Dividend allowance Many family-owned companies allocate dividends towards the end of their financial year and/or the tax year, which means that the impact of reduction in the dividend allowance from £5,000 to £2,000 from 6 April 2018, has really only recently surfaced. In addition, many other taxpayers may not become aware of the change until 2018/19 tax returns are completed, which in most cases, will be due for submission to HMRC by 31 January 2020. How much tax is paid on dividend income is determined by the amount of overall income the taxpayer receives, and the dividend tax will primarily depend on which tax band the first £2,000 falls in. For a basic rate taxpayer, the reduction in the allowance means an increase in tax paid on dividends of £225. For a higher rate taxpayer, the reduction increases the annual tax bill on dividends by £975, and for additional rate taxpayers, the increase is £1,143. Note that if dividend income falls between multiple tax bands, these figures will be different. Dividend income is taxed at the taxpayer’s highest rate. This can often work in the taxpayers favour, particularly where a mixture of salary and dividends is received. For example, if a director receives a salary of say £40,000 and a dividend of £15,000, the position for 2019/20 will be as follows:

Amount Taxed Tax Due

 

On salary of £40,000

 

Personal Allowance Basic 20% rate £12,500 £27,500 £0 £5,500

On dividend of £15,000

Dividend Allowance Basic rate 7.5% Higher Rate 32.5% Total Tax Due for year £2,000 £8,000 £5,000 £0 £600 £1,625 £7,725

Personal allowances are deducted first against the salary, leaving £27,500 of other income falling within the basic rate tax band (£37,500 for 2019/20). Dividend income falling within the basic rate band is £10,000 (£37,500 minus the £27,500 used), with the remaining £5,000 falling above the basic rate limit. The dividend nil rate is allocated to the first £2,000 of dividend income, falling wholly within the basic rate band, leaving £8,000 within the basic rate band and taxable at the lower 7.5% rate. The remaining £5,000 of dividend income is taxable at the dividend upper rate of 32.5%.

Family business structures may be particularly affected by lower dividend allowance now in force, especially where several family members take dividends from the company. A pre-dividend review may be beneficial.

Employees tend to believe the figures included in the P60s and P11ds prepared by their employers, but they could be leaving themselves open to penalties if they copy incorrect figures on to their own tax returns.

This is what happened to Ringo Scheithauer. He was employed by Dunhills on an annual salary of £306,772 for 2016/17, but the P60 he received from his employer showed pay of £167,605.48 with tax deducted of £71,679.19. He queried the P60 figures with his employer but was told they were correct, so he reported them on his tax return.

Unfortunately, the employer had issued an inaccurate P60 as part way through the year the payroll function had been moved in house. The earnings for the period to September 2016 were included on a P45, but Ringo said he didn’t receive that form. He also forgot to include his taxable benefits, as reported on the P11d, but the case report doesn’t give a reason for that.

HMRC issued Ringo with a penalty of £694.15 for a careless inaccuracy on his tax return, being 15% of the undeclared tax of £4627.73. Ringo argued that his mistake was not careless as he had taken care to check the figures with his employer. HMRC said he should have compared his P60s to his monthly payslips, or contacted a tax adviser for advice. The FTT confirmed the penalty.

HMRC is trialling a new income recorder viewer to allow agents to see all PAYE and tax deducted details for clients.

Written by the Tax Advice Network

HMRC exchanges financial data with many countries around the world about individuals’ bank accounts and assets. Where it can match data to a UK taxpayer it will write to that individual saying it has information concerning their overseas income or gains, which is taxable in the UK.

If our client receives such a letter, we should also receive a copy, but that doesn’t always happen. HMRC is careful not to accuse the taxpayer of tax evasion, but it does ask the recipient to check that all overseas income and gains have been correctly declared.

Unfortunately checking what may be missing from tax returns is a guessing game. HMRC won’t tell you what information it has, or even what tax years it applies to, although most information exchange agreements started to apply from 30 June 2014 or a later date. The data HMRC has may not tie up to UK tax returns because it has been complied on a calendar year basis, and not to the UK tax year.

If our client is, or was, not UK domiciled, the overseas income or gains may not be taxable in the UK, and thus doesn’t have to be declared in the UK. HMRC won’t necessarily know the taxpayer’s domicile.

HMRC asks for a response to its letter within 30 days and encloses a “certificate of tax position” to be completed and returned. There is no legal requirement for our client to complete that certificate, but if HMRC doesn’t receive a relatively prompt response in some form it will follow-up and possibly open a tax enquiry.

Clients should be carefully advised about whether to complete the certificate of tax position, as it applies to all years without limit, and there is no de-minimis level of declaration. There are serious consequences of making a false declaration.

Where a disclosure is required of overseas income or gains, consider using the Worldwide Disclosure Facility (WDF), but other methods of disclosure may be more appropriate. If you should need any further advice please contact our office.

