ACCOUNTING MADE EASY

Beware the 60% Income Tax Trap

Did you know that over half a million taxpayers faced a 60% marginal income tax rate in 2022/23? That’s a significant 23% increase from the previous year. This rate hits individuals whose adjusted net income falls between £100,000 and £125,140, effectively eroding their personal allowance.

Mitigation Strategies

To reduce your adjusted net income, consider making personal pension payments or charitable donations under Gift Aid. For example, an £80 donation under Gift Aid is grossed up to £100, reducing your taxable income by £100 and saving £60 in taxes if your income is between £100,000 and £125,140. Similarly, if your projected income is £105,000 for 2024/25, an additional £4,000 pension contribution before 5 April 2025 could restore your £12,570 personal allowance.

This planning can also help those subject to the High Income Child Benefit Clawback Charge (HICBC), which reduces child benefit by 1% for every £100 of adjusted net income between £50,000 and £60,000.

Salary Sacrifice Arrangements

Agreeing with your employer to sacrifice part of your salary, bonus, or pay rise for additional pension contributions or an electric company car can also help. For instance, an employee earning £96,000 annually and entitled to a £10,000 bonus could allocate £6,000 to their pension, thus retaining their personal allowance.

While sacrificing salary for an electric car is slightly less tax-efficient (taxed at 2% of the car’s list price), it can still be beneficial. For example, a £50,000 electric car would result in a £1,000 taxable benefit in kind, costing a 40% taxpayer £400.

Employers benefit too, as they can claim a tax deduction for providing these benefits and save on national insurance. It's a win-win!

Use Tax-Free Childcare Accounts for Summer Holiday Clubs

Tax-Free Childcare accounts are a fantastic way to pay for approved childcare, including summer holiday clubs, for children aged 11 or under (or 16 if disabled).

These accounts can also cover nursery fees, and before/after school clubs, and out-of-school activities. Opening an account is quick and easy, and families can receive £2 from the government for every £8 deposited, up to £2,000 per year per child (£4,000 if disabled).

Eligibility Criteria

• Children aged 11 or under, or up to 16 if disabled.
• Parents must earn at least the National Minimum Wage or Living Wage for 16 hours a week.
• Individual earnings must not exceed £100,000 per year.
• Families should not be receiving tax credits, Universal Credit, or childcare vouchers.

Planning a Staff Summer Barbecue?

Employers can host certain social events for staff without creating a tax liability, thanks to a statutory exemption.

The exemption applies to annual parties or similar functions available to all employees, provided the cost per head does not exceed £150 (inclusive of VAT). If the combined cost of multiple events exceeds £150, the employer can choose which event to exempt.

For example, if a Christmas party cost £100 per head and a summer event £70, the Christmas party could be exempt, but the summer event would be taxable. Employers can handle the tax and national insurance on behalf of employees through a PAYE settlement agreement.

Budget Date Announced

The State Opening of Parliament on 17 July set the stage for the Labour government’s first budget, scheduled for 30 October 2024. We’ll cover the new tax measures affecting businesses and individuals in our next newsletter.

Proposed Repeal of Special Tax Treatment for Furnished Holiday Lettings

Draft legislation proposes abolishing the special tax treatment for furnished holiday lettings (FHL) from 6 April 2025. Key changes include:

• Applying finance cost restriction rules.
• Removing capital allowances for new expenditures.
• Withdrawing access to reliefs on chargeable gains for trading assets.
• Excluding FHL income from relevant UK earnings for pension relief calculations.

Existing FHL businesses can continue claiming writing-down allowances on ongoing capital allowances pools. However, new expenditures must follow property business rules post-repeal.

Changes to VAT on Independent School Fees

From 1 January 2025, private schools will charge 20% VAT on education services, vocational training, and boarding services. Fees invoiced or paid between 29 July 2024 and 30 October 2024 will be treated as supplies from 1 January 2025 or the first day of the term.

If any of these issues affect you, please speak with us – we may be able to help you plan for potential changes. We’ll keep you informed with more details following the budget.

Enjoy your summer and happy tax planning!