May Tax Tips & News

New Class 2 NIC rules – make sure you don’t miss out on your state pension

One of the more welcome measures in the Chancellor’s Spring Budget was the alignment of the National Insurance Contributions (NIC) thresholds for individuals with the personal income tax allowance. For 2022/23, self-employed individuals will be required to pay class 2 and class 4 NIC on profits above £11,908; from 2023/24 both class 2 and 4 NIC will be payable on profits above £12,570 per year.

However, this change brings a conundrum for those self-employed individuals who have profits below the lower profits threshold (£11,908 for 2022/23) – should those individuals make voluntary Class 2 NIC payments?

Class 2 NIC is charged at a flat rate of £163.80 per year (£3.15 per week) for 2022/23 and importantly, paying it allows the individual to maintain a full NI contribution record for the year to build up entitlement to the UK state pension and certain other state benefits.

For 2022/23, the class 2 small profits threshold of £6,725 remains in place such that those self-employed individuals who make a loss or have profits below that amount have the option of paying class 2 NIC voluntarily. However, an individual who makes profits between the small profits threshold (£6,725) and the lower profits threshold (£11,908) is not liable to pay class 2 NIC and as such will be unable to pay voluntary Class 2 NIC.

To ensure that those low-profit traders are still able to maintain their NIC record, the government has created a new class 2 NI ‘credit’ which leads to the situation for 2022/23 as follows:

Profits in the band:	Class 2 NIC payable:
Up to £6,724	Voluntary NIC: £163.80 per year
£6,725 – £11,907	NI Credit given: zero payable
£11,908 or more	Compulsory NIC: £163.80 per year

To be eligible for the class 2 NI ‘credit’ the taxpayer must report self-employed profits at least equal to the class 2 small profits threshold of £6,725 on their 2022/23 tax return.

Each additional qualifying year works out to be an extra £5.29 a week (£275.08 a year) in State Pension, based on 2022/23 rates. To gain any state pension 10 years payments must be made or credit given with the full pension entitlement being 35 years. Therefore it is important for every self-employed individual to keep a check on the number of years they have built up towards their state pension and take advice accordingly. This information can be found using this link:

https://www.gov.uk/check-state-pension

PAYE Tax Coding – is your Code right?

Many employed taxpayers receive their wage slips at the end of every week/month and assume that the figures are correct – that the Code being used is correct. As a result, taxpayers may not realize that the amount of tax deducted by the end of the tax year is wrong. If that code is 1257L for 2022/23 then that is probably right – any other code needs further investigation.

Under the PAYE ‘Real-Time Information’ scheme employers report to HMRC electronically before making any salary or wage payments using Code numbers supplied by HMRC. Under a system named ‘Dynamic coding’, codes are issued as soon as HMRC receives the notification of a ‘trigger’ from employers, pension companies, or the taxpayer themselves (via entries on their tax returns). The code will remain in place until another ‘trigger’ is applied e.g. a new employment, a new benefit-in-kind, an increase in salary, etc. In working out the code HMRC assumes that the employee will continue to receive the same level of pay for the remainder of the tax year as they have received to date.

HMRC looks to amend a code within the tax year so that there is no delay in issuing a tax refund or, if the amendment results in an underpayment of tax, the taxpayer is not faced with an unexpected bill at the year-end. To achieve this HMRC use the information they receive, estimates the amount that would have been owed at the tax year-end and include this amount as a restriction in the current year’s tax code (termed ‘in-year adjustments’). Usually, adjustments to collect an estimated underpayment for the current year will not be included in a code if issued after 5 January in the tax year; instead, that underpayment is likely to be carried forward and collected in the code in the following year.

The limit to the amount of tax that can be collected through the PAYE code is less than 50% of income and the tax liability cannot be doubled.

Importantly taxpayers should be aware that increasingly HMRC has been issuing codes to include an estimated amount of dividends or rental income based on the previous year’s tax return information. Tax on such income is not due until 31 January after the tax year-end and therefore HMRC is, in effect, collecting tax in advance. If you are aware that there will be additional tax due at the year-end you may wish for the code to remain in place as you will effectively be making payments on account of that liability. Otherwise, you may wish to contact HMRC to correct the code and put any money aside separately to pay any additional tax bill.

‘Higher earner’- should you claim child benefit?

The ‘High Income Child Benefit Charge’ applies to an individual with income over £50,000 where either they or their partner received child benefit in the tax year or someone else received the benefit for a child living with them and they contributed at least an equal amount towards the child’s upkeep. Where both partners together have income greater than £50,000, the charge is levied on the higher earner; if their income is the same, the person who receives the child benefit pays the charge. ‘Partner’ does not have to be a spouse or civil partner – the charge also applies to unmarried couples living together as spouses or civil partners.

The charge claws back 1% of child benefit for every £100 by which the ‘adjusted net income’ exceeds £50,000. Where adjusted net income is £60,000 or more, the charge is 100% of the child benefit received in the tax year. ‘Adjusted net income’ for these purposes is income after taking account of any Gift Aid donations and pension contributions and, for the self-employed, trading losses.

If income is higher than the threshold, you can either claim the benefit and pay the tax charge by 31 Jan, having completed the relevant section of the tax return or not claim the benefit.

Where the charge is equal to the full amount of the child benefit, it may seem easier not to claim it, rather than claiming only to have to pay it back. However, child benefit paid for a child under 12 comes with National Insurance credits, helping to build up entitlement to the state pension. Therefore, if you do not otherwise pay sufficient NIC credits for the year to be a qualifying year, failing to claim may adversely affect your state pension.

