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Will Scottish taxpayers pay less?
From 5th April 2016 a new Scottish Rate of Income Tax (SRIT) will come into force in Scotland. Although is it currently anticipated that taxpayers in Scotland and the rest of the UK will pay the same rate of tax next year, it is likely that the regions will diverge in coming years as more power is devolved to Scotland.
Who is Scottish?
The criteria applied to determine Scottish taxpayers are based on where the individual lives, and not where they work or their feeling of national identity. All of the following would be classed as a Scottish taxpayer:
- WILLIES (Working In London Living In Edinburgh)
- Scottish Parliamentarians (regardless of where they live)
- People living and working in Scotland
- People living in Scotland and working across the border in Carlisle / Newcastle etc
HMRC are responsible for assessing whether or not someone is a Scottish taxpayer. Anyone that HMRC deems to be Scottish based on their principal residence will be issued with a new S tax code. Your payroll software should automatically process the SRIT for anyone with a new S code. As with student loans, it is not for the employer to use their own judgement about applying the SRIT. If an employee disagrees with their tax code, it for the employee to resolve this with HMRC. Employers must act on instructions from HMRC.
Do English employers need to do anything?
Even if your business operates exclusively in England (or any other region of the UK outside Scotland) you will need to comply with regulations as they apply to any of your employees who live in Scotland. Surprisingly, there is no legal obligation to inform HMRC if you move and although employers really ought to know where their employees live, it might not always be obvious, especially if an employee has more than one residence.
It is common to think that any of the criteria below qualify for Scottish taxpayer status, but it isn’t the case.
- National identity
- Place of work
- Where income is generated (eg property income in Scotland)
- Regular travel to Scotland
Will Scots benefit?
The costs of the SRIT are to be borne by the Scottish Government. HMRC currently estimates that the total costs of implementing SRIT will be in the range of £30 million to £35 million over the seven-year period from 2012-13 to 2018-19. This is split between IT expenditure of between £10 million and £15 million, and non-IT expenditure of £20 million. The additional annual costs of operating the SRIT will be between £2m and £6m. The lower estimate corresponds to a SRIT where Scots pay the same rate as the rest of the UK. If the SRIT diverges from the neutral rate of 10%, the costs rise in administering the tax regime in the UK including pensions, gift aid and disputes over residence.
Why is the SRIT being introduced?
Scotland as a whole is likely to be worse off as any difference in tax raised is offset by an adjustment to the block grant from Westminster. It is estimated that 2.6m people will be issued with an S tax code. The annual running costs are therefore less that £3 per taxpayer but it is a valid question to ask if it is a good use of taxpayer’s money if tax rates are the same across the UK. It is anticipated that after additional powers are introduced in 2017 the SRIT could be more progressive, meaning that wealthier individuals would pay a higher proportion of tax. For anyone thinking about their residence status and still had a choice, now is a good time to get advice on the best situation for you!
For more information on the SRIT and for guidance on operating your payroll scheme, please contact Alterledger.
You pay National Insurance contributions to qualify for certain benefits including the State Pension.
You pay National Insurance if you’re:
- 16 or over
- an employee earning above £155 a week
- self-employed and making a profit of £5,965 or more a year
The Office of Tax Simplification is currently beginning a process of looking at merging National Insurance with Income Tax.
ACCA’s head of tax Chas Roy-Chowdhury warned that an alignment of NI and income tax rates would be crucial prior to a merger taking place.
Whilst This is Money reported…
Middle and high earners could see their tax bills jump under radical plans to merge income tax and National Insurance, a tax expert has warned.
People taking home £50,000 a year could be £230 worse off, but low earners on £20,000 would save more than £530, and those on £30,000 would come out around £380 ahead, according to snap research by Tilney Bestinvest on the potential tax shake-up.
Chancellor George Osborne wants to reduce ‘complexity’ in the tax system to make it clearer exactly how much people have to cough up, and has ordered the Office of Tax Simplification to see if there is a case for change.
The government has already announced a consultation on the pension tax relief system, and I believe that a merger of income tax and NI would likely result in the floated idea of a pension with ISA-like tax treatment. This is because at present, a basic rate taxpayer gets 20% tax relief on pension payments but surely this would increase to 32% under a combined system. It seems illogical to increase tax relief at a time when they are actually trying to reduce the cost to the Exchequer. An equal tax treatment of ISAs and pensions could be a prelude to merging the two, potentially drawing ISAs into some form of lifetime allowance.
Childcare vouchers to be withdrawn for new employees
The existing benefits available in the form of childcare vouchers to employees will be withdrawn to new entrants in the Autumn of 2015. The current scheme saves National Insurance contributions for both employers and employees. Employees also save income tax.
New scheme to start in Autumn 2015
The new scheme for childcare vouchers will not be as good for many employees who currently benefit from the current scheme, but where both parents work and are self employed, they can get the government to pay £2,000 towards registered childcare.
How do I set up childcare vouchers?
Childcare vouchers are set up through your payroll scheme and must be available to all eligible employees to receive the tax benefit.
Alterledger can help
For more information on saving employer’s national insurance and preparing for changes to childcare vouchers, contact Alterledger or visit the website alterledger.com.
