Childcare top-up to cover summer activities

As the school holidays fast approach, many parents face having to organise extra school holiday childcare over the summer months. 

HMRC is reminding working families that the Tax-Free Childcare (TFC) scheme can help if you have children aged up to 11 years old (17 for those with certain disabilities). The TFC scheme helps support working families with their childcare costs and can be used to pay for accredited holiday clubs, childminders or sports activities during the school holidays. There are many registered childcare providers including school, football, art and tennis clubs signed up across the UK. Parents can pay into their account regularly and save up their TFC allowance to use during school holidays. 

The TFC scheme provides for a government top-up on parental contributions. For every £8 contributed by parents an additional £2 top up payment will be funded by Government up to a maximum total of £10,000 per child per year. This will give parents an annual savings of up to £2,000 per child (and up to £4,000 for disabled children until the age of 17) in childcare costs. 

The TFC scheme is open to all qualifying parents including the self-employed and those on a minimum wage. The scheme is also available to parents on paid sick leave as well as those on paid and unpaid statutory maternity, paternity and adoption leave. To be eligible to use the scheme parents will have to be in work at least 16 hours per week and earn at least the National Minimum Wage or Living Wage. If either parent earns more than £100,000, both parents are unable to use the scheme.

HMRC’s Director General for Customer Services, said:

‘We want to help kids stay active this summer, whether they are going to summer holiday clubs or a childminder. A childcare top-up will go a long way towards helping parents plan and pay for summer activities to keep their kids happy and healthy.’

Replacement of domestic items relief

The replacement of domestic items relief has been in place since April 2016. The relief allows landlords to claim tax relief when they replace movable furniture, furnishings, appliances and kitchenware in a rental property. The allowance is available for the cost of domestic items such as free- standing wardrobes, curtains, carpets, televisions, fridges and crockery.

The amount of the deduction is based on:

  • the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent); plus
  • the incidental costs of disposing of the old item or acquiring the replacement;
  • less any amounts received on disposal of the old item.

There is an important distinction when deciding if a new item represents a replacement or an improvement. Where the new item is an improvement on the old item the allowable deduction is limited to the cost of purchasing an equivalent of the original item.

HMRC’s guidance provides the example of replacing a sofa with a sofa bed and is clear that if a new sofa would have cost you £400 but a sofa bed cost you £550, you could only claim the £400 as a deduction and no relief is available for the £150 difference as this is an 'improvement'.

However, if a replacement item is for a reasonable modern equivalent for example a new energy efficient fridge replacing an old fridge this is not considered an improvement and the full cost of the new item is eligible for relief.

How are dividends taxed?

The dividend tax allowance was first introduced back in 2016 and replaced the old dividend tax credit with an annual £5,000 dividend allowance with tax payable on dividends received over this amount. The tax-free dividend allowance was reduced to £2,000 with effect from 6 April 2018 and has remained fixed at that level.

The tax rate for dividends received more than the dividend tax allowance are taxed at:

  • 7.5% for basic rate tax payers
  • 32.5% for higher rate tax payers, and
  • 38.1% for additional rate tax payers.

Dividends that fall within your Personal Allowance do not count towards your dividend allowance and you may pay tax at more than one rate.

If you receive up to £10,000 in dividends you can ask HMRC to change your tax code and the tax due will be taken from your wages or pension or you can enter the dividends on your Self-Assessment tax return, if you already fill one in. You do not need to notify HMRC if the dividends you receive are within your dividend allowance for the tax year.

If you have received over £10,000 in dividends you will need to complete a Self-Assessment tax return. If you do not usually send a tax return, you need to register by 5 October following the tax year in which you had the relevant dividend income.

Are you a landlord that owes tax to HMRC?

The Let Property Campaign provides landlords who have undeclared income from residential property lettings in the UK or abroad with an opportunity to regularise their affairs by disclosing any outstanding liabilities whether due to misunderstanding the tax rules or because of deliberate tax evasion. Participation in the campaign is open to all residential property landlords with undisclosed taxes. The campaign is not suitable for those letting out non-residential properties.

