning further.

How to extract profits out of a company…..

Once you’ve set up an incorporated business and become a director, you have to be smart about how you extract profit to avoid paying more tax than you need to. 

There are three main routes for a director to extract profits from their own limited company – salary, dividends and pension contributions. Usually, combining these three methods is the most tax-efficient approach to minimise your tax bill.

With corporation tax applying (at 19% in 2021/22) on any of your company’s taxable profits from its accounting period, the money you take out of the profits to pay yourself can potentially reduce your company’s corporation tax liability. 

How to structure your business….

If you’re looking to join the 4.3 million people in the UK who made the jump into self-employment, you might be wondering how to start your new business. 

Assuming you’ve weighed up the pros and cons involved and decided launching a startup is right for you, one of the first things to consider is how will you pay tax?

This requires you to choose a structure for your new business. The three most popular options are sole proprietorship, general partnership or limited company. 

Last year, operating as a sole trader was the most common structure as around 3.2m sole traders accounted for 56% of the UK’s entire private-sector business population. 

By comparison, there were 2m actively-trading companies and 384,000 general partnerships, making up 37% and 7% of the business population, respectively. You can also be a limited liability partnership. 

The vast majority of those sole proprietors are genuine one-man bands; that’s to say they don’t have any employees (in an official capacity, at least).

There’s no rhyme or reason for going it alone and it’s worth being aware of the key options on the table when you start a business. You can also change your business’s structure whenever you like, although that can prove costly.

Report sheds more light on changes to R&D regime

More details have emerged on upcoming changes to the UK’s research and development (R&D) regime, which will take effect from April 2023. 

The Treasury published a report on R&D following last year’s Autumn Budget, in which Chancellor Rishi Sunak announced several new measures.

“If we want greater private-sector innovation, we need to make our R&D tax reliefs fit for purpose,” said the Chancellor during his speech in October 2021.

The report centred on the R&D expenditure credit (RDEC) and the small and medium-sized enterprises (SME) R&D relief.

These schemes provide an injection of cash or a corporation tax reduction when evidence of qualifying R&D is submitted to, and approved by, HMRC.

More red tape for importers as new EU checks kick in

Most UK importers were unprepared for the recent introduction of import controls on EU goods, according to a report from the Federation of Small Businesses (FSB). 

Full customs declarations and controls took effect from 1 January 2022, although safety and security declarations are not required until 1 July 2022.

Before 1 January 2022, full customs declarations for EU goods could be deferred at the point of arrival. 

Now, importers will have to submit paperwork which includes notice of food, drink, and products of animal origin imports in advance of arrival.  

Research from the FSB discovered that only 25% of small importers knew of the changes and had prepared for them prior to this month. 

One in eight (16%) importers polled said they were unable to prepare for the introduction of checks in the current climate, and 33% were unaware of the new rules prior to the study.

Mike Cherry, chairman at the FSB, said: 

“A lot of small firms simply don’t have the cash or bandwidth to manage this new red tape.

“They should speak to suppliers to ensure they have all they need to make declarations, consider alternative providers if that looks like an efficient way forward, and think about different transportation routes.

“Stockpiling is naturally a temptation for those fortunate enough to have the funds for it, but there is already a squeeze on warehousing space – if everyone ramps up storage, that squeeze will only tighten.”

Importers have already had to contend with increased bureaucracy since the UK formally left the EU this time last year. 

Complex VAT rules on imports changed at the same time, requiring UK businesses to account for import VAT on goods worth £135 or more. 

Most firms impacted by this rule use the postponed VAT payment system, which allows them to account for VAT on imported goods on their next VAT return.

This means the goods can be released from customs without the need for immediate VAT payment.

Get in touch to discuss any aspect of VAT.