Though VAT-registered businesses should be submitting tax returns through Making Tax Digital already, some businesses have been able to continue using their VAT online account as well.

However, from Tuesday 1st November, this option will not be available for businesses filing monthly or quarterly VAT returns. The only option is to file through Making Tax Digital using compatible software – otherwise, your business could face a penalty from HMRC from 1st January 2023.

As difficult as adjusting to the new system might be, Making Tax Digital isn’t here to catch you out. It’s here to help reduce errors and make filing and paying VAT easier so businesses can get it right the first time. According to gov.uk, over 1.8 million businesses are benefitting from MTD, with more than 19 million tax returns filed through the service already.

If you’re concerned about Making Tax Digital penalties, here’s a quick guide to what could happen if you don’t file your VAT returns correctly, and what you can do to make sure your business complies with the new rules and doesn’t receive a financial penalty.

What are the penalties for late VAT returns?

While HMRC is allowing businesses that file annual VAT returns to continue using their VAT online accounts until 15th May 2023, any business that files monthly or quarterly must use MTD only.

If your business fails to submit a VAT return through MTD-compatible software, you could receive a fine of up to £400 per non-compliant return. However, if your annual turnover is less than £100,000, then the maximum penalty you could receive for not submitting returns through MTD is £100.

If you fail to keep records digitally in the MTD-compliant software, you could be charged from £5 to £15 per day until you have updated the records correctly and used digital links to transfer your data.

Additionally, if you don’t use the software properly – such as failing to use the checking tool either deliberately or carelessly – and submit an incorrect VAT return with mistakes, then HMRC can charge you a penalty of up to 100% of the VAT you owe (in addition to having to pay that VAT).

VAT late submission penalties

The new penalty system for late submission of VAT returns will be a points-based system. From January 2023, businesses will start to accrue penalty points for every late submission.

You will receive 1 point every time you miss a deadline for filing a VAT return. These points will stay on your account for 2 years until they expire, and HMRC will charge you £200 if you receive a certain number of points for late submission:

This means that you’ll have to pay £200 if you miss the filing deadline for two annual submissions, four quarterly submissions, or five monthly submissions within a 2-year period.

VAT late payment penalties

In addition to the late submission penalties changing from January 2023, so are the penalties for late payment of VAT. It’s similar to the old system, but with different thresholds, with penalties being proportionate to how late the submission is:

Late payment penalties will only be applied after 15 days, but remember that interest will be charged daily from the original due date (currently at a rate of 4.75%).

HMRC is willing to be lenient for the first year of implementing this new system, so you may be able to avoid a penalty for up to 30 days if you can prove that your business is doing everything possible to comply with the new rules so you can reach an agreement with HMRC.

How can you avoid VAT penalties?

If you have a VAT-registered business, the most straightforward way to avoid penalties on VAT returns is to follow the rules for the Making Tax Digital system, meet your deadlines for filing, and make your VAT payments on time.

To do this, you must be signed up to Making Tax Digital for VAT, and have compatible accounting software set up to share your digital records securely. You must use this to store your records digitally and file online through MTD from now on.

Keeping digital records means storing the following information in your electronic account:

You don’t need to scan all your paper records, such as invoices and receipts, but you should enter or transfer all information digitally. Data must not be transferred or exchanged between software programmes manually.

Before you file a VAT return, make sure you use the checking function in your MTD-compatible software to catch potential errors before you submit it. Otherwise, you could be penalised for making mistakes, even if it was a genuine accident.

What support is available for VAT-registered businesses?

Digital tax returns are now compulsory for VAT-registered businesses, unless subject to insolvency procedures or given an official Making Tax Digital exemption by HMRC. There are limited excuses for failing to use MTD correctly or on time that HMRC might consider reasonable.

If you’re finding it difficult to switch to Making Tax Digital, there is plenty of support on the government website to help you transition to digital VAT returns. This includes webinars, videos, and extra support for those with accessibility issues.

If you’re having financial difficulties, your business may be able to get up to 50% off the price of compatible digital accounting software through the Help to Grow: Digital scheme.

Or, if your difficulties lead to you accruing penalties that you’ll struggle to pay, HMRC offers a Time to Pay service, which allows you to set up a payment schedule. You can pay your debt off in instalments over 12 months without receiving further penalties.

Are you one of the business owners who still needs to overhaul their accounting system and get set up with Making Tax Digital? It may seem like an inconvenience now, but the new processes will help you to manage your finances and keep up with taxes much more easily in the long-term.

If you’re looking for a tax agent to help you register with MTD and get started with new digital accounting software, the team at GBAC, accountants in Leeds, not only Barnsley, can help. Get in touch with us by calling 01226 298 298 or emailing info@gbac.co.uk to find out how we can assist you and your business.

