PFS What's new bulletin - September I

TAXATION AND TRUSTS

 

New HMRC guidance on the need to register for self-assessment (AF1, RO3)

 

Anyone who needs to complete a self-assessment tax return for the first time to cover the 2023/24 tax year, should tell HMRC by 5 October 2024.

HMRC has provided new guidance in an attempt to debunk some common myths about who needs to file a self-assessment tax return before the 31 January 2025 deadline. We have re-produced that guidance below, with a few tweaks:

Myth 1: “HMRC hasn’t been in touch, so I don’t need to file a tax return.”

 

Reality: It is the individual’s responsibility to determine if they need to complete a tax return for the 2023/24 tax year. There are many reasons why someone might need to register for self-assessment and file a return, including if they:

 

• are newly self-employed and have earned gross income over £1,000;
• earned below £1,000 and wish to pay Class 2 National Insurance contributions (NICs) voluntarily to protect their entitlement to State Pension and certain benefits;
• are a new partner in a business partnership;
• have received any untaxed income over £2,500;
• receive Child Benefit payments and need to pay the High Income Child Benefit Charge (HICBC) because they or their partner had income of more than £50,000.
  
  

More information can be found on GOV.UK and anyone who is unsure if they need to file self-assessment can use the free online tool on GOV.UK to check. Once registered for self-assessment, they will receive their Unique Taxpayer Reference, which they will need when completing their return and paying any tax that may be due. Taxpayers will have to reactivate their account if they have registered for self-assessment previously but did not send a tax return last year.

 

Myth 2: “I have to pay the tax at the same time as filing my return.”

 

Reality: False. Even if someone files their return today, the deadline for taxpayers to pay any tax owed for the 2023/24 tax year is 31 January 2025. Taxpayers may also be able to set up a Budget Payment Plan to help spread the cost of their next self-assessment tax bill, by making weekly or monthly direct debit payments towards it in advance.

 

Myth 3: “I don’t owe any tax, so I don’t need to file a return.”

 

Reality: Even if a taxpayer does not owe tax, they may still need to file a self-assessment return to claim a tax refund, claim tax relief on business expenses, charitable donations, pension contributions, or to pay voluntary Class 2 NICs to protect their entitlement to certain benefits and the State Pension.

 

Myth 4: “HMRC will take me out of self-assessment if I no longer need to file a return.”

Reality: It is important taxpayers tell HMRC if they have either stopped being self-employed or they don’t need to fill in a return, particularly if they have received a notice to file. If not, HMRC will keep writing to them to remind them to file their return and they may be charged a penalty.

 

Taxpayers may not need to complete a tax return if they have stopped renting out property, no longer need to pay the HICBC, or their income has dropped below the £150,000 threshold and they have no other reason to complete a tax return. If taxpayers think they no longer need to complete a tax return for the 2023/24 tax year, they should tell HMRC online as soon as their circumstances change. Taxpayers can watch HMRC’s YouTube videos on stopping self-assessment to guide them through the process.

 

Myth 5: “HMRC has launched a crackdown on people selling their possessions online and now I will have to file a self-assessment return and pay tax on the items I sold after clearing out the attic.”

 

Reality: Despite speculation online earlier this year, tax rules have not changed in this area. If someone has sold old clothes, books, CDs and other personal items through online marketplaces, they do not need to file a self-assessment and pay income tax on the sales. HMRC’s guidance on selling online and paying taxes can be found on GOV.UK.  

Further information

For more information, please see self-assessment. The deadlines for tax returns for the 2023/24 tax year are 31 October 2024 for paper returns and 31 January 2025 for online returns. Taxpayers who chose to file by paper can find out how to request a paper return via GOV.UK. HMRC no longer automatically issues paper returns unless there is a reason a taxpayer cannot file online. More than 97% of taxpayers now file their self-assessment tax returns online.

Pensioners are required to pay income tax on any taxable income, including their pension income, above their personal allowance threshold. There are different ways to pay any tax owed, depending on the individual’s circumstances, including:

 

• if they already complete a self-assessment tax return, they will need to report and pay via this route;
• if they have a PAYE tax code, HMRC will automatically collect any tax through their tax code.

Alternatively, if a pensioner does not already pay tax via self-assessment or PAYE, HMRC will send them a Simple Assessment summary. The Simple Assessment will tell them how much income tax they need to pay and the deadline – usually by 31 January following the end of the tax year. HMRC produces the Simple Assessment from the information it already holds, so people do not need to do anything - there is no form to complete. Please see Simple Assessment for more information.

