October 2024 Tax Tips & News

Mounting speculation of Inheritance Tax changes to come

As speculation mounts that the new Government will soon make changes to raise more money for the Treasury via Inheritance Tax (IHT), it seems we’re already set for the highest receipts on record this year.

The latest HMRC stats show IHT receipts for April 2024 to August 2024 are £3.5 billion. That’s higher by £0.3 billion compared to the same period last year.

With the Budget fast approaching on 30 October – the new Chancellor Rachel Reeves’ first chance to stamp her authority on the public finances – there’s a lot of chatter about IHT being one of the headliners.

What exactly might change? Could the existing favourable treatment for agricultural and business property come to an end? At the moment these types of properties gain tax relief of either 50% or 100% of the value of the assets.

Another element that may be tinkered with concerns what is sometimes referred to as a ‘double benefit’ loophole surrounding IHT and CGT and revaluation on death. Often, when an asset is passed down to a beneficiary, its value is raised to market value. In turn, that cuts the amount liable to CGT.

Some political commentators have also suggested that residential nil rate band may also be tweaked. Will the Government cut or lower it? Right now, if homeowners leave their main home to their children, they can increase their nil rate band by up to £175,000, or £350,000 if they are a couple. Gifts made to individuals could also be another area where the Treasury tinkers. At the moment these are exempt from IHT seven years before a person dies.

The previous two tax years have set a record high for IHT receipts with £7.5bn in 2023/24 and £7.1bn in 2022/23.

A new flat rate for pension tax relief? Budget changes expected

Amid the frequently repeated references to the £22bn ‘blackhole’ in the public finances and warnings from the Prime Minister of a ‘painful’ Autumn Budget, it would appear that tax relief on pensions may be another area the Government seeks out to raise money.

We know Labour have had their eyes on pensions reforms. Their manifesto for the General Election stated: ‘We will also undertake a review of the pensions landscape to consider what further steps are needed to improve pension outcomes and increase investment in UK markets.’

So, will we discover more about the scope and detail of the review and what it means for tax relief on Budget day?

And one key question many pension and tax experts are asking:  will the Chancellor scrap 25% pension tax-free cash?

It’s currently a popular perk that most retirees can take advantage of.

But, as Rachel Reeves looks for ways to increase revenue for the Treasury, it could be a target. Perhaps it will be reduced to 20% or axed completely?

Could the amount of tax-free cash also be limited much more? Currently there’s a maximum of £268,275 you can take tax free.

One pensions guru – the former pensions minister Steve Webb – told the Telegraph newspaper that there is ‘widespread concern’ among the public about the potential changes.

The report claims ‘Britain’s pension industry is facing a stampede of savers attempting to withdraw lump sums from their retirement pots.’

Mr Webb said: ‘Not unreasonably, those who are aged 55 or over are tempted to ‘crystallise’ their pensions now to get hold of their 25pc tax-free cash, and this surge in interest is likely to have put pressure on pension schemes and pension providers.’

In terms of pension tax relief, if the Chancellor took the option to reduce it to 20% that would mean be no change for basic-rate taxpayers. Not so for higher and additional-rate taxpayers, however. It would represent a big cut for them as they currently can get 40% and 45% relief on their pension contributions.

Some commentators have suggested there could be a flat rate of 30% instead.

Steven Cameron, Pensions Director at Aegon, wrote: ‘Moving to a flat rate of 30% would be good news for basic rate and non-taxpayers who would get an extra Government top-up every time they contributed to their pension. But this would be at the expense of higher and additional rate taxpayers who would get a less generous top-up than at present.’

With so many permutations on the table, we’ll have to wait to see what unfolds. In the meantime, if you need help understanding tax relief on your pensions or retirement planning guidance, give our team a call.

Loophole for fund managers that chancellor called ‘absurd’ set to be closed

One area of potential tax reform that we know we should expect to hear more about on Budget day surrounds the tax treatment of ‘carried interest’.

This tax break enables private equity fund managers to pay a reduced rate of tax on their earnings. It is, as the Financial Times describes, a ‘share of the overall profits of a private equity fund paid out to the fund’s investment managers’.

The Chancellor Rachel Reeves has been quoted in the past as calling it ‘absurd’. And in the Labour General Election Manifesto, the party claimed that it would raise £565million through closing the ‘loophole’.

If you haven’t heard of this before, this is how the Government describes it: ‘Carried interest is a form of performance-related reward received by fund managers, primarily within the private equity industry. Unlike other such rewards, carried interest can currently be taxed at Capital Gains Tax (CGT) rates of 18% and 28%.’

The Government has said to ‘expect a further announcement at the Budget’ on this subject. It follows a call for evidence – or consultation – launched in July and now closed.

This document, in a section called ‘the case for reform’, elaborated on the reasons why the Government is focusing on it and what it will do, saying: ‘The Government believes that the current tax regime does not appropriately reflect the economic characteristics of carried interest and the level of risk assumed by fund managers in receipt of it. As a result, the Government will be taking decisive action.’

There were three main areas that the Government wanted to hear views on:

– How can the tax treatment of carried interest most appropriately reflect its economic characteristics?
– What are the different structures and market practices with respect to carried interest?
– Are there lessons that can be learned from approaches taken in other countries?

Seasonal staff warning from HMRC

Many businesses across the UK have peaks and troughs in their trade, depending on the season. And some, as a result, have to take on more helping hands to cover the workload just during that particular spell.