Every business using temporary labour should be aware of the potential for mini umbrella company fraud in their supply chain, which is why HMRC
recently released updated guidance on this issue.

No matter which industry you work in, a fraudulent mini umbrella company (MUC) could pose serious risks to your business. Not only will you be participating in criminal activity if you get caught up in a tax fraud scheme, but the financial and reputational damage could destroy your business.

Not to mention that MUCs abusing the VAT Flat Rate Scheme and National Insurance contribution allowances will result in your workers not receiving the money and tax benefits they’re entitled to.

This blog explains everything you need to know about mini umbrella company fraud, including how to look out for it and what you should do if you need to report a mini umbrella company to HMRC.

What are mini umbrella companies?

Many people will never have heard of mini umbrella company fraud before. While HMRC uses this term, there’s no standard model for MUC fraud. The criminals behind it are constantly developing new ways to try to hide their schemes from HMRC.

The way it generally works is that the criminals set up multiple limited companies, which only employ a small number of temporary workers each. They use one ‘promoter’ outsourcing business to facilitate this, creating complex layers within a supply chain.

This structure allows the criminals to abuse government incentives for small businesses, and can also lead to other taxes not being paid (including PAYE, National Insurance, and VAT). This significantly reduces the funding gathered for public services in the UK.

By contrast, a proper umbrella company arrangement would involve just one umbrella company employing temporary workers, not a series of smaller ones, and they would also pay taxes normally.

Mini umbrella company fraud happens across a variety of trade sectors, wherever temporary labour is used in supply chains. The workers themselves, who are typically contractors, are usually unaware that they are being moved between mini umbrella companies for fraud purposes.

This often results in the loss of employee rights, wages, and benefits. It’s crucial to ensure that any umbrella company you engage with is compliant with HMRC tax rules from the start, to avoid investigations and penalties if it turns out that they aren’t.

Though the umbrella company sector technically isn’t regulated, businesses and temporary workers can still get into serious trouble if they get mixed up with non-compliant umbrella companies.

Warning signs of mini umbrella company fraud

Since fraudulent mini umbrella companies are low in the supply chain, it’s not always easy to notice them. You should be vigilant and carry out due diligence checks regularly to look out for them. They will usually demonstrate most, if not all, of the following warning signs.

The way that the criminals behind these schemes keep their activities concealed is by creating and dissolving companies within a short amount of time, allowing them to set up new companies to replace the ones shut down after failing to meet their Companies House filing obligations.

Warning signs of MUC fraud for temporary workers

Temporary workers should also be vigilant about their employers, no matter how briefly they work for them. Warning signs for workers employed by a fraudulent mini umbrella company include:

A legitimate umbrella company will pay you the correct amount through PAYE, also registering and paying the correct amount of tax this way. You should not be passed along between other MUCs and made to sign various contracts during your employment.

You should also be wary of anyone claiming to be an HMRC-approved umbrella company, as this lie is an immediate sign of shady business – HMRC never
endorses or promotes umbrella companies.

What is HMRC doing to stop mini umbrella company fraud?

The HMRC Fraud Investigation Service uses both civil and criminal powers to investigate individuals and businesses involved in mini umbrella company fraud. Tens of thousands of MUCs have been caught and deregistered for exploiting the VAT Flat Rate and/or the Employment Allowance.

When any other business in the same supply chain is found to have known that fraud was happening, or failed to identify that they were facilitating fraud, HMRC can prevent them from recovering VAT input tax. This is the VAT added to the cost of goods or services with VAT
liability.

HMRC also collaborates with other government departments and trade bodies to continue raising awareness of mini umbrella company fraud. They have issued multiple public information campaigns to draw attention to umbrella companies and tax avoidance schemes, including:

If you’re concerned that a supplier, labour hirer, or associate may be involved with a fraudulent MUC – or is actively committing tax evasion – you can report tax fraud to HMRC anonymously.

HMRC has also published a regularly updated list to name and shame known
tax avoidance schemes and their promoters, enablers, and suppliers. You should check the latest version of the list before committing to a payroll provider or umbrella company to make sure they aren’t on it.

If you’re looking for a reputable payroll and tax management service that you can trust, why not speak to us at GBAC? Our accountants in Barnsley can help with anything from bookkeeping and VAT to cloud accounting and audits – and we’re always completely transparent with our clients.

For the sixth time this year, interest rates will be increasing next month from 11th October 2022.

Starting at 2.6% at the beginning of 2022, the most recent increase was 4.25% just last month, following the Bank of England’s decision to raise their base rate from 1.25% to 1.75%
in August.

