Income Tax

Savings income and dividends are taxed at the recipients' highest tax rate.

The relevant legislation in ITA07/S16 sets out the following rules.

• If a person has savings income but no dividend income, the savings income is treated as the highest part of their total income.
• If a person has dividend income but no savings income, the dividend income is treated as the highest part of their total income.
• If a person has both savings and dividend income, the amounts taken together are treated as the highest part of their total income, and the dividend income is taken as the highest part of the combined amount.

This usually means that the first slice of a person’s income comprises earnings, pensions, taxable social security payments trading profits and income from property. The next slice is savings income (if applicable after personal savings allowance), and dividend income (after dividend allowance) is the top slice.

If you are entitled to the marriage allowance and have not yet applied, you could receive a payment of up to £1,150 from HMRC. HMRC used the occasion of Valentine’s Day to remind couples to make a claim. It is estimated that whilst 1.78 million couples have already claimed the Marriage Allowance, there are still more than 2 million eligible couples that have not made a claim.

The marriage allowance is available to qualifying married couples and those in a civil partnership where a spouse or civil partner is a non-taxpayer i.e. has an income below their personal allowance (currently £12,500). The marriage allowance facilitates the lower earning partner to transfer up to £1,250 of their personal tax-free allowance to their spouse or civil partner. The marriage allowance can only be used when the recipient of the transfer (the higher earning partner) doesn’t pay more than the basic 20% rate of Income Tax. This would usually mean that the higher earner's income is between £12,500 to £50,000 in 2019-20. The limits are slightly different if you live in Scotland.

If you meet the eligibility requirements and have not yet claimed the allowance, then you can backdate your claim to 6 April 2015. This could result in a total tax break of up to £1,150.

Please note, that back-dating claims for the tax year 2015-16 is 5 April 2020.

There are tax implications that you will need to consider if you previously left the UK to live abroad and are now returning to live and work in the UK or are considering such a move.

In most cases, if you have returned to live in the UK you will be classed as resident in the UK and you will be required to pay UK tax on your UK income and gains, and any foreign income and gains.

Your exact liability to Income Tax will depend on whether you are resident and / or ordinarily resident and / or domiciled in the UK. For example, you may not be liable to UK tax on foreign income and gains if your domicile remains outside of the UK. The domicile rules are complex.

When you return to the UK, you will need to register for Self-Assessment if required to do so. For example, if you are self-employed or have income / gains from abroad to report to HMRC.

You would not usually be required to register for Self-Assessment if you are returning to the UK to take up a job as an employee and don’t have any other income to report.

If you had moved abroad and returned to the UK after a period of less than 5 years (temporary non-residence), you may have to pay tax on certain income or gains made while you were non-resident. This doesn’t include wages or other employment income. If you were away from the UK for less than a full tax year then you will usually be liable to pay UK tax on any foreign income for the entire time you were away.

The rent-a-room scheme is a set of special rules designed to help homeowners who rent-a-room in their home. The current tax-free threshold of £7,500 per year has been in place since 6 April 2016. If you are using this scheme you should ensure that rents received from lodgers during the current tax year do no exceed £7,500. The tax exemption is automatic if you earn less than £7,500 and there are no specific tax reporting requirements.

The relief applies to the letting of furnished accommodation, for example, when one bedroom is rented out in a furnished house to a lodger. This process is becoming more widely adopted as more home owners rent out rooms online. The relief also simplifies the tax and administrative burden for those with rent-a-room income up to £7,500. The limit is reduced by half if the income from letting accommodation in the same property is shared by a joint owner of the property.

The rent-a-room limit includes any amounts received for meals, goods and services provided, such as cleaning or laundry. If gross receipts are more than the limit, taxpayers can choose between paying tax on the actual profit (gross rents minus actual expenses and capital allowances) or the gross receipts (and any balancing charges) minus the allowance – with no deduction for expenses or capital allowances.

If you have a student loan, have finished your studies and entered the workforce you must begin to make loan repayments from the April after you have finished your studies or when your income begins to exceed the annual threshold. The annual threshold amounts are currently £18,935 for plan 1 and £25,725 for plan 2. The Department for Education has confirmed that the thresholds will increase to £19,390 for plan 1 and to £26,575 for plan 2 from 6 April 2020.

