According to LLC Partner and former pensions minister, Steve Webb, hundreds of thousands of women pensioners who have shared their personal allowance with their husband could face unexpected tax bills.
Marriage Allowance
With Marriage Allowance, you can transfer up to £1,260 of your personal allowance to your spouse or civil partner. Your personal allowance is the amount of income you can earn without paying any income tax, and it is currently set at £12,570.
In order to benefit from Marriage Allowance, one person must be paying the basic rate of tax (applied to earnings between £12,571 and £50,270) and the other must not be paying income tax (as they earn below £12,570).
The lower earner then shares part of their personal allowance with the higher earner to reduce their spouse or civil partner’s tax burden. Marriage Allowance can reduce the higher earner’s tax by up to £252 in the 2023/24 tax year.
You can use HMRC’s free online service to see whether you could reduce your annual tax bill from Marriage Allowance, and if so, by how much.
Unexpected Tax Bills
Once you opt in to the system of Marriage Allowance, the transfer of your personal allowance happens automatically every year unless cancelled. If you wish to cancel Marriage Allowance you can do so here.
Previously, many could hand over 10% of their personal allowance at no cost to themselves. However, big cash increases in the value of the State Pension, combined with the freezing of the income tax threshold, means many more of these individuals will now be liable to pay tax.
Why are Women Pensioners Disproportionately Affected?
Government figures suggest around 2.1 million couples benefitted from Marriage Allowance in 2020/21, with over 1/3 of these estimated to be pensioner couples. In most of these cases, the wife is the non-taxpayer who is sharing her personal allowance with her husband.
In many working-age couples, the lower earner may be earning little or no taxable income if they are a stay-at-home partner, whereas with many pensioner couples, the lower earner will be close to the tax threshold due to the State Pension.
“This is yet another unwelcome by-product of the year-on-year freeze in the value of the tax allowance. Hundreds of thousands of women have signed over part of their tax-free allowance in order to reduce their husband’s tax bill. But as the state pension rises, many of these women may now find they end up with an unexpected tax bill. We could see marriage allowance mayhem as hundreds of thousands of couples have to decide whether to carry on with this arrangement or cancel it, to avoid low-income pensioners being dragged into the tax net. The sooner the freeze on tax allowance comes to an end, the better”
by Red Star Wealth
Business Asset Disposal Relief (previously known as Entrepreneur Relief) is a form of tax relief from capital gains tax.
How does it Work?
Business Asset Disposal Relief is when you sell all or part of your business or its assets and pay only 10% capital gains tax (CGT) on profits up to £1 million (the new lifetime limit). Once you surpass the £1 million limit, you will be charged the usual rate of CGT on the remaining taxable gains.
Previously, the lifetime limit was £10 million but at Budget 2020, Rishi Sunak, as Chancellor of the Exchequer, announced that the lifetime limit would be brought down to £1 million for any qualifying disposals made on or after 11th March 2020.
How much can it Save You?
If you’re a basic rate taxpayer, you will pay CGT on the disposal of assets according to the size of profits, your taxable income, and whether the gain is from residential property or not. If your taxable income falls within the basic income tax band, you’ll pay 10% CGT on gains (18% if disposing of residential property).
However, as a higher or additional rate taxpayer, you would pay 20% CGT on taxable gains from any chargeable assets (except for disposal of residential property, on which you’d pay 28%).
Therefore, Business Asset Disposal Relief could save you up to £100,000, because if claiming the tax relief on up to £1 million worth of assets, you’d reduce your tax burden by 10% (£100,000).
How do I Qualify?
Business Asset Disposal Relief covers both shares and business assets. Sole traders and partnerships can claim this relief when selling assets used in the business. Company directors and shareholders can claim the relief when selling shares or assets.
To qualify for tax relief on sale of assets, you must fulfil the following criteria for at least 24 months:
You must be an employee of the company (includes being company director) or a sole trader
You must own at least 5% of company shares if claiming the tax relief on share sales
There are also some extra things to bear in mind:
You can claim relief on share sales if a company stops trading, providing this is done within 3 years
You cannot sell a ‘going concern’, i.e, you cannot claim tax relief on the sale of something that is loss making and not commercially viable
If trying to claim the tax relief on property sales, the property must exclusively be a business asset. It must be owned by the company and used rent free
The 5% Rule
As noted above, you must own at least 5% of company shares in order to qualify for Business Asset Disposal Relief on share sales. If your share in the company is only just above this 5% lower limit, you should keep an eye on it to ensure it doesn’t drop below the threshold if you’re considering selling your shares in the near future. This could happen if your shares became diluted from more shares being allocated or other employees activating share options, meaning more shares in circulation.