Now, in September, the Bank of England Monetary Policy Committee has voted to increase the base rate yet again to 2.25%. Since HMRC interest rates are linked to the Bank of England’s base rate, this means that HMRC interest payments – which went up last month – are also going up in October.

What is happening to HMRC interest rates?

HMRC charges interest on late tax payments or repayments in line with the Bank of England (BoE). Late payment interest is the BoE base rate +2.5%, while repayment interest is the base rate -1%
(with a lower limit of 0.5%).

The BoE uses their base rate to tackle inflation by discouraging over-borrowing, and HMRC uses their linked interest rates to encourage prompt tax payments.

Since the BoE base rate went up to 1.75% in August, HMRC’s interest rates increased to 4.25% for late payments and 0.75% for repayments. Just over a month on, another BoE base rate increase for October will also be pushing these rates up again.

Since the BoE base rate rose to 2.25% on 22nd September, the new HMRC rates will be:

These HMRC interest rates will take effect on 11th October 2022 for non-quarterly instalment payments. However, for quarterly instalment payments, the changes come into effect over a week earlier on 3rd October 2022.

This may be the highest interest rate increase in 14 years, but market predictions believe that it could more than double in the next year to 5.8%.

Who will be affected by the new HMRC interest rates?

Anyone who isn’t up to date with tax payments may struggle with paying the higher interest rates on top of their outstanding taxes, especially with the ever-rising cost of living. The increased HMRC interest rates will apply to the following taxes:

Interest is charged daily from the date that a payment becomes overdue until the date that it’s paid off in full. The longer it takes to pay off, the more interest will accrue.

The due date for PAYE tax payments to HMRC is the 19th of the month for cheque payments and the 22nd of the month for electronic payments – while interest begins to accrue from the 19th, it will be cancelled if you pay electronically by the 22nd.

The only good side of the interest rate news is that people who have overpaid taxes will earn more interest on repayments, meaning they’ll receive more money back from HMRC.

Do you need HMRC tax advice?

With inflation and interest rates soaring to the highest levels in over a decade, it’s more important than ever to make sure that your taxes are filed and paid on time.

Thanks to HMRC’s interest rates system, it’s better to pay early – and perhaps end up overpaying and receiving repayments – than it is to miss deadlines and end up paying more in late payment interest that you won’t get back.

If you think you would benefit from a tax consultancy service to help you manage your finances and tax payments, why not contact GBAC?

Our accountants in Barnsley provide a wide range of services to individuals and businesses across the nation, from payroll to probate, ensuring that every client stays on top of their taxes.

There is still no facility for contacting HMRC by email, but there is now the option of receiving a response by email when you contact HMRC.

As anyone who has dealt with HMRC by post will know, it can be a very slow process. With resources stretched further than ever by the combination of Brexit and COVID-19, it’s taking HMRC a long time to work through the ever-growing backlog of post.

This has prompted HMRC to slowly move into the twenty-first century by providing the option to receive responses by email, instead of waiting for a letter or phone call.

Of course, there are risks to all kinds of communication with HMRC – here’s what you need to be aware of, and what you need to do to opt in to receiving emails from HMRC.

HMRC scam risks

Due to the sensitive nature of the information exchanged with HMRC, it’s common for criminals and scammers to target people by pretending to be HMRC representatives.

Unfortunately, there are many phishing scams run by fraudsters that aim to get personal or financial details from vulnerable people. This includes email, where scammers can send official-looking emails posing as HMRC, which contain malicious attachments.

These may invite you to open an attached file or click on a link, which can download a virus onto your device or prompt you to enter your bank details into an unsecure form.

To reduce the risk of scammers intercepting, altering, or manufacturing fake emails, HMRC plans to desensitise the information they send in response emails by only quoting parts of your details, such as a section of a unique reference number.

If you’re ever concerned that communication you’ve received from HMRC might be fraudulent, you can check the list of genuine HMRC contacts on the government website.

HMRC contact confirmation

If you would like to allow HMRC to contact you by email in response to your phone calls, online form submissions, or letters to HMRC, you must opt in by confirming this in writing.

To do this, you (or your agent) should fill out the email authority template confirming that you:

You should also specify the names and email addresses of any staff or authorised representatives that you are happy for HMRC to interact with via email. You can opt out of this at any time by contacting HMRC
to revoke your permissions.

If you have a tax agent who handles your correspondence with HMRC, you should discuss this with them to decide whether or not you want to opt in to receiving HMRC emails.

Or, if you’re currently searching for a tax consultant
to help you get your tax affairs in order or handle HMRC enquiries
on your behalf, you can contact GBAC to arrange a consultation.




Working through Inheritance Tax (IHT) is difficult after any death. The residence nil rate band (RNRB) provisions for spouses or civil partners can be especially confusing to navigate.