Businesses in this position have been reminded by HM Revenue and Customs not to forget about the matter of workplace pensions for temporary staff they’re hiring. Particularly because it could lead to financial penalties if they don’t comply correctly and in time.

In an online notice, HMRC told employers hiring staff for a limited period: ‘you must check if these workers are eligible for automatic enrolment into a workplace pension. Employers must individually assess any seasonal or temporary staff every time they pay them. This includes staff with variable hours and pay, whether they are employed for a few days or longer.’

Furthermore, officials warned about sanctions for companies who don’t abide by the pension rules: ‘Employers who fail to comply with their workplace pensions’ duties may receive a warning notice with a deadline to comply. Those who continue to fail to comply risk a fine.’

Employers were also advised that they can use ‘postponement to delay assessing’ employees who will be brought on board for under three months. HMRC added: ‘This pauses the duty to assess those staff until the end of the three-month postponement period.’

 

October Questions and Answers

Q: I earn £62,000 and have been offered a bonus that would increase my total income to £95,000. How will this affect my tax, and are there any higher tax bands I should be aware of? Am I right that bonuses are taxed more than normal income?

A: No, bonuses are taxed just like your regular salary. It’s not taxed at a higher rate but neither is there an exemption for them. So, if you get a bonus, it’s added to your total income and taxed at the same rates.

When your income rises to £95,000, here’s how it will affect your tax:

You’ll pay no tax on the first £12,570 due to the personal allowance. You’ll then pay 20% tax on the next £37,700 (the portion of income between £12,570 and £50,270). Any amount between £50,270 and £95,000 will be taxed at 40%.

Since your income is under £100,000, you won’t lose any of your personal allowance. If your income were to exceed £100,000, you would start losing your personal allowance, thereby increasing your effective tax rate. The additional 45% tax rate applies only to income over £125,140.

Q: I’m a long-term non-domiciled resident in the UK – how will the 2025 changes impact my tax status?

A: Firstly, you’re right to say there are changes coming next year that will affect you and any others who are classified as non-domiciled. The issue of ‘non-doms’ – referring to a person’s tax status, not nationality, citizenship or resident status – has been highlighted politically for several years. Former Chancellor Jeremy Hunt surprisingly announced changes at the Budget earlier this year, in an attempt to steal Labour’s thunder after they had signalled they would scrap the status. The new Government is going ahead with the plans Mr Hunt laid out, with a few changes. The existing system will be replaced by a new 4-year foreign income and gains (FIG) regime for individuals who become UK tax resident after a period of 10 tax years of non-UK residence.

The rule changes set for April 2025 will significantly alter your tax situation. Currently, you may be taxed only on UK income and any foreign income you bring into the UK (remittance basis). However, from 2025, you will only be able to use this remittance basis for the first four years of UK residence. After that, all your worldwide income will be taxed, regardless of whether it’s remitted to the UK. This will likely increase your tax liability substantially, so it’s important to review your financial arrangements now.

It’s also worth noting that the previous Government’s plan offered a 50% reduction in foreign income subject to tax for individuals who lose access to the remittance basis in the first year of the new regime. But the new Government has axed that element.

And for any UK resident individuals ineligible for the new scheme or who choose not to make a claim for a tax year will be ‘subject to Capital Gains Tax (CGT) on foreign gains in the normal way’, the Government has said.

Q: My company is considering paying me in cryptocurrency. What are the tax implications for me?

A:If your employer pays you in cryptocurrency, it’s treated as taxable income by HMRC. This means you’ll owe Income Tax and National Insurance Contributions (NICs) just as you would for regular salary payments.

However, the type of cryptocurrency is important because it can be either classified as a ‘readily convertible asset’ (RCA) or not.

It will be deemed RCA if the crypto can be easily exchanged for cash. In this case, it will be subject to Income Tax and National Insurance Contributions (NICs) via PAYE, just like regular salary. The value of the cryptocurrency at the time of payment will be calculated in GBP, and tax will be deducted via PAYE.

However, if the cryptocurrency is not considered an RCA, the responsibility to report and pay the appropriate tax to HMRC may fall to you rather than your employer. PAYE deductions might not apply. So, tax is still owed, it’s just a question of how and when it is paid. It’s a question of the method of collection (PAYE vs. self-reporting) that differs.

Later, if you decide to sell or convert the cryptocurrency, you may also be liable for Capital Gains Tax (CGT) if its value has increased. Cryptocurrency’s volatility means it’s important to carefully consider how these tax liabilities may fluctuate before agreeing to be paid this way.

October Key Dates

5^th

– Self-Assessment Registration Deadline: if you’ve become self-employed or earned other untaxed income during the 2023-24 tax year, you must register for self-assessment by this date to avoid penalties.

19^th

– For employers operating PAYE, this is the deadline to send an Employer Payment Summary (EPS) to claim any reduction on what you’ll owe HMRC

22^nd

– Deadline for employers operating PAYE to pay HMRC. This is also the quarterly deadline for businesses that pay per quarter.

30^th

– The Chancellor will announce the first Budget under the new Government

31^st

– Self-Assessment Paper Tax Return Deadline: Last day for submitting a paper version of your self-assessment tax return for the 2023-24 tax year (online submissions have until 31 January 2025).
– Corporation Tax Returns are due for companies with year-end of 31 October