Written by the Tax Advice Network

Mary Appiah submitted her 2016/17 tax return on time, and paid the £903 due for that year on 31 January 2018. So she was very surprised to receive £90 penalties for not paying her tax on time, and challenged those penalties at the tax tribunal.

HMRC had allocated the £903 paid for 2016/17 against her liability for 2015/16, but didn’t tell her it had done this until 29 October 2018. The tax liability for 2015/16 arose because Mary had an outstanding income contingent student loan, and her accountant had not ticked the box on her 2015/16 return to declare that. The loan was repayable through her SA tax return.

The tax due for 2015/16 (£1633.41) was not apparent until HMRC compared Mary’s 2015/16 return to the Student Loan Company records. HMRC amended the SA 2015/16 return record on 18 January 2018, but didn’t inform Mary of the tax due at that time. She paid the balance due for 2015/16 as soon as she was made aware of it, but this was after the 2016/17 tax had been reallocated.

There were penalties for late payment of the 2015/16 tax, but HMRC cancelled them once the tax was paid. It refused to cancel the penalties for 2016/17.

The tax tribunal cancelled the 2016/17 penalties on the basis that HMRC had not correctly communicated with the taxpayer concerning the tax debts and reallocation of tax payment. The FTT also found she had a reasonable excuse for late payment.

However, all this bother could have been avoided if the accountant had correctly declared the outstanding student loan on the 2015/16 tax return.

Written by the Tax Advice Network

Individual landlords who own residential properties should be well aware of the block on the deduction of interest and finance charges from their rental income. This increases their taxable profits without increasing their accounting profit, but the tax increase is partially softened by a tax credit equivalent to 20% of the blocked interest.

The government said this tax change would only affect higher rate taxpayers, as basic rate tax relief was given through the 20% tax credit, but that is not the case.

We need to check whether you are caught by any of the knock-on effects of the restriction on interest deductions:

• Loss of marriage allowance as the higher earner is now taxed at 40%.
• Liable to have child benefit clawed back through the HICBC, as gross taxable income now exceeds £50,000.
• More tax to pay on savings income as the personal savings allowance is reduced from £1000 to £500 once total taxable income exceeds the 40% threshold.
• More tax to pay on saving income because the starting rate for savings (0% on up to £5000) no longer applies if non-savings income eats into that band.
• Higher student loan repayments as gross taxable income is higher and exceeds the repayment threshold.
• Liable to pay higher amounts of child maintenance.
• CGT due at 20% rather than 10%, as marginal income tax rate is now 40%.
• Paying tax on dividend income at 32.5% rather than at 7.5% and total taxable income is now in higher rate band.
• Loss of personal allowance as total taxable income exceeds £100,000.
• Reduction in pensions annual allowance as total taxable income exceeds £150,000.
• Ineligible for tax free childcare account as total income exceeds £100,000.
• Loss of 30 hours free childcare.

As the interest restriction is being tapered in, with 25% blocked in 2017/18 and 50% blocked in 2018/19, the full effect won’t be felt until 2020. However, some or all of the above may well apply to you for 2018/19.

 

Written by the Tax Advice Network

Welcome to our monthly newswire. We hope you enjoy reading this newsletter and find it useful.

Connect effectively in the digital age

It’s time to rethink how we connect with customers, suppliers, colleagues and the business community.

The way we work is becoming increasingly digital. Today it is pretty normal for people to work remotely at least one day per week and this is just the tip of the iceberg.

As the future of work looks set to become more and more focused on digital, it’s going to be the fundamental human skills that remain most relevant. Skills like being able to seek out and learn from someone who already possesses the skill you’re looking to acquire; being able to display value through a meaningful conversation; being able to pick up on and understand people’s pain points without needing them to be pointed out in the first place. Despite the focus on all things digital, the most important business skill of all will continue to be having the ability to spot a commercial opportunity.

The shift to a more digital focus has seen people become increasingly isolated. As such, people who understand how to form meaningful connections will have the advantage. Tools such as LinkedIn, Twitter and Instagram are useful, but they are just that, tools. The most meaningful business connections still come through genuine conversations and physical meetings. When it comes to success in business, we are all familiar with the phrase “it’s not what you know, it’s who you know.” Many of the most valuable skills in business are soft skills: communication, relationship management, leadership, etc. which means that the way to succeed, regardless of the type of business you work in, is to make meaningful connections with people who have influence.

As the world continues in this direction of social media, online connectivity and remote working, it’s likely that  over time we will see closed or vetted social networks adding more value for business people. This is already happening on platforms such as LinkedIn through Groups, etc. More importantly, it’s going to be the individuals who invest in bringing these online connections, offline, that possess the greatest professional advantage. In business, “people buy people”. People want to do business with individuals that they like and respect.

Project Management Software Tools

If you are running various projects across your firm simultaneously, you may need some type of project management tool to help you to keep track of progress, manage emails, deadlines and so forth.