For example, when the second individual passes away, any unused RNRB left over from the first individual’s death can be relieved – but some executors are using the value at the first person’s date of death to claim this, when they should be using the second person’s date of death.

It doesn’t seem like HMRC has been picking up on this error, so if you think a mistake has been made in RNRB relief value in a case like this, then you’ll have to write to them yourself.

This blog explains the basics of residence nil rate band relief and what to do if you need help with claiming RNRB transfers.

What is residence nil rate band relief?

The RNRB was introduced in April 2017 as an additional relief amount towards the value of a home on top of the standard nil rate band (also known as the IHT threshold).

The nil rate band means that every individual can transfer their estate up to a value of £325,000 without having to pay IHT. Anything above this will be charged 40% – unless it’s left to a surviving spouse under certain conditions.

Any unused proportion of the regular nil rate band
can be transferred to the surviving spouse’s allowance, increasing their threshold from the standard £325,000. Similarly, the residence nil rate band allowance of £175,000 can also be transferred if unused.

The RNRB applies more specifically to residences passed on to direct descendants. So, if the married couple’s home is left to their children or grandchildren when they pass away, they could claim up to £350,000
in unused RNRB relief.

This means that the total IHT relief for the estate could add up to £1 million. It’s also possible to claim RNRB on residences worth more than this, but the amount is tapered off by £1 for every £2 of the property value over £2 million.

This might not seem too complicated just yet, but actually filing a claim for RNRB relief can quickly become complex. When filling out the IHT436 form to make a claim, it’s easy to be confused by the wording HMRC
uses.

It suggests that the RNRB value is stated in entry 11
– at the first spouse’s date of death – while the current claim should be for the value at entry 14, at the second spouse’s date of death. This is where some executors make what could be a costly mistake if the estate isn’t taxed correctly.

What are the conditions for RNRB?

Unlike the normal IHT thresholds, the RNRB is not available against lifetime gifts, trust transfers, or any other possessions than one primary home.

The property only qualifies if all or part of it is inherited by ‘lineal descendants’ – including not just biological children and grandchildren, but also stepchildren and adopted or fostered children.

The home doesn’t have to be worth more than the basic threshold of £325,000 to qualify for RNRB relief. If it’s worth less than the RNRB threshold of £175,000, the remaining relief can’t be applied to the rest of the estate, but the unused amount can be transferred.

If the lineal descendant has also passed away, the home/estate and any remaining allowances can transfer to their surviving spouse or civil partner, who counts as a direct descendant.

Multiple lineal/direct descendants can inherit a share of the home, which must have been left to them in the deceased’s Will. They can choose to sell the home as part of the estate administration without invalidating the RNRB relief.

In the case of RNRB transfers from one spouse to another/to a direct descendant, the claim must be made within 2 years of the second spouse’s death.

Of course, there are far more rules for RNRB than these summarised points – you can find more information in the Inheritance Tax
section on the government website.

Need advice on claiming RNRB relief?

The government is keeping the IHT and RNRB
thresholds and tapers frozen at the 2020–2021 level until 2025–2026. While 94%
of estates are forecast to have zero IHT liability during this time, an estimated 161,900 will – including estates pushed over the threshold by inflation.

To help people with this complicated issue, HMRC has published RNRB guidance for calculating and applying this form of IHT relief. However, HMRC does not offer tax planning advice, and can’t provide individual guidance on how to take advantage of the residence nil rate band.

If you have concerns about this and aren’t sure which action you need to take to minimise your IHT liability and maximise your RNRB relief, it’s best to seek professional advice. Not only can an accountant help you with Wills and tax management for your estate, but they can also help you to apply tax relief transfers efficiently.

If you believe you could benefit from financial services like these, get in touch with GBAC, accountants in Barnsley, today.

The latest data from HMRC shows that Inheritance Tax (IHT) receipts from the Treasury have doubled in the last decade.

While it was once seen as something that only the wealthy would have to worry about, more and more people are finding themselves liable for IHT.

But what exactly is an Inheritance Tax receipt, and why are so many people having to pay?

This blog explains what’s going on with IHT and what you can do to reduce your own liability.

What is IHT?

Though it has a reputation as a highly hated tax, IHT
gathers a relatively small amount of revenue for the Exchequer – just 1%
of what Income Tax, VAT, and National Insurance produce.

It’s also disliked due to confusion over what this tax actually is, which isn’t helped by the misleading name. As its former name suggested, it’s more of a capital transfer tax.

When someone passes away, IHT is charged on the transfer of their estate. This is currently 40% of the value of the deceased’s money, property, and possessions over £325,000.