The terms of loan repayment for courses of study started before 01 September 2012 are referred to as 'Plan 1', and those started after 01 September 2012, are referred to as 'Plan 2'. Repayments are deducted at a rate of 9% of income over the threshold. The threshold for postgraduate loans is £21,000 (no change for 2020-21) and repayments are deducted at a rate of 6%

The loans are also subject to varying levels of interest. The interest rates for Plan 2 repayments are based on the Retail Prices Index plus a variable rate dependent on income. The interest rates for Plan 1 repayments are significantly lower than for Plan 2 repayments.

Student Loans are part of the Government’s financial support package for students in higher education in the UK. They are available to help students meet their expenses while they are studying. It is HMRC’s responsibility to collect repayments if you are working in the UK. The Student Loans Company (SLC) is responsible for collecting the loans of borrowers outside the UK tax system.

Public finance minister Kate Forbes delivered her first Budget statement to the Scottish Parliament on 6 February 2020. This followed the shock resignation of finance minister, Derek Mackay.

This is the first time that Scotland has held a Budget before the rest of the UK. 

It was announced as part of the Scottish Budget that there would be no change in Income Tax rates and only a small change in the lower rate Income Tax thresholds. It was also announced that the higher rate threshold would be frozen at £43,430. 

The proposed Scottish rates and bands for 2020-21 are as follows:

 

Starter rate – 19%	£12,501* – £14,585
Basic rate – 20%	£14,586 – £25,158
Intermediate rate – 21%	£25,159 – £43,430
Higher rate – 41%	£43,431 – £150,000**
Additional rate – 46%	Above £150,000**

 
* Assumes person is in receipt of the Standard £12,500 UK Personal Allowance
** Personal Allowance is reduced by £1 for every £2 earned over £100,000

The figures are subject to approval by the Scottish Parliament. For the vast majority of individuals, the question of whether or not they are defined as a Scottish taxpayer is a simple one – they will either live in Scotland and thus be a Scottish taxpayer or live elsewhere in the UK and not be a Scottish taxpayer.

The furnished holiday let (FHL) rules allow holiday lettings of properties that meet certain conditions to be treated as a trade for tax purposes.

In order to qualify as a furnished holiday letting, the following criteria need to be met:

• The property must be let on a commercial basis with a view to the realisation of profits. Second homes or properties that are only let occasionally or to family and friends do not qualify.
• The property must be located in the UK, or in a country within the EEA.
• The property must be available for commercial letting at commercial rates for at least 30 weeks (210 days) per year.
• The property must be let for at least 15 weeks (105 days) per year and home owners should be able to demonstrate the income from these lettings.  
• The property must not be used for more than 155 days for longer term occupation (i.e. a continuous period of more than 31 days).
• Where there are a number of furnished holiday lettings properties in a business, it is possible to average the days of lettings for the purposes of qualifying for the 15 weeks threshold. This is called an averaging election.

There is a special period of grace election which allows homeowners to treat a year as a qualifying year for the purposes of the furnished holiday let rules where they genuinely intended to meet the occupancy threshold but were unable to do so subject to a number of qualifying conditions.

In any other cases, where the qualifying conditions are not met, the normal property income rules apply. Trading losses from a furnished holiday lettings business can only be set off against qualifying future FHL profits.

Now is a good time to check that any clients with FHL’s will achieve the relevant occupancy requirements before the end of the current tax year. This should be done to ensure that they have met the minimum qualifying requirements and are able to continue benefiting from the special FHL tax rules.

As the deadline for submitting your 2018-19 tax return has passed, now is a good time to focus on the 2019-20 tax year. It is important to carry out an annual review and ensure that you have planned properly for the current tax year. This includes exploring any tax saving strategies that are available before the current tax year ends on 5 April 2020.