I am pleased to present you with the main points from yesterday’s budget.
1). Employer’s will be given a refund on the first £2,000 of national insurance they pay.
Comment: This is a real help because it will take £2k off the payroll bill for existing small employers with less than 250 employees, and removes the most common reason that why hear as to why clients are reluctant to take on their first employee.
In summary you could take on:
• one £22k employee, save the £2k NI and reduce your corporation tax bill by £4,400
• four trainees on minimum wage, save the £2k NI and reduce your corporation tax bill by £9,700
2). Single rate of 20% corporation tax for the first time since 1973.
Comment: Clients who trade as a limited company with the owners on the payroll continue to pay significantly less corporation tax than the income tax that would otherwise be due by the same business operating as a sole trader.
The difference for a business with an income of £30k is a £1,961 reduction to their 2014-15 tax bill.
3). The rate at which people start paying income tax rises to £10,500 from April 2015 (the allowance was already increased to £10,000 from next month in last year’s budget)
Comment: When the government came to power the starting rate for tax in 2010-11 was £6,475. This move has done much to not only take a whole bracket of people out of tax completely, and also reduces the amount those who do pay tax by £805 per year.
4). The point at which higher rate (40%) tax applies is increased to £41,865 from next month and £42,285 from April next year.
Comment Clients who are high rate earners will see a modest £83 reduction to their tax bill this year and £167 next year. For those clients who operate as a limited company the extra tax free dividend they can take will result in an additional tax saving or £188 per year.
5). The Help to Buy scheme where the government offers a 20% deposit to a first time buyer purchasing a new house costing less than £600k, will continue until 2020.
The purchaser is asked to raise a 5% deposit with the government providing a 20% loan which is interest free for the first 5 years, with the option to defer repaying it until the owner sells.
Comment: We have more clients in the construction industry than all the other sectors combined so this is clearly welcome news for them as well as the bigger firms where shares in Persimmon rose by 6% following the announcement, and those in Bovis and Taylor Wimpey by 4% and 3.4% respectively.
6). Inheritance tax will be scrapped for members of the emergency services
Comment: Useful if your estate is worth more than £325,000
7). Cash and Stock / Shares ISA’s to be merged from July with a new tax free allowance of £15,000 per year (currently £5,760 for a cash ISA).
Comment: While this is welcome news for savers the interest rates on ISA’s remain so low (1.5% for instant access / 2.5% for fixed three year deals) that it is only worth putting significant money into them if you have already paid off your mortgage where the equivalent interest savings are considerably greater.
8). A new saving scheme exclusively for those over 65 (The Pensioners Bond) will be introduced with interest rates of 2.8% for instant access & 4% if fixing for three years.
9). Tax breaks on businesses investing in capital items will be increased from £250k to £500k.
Comment: This costs the government £2bn so it is right that it is a significant measure in encouraging our clients to invest in their business for the future. Capital items can include new plant, machinery, equipment, premises renovations, commercial vehicles and cars with a CO2 rating of under 95g/km.
10). The current 10% income tax band on savings income up to £2,790 will be replaced with a new tax free limit of £5,000.
Comment: We fail to see how this provides any help to savers because if you have any other income then you lose the entitlement to claim reduced income tax on your savings income. The only positive is that in the rare instance where the saver has no other income (?) they can now apply to their bank to receive the interest without the usual 20% deduction of tax, therefore saving them the need to file a tax return.
11). Small Business Rate Relief has been extended to April 2018; under the scheme small businesses with a rateable value of £6,000 or less can get 100% relief, the relief is scaled down to zero on rateable values of £12,000 and there is a lower multiplier on rates between £12,001 and £17,999.
Comment: this is a welcome help for clients with their own business premises and those thinking of taking the step up.
12). Pensions Reform
At the moment, anyone who saves a decent sum into a defined contribution pension (one where your pension depends on how much your savings are worth) can cash in 25% of the fund value from the age of 55 but then usually has to buy an annuity with the remaining 75% lump sum when they come to actually retire. An annuity is effectively a bond which provides a retirement income for the rest of your life.
Mr Osborne announced a plan for a new law that will get rid of the requirement to buy an annuity entirely. Instead, people will be able to take the lump sum as cash and organise their own spending.
It is important to note that anyone who already receives an annuity will not be able to change that existing arrangement under these planned new rules. Also people who are in defined benefit or final salary pension schemes will not see any change.
Comment: For individuals with modest pension funds these new rules create a new way of accessing their money in full when they retire. But since the proposal is to levy income tax on the value of any lump sum you take this would mean anything you receive during a single year that is in excess of £41,865 would be subject to 40% tax…. For this reason some spreading out of the draw down to utilise your annual basic rate allowances will still be required, and it may well be that this is best achieved through the use of an annuity still.
13). Parents paying 80% of childcare costs of up to £10,000 per child, aged up to 12, to a registered provider will get the remaining 20% from the government tax-free from September 2015.
Comment: The government is hoping that this will go some way to appeasing those earning more than £50k per year who lost their entitlement to state child benefit last year.
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