The tax usually doesn’t apply if the deceased leaves their estate to their spouse, and the tax-free threshold increases to £500,000
if the recipients are their children or grandchildren. This means that IHT
normally won’t affect married couples with children unless their estate exceeds £1 million.

Since the majority of UK citizens won’t leave an estate with a value higher than these thresholds, Inheritance Tax hasn’t been as much of a concern for many people.

If this is the case, though, then why have IHT receipts
been increasing so much?

What do the IHT statistics show?

The latest official figures show that IHT receipts have risen from just over £3 billion in the 2012–2013 tax year to just over £6 billion in the 2021–2022 tax year, effectively doubling in just under ten years. While this might initially seem unusual, the government suggests several reasons for it.

Firstly, the IHT nil rate band has been frozen since 2009, and will stay frozen until April 2026. This band is the £325,000
allowance mentioned above. While this has stayed the same for over a decade, house prices haven’t – so inflation has been steadily pushing more estates over the threshold.

Secondly, the larger increases that happened throughout 2020
and 2021 are likely due to the effects of the COVID-19 pandemic. The number of deaths during these years was much higher than usual, resulting in a higher number of wealth transfers that are liable for Inheritance Tax.

The rise in receipts from 2017–2018 followed by a drop in 2019–2020 was also due to circumstantial changes. A probate fee increase due to take effect in April 2019, which was later cancelled, caused some estate executors to bring their IHT payments forward into the 2018–2019 tax year to avoid it.

Then, the gradual introduction of the residence nil rate band threshold led to a fall in receipts in the 2019–2020 tax year. This offers an extra allowance of £175,000 when qualifying residences are passed on to direct descendants (with a taper for residences worth more than £2 million).

According to the government’s commentary on the Annual Bulletin, the statistics show that IHT receipts are now overall at the highest level on record.

How to reduce IHT liability

There are plenty of legal methods for mitigating your IHT
burden. For example, if you leave 10% or more of your Will’s ‘net value’ to charity, then your estate will be taxed at 36% instead of 40%.

Or, if you’re a small business owner, you may be eligible for ‘business relief’ – allowing you to pass on certain business assets either IHT-free or with a reduced IHT rate. You may need to consult an accountant if you aren’t sure whether or not your business qualifies.

If you have children and grandchildren, you could make the most of several tax-free gift allowances. You can give away up to £3,000
a year to family members, plus gifts of up to:

However, some financial gifts are only exempt from tax if the giver survives for 7 years. If you were to pass away within this period after gifting such sums of money, the recipients would have to pay IHT
– starting at the standard 40% within 3 years then tapering to 0%
by the 7-year mark.

It’s up to each individual or couple to decide what they want to leave behind for their children, grandchildren, or other family members when they pass away. If you want to ensure that as much of your estate goes to the people you love as possible, then financial planning is a smart move.

It’s always a good idea to prepare an up-to-date Will, gift excess income and assets while you’re living, and even consider putting your assets into a Trust. If you’re in need of professional advice to help you preserve your estate for your family, why not contact GBAC, accountants in Barnsley, today?

Companies that claim tax relief or tax credits
on research and development (R&D) expenditure will see some changes to the system for accounting periods starting from 1st April 2023.

Several new activities will qualify for R&D relief, but the process for making R&D relief claims will be different. Not only will the service go completely digital, alongside many other tax services, but the rules are also being adjusted to try to reduce fraudulent R&D claims.

Here’s what you should know about the R&D tax relief
changes that will come into effect next year.

Extending R&D expenditure

As an incentive for research and development to use modern digital approaches, the government is extending qualifying expenditures to include data licences and cloud computing. All cloud-related costs could now fall under the scope of qualifying expenditure for future R&D relief claims.

The government is also adding secondary legislation to amend the exclusion of pure mathematics. This means that research and development
underpinned by mathematical advances, and pure maths in particular, will now be covered under the definition of R&D for tax relief purposes.

However, in an attempt to refocus tax reliefs towards innovation within the UK, these qualifying expenditures will only apply to UK-based activity. This means that expenditure on overseas workers will only qualify to the extent of their earnings being taxed through PAYE, limiting talent searches.

Of course, there will be a few exceptions for cases when the R&D activity can’t reasonably be carried out in the UK. Workforce availability and costs limitations aren’t valid reasons, but factors such as different geography, population, and environmental conditions that aren’t present in the UK but are required for research purposes could be exempt – for example, deep ocean studies or clinical trials.

R&D fraud and compliance

Abuse of the R&D tax relief system and boundary-pushing has become a growing concern for the government over the last few years. According to HMRC’s annual accounts, the estimated level of fraud, error, and non-compliant behaviour is 4.9%
of the relief costs in 2021–2022, up from 3.6% in 2020–2021. In April 2022, HMRC identified an irregular claims pattern that spurred on the reforms.