A number of readily available saving strategies are mentioned below:

• Tax relief for contributions to pension schemes is given at your highest marginal rate of Income Tax. You can get tax relief on private pension contributions worth up to 100% of your annual earnings subject to the £40,000 annual cap and £1,055,000 lifetime allowances. The income and gains which arise as part of your pension savings are generally exempt from Income Tax and CGT.
• Donations to charity over the course of a tax year can add up and you should ensure that you keep a proper record of all donations made and declare them on your return. Donations that are made through the Gift Aid scheme allow for the recipient charity to claim 25p worth of tax relief on every pound donated. If you are a higher rate or additional rate taxpayer, you are eligible to claim additional tax relief on the difference between the basic rate and your highest rate of tax.
• There are business tax reliefs that may be available on certain expenses incurred in running your own business or if you use your own money to travel or buy things for your job.
• If you are married or in a civil partnership, there may be opportunities available to transfer income producing assets to your spouse or partner, especially if they pay tax at the lowest marginal rate. Of course, there are anti-avoidance provisions and wider issues of gifting assets that will need to be considered.
• Consider your CGT position especially if you are contemplating the sale of a residential property in the near future on which CGT will be due. Changes coming into effect from 6 April 2020 mean that accelerating the sale to before 6 April 2020, will extend the time you have to report the gain and pay any tax due.
• Your personal allowance is gradually reduced by £1 for every £2 of adjusted net income over £100,000 irrespective of age. This means that if your taxable income exceeds £100,000 this will result in a reduction in personal tax allowances and marginal rates of tax due may be as high as 60%.
• It is also worth remembering that whilst the amount invested in an ISA does not benefit from tax relief, the income and gains are free from most taxes including Income Tax and CGT. Withdrawals can usually be made at any time without the loss of tax relief.

If you have not considered your tax planning options for 2019-20, now is a good time to pick up the phone and speak to us. Once the end of the present tax year passes, 5 April 2020, 90% of tax planning options expire. 

Are you among the over 958,000 taxpayers that missed the 31 January 2020 filing deadline for 2018-19 Self-Assessment returns? If you missed the filing deadline you will be charged a £100 fixed penalty if your return is up to 3 months late, whether you owed tax or not for the 2018-19 year.

If you do not file and pay before 1 May 2020, you will face far greater penalties. A daily penalty of £10 per day, up to a maximum of £900 (90 days), will be charged from 1 May 2020. Further penalties will apply if your return is still outstanding for more than 6 months after the 31 January 2020 filing deadline. From 1 August 2020, you will be charged a penalty the greater of £300 or 5% of the tax due. If your return still remains outstanding one year after the filing deadline, further penalties will be charged from 1 February 2021.

You can appeal against any penalties that have been issued and HMRC has said that they will treat appeals where tax-payers have genuine excuses, leniently. However, you need to act fast and the excuse must be genuine and HMRC can ask for evidence to support any claim. An appeal must usually be made within 30 days of receipt of the penalty.

If you need help sorting out a late return, please call. It is better to resolve any late filing issues sooner rather than later in order to reduce your exposure to interest and penalty charges. We can also help you make an appeal if you have a reasonable excuse for late filing.

A recent press release by HMRC has revealed some of the oddest excuses for submitting a late tax return, that have been made during the past 10 years. The excuses ranged from the sublime to the ridiculous and included:

1. My mother-in-law is a witch and put a curse on me.
2. I was up a mountain in Wales and couldn’t find a post box or get an internet signal.
3. My dog ate the post … again.
4. I’ve been cruising round the world in my yacht, and only picking up post when I’m on dry land.
5. A DJ was too busy with a party lifestyle – spinning the deck….in a bowls club.

HMRC also revealed that taxpayers have tried to make expense claims for such random items as a caravan rental for the Easter weekend, pet food for a Shih Tzu ‘guard dog’ and a claim for £4.50 for sausage and chips meal expenses for 250 days.

Remember, the deadline for submitting your 2018-19 Self-Assessment tax returns is 31 January 2020. This is also the date that certain payments of tax are due. This includes the payment of any balance of Self-Assessment liability for the 2018-19, plus any payment on account due for the current 2019-20 tax year.

Whilst HMRC will consider reasonable excuses these are limited to exceptional circumstances. If you need support with late filing appeals, please contact us to see how we can help.