If you lent any assets to the business, to claim the tax relief you must have sold at least 5% of your part of the business partnership or shares in a personal company. You must have also owned these assets yourself but let the business use them for a minimum of a year before your sale of the shares or business partnership.
For information about how and when to claim Business Asset Disposal Relief, click here.
by Red Star Wealth
Jeremy Hunt’s decision to scrap the pensions lifetime allowance, announced on Wednesday 15th March during his Spring Budget, has been met with controversy.
What was the Lifetime Allowance?
The lifetime allowance previously capped the amount that individuals could save into their private pension before incurring a tax charge. Previous to the Spring Budget, the lifetime allowance was set at £1,073,100, with expectations that Hunt would increase this figure to £1.8 million. However, in a surprise move he instead decided to abolish the lifetime allowance completely.
For most lower and middle earners, the scrapping of the lifetime allowance will not affect them. This decision will mainly affect higher earners as these tend to be the people who can afford to build bigger pension pots.
“It is a pension tax reform that will stop over 80% of NHS doctors from receiving a tax charge and incentivise our most experienced and productive workers to stay in work for longer”
“I have listened to the concerns of many senior NHS clinicians who say unpredictable pension tax charges are making them leave the NHS just when they are needed most”
The decision to scrap the lifetime allowance is aimed to keep people close to retirement in the workforce for longer, as well as encouraging those who have already retired to return to work. This is because there is more incentive for employees to stay in work to continue building their pension as they won’t face tax penalties for doing so. The idea is that this will help stimulate economic activity and produce economic growth.
Criticism
However, this decision has been met with controversy, with some arguing that whilst these changes would indeed combat the issue of 55% tax penalties faced by doctors, they would also give a big boost to many wealthy people.
David Brooks, head of policy at Broadstone, has argued that scrapping the lifetime allowance and increasing the annual pensions contributions has acted as a “huge tax giveaway to the wealthiest people in the country”
The following images is taken from the director of the Social Market Foundation, James Kirkup’s, twitter:
Perhaps the government should be focussing on getting more people to start building pensions, rather than helping those with large pensions make them even bigger.
Shadow Chancellor and Labour MP, Rachel Reeves stated:
“The only surprise in the budget was a huge handout to the richest one percent of pension savers […] Labour believes that the tax burden should be shared fairly. That is why I’ve announced today that Labour will reverse the changes to tax-free pension allowances. It is the wrong priority at the wrong time”
Given that Labour is favoured to win the next general election, it is a real possibility that Hunt’s scheme may not be in place for very long…
To read more about other changes announced in the Spring Budget, check out our previous blog.
by Red Star Wealth
Relevant Life Insurance is a type of life insurance policy tailored towards Directors of Limited Companies who wish to cover themselves or an employee. So, let’s have a look at how it works and the tax benefits that come with it.
Who is Relevant Life Insurance For?
Relevant Life Insurance is an insurance policy for Directors of Limited Companies who want to provide life insurance for an employee and don’t have enough employees to qualify for a group policy.
Relevant Life Insurance is a single-life policy; it covers one employee per policy. For example, you, as the Company Director, could choose to cover yourself through this insurance and pay for it through the company.
Just like with traditional life insurance policies, the price of premiums will depend on the level of cover and the age, health and lifestyle of the employee in question.
If the insured employee dies whilst employed by the company, a cash lump sum will be paid out. You are usually allowed to cover up to 30 times your annual renumeration, but it depends on your age and on your policy. Many policies will also pay-out if the insured person is diagnosed with a terminal illness with less than 12 months to live.
Relevant Life Insurance policies can be taken out by limited companies, charities and partnerships but sole traders are currently unable to access this type of policy.
Relevant Life Insurance vs Group Life Insurance
Relevant Life Insurance essentially acts as a death in service benefit for smaller businesses instead of taking out a group life scheme.
It’s best suited to companies which are too small to consider these group protection schemes or who only want to provide cover to one employee, such as to the Director. Group schemes often work out cheaper for larger groups so if your company is smaller, you may not qualify for this or it may work out too expensive.
Tax Efficiency: Corporation Tax, Income Tax and National Insurance
As Director of a Limited Company, you will not pay for a Relevant Life Insurance policy out of your own pocket. Instead, it is paid for by the company and so is classed as a tax-deductible business expense. Therefore, it is subtracted from company profits, in turn reducing your corporation tax liability.