To tackle non-compliance levels, whether due to deliberate fraud or genuine error, all R&D relief claims must be made digitally in the future. Whether it’s for a deduction or credit, all Corporation Tax returns including an R&D claim must be submitted through HMRC’s online tax returns portal.

Digital R&D claim submissions will also have to provide additional information about the R&D activities being claimed for. This includes descriptions of the research and development work, breakdowns of costs across qualifying categories, details of any advisory agents who helped to compile the R&D claim, and signed endorsement from a senior officer within the company.

HMRC will also require pre-notification of intended claims through their digital service. Companies will need to inform HMRC in advance of an upcoming claim within 6 months of the end of the period that it relates to. However, if a company has already made a claim in one of the previous three periods, they won’t be required to re-notify HMRC of their intention to file another R&D claim.

Companies will have longer to make a claim even after pre-notifying HMRC, as the time limit will be extended to 2 years from the end of the relevant accounting period rather than the current limit, which is 12 months from the statutory filing date.

How will this affect R&D tax relief claims?

The R&D relief reforms are likely to affect companies that claim tax relief for research and development activities their businesses carry out under one of two schemes – Research and Development Expenditure Credit (RDEC) or small or medium enterprises (SME) R&D relief.

The changes could also affect some companies who make a Patent Box election, as this regime uses R&D qualifying expenditure definitions as part of its calculations, requiring further amendments.

Since these reforms come into effect for accounting periods starting on or after 1st April 2023, there could be inconsistencies between businesses reporting relief claims over different time periods. For example, Business A with their year-end in December would first feel the impact from 1st January 2024, while Business B with a March year-end would immediately be affected from April 2023.

This means that Business A could claim under the old rules for up to 9 months longer than Business B, allowing them to get R&D relief for overseas expenditure that would be ineligible under the new rules. As the legislation is still in the drafting stages, the government could adjust this for fairness.

If you’d like to learn more about this topic, you can read through the government’s ‘Research and Development Tax Relief reform’ policy paper. Should you have any concerns about your company’s future R&D tax relief or tax credit
claims, why not contact GBAC, accountants in Barnsley, who also cover Leeds and Sheffield, today to arrange a consultation?

After much speculation, new Prime Minister Liz Truss has announced the government’s plans to handle the ongoing energy price crisis. This highly anticipated statement comes a few weeks after the Ofgem price cap rose to an eyewatering £3,549 a year.

The earlier assistance package proposed by then-Chancellor Rishi Sunak in February was based on projections of the price cap increasing from £1,971 in April to £2,800 in October. Since then, Ofgem has decided to review the price cap every three months instead of every six months.

The regulator’s current price cap of £3,549 for the October–December 2022 period is an increase of 80% on the current level, but projections for the next three-month period’s price cap suggest an even more shocking increase to £6,500 a year in the first quarter of 2023.

To support the British public and businesses with soaring energy bills this winter, the government is taking action to provide financial support and tackle the underlying issues with the UK energy market. This blog explains what you need to know about the new energy price cap.

 

What is the government doing about rising energy prices?

The Prime Minister revealed that the government will introduce an Energy Price Guarantee (EPG) that will take effect from 1st October 2022
and stay in place for the next 2 years. Like the Ofgem price cap, it is a limit on standing and unit charges, not a total bill cap.

This means that you’ll still pay for as much energy as you use, but the price per unit will stay at a fixed rate under the EPG. Even if energy prices continue to fluctuate for suppliers, the government will be taking on the excess costs rather than passing them on to domestic consumers.

Based on average household energy consumption, this will limit average domestic energy bills to a maximum of £2,500 a year. However, Ofgem’s three-monthly price cap reviews are still important, as they’ll determine how much the EPG scheme will cost the government (and taxpayers).

In addition to the EPG, the previously announced Energy Bills Support Scheme (EBSS) is still going ahead. All households in Great Britain with a domestic electricity connection will receive £400
in non-repayable credit to help with winter energy bills.

These will be split into monthly automatic payments over the next six months (£66 in October and November, then £67 for the following months until March). This means that the prospective average bill for October 2022 to October 2023 will actually be £2,100.

Other previously announced assistive measures remain in place, but green levies have been temporarily suspended as part of the new EPG scheme. The plan applies to all domestic households in England, Scotland, and Wales, with ‘the same level of support’ proposed for Northern Ireland.

Anyone who doesn’t use mains energy (such as heating oil instead of gas or electricity) will also receive help in the form of discretionary payments.

 

What is the Energy Price Guarantee?