Landlords who do not avail of the opportunity and are targeted by HMRC can face penalties of up to 100% of the tax for UK gains and 200% for offshore liabilities together with possible criminal investigation.

Taxpayers that come forward will benefit from better terms and lower penalties for making a disclosure. Landlords that make an accurate voluntary disclosure and have taken ‘reasonable care’ are likely to face the lowest penalties. There are higher penalties where you did not take reasonable care if you deliberately misled HMRC regarding offshore liabilities. 

There are three main stages to taking part in the campaign, notifying HMRC that you wish to take part, preparing an actual disclosure and making a formal offer together with payment. The campaign is open to all individual landlords renting out residential property. That includes landlords with multiple properties and single rentals as well as specialist landlords with student or workforce rentals.

How to claim tax relief on employment expenses

If you are an employee that needs to buy substantial equipment to use as part of your employment you may be able to claim tax relief. In most cases you can claim tax relief on the full cost of this type of equipment. Tax relief is reduced if your employer provides a contribution towards buying the item.

The way to claim tax relief depends on the amount you are claiming. HMRC provides the following information on making a claim:

Claims up to £2,500

You can make your claim:

  • Using a Self-Assessment tax return if you already fill one in.
  • By using HMRC’s online service or by printing and posting form P87 if you do not already fill in a tax return.
  • By phone if you have had a successful claim in a previous year and your expenses are less than £1,000 (or £2,500 for professional fees and subscriptions).

Claims over £2,500

  • You can only claim using a Self-Assessment tax return. You will need to register if necessary.

There are different rules if you are an employee using your own uniforms, work clothing and tools for work. You cannot make claim relief on the initial cost of buying small tools or clothing for work. However, it is possible to claim for the cost of repairing or replacing small tools you need to do your job (for example, scissors or an electric drill), or cleaning, repairing or replacing specialist clothing (for example, a uniform or safety boots). A claim for valid purchases can be made against receipts or as a 'flat rate deduction'. 

You have four years from the end of the tax year to make a claim. This means that there is a deadline of 5 April 2022 for making a claim dating back to the 2017-18 tax year. 

Income Tax if you move to or from Scotland

The Scottish rate of Income Tax (SRIT) is payable on the non-savings and non-dividend income of those defined as Scottish taxpayers.

The definition of a Scottish taxpayer is based on whether the taxpayer has a 'close connection' with Scotland or elsewhere in the UK.  The liability to SRIT is not based on nationalist identity, location of work or the source of a person’s income e.g., receiving a salary from a Scottish business.

HMRC’s guidance states that for the vast majority of individuals, the question of whether or not they are a Scottish taxpayer will be 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. 

If a taxpayer moves to or from Scotland from elsewhere in the UK, then their tax liability for the tax year in question will be based on where they spent the most time in the relevant tax year. Scottish taxpayer status applies for a whole tax year. It is not possible to be a Scottish taxpayer for part of a tax year.

You may also pay Scottish Income Tax if you live in a home in Scotland and have a home elsewhere in the UK. In this case, you need to identify which is your main home based on published guidance and the facts on the ground. You may also be liable to SRIT if you do not have a home and stay in Scotland regularly, for example you stay offshore or in hotels.

Jobseeker’s Allowance

The Jobseeker’s Allowance (JSA) is a benefit for those usually aged over 18 who are either not working or who are currently working less than 16 hours per week. Applicants must be capable of working and actively looking for work. There are three different types of JSA. However, two of these JSAs, the contribution based JSA  and Income-based JSA are no longer available to new applicants. 

The New Style JSA replaced the contribution-based JSA and works in the same way. To be eligible for the JSA, applicants will have needed to have worked as an employee and paid Class 1 National Insurance contributions, usually in the last 2 to 3 years.

Applicants that are eligible must then attend a phone interview with their local Jobcentre Plus office and continue to actively look for work. JSA payments can be stopped if the recipient does not keep to their agreement to look for work and cannot give a good reason.

The actual amount awarded depends on the applicants age, income and savings. The maximum rate for the New Style JSA is £59.20 for those aged under 25 and £74.70 for those aged 25 and over.

