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The money can usually be withdrawn in one or more of the following ways.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.

5% late penalties apply from 1 April 2021

Self-Assessment taxpayers that failed to pay their outstanding tax liabilities or set up a payment plan by midnight on 1 April 2021 will be charged a 5% late payment penalty charge.

Under the normal rules a 5% late payment penalty would have been charged if tax remained outstanding or a payment plan has not been set up before 3 March 2021. This extension was put in place due to the impact of the COVID-19 pandemic and gave taxpayers an extra 4 weeks to sort out their affairs before the 5% late payment penalty was levied.

Interest will also have been applied to any balance that was outstanding from 1 February 2021. The only way to stop further interest amassing is to pay any tax due in full. The current rate of late payment interest is 2.6%

If you are unable to pay your tax bill, then there are a number of options for you to defer the payment that was due on 31 January 2021. This includes an option to set up an online time to pay payment plan to spread the cost of tax due in monthly instalments until January 2022. This option is available for debts up to £30,000. If you owe Self-Assessment tax payments of over £30,000 or need longer than 12 months to pay in full, you can still apply to set up a time to pay arrangement with HMRC, but this cannot be done using the online service.

Further late payment penalties will apply if tax remains outstanding (and no payment plan has been set up) for more than 6 months after the 31 January filing deadline. From 1 August 2021 you will be charged a penalty of the greater of £300 or 5% of the tax due. If your return remains outstanding one year after the filing deadline, then further penalties will be charged from 1 February 2022.

You can appeal against any penalties that have been issued. However, you need to act fast, and the excuse must be genuine and HMRC can of course ask for evidence to support any claim. An appeal must usually be made within 30 days of receipt of the penalty.

Updating Self-Assessment tax returns

There are special rules to follow if you have submitted a Self-Assessment return and subsequently realise you need to change it. This can happen if for example you made a mistake like entering a number incorrectly or missing information from the return.

If you filed your return online, you could amend your return online as follows:

  1. Sign into your personal tax account using your User ID and password.
  2. From ‘Your tax account’, choose ’Self-Assessment account’ (if you do not see this, skip this step).
  3. Choose ‘More Self-Assessment details'.
  4. Choose ‘At a glance’ from the left-hand menu.
  5. Choose ‘Tax Return options’.
  6. Choose the tax year for the year you want to amend.
  7. Go into the tax return, make the corrections and file it again.

If you opted to file your return on paper, you will need to download a new return and fill in the pages that you wish to change and write ‘amendment’ on each page. You must also include your name and Unique Taxpayer Reference on each page and then send the corrected pages to the address where you sent your original return.

If you used commercial software to submit your Self-Assessment return, then you should contact your software provider in the first instance. If your software provider cannot help, then you should contact HMRC.

The deadline for making changes for the 2019-20 tax year using any of the methods outlined above is 31 January 2022.

If you have missed the deadline, you will need to write to HMRC instead. For example, if you found a mistake in your 2018-19 return after 31 January 2021. In the letter, you will need to say which tax year you are correcting, why you think you have paid too much or too little tax and by how much. You can claim a refund up to 4 years after the end of the tax year it relates to.

Rent-a-room relief

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 and can be used when a bedroom is rented out to a lodger by homeowners in their home. 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.

Tax-free property and trading income

Two separate £1,000 tax allowances for property and trading income were introduced in April 2017. If you have both or either type of income highlighted below then you can claim a £1,000 allowance for each.

The £1,000 exemptions from tax apply to:

  • If you make up to £1,000 from self-employment, casual services (such as babysitting or gardening) or hiring personal equipment (such as power tools). This is known as the trading allowance.
  • If your annual gross property income is £1,000 or less, from one or more property businesses you will not have to tell HMRC or declare this income on a tax return. For example, from renting a driveway. This is known as the property allowance.

Where each respective allowance covers all the individual’s relevant income (before expenses) the income is tax-free and does not have to be declared. Taxpayers with higher amounts of income will have the choice when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. 

You cannot use the allowances in a tax year, if you have any trade or property income from:

  • a company you or someone connected to you owns or controls
  • a partnership where you or someone connected to you are partners
  • your employer or the employer of your spouse or civil partner

You cannot use the property allowance if you:

  • claim the tax relief for finance costs such as mortgage interest for a residential property
  • deduct expenses from income letting a room in your own home instead of using the rent-a-room scheme

Reminder, what are badges of trade

The 'badges of trade' tests whilst not conclusive are used by HMRC to help determine whether an activity is a proper economic trade / business activity or merely a money-making by-product of a hobby.

They are useful when careful consideration needs to be given to deciding whether a hobby has become a taxable activity. The approach by the courts in using the badges of trade has been to decide questions of trade on the basis of the overall impression gained from a review of all the badges.

HMRC will consider the following nine badges of trade as part of their overall investigation as to whether a hobby is actually a trade:

  • Profit-seeking motive
  • The number of transactions
  • The nature of the asset
  • Existence of similar trading transactions or interests
  • Changes to the asset
  • The way the sale was carried out
  • The source of finance
  • Interval of time between purchase and sale
  • Method of acquisition

Even if HMRC consider that the activities in question are a trade, taxpayers can make up to £1,000 per year from their hobby using the trading allowance that was introduced in 2017.

Spring Budget 2021 – Income Tax Rates & Allowances

It has been confirmed as part of the Budget announcements that the 2021-22 personal allowance will increase to £12,570 (2020-21: £12,500) and the basic rate limit to £37,700 (2020-21: £37,500). As a result, the higher rate threshold will increase to £50,270 (2020-21: £50,000) from 6 April 2021.

The Chancellor, Rishi Sunak revealed that these rates will be frozen until April 2026. This freeze is part of the Chancellor’s approach to improve public finances. This means that the allowances will not increase in line with inflation creating a stealth increase in the limits.

The basic rate limit currently applies to non-savings and non-dividend income in England, Wales and Northern Ireland and to savings and dividend income across the UK. The Scottish Parliament sets the basic rate and higher rate thresholds for non-savings and non-dividend income in Scotland. Changes to the Scottish bands were announced on 28 January 2021 as part of the Scottish Budget measures.

For high earning taxpayers the personal allowance is gradually withdrawn by £1 for every £2 of adjusted net income over £100,000 irrespective of age. Adjusted net income is total taxable income before any personal allowances, less certain tax reliefs such as trading losses and certain charitable donations and pension contributions. Any taxpayers with an adjusted net income of between £100,000 and £125,140 in 2021-22 will pay an effective marginal rate of tax of around 60% as the tax-free personal allowance is gradually withdrawn.