The government’s Energy Price Guarantee scheme is taking the sting out of the Ofgem price cap, reducing the average bill projection by around £1,000 a year. However, it’s important to bear in mind that the EPG doesn’t put a cap on total annual energy bills – it only limits how much your energy supplier can make you pay per unit and per standing charge.

Your exact bill will depend on how much energy your household uses, just as it did before the EPG. The number of people in your home and their living habits will affect this – so it’s still a good idea to make conscious efforts to reduce your energy consumption this winter.

You won’t need to apply for the EPG scheme, as it will be automatically enforced. Your energy company should calculate how the new measures will affect your specific energy prices and contact you before 1st October 2022 with more information.

Since the projection of £2,500 annual bills is for an ‘average’ household, and not everyone uses the same amount of energy, it’s likely that many people will actually pay less. All households will also receive the £400 from the EBSS, in the following ways:

If you pay ‘inclusive’ rent, your landlord must comply with maximum resale pricing rules (set at the same price as they originally paid for the energy).

 

What about support for business energy bills?

While most non-domestic energy customers in the UK have fixed tariffs, many don’t – which makes things even more difficult for the government. With lots of businesses due to renew their fixed price energy deals in October, and no Ofgem price cap or EBSS payment to protect or support them, lots of businesses are likely to go under when they can no longer afford their utility bills.

To help commercial businesses and public sector organisations (like charities, hospitals, and schools), the government is planning to provide a similar six-month scheme to the Energy Price Guarantee for non-domestic energy users. This ‘equivalent guarantee’ should cap tariffs at the same price per unit, but will only last for six months, compared to the two-year EPG.

After this initial period, the government intends to provide further support to vulnerable sectors, such as hospitality, following a review within the next three months. This review should identify where the government needs to focus their non-domestic energy bill support.

We can expect further details of this business support scheme to be published in due course.

 

Will the government regulate the energy sector?

There are long-term problems with the UK energy sector that are contributing to the underlying causes of soaring energy costs. The government is therefore looking closely at the ways Ofgem operates as an industry regulator and reviewing what needs to be changed.

This includes launching an Energy Supply Taskforce to negotiate long-term contracts with both domestic and international energy suppliers to reduce prices, and an Energy Markets Financing Scheme to address liquidity requirements for UK energy firms.

Other actions include launching new oil and gas licences, lifting the moratorium on shale gas production (fracking), and accelerating the sourcing of new energy supplies (including North Sea oil and gas, and renewables like wind and solar power).

The government is also looking into nuclear energy projects, and reviewing current targets for net zero emissions by 2050. Prime Minister Liz Truss has further ambitions to make the UK an energy exporter by 2040, alongside fundamental energy market reforms.

 

Where to get financial help with paying energy bills

It’s a bit of a waiting game for domestic energy users and businesses alike, as everyone needs to wait for their energy supplier to contact them about their bills changing in October. Each user’s bill will be different, depending on their tariff type and location.

If you find yourself unable to keep up with energy bill payments, you should contact your supplier. They must offer you a payment plan that you can ‘reasonably afford’ in line with Ofgem rules, or provide emergency credit if you can’t top up your meter.

Anyone struggling with serious energy bill debt should look into applying for an Energy Fund grant that could help you to get back on track with repayments.

In addition to the EBSS payment, other vulnerable people may also receive further payments from the government to help with energy bills and other living costs. These include:

You could also contact your local council to enquire about the Household Support Fund., or visit the Help for Households campaign website for more options.

Announcements about the funding methods for these measures are expected in the week beginning 19th September, but are likely to be delayed due to the passing of Her Majesty Queen Elizabeth II.

If you find yourself in need of fiscal management advice and are able to hire a consultant within your budget, please contact GBAC – our team of talented accountants will be happy to assist you.

In July 2022, the UK government published details of new legislation that will allow workers who save for their pension through a Net Pay Arrangement (NPA) to receive the same level of top-ups from the government as workers who save through a Relief at Source (RAS) scheme.

When the new legislation takes effect in April 2024, around 1.2 million workers will receive the government support they previously lost out on due to an anomaly in the system, which has been resulting in less take-home pay for those enrolled in these ‘net pay’ pension schemes.

This correction to the pension tax system means that lower earners could see up to a hundred extra pounds a year added to their take-home pay from the start of the 2024–2025 tax year. Read on to learn more about the previous situation, how it’s changing, and how this could affect your earnings.

How do Net Pay Arrangements work?

When an employee makes contributions to their pension directly from their salary, they should receive pension tax relief based on the rate of income tax
they pay on their earnings. So, basic rate taxpayers should receive 20%
relief, higher rate taxpayers can claim 40% relief, etc.