Relevant Life Insurance is not classed as a P11D benefit in kind, meaning that Directors don’t have to pay extra income tax or make national insurance contributions on the value of the premiums. Premiums therefore qualify for income tax relief, national insurance relief and corporation tax relief. According to Legal and General, this means you could see your premiums reduced by up to 49% of a typical life insurance policy as a higher rate taxpayer, or up to 40% as a basic rate taxpayer.
No Impact to the Pensions Lifetime Limit
If you build up pension savings more than the lifetime allowance (currently set at £1,073,100*) you incur a tax charge.
Unlike with group schemes, Relevant Life Insurance does not fall under pensions legislation so it does not count towards the pension lifetime allowance. Therefore, this type of policy may be helpful for high earning directors or other employees who have reached, or are likely to reach, their lifetime allowance.
In contrast, lump sum payments under a group policy do contribute to the lifetime allowance and payments to the estate exceeding this limit would face tax charges of 55%.
Avoiding Inheritance Tax
If taking out a Relevant Life Insurance policy, you should establish a specialist trust to pay the benefit into.
This helps to avoid potential tax issues with the claim as the pay-out will not enter the company’s or the deceased’s estate, keeping it free from inheritance tax and avoiding probate delays.
*This figure is expected to be increased to £1.8m in the budget on March 15, 2023
If you have any questions regarding Relevant Life Insurance, or would like a quotation, please contact Red Star Wealth’s Managing Director Kristen Cunliffe via email kristen@redstarwealth.co.uk and she will be happy to help
by Red Star Wealth
If you’re feeling a bit dizzy from all the U-turns in economic policy under Truss’ leadership recently, we can’t blame you! It’s difficult to keep up with it all at the moment, so we are here to help. Let’s have a look at what’s been going on…
Goodbye Kwarteng, Hello Hunt
Jeremy Hunt has recently replaced Kwasi Kwarteng as Chancellor, bringing with him even more economic changes.
Liz Truss has stated that Government spending will low grow less rapidly than she planned, meaning lots of U-turns on her previous plans.
The Medium-Term Fiscal Plan
On 26th September 2022, Kwarteng revealed that his Medium-Term Fiscal Plan would be presented on 23rd November.
This announcement is still in place, except now it’s happening earlier than planned and being delivered by a different man (Hunt). The Treasury announced on 10th October that the Chancellor would bring forward the announcement of this plan to the 31st October as opposed to 23rd November.
Triple Lock Confusion
The triple lock means that the state pension rises each year in line with either inflation, average earnings, or 2.5%, depending on which figure is the highest.
On 17th October, Hunt indicated that the Government was considering shelving the triple lock on pensions. However, two days later during Prime Minister’s Questions, Truss confirmed that the triple lock was there to stay.
“Firstly, we will reverse almost all the tax measures announced in the Growth Plan three weeks ago that have not started Parliamentary legislation” -Jeremy Hunt
Income Tax U-Turns
Hunt has announced that he’s reversing the proposed 1% cut in the basic rate of income tax announced in Kwarteng’s mini-budget. Instead, the basic rate will remain at 20%.
He’s also announced that the Government will not proceed with abolishing the 45% additional rate of income tax, as was previously announced in the mini-budget.
Alcohol Duty Freeze U-Turn
Hunt has also abandoned Kwarteng’s plans of freezing alcohol duty rates for a year, commencing 1st February 2023. This freeze is no longer going ahead, which is estimated to save the Treasury £600 million a year.
Corporation Tax Double U-Turn
Kwarteng announced in his mini-budget that the previously planned rise in corporation tax due to come into force in April 2023 would no longer go ahead.
Since his replacement, Truss has stated that the rise will go ahead next year after all, rising from 19% to 25%.
Energy Bill Price Cap
During Prime Minister’s questions on 19th October, Truss seemed to lean heavily on her energy bill price cap as a supportive measure for those most vulnerable. However, this energy bill support to ensure that the typical household’s average bill doesn’t exceed £2,500 is only to last until April 2023. The support is only actually in place for half a year.
Stamp Duty Land Tax
One remaining element of Kwarteng’s mini-budget is the changes to Stamp Duty Land Tax. The nil-rate tax threshold will stay at the increased £250,000, and £425,000 for First-Time Buyers.
So, that’s all of the recent changes summed up… for now! Things may be due to change again with Truss’ resignation, so stay tuned.