 

 

Basis period reform - more HMRC guidance

(AF1, AF2, JO3, RO3)

 

How basis period reform affects unincorporated taxpayers, i.e self-employed sole traders and those trading in a partnership. Plus new HMRC guidance on setting up as a sole trader

HMRC’s latest Agent newsletter provides further guidance around basis period reform and reporting profits on a tax year basis.

All sole trader and partnership businesses must now report their profits on a tax year basis, beginning with the self-assessment return due by 31 January 2025 (covering the tax year 2023/24).

Any business that previously had a non-tax year accounting period must declare profits from the end of their basis period in 2022/23 up to 5 April 2024, with the additional profit (after overlap relief) being transition profit. The transition profit will be spread by default over five years including 2023/24. Accounting periods ending on 31 March will now be treated as equivalent to those ending on 5 April. This also applies to property businesses.

Businesses remain free to choose their accounting date. Any business that continues to have a non-tax year accounting period after 6 April 2024 will need to apportion profits from their accounting periods to the tax year.

HMRC says that it has now launched a full package of online interactive guidance to support completion of the return and working out transition profit for these cases.  And it has provided an online service to ask HMRC what the overlap relief figure is according to its records.

HMRC adds that it has recently seen a major increase in demand and at present response times are not as quick as it would like, but it is now clearing the backlog of requests. Anyone who has applied and not heard back, can check the progress of their request. However, HMRC asks that people do not contact it directly as it expects to have cleared the current backlog in the coming weeks.

HMRC requests that people only use the online form if it is necessary, as it is not intended to be used to ‘check’ a figure that the individual already holds and there is no requirement to use the service before filing a return. As an example, HMRC has seen cases where the individual started trading within the last three years where the overlap figure is known to their accountant. Dealing with these cases can slow down HMRC’s response times for all. Taxpayers can find further guidance and support at basis period reform.

For those with an accounting year end that is not 31 March, 5 April, or any dates between, the amount of their profits subject to income tax in 2023/24 will be affected by basis period reform.

How this will impact on them depends upon a variety of factors, but one consequence for many people will be that more than twelve months of profits will be taxable in 2023/24. The earlier in the tax year their accounting year ends, the greater the impact. For example, if they have an accounting year end of 30 April – a date once recommended for maximum tax deferral – then, after special transitional relief, they could find themselves with the equivalent of a little over 14 months profits taxable in 2023/24. This is because, under the pre-2023/24 basis year system, with an end April date, the calculation of tax was based on roughly 11 months of profit in the previous tax year. For example, in 2022/23, the taxable profit would be based on the trading period ending on 30 April 2022.

 

In 2023/24, the advantage of 30 April year end morphs into a disadvantage because tax is based on:

 

1. Trading income to 30 April 2023, plus
2. Trading income from 1 May 2023 to 5 April 2024 (341/366ths of the trading year to 30 April 2024 as 2024 is a leap year), less
3. Any unused overlap relief available (broadly, the very first 11 months of profit that would have been taxed twice when they started their business).

By default, the sum of 2 and 3 (the transitional profits) will be divided by five and spread over five tax years – 2023/24 to 2027/28.

Any year end planning needs to take account of this income boost, which will also apply for the following four tax years, unless they opt out of the automatic transitional relief. An opt out can make sense in some circumstances, but the decision to do so and the strategies to then adopt require expert advice.

Profits incurred in the 2023/24 tax year can be reduced by any overlap relief which is entered on the 2023/24 self-assessment return.

A starting point to learn more is HMRC’s earlier guidance here and here.

More information on basis period reform can also be found in the Association of Taxation Technicians (ATT)’s dedicated FAQs.

Helping new sole trader clients as they get started in business 

HMRC has also updated one of its guidance pages to make it easier for taxpayers to know what they need to do when setting up as a sole trader. They can check employment status, understand their obligations, and register for tax. Please see HMRC’s updated guidance Set up as a sole trader: step by step.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTMENT PLANNING

 

New mortgage scheme statistics show another increase  

(ER1, LP2, RO7)

 

Official quarterly statistics on the Mortgage Guarantee Scheme: 19 April 2021 (scheme launch) to 31 March 2024

 

First announced at the March 2021 Budget, the scheme is available to first time buyers or current homeowners buying a house in the UK with a purchase value of £600,000 or less.  

According to these latest statistics, there were 44,368 mortgage completions from scheme launch on 19 April 2021 to the end of March 2024, which represents 1.5% of all residential mortgage completions in the UK from the beginning of April 2021 to the end of March 2024.

