Looking Forward To Tax Changes In 2024

With Covid, several Prime Ministers and Chancellors and the run up to a general election, changes to the tax system have been numerous and we can expect more in 2024.

What can we see on the horizon and how should you react?

HMRC Resources

Don't underestimate the impact of limited resources on HMRC's policy and behaviour. 

Recent changes include taking all PAYE earners up to £150k, with no other taxable income, out of the tax return system and setting default taxable income for all sole traders and partnerships regardless of size to be based on cash. 

A few years ago these would have been unthinkable explained mostly as a way of saving HMRC time. 

How might you react?

PAYE Income Up to £150k

- It's common for payments into employer pension schemes to receive only 20% income tax relief via direct payment by HMRC into your pension scheme. We see many cases where even 40% taxpayers aren't claiming the additional 20% relief. With earnings over £100k the additional relief is 40% and over £125k it's 25%, which are often missed. You may be encouraged to claim this through your tax code but they're hard to understand and we see many errors here too.

Advice: Continue to prepare a tax return

Cash Accounting 

- So much to say! Essentially, this ignores all the good things accountants learn to help you monitor your business. Yes, for many small businesses, there's not too much difference between cash and the accountants accruals basis, however, if you want to make true comparisons between each year or more often, you should check further.

For example, if you pay for materials, do the work for a customer and raise invoices not paid before 31 March, you'll have delayed tax and national insurance on the unpaid invoices. But what about the next year? What if all invoices are paid before 31 March? You'll be taxed on the previous year's delayed income and this year's cash income.

If your profits are near £50k you may tip over and then start losing child beneft as well as pay 40% income tax instead of 20%.

How will you know what your actual margins are? Successful businesses track their margins ensuring increased costs are passed on and whether they should do better with suppliers, or change their model.

Advice: Choose accruals accounting 

Yes, accountants would say this wouldn't they? However, we see so many errors and problems which we genuinely want you to avoid and it's in our DNA to help you run a successful business and keep you as tax efficient as possible.

Sole Trader/Partnership or Limited Company?

Increased dividend tax and corporation tax but lower self employed national insurance, together with the temptation of cash accounting makes being a limited company less attractive than it used to be.

All factors need to be taken into account, not the least of which is the ability with a limited company to control your income tax bill and hang onto all your child benefit or personal tax free allowances!

Advice: Consult an accountant who lives and breathes these things.

Pension Contributions

The increase in the annual gross contributions of £60k together with the removal of the lifetime limit, may be reversed or amended by a Labour government.

How might you react?

- You may want to make higher contributions than normal to take advantage of these generous thresholds while you can. In particular if your limited company is likely to pay 25%/26.5% corporation tax, employer pension contributions save more corporation tax than in previous years.

Advice: Check your personal and company cash and profits to identify whether you can afford and should make pension contributions. Take IFA advice as always, who should also work with your accountant.

Capital Gains Tax

The reduction in the tax free annual exemption from £12,300 to £3,000 from April 2024, costs over £5k for residential property jointly owned by higher rate taxpayers.

If Labour wins the general election you might expect an increase in rates possibly from 10%/20% to the residential property rates of 18%/28% or even higher for all assets. 

How might you react?

- The tax free annual exemption is already down to £6k. If you're about to sell an asset sometime in March you may want to ensure you exchange before 5 April 2024, as one day's difference might cost you a maximum of £1,680 for a jointly owned residential property.

Advice: If you consider Labour will form the next government and likely to increase capital gains rates, you may want to consider bringing forward asset disposals. Naturally, never forget commercial considerations such as how much more or less you might receive if the market moves for or against you.

Inheritance Tax

Continuing rumours suggest the current government wants to reduce inheritance tax. Perhaps something will be announced in the Budget on 6 March 2024 such as higher tax free thresholds or a reduction in rates. It's a strange one where it's more unpopular than it's impact would suggest, that is, not many people actually pay any inheritance tax.

How might you react?

- Rumours and speculation really aren't a basis for good tax planning and never more so with inheritance tax as often the assets are very valuable! There may be a favourable change under the current government after which a Labour government waters it down. 

Advice: Ensure any inheritance tax reliefs are as secure as possible such as business property relief, review your Will in conjunction with inheritance tax considerations and consult your accountant/solicitor/IFA, ideally all three! - on whether early gifts are likely to be the best defence against inheritance tax and whether existing reliefs such as expenditure out of normal income could be utilised.

In Summary: Be wary of being taken out of the tax return system, check the impact of 'simplifications' and don't overreact to speculation. 

Wishing you all the best for 2024.

Autumn Statement 2023 - More Drip Than Waterfall

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