Projects are a specific type of work. Every project has a start and end date, and a deliverable. For example, launching a new service is a project and building a new website is a project. However, cash collection is ongoing work. In theory, you could manage cash collection from each client as its own “mini-project”, but if the turnaround time is quick and only a few people are involved, using full-scale project management software for that would be overkill.

Businesses tend to turn to project management software because they’re overwhelmed by working via email and spreadsheets. The right project management platform can help to reduce email traffic, although that won’t happen overnight. It takes time for employees to learn the software, and for your firm to figure out how best to use it for current and future projects. The very best project management tools are designed to help teams handle common problems, such as managing deadlines, workload, etc. These tools can also generate reports that give managers insight into which team members have too much or too little work to do. Many of the most popular project management tools can track time spent on projects and integrate with invoicing and billing systems.

Choosing the right project management tool for your business is key. Tools such as Teamwork Projects, Zoho Projects, TeamGantt and many others offer a free trial of their systems so you can see if they will fit with the needs of your firm. Most can then be purchased either as online software as a service (SaaS) or you can host the software and all your data yourself on your own servers with an enterprise license. The version that you choose largely depends on whether your business hosts data in the cloud or on its own servers. The SaaS tools tend to cost between £20 -£50 per user per month.

The enterprise pricing varies depending on the number of users, etc. but the total cost will tend to be a one off license fee and the upfront costs are therefore higher.

Setting Up a New Hire for Success

No one has a bigger impact on a new employee’s success than the manager who hired them. Here are some tips on how to set your new hires up to succeed.

Investing time in onboarding brings new employees up to speed faster, which means they’re more quickly and efficiently able to contribute to the business. Effective onboarding also dramatically reduces failure rates and increases employee engagement and retention. The time between someone accepting an offer and starting their new role can be used to jump-start the process.

But even if new employees are already in their new job, there are many ways to get them up to speed faster. The starting point is to take care of the “onboarding basics” – such as documentation, compliance training, office space, support, and technology. Fortunately, most firms do a reasonably good job of these elements. The real work begins with integrating new hires into the business.

Understand the challenges

Starting a new job is challenging. Even experienced professionals can struggle as they are unfamiliar with the business, don’t understand the culture and aren’t fully aware of how things really work. New employees have to learn a lot and may be feeling quite vulnerable, even when they seem outwardly confident.

Managers need to get involved

Managers have a vested interest in onboarding their new hires effectively. They need to coach their new recruits, check-in with them regularly and be ready to intervene if things look like they might go off-track. This requires an investment of time and energy but can help the new hire to secure some early wins, which can boost their confidence, their credibility within the firm and will increase the likelihood that they will succeed in their new role.

Make them part of the team

New hires need to build effective working relationships with their peers. The arrival of a new employee should be communicated prior to their start date so that the team understands who the new person is, why they have been hired and the role they will fulfill.

Once they join, a team lunch or social get-together is a good investment as it helps to connect your new hire with others in the team, in a more relaxed setting. Outside of the new hire’s immediate team, there are likely to be other stakeholders who will be critical to their success in the job. A good manager will take the time to set up introductory meetings with key stakeholders so that the new recruit gets connected with the right people from the start.

Direction

From the beginning, a manager should explain to the new hire what the expectations of the role are and set some key objectives for the first 100 days. The new recruit should be clear on what they need to do, how they should be doing it and what the purpose of the role is within the context of the wider business.

Focus on managing your energy, rather than your time

You can only spend your time in a productive, effective manner if you have enough energy to do so.

Most people respond to the increasing demands in their day to day jobs by putting in longer hours. This takes a toll on us physically, mentally and emotionally.  Over time this can lead to increasing levels of distraction, burn-out, mistakes being made (which can cost a business money) and high staff turnover rates. Most people talk about being too busy. Being too busy implies not just a shortage of time but a lack of equilibrium and wellbeing.

To effectively re-energise their teams, businesses need to shift their emphasis from getting more out of people, to investing more in them. This ensures that your people are more motivated and come to work feeling more energised and ready to succeed at whatever it is that they do. Businesses need to equip their people with the tools to re-energise and motivate themselves, to recognise energy-depleting behaviours and take responsibility for changing those behaviours in order to achieve a more positive outcome.

To ensure that your team are energised, you could ensure that they have adequate exercise, rest / sleep and nutrition. Whilst it isn’t the firm’s responsibility to police this, educating your team can help them to change their approach in order to exhibit the right behaviours on their own terms. On top of this, you could equip them with the tools to manage their emotions and focus their attention when they are working.

Many view multitasking as a necessity in the face of all the demands they juggle, but it actually undermines productivity. Distractions are costly: A temporary shift in attention from one task to another – stopping to answer an e-mail or take a phone call, for instance, increases the amount of time necessary to finish the primary task. This is known as “switching time.” It’s far more efficient to fully focus for 45 to 60 minutes, take a true break, and then fully focus on the next activity. Once people see how much they struggle to concentrate, they can make efforts to reduce the relentless interruptions that technology has introduced in their lives and focus on working more effectively rather than just putting in more hours at the office.