Compass Accountants Nov 2019 Newsletter- pg 1 Newsletter - November 2019 In this month’s edition… Gifts to spouses and civil partners ● Beware of triggering an IHT bill on Christmas gifts The inter-spouse exemption protects gifts ● Self-employed - How to calculate your payments on between spouses and civil partners. account Consequently, gifts of any value can be given to ● Zero charge for zero emission cars a spouse or civil partner without worrying about ● Can we deduct entertaining expenses? ● Directors’ loans - Beware of ‘bed and breakfasting’ the inheritance tax implications. ● Introducing - The S.S Shieldhall and Chief Engineer, Graham Macenzie Annual allowance ● Christmas - Guidance for employers. Everyone has an annual allowance for inherit- ance tax purposes of £3,000. The annual allowance enables you to give away £3,000 eve- Beware of triggering an IHT bill on ry year in assets or cash, in addition to gifts Christmas gifts covered by other exemptions, without it being added to the value of your estate. When deciding what to give as Christmas gifts, You can also carry forward the annual the possibility of triggering an unintended exemption to the following year if it is not used, inheritance tax liability is not one that so if you did not use it in the last tax year, you can immediately springs to mind. However, there are make gifts of up to £6,000 this year without traps that may catch the unwary. having to worry about inheritance tax. However, any unused allowance can only be carried Income or capital forward to the following tax year, after which it is When making a gift, it is important to ascertain lost. whether the gift is being made out of income or from capital. There is an inheritance tax Small gifts exemption for normal expenditure from income. The small gifts exemption enables you to make To qualify, the gift must be made regularly and gifts of up to £250 a year to as many people as only from surplus income. It is important that after you like without having to keep a tally for making the gift you have sufficient income left to inheritance tax purposes. However, the same maintain your usual lifestyle. To avoid unwanted person cannot benefit from a small gift of £250 in questions, it is a good idea to set up a regular addition to the annual gifts allowance. pattern of giving and keep records to show that the gifts were made from income. Wedding gifts If a family wedding is on the horizon, you can A gift that is made from capital – for example, take advantage of the wedding gifts exemption to from the proceeds from the sale of a property or make further gifts. To qualify, the gifts must be a gift of a valuable antique – will reduce the made before the wedding not afterwards. The value of the estate. Unless the gift falls within the exempt amounts are set at £5,000 for gifts to a ambit of another exemption, the gift will be a child, £2,500 for gifts to a grandchild or potentially exempt transfer (PET) and will be great-grandchild and at £1,000 for a gift to taken into account in working out the inheritance another relative. tax due on the estate if you die within seven years of making the gift. Compass Accountants Nov 2019 Newsletter- pg 2 Self-employed – How to calculate your payments on account The deadline for filing the self-assessment tax Example return for 2018/19 is 31 January 2020. This is also Richard is a sole trader. In 2018/19 his profits the date by which any outstanding tax for 2018/19 from self-employment were £30,000. He has no must be paid and, where payments need to be other income. made on account, the date by which the first payment on account of the 2019/20 liability must His income tax liability for 2018/19 is £3,630 (20% be made. (£30,000 - £11,850)) and his Class 4 National Insurance liability is £1,941.84 (9% (£30,000 - What is a payment on account? £8,424). As the name suggests, a payment on account is an advance payment towards a taxpayer’s tax His combined tax and Class 4 National Insurance and Class 4 National Insurance bill. Where pay- liability is thus £5771.84. ments on account are due, the tax is payable in two instalments on 31 January in the tax year and As this is more than £1,000, he must make on 31 July after the tax year rather than in full in a payments on account of the 2019/20 tax year of single instalment of 31 January after the tax year. £2,785.92 on 1 January 2020 and 31 July 2020. Each payment is 50% of the previous year’s As the payments on account are based on the liability of £5,771.84. If the liability for 2019/20 is previous year’s liability, it is not an exact science more than £5,771.84, the balance must be paid – there may be more tax to pay or the taxpayer by 31 January 2021, together with the Class 2 may have paid too much. Any balancing National Insurance for 2019/20. payment must be made by 31 January after the end of the tax year. If the taxpayer has paid too Beware fluctuating years much, the excess will normally be set against the Where the tax and Class 4 liability is under £1,000 next year’s payments on account or refunded if one year but not the next, the payments can none are due. fluctuate widely – this may hit the taxpayer hard. When must payments on account be made? Example Payments on account must be made where tax Tim has a tax and Class 4 National Insurance and Class 4 National Insurance for the previous liability of £900 in 2017/18. As a result, he is not tax year was £1,000 or more, unless at least 80% required to make payments on account for of the tax owed has been deducted at source, for 2018/19. However, 2018/19 is a good year and example under PAYE. his tax and National Insurance liability is £4,000. As payments on account were not made, the Payments on account are not required when the amount is due in full by 31 January 2020. Also, tax and Class 4 National Insurance bill for the because it is more than £1,000, he must make previous year was less than £1,000. payments on account for 2019/20. Calculating the payments on account As a result, he has to pay £6,000 on 31 January Each payment on account is 50% of the previous 2019 – the full liability for 2018/19 (£4,000) and year’s tax and Class 4 National Insurance the first payment on account of £2,000 (50% of liability. £4,000) for 2019/20. The second payment on account for 2019/20 of £2,000 is due by 31 July Class 2 National Insurance contributions are not 2020. taken into account in calculating the payments on account and must be paid in full by 31 January Reduce payments on account after the end of the tax year. If the taxpayer knows that income in the current year will be less than the previous year, they can ask HMRC to reduce the payments on account. However, interest is charged on the shortfall if the payments are reduced below the level they should be. Compass Accountants Nov 2019 Newsletter pg 3 Zero charge for zero emission cars From 6 April 2020, the way in which carbon In 2020/21, the appropriate percentage is 0% so dioxide emissions for cars are measured is there is no tax or Class 1A National Insurance to changing – moving from the New European pay. This is a significant reduction compared to Driving Cycle (NEDC) (used for cars registered 2019/20. prior to 6 April 2020) to the Worldwide Light Testing Procedure (WLTP) for cars registered In 2021/22, the charge is 1% of the list price, on or after 6 April 2020. equal to £320, on which the tax is £128 (assuming a 40% tax rate) and the Class 1A For an introductory period, the appropriate National Insurance is £44.16. percentages for cars registered on or after 6 April 2020 are reduced – being two percentage From 2022/23 the charge is 2% of the list price – points lower than cars with the same CO2 equal to £640. emissions registered prior to 6 April 2020 for 2020/21 and one percentage point lower for Not quite zero emissions 2021/22. From 2022/23 the appropriate It is also possible to enjoy a company car percentages are aligned regardless of which tax-free in 2020/21 if it is registered on or after 6 method is used to determine the emissions. April 2020, has emissions of between 1 and 50g/km (measured under the WLTP) and an Zero emission cars electric range of at least 130 miles. As part of the transition, the appropriate percentage for zero emission cars is reduced to Go electric 0% for 2020/21 and to 1% for 2021/22. This The benefits of choosing electric cars from a tax applies regardless of when the car was perspective, as well as from an environmental registered. one, are significant. The charge was originally set at 2% for 2020/21 and 2021/22, and will revert to this level from 2022/23. Impact Electric company car drivers were already set to enjoy a tax reduction.