Your Monthly Tax Update – January 2020
Conservative Party Elected with Working Majority
Now that Boris Johnson and his Conservative party have won the General Election will we finally “Get Brexit Done”? More importantly, can the Government now get on with running the country and sorting out urgent issues such as the NHS?
We are still awaiting the date of the Budget, which is expected to be in February. That Budget may include some of the tax measures contained in the Conservative Party election manifesto. The manifesto promised that there would be no changes to the rates of income tax, national insurance or VAT.
The manifesto stated that the corporation tax rate would remain at 19%, instead of reducing to 17% on 1 April 2020, to provide an extra £6 billion for the NHS. Businesses would however benefit from a planned increase in the structures and buildings allowance from 2 per cent to 3 per cent. That allowance provides tax relief for the construction or renovation of commercial buildings.
The manifesto also announced that the national insurance threshold would be raised to £9,500 in 2020/21, from the current £8,632.
The party’s ambition was to raise the threshold to £12,500 in line with the income tax personal allowance.
Finance Bill Should Now Proceed
Now that the General Election is out of the way, the tax changes in the draft Finance Bill scheduled to take effect from April 2020 are now more likely to go ahead.
The key tax measures “in limbo” until legislated in Finance Act 2020 are:
– Extending the “off-payroll” working rules to the private sector
– Restricting R&D repayable credit for SMEs
– The proposed 2% reduction in P11D car benefits
– Limiting CGT private residence letting relief
If the changes to CGT private residence letting relief and PPR (principal private residence) relief go ahead from 6 April 2020, it may be worth considering the disposal of a property that currently qualifies for the reliefs before 6 April 2020. This is a big one so if you currently rent a property which you previously lived in contact Jan Friend urgently to discuss the tax implications.
The “off-payroll” working rules will almost certainly proceed, even if not from 6 April 2020, and thus businesses and workers affected should prepare for the planned changes. Contact us if you need help in assessing the likely impact on your business.
Don’t Forget There May Be Tax to Pay on Your Dividends in January
The rules for taxing dividends changed radically from 6 April 2016 with the removal of the 10% notional tax credit and the introduction of new rates of tax on dividends. For many taxpayers that means more tax to pay on dividends on 31 January each year.
If you are a higher rate taxpayer and received £22,000 of dividends in 2018/19 only £2,000 of those dividends are tax free now. That leaves £20,000 to be taxed at 32.5% meaning £6,500 tax due on 31 January 2020, and possibly payments on account of your 2019/20 liability (unless your tax liability is likely to be lower in 2019/20).
New Year’s Resolutions To Save Tax
At this time of year we think about New Year’s resolutions. It is also a good time to start planning your tax affairs before the end of the tax year on 5th April.
An obvious tax planning point would be to maximise your ISA allowances for the 2019/20 tax year (currently £20,000 each).
You might also want to consider increasing your pension savings before 5 April 2020 as the unused annual pension allowance is lost after three years.
For those looking to do some inheritance tax planning it would be a good time to review (or make) your Will.
If you are looking at any form of tax planning then please contact our tax team or Jan Friend.
Pension Planning
For most taxpayers the maximum pension contribution is £40,000 each tax year, although this depends on their earnings. This limit covers both contributions by the individual and their employer.
Note that the unused allowance for a particular tax year may be carried forward for three years and can be added to the relief for the current tax year, but then lapses if unused.
Hence the unused pension allowance for 2016/17 will lapse on 5 April 2020 if unused. Note that under the current rules the net after tax cost of saving £10,000 in a personal pension for a higher rate taxpayer is only £6,000.
Pension payments are a great way to save tax and provide security for your future retirement. We have a number of financial advisors we can recommend to you, so if you are interested in making additional contributions or starting a pension then please contact us here.
Gifts Out of Surplus Income
Inheritance tax only applies to gifts of capital. There is currently a very generous exemption from inheritance tax for regular gifts out of income. In order to qualify for the exemption it is important to set up regular transfers and to be able to prove that after those regular gifts you are left with sufficient income to support your normal lifestyle.
We can assist you in taking advantage of this generous exemption and keeping the necessary records for HMRC.
There are a number of insurance based products that take advantage of this relief and the regular payments could be used to fund school fees for children and grandchildren.
Passing On the Family Home
The Labour party were proposing to reverse the recent Tory party inheritance tax cuts if elected. They were referring to the additional nil rate band for passing on the family home. This additional relief should be taken into consideration when drafting your Will and we can work with your solicitor to make sure your Will is tax efficient.
When fully phased in from April 2020, an additional nil rate band of up to £175,000 is available on death where your residence is left to direct descendants.
This is on top of the normal £325,000 nil rate band.
The residence nil rate band is however restricted if your assets exceed £2 million. The rules are fairly complicated but we can review your personal circumstances to enable you to take advantage of all the relief that you are entitled to.
Note that the additional inheritance tax relief is available even when you downsize to a smaller property or move into care, provided assets of equivalent value are left to direct descendants in your Will.
If you are interested in inheritance tax planning then please contact Jan Friend. Jan carries out all our inheritance tax planning, is regulated to carry out probate work and works closely with our clients and specialist will writers to ensure that our clients’ inheritances are directed to their loved ones correctly and in the most tax efficient manner.
The content in this blog is correct as at 9th January 2020. See terms and conditions.
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