In April, inflation in the UK rose to 9% – the highest it’s been since 1982. As the cost of goods and services continues to increase faster than wages and savings can keep up with, consumers have no choice but to limit their spending.

This means that owners of small businesses are hit twice over. Not only do rising prices limit their own spending power, but struggling customers buying less is also reducing their revenue.

The BBC
reports that higher energy bills and surging fuel prices were the cause of around 75% of April’s inflation increase. Most other goods and services are also rising in price, with the Bank of England anticipating another recession this year if inflation passes 10%.

So, what does this mean for small businesses and consumers in 2022? This GBAC blog explores what’s happening with UK inflation and how to reduce its negative impact.

How can consumers manage spending?

Now the UK has the highest inflation rate of the G7 countries, the economy is undoubtedly shrinking. Many people are trying to cut costs wherever they can, from limiting car journeys to cancelling streaming subscriptions.

Switching to own-brand items for isn’t going to help everyone with the cost of living crisis, but there are a few things you can do to build up short-term savings.

Cancelling or pausing subscriptions can save you more than you might think. Not just media services, but things like gym memberships, magazines, computer software, and monthly delivery boxes. Most of us will have a rolling contract for paid music, gaming, or dating apps, but do you use them enough to justify the price? Is there a free alternative?

Similarly, if your current broadband and mobile contracts are coming to an end, start comparing deals and switch to the best one. If you don’t want to swap providers, you can try contacting your current company to haggle, armed with competitor prices.

You should definitely assess every direct debit and recurring payment coming out of your bank account every month, and cancel anything that isn’t necessary. If you’re struggling to keep up with mortgage payments, don’t attempt to cancel them without contacting your lender, as you could be in breach of your contract.

Another option is to pause or reduce your pension contributions, if you regularly pay into a private pension. It’s not advisable to opt out of your workplace pension contributions, though, if you don’t want to lose out on employer contributions.

Generally, we all should think more carefully before we spend. Blocking notifications from retailers you buy from infrequently can help reduce the temptation to make unnecessary purchases, while signing up for loyalty cards can get you discounts at the places you shop regularly.

How can small businesses handle inflation?

According to the Financial Times, operating costs have risen for almost 90% of small businesses compared to this time last year. As business expenses increase and customers cut back on superfluous purchases, SMEs (Small to Medium Enterprises) need to make difficult choices on how to trim their spending and cover rising costs.

Startups Magazine reports that 26% of small business owners have already had to increase their prices in the last year, largely due to rocketing energy costs. However, not everyone is able to raise the prices of what they sell, and it also risks driving away more customers.

There are also other factors contributing to the financial squeeze, including rising National Insurance and business rates, plus labour shortages and international supply chain disruptions due to Brexit, the COVID-19 pandemic, and the war in Ukraine.

Most retailers will need to keep their prices competitive and retain a human touch, especially when providing services on credit. Customers may delay or even cancel payments that will have a knock-on effect on your cashflow, so it’s important to constantly keep things under review and adjust your long-term plans with regular re-budgeting.

When it comes to dealing with inflation as a small business owner, there are mostly two choices. You can either keep things small by cutting back on non-essential production costs, or take the risk of investing in growth. This may involve focusing on marketing and technology that could increase your sales enough to at least keep up with inflation, if not outpace it.

Where to get financial advice in 2022

It’s an unfortunate reality that inflation is a constant, so everyone needs to be aware and prepared. However, the current pace of inflation in the UK is unusual, and it won’t last forever. Until inflation returns to a more manageable level, individuals and businesses should be thinking over solutions to carry them through this tough time.

If you find yourself struggling with the cost of living, there is a helpful MoneySavingExpert survival guide with plenty of tips on how to save money and be smarter about spending it. Should your budget cover professional financial planning, GBAC, accountants in Barnsley, are always willing to help employers and the self-employed to streamline their business finances.

Simply give our accountants a call on 01226 298 298, or email your enquiry to info@gbac.co.uk and one of our financial advisers will be in touch.

Paying more than basic rate tax in the UK was once like being part of a select club. Following the introduction of the additional higher rate tax band in 2010-2011, the percentage of taxpayers over the higher rate threshold was just 10.4%.

By 2015-2016, austerity measures were pushing this number up to 16%. After raising the threshold, the proportion of higher rate taxpayers dropped to 13.6% in 2019-2020. However, it began to rise again, and is continually increasing.

The Office for Budget Responsibility (OBR) estimates that the Personal Allowance freeze will not only make more earners liable for Income Tax, but also push more people from the basic rate band into the higher rate band.

As Income Tax allowances will be frozen until 2025-2026, while wages gradually increase in an attempt to catch up with inflation, up to 19% of taxpayers could find themselves paying double the tax they previously owed.

What does this mean for UK taxpayers?