This means that if you were in the basic rate income tax band and paid £100
into your pension, for example, the tax relief should mean that the contribution only costs you £80 from your take-home pay. However, this depends on the type of pension scheme you’re enrolled in.

An NPA
earner would pay the £100 and likely wouldn’t receive the tax relief they should, instead receiving a marginal tax relief rate of 0%. Meanwhile, the pension schemes of RAS earners should automatically send a request to HMRC to receive a 20% top-up.

This issue mainly affects low earners whose taxable income is above the auto-enrolment amount of £10,000 a year but below the annual Personal Allowance
of £12,570.

The government is thereby taking steps to rectify the problem, giving HMRC the duty of making top-up pension payments
directly to eligible earners from 6th April 2024 once new IT system support is in place for this, regardless of the scheme individuals are registered with.

How will pension top-up payments work?

The Treasury provided an example to explain how the changes are going to work. In this scenario, two employees both earn less than the Personal Allowance (£12,570) and both pay £500 in pension contributions. However, Employee A uses an NPA scheme and Employee B uses an RAS scheme.

Employee A has the full contribution deducted from their earnings before paying tax, so they don’t have to use their Personal Allowance to pay the £500 out of their untaxed income. The rest of their earnings are taxed afterwards, but there is no income tax due – all £500 goes into their pension.

Meanwhile, Employee B has no income tax to pay because their earnings are below the Personal Allowance. The equivalent pension contribution is paid to their scheme as if basic rate tax (20%) had been deducted from the £500, so £400 goes into Employee B’s pension. Though they didn’t pay any tax on it, the RAS scheme provider can still claim £100 tax relief from HMRC, topping it up to £500.

So, while both employees have £500 in their pension, Employee A had the full contribution deducted from their earnings, while Employee B only had £400 deducted, leaving them with more take-home pay. However, Employee B will have used up more of their Personal Allowance
for the contribution.

From April 2025, the tax year after the new legislation takes effect in April 2024, Employee A could qualify for top-up payments on eligible pension contributions from the previous year. HMRC will have a system for identifying and notifying eligible earners like Employee A, and paying them a top-up of 20% of their contributions (so in Employee A’s case, £100 would go into their bank account).

Who will benefit from pension top-ups?

As mentioned, individuals saving into an occupational pension under a Net Pay Arrangement (NPA) while earning an annual income below the Personal Allowance are most likely to be affected by this legislation. HMRC will determine eligibility for top-up payments based on whether you contributed to an NPA pension scheme and if your total taxable income is lower than the Personal Allowance.

When the new measures come into force in April 2024, HMRC
will use the information it already has to identify eligible workers and contact them. These individuals will be invited to provide their bank details to receive their direct top-up payment – they won’t have to confirm their entitlement first.

The payments should be made as soon as possible after the end of the tax year in which qualifying pension contributions were paid – so, from April 2025 at the earliest. If HMRC contacts you about a top-up payment, you’ll have to confirm your details through a digital service so you can receive the money. It will go to your personal bank account rather than your pension, reducing your tax burden.

Unfortunately, these payments will be taxable – but given the lower level of earnings, it’s unlikely to mean that recipients of top-up pension payments will end up paying any additional income tax.

The government estimates that a massive 1.32 million people will qualify for the top-up, with the average worker receiving an extra £53 a year. Around 200,000 low-income workers could receive an extra £100 a year. The vast majority of the beneficiaries are likely to be women, making up 75%.

Should you increase or reduce your pension contributions?

With the cost of living crisis continuing to worsen in the UK, it could be tempting to stop making pension contributions. While this might ease the strain on your finances in the short-term, it won’t help you in the future when it’s time to retire. Cutting back on contributions is likely to mean missing out on various tax reliefs and employer contributions, so you’ll be losing more money that way.

Realistically, most people won’t be contributing up to the Pensions Annual Allowance every year (set at £40,000 for the 2022–2023 tax year­, with unused allowances able to be carried forward from the last 3 years). Currently, around 84.2%
of income tax payers are on the basic rate, meaning the average UK income for most workers is somewhere between the thresholds of £12,571
and £50,270.

Even if you earn a little above the Personal Allowance
and part of your pension contributions already benefit from other tax reliefs, you could still receive a top-up payment for a proportion that doesn’t. It’s always a good idea to seek professional pensions advice to ensure you’re making smart investments in your future, so you’ll be able to get the most out of your retirement fund later on.

If you’re looking for accountants to help you with tax relief planning, you can always contact GBAC, accountants in Barnsley, by calling 01226 298 298 or emailing info@gbac.co.uk. For more details on the pension tax relief legislation changes, view the policy paper on ‘pensions relief relating to net pay arrangements’.