 

Since the last statistical release, there have been an additional 1,532 completions under the scheme from December 2023 until the end of March 2024. The corresponding value of the guarantees was £1.2 billion, while the overall value of loans supported by the scheme was £8.5 billion. These mortgages were used to finance properties worth £9 billion in total.

 

The mean value of a property purchased or remortgaged through the scheme to the end of March 2024 was £203,673, compared to an average UK house price of £283,000. The median property value was lower, at £180,000, reflecting that a higher proportion of properties in the scheme are in the lower value bands.

 

23% of all mortgage completions through the scheme to date were on properties in the lowest value band up to £125,000, and a further 52% were on properties between £125,001 and £250,000. Only 26% of mortgage completions were on properties valued at over £250,000.

 

The majority of mortgage completions through the scheme to date have been on terraced houses, making up 35% of total completions. 23% of completions in the scheme were on flats or maisonettes, while completions for detached houses and bungalows were much lower, making up 7% and 3% of the total respectively.

 

Just under half of households who completed a mortgage with the support of the scheme had a household income of between £0 and £50,000. Take-up was lower for those on higher incomes; households with an income over £80,000 made up 15% of all completions. The median household income for borrowers using the scheme was £50,508, while the mean household income was slightly higher at £55,863.

 

86% of mortgage completions through the Mortgage Guarantee Scheme to date have been for purchases by first-time buyers.

 

69% of completions through the Mortgage Guarantee Scheme were in England, compared to England’s 84% share of overall UK residential mortgage completions.

 

In Scotland, the proportion of mortgage completions with the support of the scheme was significantly higher than the country’s share of total mortgage completions in the UK as a whole. Since the launch of the scheme, 8% of all UK mortgage completions have taken place in Scotland, compared to 22% of Mortgage Guarantee Scheme completions.

In Wales, mortgage completions made up 4% of the UK total, compared to 5% of Mortgage Guarantee Scheme completions.

 

In Northern Ireland, mortgage completions made up 2% of the UK total, compared to 3% of Mortgage Guarantee Scheme completions.

 

 

Help to Buys ISAs - quarterly statistics released

(FA5)

 

HMRC’s latest quarterly statistics on Help to Buys ISAs have been released. These cover the period from 1 December 2015 to 31 March 2024.

 

The statistics show that, since the launch of the Help to Buy ISA, 601,476 property completions have been supported by the scheme and 782,299 bonuses have been paid through the scheme (totalling £998 million) with an average bonus value of £1,276.

 

The table below shows the number of property completions from 1 December 2015 to 31 March 2024 supported by the scheme broken down by property value: 

 

 

The statistics also show:

 

• The mean value of a property purchased through the scheme was £178,012 compared to an average first-time buyer house price of £236,461 and a national average house price of £283,000;
• 65% of first-time buyers who have been supported by the scheme were between the ages of 25 to 34;
• The mean age of a first-time buyer in the scheme was 29.
• 73% of bonuses paid were in England and this supported approximately 72% of total property completions through the scheme.
• At a regional level, property completions were distributed fairly evenly across England. The highest number of property completions with the support of the scheme was in the North West, Yorkshire and the Humber, the West Midlands and Scotland, with the lowest numbers in the North East of England, East England, Wales and Northern Ireland.

The Help to Buy ISA scheme was launched on 1 December 2015. The scheme closed to new accounts on 30 November 2019, so it is no longer possible to open a new account. However, it is possible to continue saving until 30 November 2029 when accounts will close to additional contributions. The Government bonus must be claimed by 1 December 2030. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PENSIONS

 

Pension tax relief - ideas for reform

(AF8, FA2, JO5, RO4)

 

A new paper from a Labour-supporting think tank, which has called on Rachel Reeves to make reform of pension tax relief a priority

 

What sort of organisation publishes a paper on Bank Holiday Monday calling for the reform of pension tax relief? The answer is ‘a democratically governed socialist society, a Labour affiliate and one of the party’s original founders’ – the Fabian Society.