The FT Adviser reports that wage growth has been increasing faster than expected as the economy recovers from the pandemic, which could result in 1 in 5 taxpayers becoming liable for the higher rate (40%) or additional rate (45%) by 2024-2025.

According to Steve Webb, former pensions minister, original estimates were far lower than the reality. The OBR estimated wage growth of 2.9% from 2020 to 2022, but have since revised this to reflect the 2.6%
growth in 2020-2021 and 7.5% in 2021-2022.

This average wage increase of more than 10% is likely to have pushed over a million more people across the frozen higher rate threshold than anticipated. Compared to the estimated 1 million expected to be liable for the higher rate between 2019-2020 and 2024-2025, Webb predicts the number will be closer to 2.5 million over the duration of this Parliament.

If these newer estimates are correct, this means that up to 20%
of taxpayers could end up paying more Income Tax during this period. Since this doubles the percentage from 2010-2011, it’s safe to say that being a higher rate taxpayer is no longer a select club.

What are the options for higher rate tax relief?

This type of ‘stealth tax’ is even more unwelcome than unusual as the cost of living crisis continues in the UK. Many people will find themselves passing a larger cut of their income to HMRC in the next few years, if they haven’t already been dragged into a higher tax band since the 2019 election.

It’s certainly an incentive to reassess your tax liabilities and financial habits. So, is there anything you can do to minimise your losses to the Exchequer? Here are some examples of actions to take:

If you’ve joined the ever-expanding club of higher rate taxpayers, or believe that you’re likely to in the next few years, you could benefit from expert financial advice. Here at GBAC, we offer a range of tax consultancy services and HMRC enquiry support for a variety of clients throughout the UK.

Call 01226 298 298
to speak to our team, or send an email to info@gbac.co.uk
with your query. Our highly qualified accountants are available to assist you from 9am to 5.30pm, Monday to Friday.

The rise of remote working throughout the COVID-19 pandemic has opened new opportunities for many people wanting to escape the office full-time. Not only can employees work from their own homes, but they can choose to establish a home office anywhere – even if it’s in another country.

If all you need to do your job is your computer and a secure internet connection, why wouldn’t you want to set up shop somewhere better? Becoming a digital nomad seems like a dream come true for most workers. However, it’s not always that easy to relocate overseas whilst keeping the same job in your country of origin. Time zones and accessibility aside, residency and taxation can be a roadblock.

Let’s look into what it takes to be a digital nomad, and what this style of remote working means for individuals and employers when it comes to work permits, residency visas, and international taxes.

What is a digital nomad?

A digital nomad is a remote worker who travels, using technology to do their work from wherever they might be at the time. Some digital nomads move around within their home country, while others move to another country to work remotely from there instead. The more adventurous travel around the world from country to country – though this truly nomadic lifestyle isn’t for everyone.

While remote workers operate outside of business premises, they aren’t necessarily nomads, as they can also work in the office if required. The main differentiating factor is that remote working is a necessity for digital nomads because they travel further afield. Opportunities to do this were mostly limited to freelancers and the self-employed, but many employers are now offering more flexibility.

There are many professional roles that are compatible with the lifestyle of a digital nomad, such as:

It’s not restricted to e-commerce entrepreneurs and online influencers anymore. As long as you have the equipment you need and legal permission to work wherever you’re going, anyone can be a digital nomad nowadays. You’re only limited by employer policies and international tourist laws.

Can you get a digital nomad visa?

While it’s not an official term or specific document, a digital nomad visa is a permit allowing the holder to work remotely from a country other than their primary residence. It’s easy to get a tourist visa for visiting most countries, but these don’t always allow you to earn income while staying there.

This is why you need a ‘right to work’ visa if you plan to receive payment for remote work, even if the payment comes from outside the country you’re working in. You must operate in line with the immigration laws for whichever country you’re in, including ‘freedom of movement’ agreements.

Since the increasing popularity of digital nomad working during the pandemic, some countries are introducing targeted schemes along the lines of a digital nomad visa. For example, Barbados has a ‘welcome stamp’ for digital nomads, who can work there for a year if they earn a certain amount.

Malta also has a ‘nomad residence permit’ that allows remote workers to live there if they meet the minimum monthly income requirements. Bermuda has a similar ‘work from Bermuda’ scheme, and Iceland also offers a long-term remote worker visa. Other countries with digital nomad visa options include Germany, the Czech Republic, Norway, Estonia, and Portugal, plus Mexico and Costa Rica.

Where do digital nomads pay tax?

The issue with working remotely from a secondary country while sourcing your income from another is that filing and paying taxes can quickly become complicated. You’ll need to consider tax liabilities in both your country of origin (where you maintain citizenship) and the country you’re working in.