Let property – Claiming the full amount of mortgage interest tax relief

Personal landlords with mortgages or loans on residential lets will be aware of the restriction on the amount of tax credit relief that can be claimed on interest paid. Usually, this amount is 20% of the interest paid in any one year. However, there are circumstances where a further restriction (a ‘cap’) may apply. The ‘cap’ is 20% of the lower of the:

– interest claimable in the tax year
– profits of the business for the tax year; and
– the landlord’s adjusted total income (after losses and reliefs but excluding savings and dividend income) that exceeds the personal allowance for them

Although ‘capped’ the interest relief is not entirely lost as any amount not utilized in one year is carried forward and added to the loan interest figure of the following year.

Example

Alan is employed and earns £15,000 a year. He rents out a residential property at an annual gross rent of £20,000 with expenses of £3,800 creating a profit of £16,200. Mortgage interest of £6,000 has been paid and there was a loss brought forward of £(4,000). There is also an amount of £7,500 interest that was unable to be utilized in the previous year and has been brought forward to be included in the interest calculation for the current tax year.

The amount available as a tax credit is ‘capped’ at the lower of:

• interest – 20% of £13,500 (£6,000 + £7,500) = £2,700;
• property profits – 20% of £12,200 (£16,200 – £(4,000)) = £2,440;
• adjusted taxable income – 20% of £27,200 (£15,000 + £16,200 – (£4,000) – £12,570) = £2,926.

Therefore, the amount of tax credit claimable for loan interest relief is £2,440 with the balance of unrelieved finance costs of £1,300 (£13,500 – £12,200) available to be carried forward to the next tax year. Should the amount of tax credit reduction be calculated to be less than the tax liability, then the tax liability is reduced to nil as a tax credit cannot create a tax refund.

These rules do not apply to furnished holiday lets as the profits on such lets are treated as a business and as such interest payments are allowable in full. They also do not affect landlords with commercial properties or those properties held within a company structure.

May Questions and Answers

Q1. I am the director of my own company incorporated 15 months ago. The business has expanded such that I have taken on a bookkeeper. Whilst preparing the information required to give to my accountant at the year-end, my new bookkeeper has found a batch of sales invoices that I issued soon after registration but inadvertently did not include VAT. Can I now issue additional invoices to correct the VAT error?

A: Mistakes happen and this scenario is not uncommon such that HMRC has a set procedure for dealing with such circumstances. The invoice you give to your customers must state if it is inclusive or exclusive of VAT. Legally this means that if your invoice does not show VAT then you cannot later demand payment from the customer. Therefore, if you fail to charge or charge the wrong amount of VAT, you are liable to make up the shortfall. Any shortfall of VAT must be declared on the return for the period in which the error is discovered. If the total amount for all errors is less than £10,000, or less than £50,000, and 1% of the outputs figure (Box 6 on the VAT return), the correction is made by including an adjustment on the next VAT return. If the amount is more, notification is via completion of form VAT652.

Whether you can recover any of this underpayment from your customer will probably depend upon the goodwill of that customer and their own VAT registration status. Should your customer be VAT registered they may be willing to make the payment as they may not be worse off if payment is made. A non-VAT registered customer will have an extra bill to pay although they may be able to deduct that payment from their profit for tax purposes if they are in business.

Q2. In 2020 I entered into an agreement to purchase the leasehold of a commercial property that was under construction in exchange for a premium of £500,000. The agreement stated that a 20% deposit was to be paid plus a 10% stage payment 12 months later with the balance on completion. Unfortunately, my business folded due to Covid and I defaulted on the later stage payment. This was deemed a breach of the agreement, the contract was never completed and the builder kept the deposit. Can I claim a capital tax loss in respect of the lost deposit?

A: Unfortunately not – a capital loss can only be claimed where there is a disposal, or deemed disposal, of a chargeable asset. In this case, the terms of the contract were not adhered to, so you could not take possession of the underlying asset so no loss can be claimed.

Q3. I live within walkable distance of a train station with a direct route into London. I work locally and drive to work so the drive is not used in the daytime. What are the tax implications if I rent out the drive?

A: Under the Property Tax Allowance rules, if total income from letting out the drive is less than £1,000 in the tax year, the whole amount is tax-free and does not need to be reported to HMRC.

Where property income exceeds £1,000 in the tax year, you have one of two choices – either:

– deduct the £1,000 allowance from the receipts and pay tax on the excess; or
– work out the profit or loss in the normal way.

The option as to which is the more beneficial will depend on the level of the expenses.

If receipts exceed expenses, but expenses are less than £1,000, the best result is to claim the property allowance and pay tax to the extent that income exceeds £1,000. If expenses are more than £1,000, the best result will be obtained by working out the profit in the usual way, deducting allowable expenses from receipts.

May Key tax dates top

1 – Submission of Annual accounts to Companies House and payment of Corporation Tax for accounting periods ending 31 July 2021

1 – VAT fuel scale charge: new rates apply from the next VAT period beginning on or after 1 May 2022

6 – Electronic VAT return submission and payment due for the quarter ended 31 March 2022

19/22 – PAYE/NIC, student loan, and CIS deductions due for the month to 5 May 2022

31 – Submission of Corporation Tax returns: 31 May 2021 year-end

31 – VAT annual accounting: 31 March stagger VAT return and balancing payment

31 – P60: issue to employees