 

In a paper entitled ‘Expensive and Unequal’, the Society’s general secretary has called on Rachel Reeves to consider a radical restructuring of the pension tax landscape. None of the proposals are new, but as we head towards the ‘difficult decisions’ of 30 October, they are worth noting. Although, we should make it clear, this isn’t a Government-sanctioned paper. It’s just some ideas put forward by a Labour-supporting think tank:

 

1. Reform income tax relief on pension contributions

 

• Create a single flat rate of tax relief for individual pension contributions. The paper is vague about the actual rate, initially giving an example of 30% as midway between 20% and 40%. It then suggests ‘…a lower rate could be set to generate rather than recycle revenue, for example 25%’. The Society’s estimate for tax savings on these two rates are £1.4bn and £5bn, based on applying an estimate from a June 2020 Pension Policy Institute paperto recently published HMRC data for 2022/23. The Institute for Fiscal Studies (IFS) recently calculated that a 30% rate of relief would raise £3bn a year in the long run.
• The same flat rate would apply to employer contributions, which would become taxable income. However, the paper says it would be necessary to ‘consider special arrangements for defined benefit schemes.’
• Rebadge tax relief as ‘a simple top-up credit on pension contributions (e.g. a £1 match for every £3 of contributions after tax)’, echoing the approach for Lifetime ISAs.

 

1. Consider increasing taxes on pensions in retirement

 

• Revise the taxation of pension lump sums, for example, by reducing the maximum pension commencement lump sum (PCLS) to the lower of £100,000 or 25% of pension value.
• Charge employee national insurance (NICs) on private pension incomes, with an annual allowance (matching the personal allowance) that would exempt small pensions. The paper says the measure should be introduced instead of means-testing the Winter Fuel Payment, albeit, on its calculation, such a move would have produced £2.5bn extra revenue in 2021/22 against the projected Winter Fuel Payment saving of £1.5bn in 2025/26.
• Make pension assets subject to inheritance tax and levy income tax on all inherited pensions. This echoes a frequent IFS proposaland, on its estimates, would raise about £1.9bn a year in the long term.

1. Consult on reforms to NICs for pension contributions

 

• The paper gives the example of replacing the current NICs exemption for employer contributions with ‘a clearer cashback scheme that rewards employers only for making voluntary contributions beyond the auto enrolment minimum’.
• It also suggests levying employee NICs on employer contributions, in exchange for a higher flat-rate pension tax credit on the first tranche of annual pension saving (e.g. £1 match for every £2 of contributions after tax on the first £7,500 of contribution).

 

1. Recycle some of the savings into improving support for under-pensioned groups

 

• Increase minimum employer contributions under automatic enrolment from 3% to 7% of earnings. On its own this would represent revenue loss to the Treasury due to increased tax relief, but the paper notes that ‘This could easily be absorbed as part of a comprehensive reform package that reduced the overall cost of pension tax relief, largely targeting high earners’. The paper does not put any numbers on this or consider the impact of such an increase on the Government’s economic growth goals.
• Develop a new opt-out pension for the self-employed with tax relief designed to match what employees receive (income tax and NICs). This would add to expenditure, both because of the greater total relief and more encouragement to make pension savings.
• Consider providing pension credits to people out of work because they are caring for young children or disabled people.

 

The paper says that ‘even if only a sub-set [of its measures] were progressed there would be ample scope to generate £10bn per year in extra tax revenues.’

 

Comment

 

Pensions tax relief has been the ‘low-hanging fruit’ of nearly every journalist’s pre-Budget copy for years. 2024 might just be their last opportunity to recycle the story.

 

 

HMRC updates the Pensions Tax Manual

(AF8, FA2, JO5, RO4)

 

HMRC have updated their internal manual, the Pensions Tax Manual (PTM) containing guidance on the legislation and regulations behind the pension schemes tax regime.

The PTM has been updated as follows:

 

• PTM063700Member benefits: lump sums: small pension payments – exception removed following SI 2009/1171, reg. 7(5) being repealed;
• PTM175310Lump sum allowance and lump sum and death benefit allowance: Enhancement factors: Non-residence factor: Overview – error with date at active membership period, should be 2006 to 2024 as per legislation;
• PTM145200Other authorised payments: authorised employer payments: authorised surplus payments – rate of authorised surplus payments charge amended from 35% to 25% by the Authorised Surplus Payments Charge (Variation of Rate) Order 2024 (SI 2024/335), which came into force on 06/04/24;
• PTM062210Member benefits: pensions: protected pension age: occupational and public service schemes – right to take benefits before age 55 – clarified section on ‘unqualified right’ applies to both 2010 and 2028 protected pension age;
• PTM063130Member benefits: lump sums: protection of pre-6 April 2006 lump sum rights: scheme-specific lump sum protection – overview – updated to clarify the circumstances in which a pension commencement excess lump sum can be paid.