Applicants that cannot work due to coronavirus can also claim the JSA if they meet the relevant eligibility requirements. 

Taking money out of a limited company

There are a number of ways a director can extract money from their limited company.

The money can usually be withdrawn in one or more of the following ways. For most directors, the optimum way to minimise personal tax liabilities will be using a combination of these methods. 

  1. Salary, expenses and benefits
  2. Dividends
  3. Director’s loan

Salary, expenses and benefits

Directors must ensure they are employed as an employee of their company and their salary is paid via PAYE. Most directors prefer to take a smaller salary and take a larger share of their pay in dividends. This is usually the most tax efficient method, but care needs to be taken based on individual circumstances. 

Dividends

The tax-free dividend allowance is currently £2,000. The tax rate for dividends received in excess of the dividend tax allowance are taxed at: 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers. 

To pay a dividend, the company must:

  • hold a directors’ meeting to ‘declare’ the dividend
  • keep minutes of the meeting, even if there is only one director

Also, dividends can only be paid if there are sufficient retained profits to cover the payment.

Director’s loan

A director's loan account is created when a director (or other close family members) 'borrows' money from their company. Many companies, particularly 'close' private companies, pay for personal expenses of directors using company funds. 

Usually, when directors have overdrawn loan accounts, they do not have to pay tax, as long as the sum is repaid to the company within 9 months and one day of the account's reference date.

However, the rules are further complicated if the loan is for more than £10,000 as interest must be charged. There are also further Income Tax costs if the loan is written off or 'released' (not repaid) by the company.

Tax on savings interest

If you have taxable income of less than £17,570 in 2021-22 you will have no tax to pay on interest received. This figure is calculated by adding the £5,000 starting rate limit for savings (where 0% of the interest is taxable) to the current £12,570 personal allowance. However, it is important to note that if your total non-savings income exceeds £17,570 then the starting rate limit for savings is unavailable.

There is a tapered relief available if your non-savings income is between £17,570 and £12,570 whereby every £1 of non-savings income above a taxpayer's personal allowance reduces their starting rate for savings by £1.

There is also a Personal Savings Allowance (PSA) that can be beneficial to many savers. This allowance ensures that for basic-rate taxpayers the first £1,000 interest on savings income is tax-free. For higher-rate taxpayers the tax-free personal savings allowance is £500. Taxpayers earning over £150,000 do not benefit from the PSA.

Interest from savings products such as ISA's and premium bond wins do not count towards the limit. So, taxpayers with tax-free accounts and higher savings can still continue to benefit from the relevant PSA limits.

Banks and building societies no longer deduct tax from bank account interest as a matter of course. Taxpayers who need to pay tax on savings income are required to declare this as part of their annual Self-Assessment tax return.

Taxpayers that have overpaid tax on savings interest can submit a claim to have the tax repaid. Claims can be backdated for up to four years from the end of the current tax year. This means that claims can still be made for overpaid interest dating back as far as the 2017-18 tax year. The deadline for making claims for the 2017-18 tax year is 5 April 2022.

Claims to reduce payments on account

Self-Assessment taxpayers are usually required to pay their Income Tax liabilities in three instalments each year. The first two payments are due on 31 January during the tax year and 31 July following the tax year.

These payments on account are based on 50% each of the previous year’s net Income Tax liability. In addition, the third (or only) payment of tax will be due on 31 January following the end of the tax year. If you think that your income for the next tax year will be lower than the previous tax year, you can apply to have your payment on account reduced. This can be done using HMRC’s online service or by completing form SA303.

It is important to note that you do not need to make any payments on account where the net Income Tax liability for the previous tax year is less than £1,000 or if more than 80% of that year’s tax liability has been collected at source.

There are no restrictions on the number of claims to adjust payments on account a taxpayer or agent can make. The payments are based on 50% of your previous year’s net Income Tax liability. If your liability for 2020-21 is lower than 2019-20 you can ask HMRC to reduce your payment on account. The deadline for making a claim to reduce your payments on account for 2020-21 is 31 January 2022.

If taxable profits have increased there is no requirement to notify HMRC although the final balancing payment will be higher.