Even if the country you’re residing in offers a tax exemption for your type of temporary residency, it doesn’t mean you’ll be exempt back home. For example, if you were working in Barbados under the tax-free scheme, but your earnings were still being paid by an employer in the UK, that income would still be subject to UK taxes – including Income Tax and National Insurance contributions.

On the other hand, if you were working remotely in a secondary country but your earnings were paid within the same country, you would need to determine your primary country of residence to find out whether you still owed tax on that income back in the UK. If you’re unlucky, you could end up paying taxes twice on the same income, unless both countries have a double taxation agreement.

Wherever you go as a digital nomad, you need to take the tax residency requirements of each place into account. For many countries, you must live there for more than 183 days out of the year to be classed as a tax resident, but the rules can vary. It’s vital to know the country’s rules before working from there. To check your UK tax residence status, take the HMRC Statutory Residence Test (SRT).

What are the implications for businesses hiring digital nomads?

It might not be as much of an issue for those in self-employment, but hiring a digital nomad as an employer can have complications. Employers can state where an employee is obliged to work in their contract, so they decide whether to allow working from another location or not. This may be negotiated on a case-by-case basis, especially if it concerns a single employee working overseas.

It’s not wise for UK companies to allow employees to work remotely from wherever in the world they like, and definitely not without investigating your company’s legal obligations in each country first. In some cases, your employee working from abroad could mean you’re obligated to register as a foreign employer in that country, which could then make you liable for corporate tax there, too.

Employers also have to consider wider implications like the employee’s ability to maintain their quantity and quality of work, and how effective communication will be for collaborative purposes. Not only will employees need the appropriate equipment and software, but companies also need to ensure they comply with data protection laws in each country if they access sensitive information.

Are you an employer or employee affected by the rise of digital nomads?

If you’re planning to become a digital nomad, you need to get into the habit of keeping thorough financial records (if you don’t already do this). You’ll need to stay on top of your income, business expenses, and relevant tax legislations to avoid missing deadlines and receiving penalties. It can help to have a tax consultant in your primary country of residence to handle all the paperwork for you.

If you’re an employer with an employee who would rather be a digital nomad, you’ll need to work out a detailed legal agreement after researching the individual and corporate tax regulations in each jurisdiction. Having an accountant to manage bookkeeping and payroll can assist with gathering the financial information you need and ensuring that taxes are paid on eligible income for all employees.

As the working world continues to change with ongoing digitalisation, it’s likely that more and more countries will introduce some kind of digital nomad visa to encourage foreigners to live and work there. Should you need assistance with financial planning related to remote work and taxation, you can contact our team at GBAC, accountants in Barnsley, by calling 01226 298 298 or emailing info@gbac.co.uk.

Though it was introduced almost a decade ago in January 2013, many parents and guardians may still be unaware of the High Income Child Benefit Charge (HICBC). This Child Benefit Tax applies to anyone earning more than £50,000 a year while claiming Child Benefit
for a child in their household.

However, many workers who are used to being taxed through their employer’s PAYE system won’t realise that the government expects them to submit annual self-assessment tax returns for HICBC. This has led to HMRC sending hundreds of thousands of letters about suspected non-compliance, hitting families with surprise bills and fines during a time that’s already financially difficult for many.

The Office for Tax Simplification (OTS) has been extremely critical of the HICBC
implementation, issuing recommendations for improvement that HMRC has yet to follow. The question is, can the Child Benefit Tax be fixed? Or are the problems with enforcing HICBC declarations and collecting HICBC payments only the tip of the iceberg? Should the government rethink the whole scheme?

What is the Child Benefit Charge?

In England and Wales, an adult responsible for raising a child under 16 years old (or under 20, if they stay in education or training) can claim Child Benefit. This is a four-weekly payment at a weekly rate of £21.80 for the first child and £14.45 per additional child. Only one adult can claim for each child.

With a monthly payment of £87.20 for an only child, this can add up to a tax bill of over £1,000 if the parent is required to pay it back. For families with multiple children, the High Income Child Benefit Charge
can claw back over £600 more for each additional child. While having an adjusted net income above £50,000 would make you a high earner, this can still drastically affect budgeting and cashflow.

For every £100
you earn above the threshold, you would have to repay 1% of the total Child Benefit you received that year. This may not seem like much, but if your adjusted income exceeds £60,000 then you’ll find yourself having to pay back every penny. If you don’t submit your HICBC tax return or fail to pay, HMRC could fine you 30% of the balance, plus a £100
late fee, and interest on top.

What’s even more confusing is that the HICBC only applies to one parent. If both parents earn above the threshold, the person with the highest earnings would be responsible for the HICBC, even if their partner was the Child Benefit claimant. Single parents will also have to shoulder the bill themselves.

The threshold for ‘high income’ has stayed the same since 2013, while the higher rate Income Tax threshold has surpassed it (reaching £50,270 in 2022). This has pushed even more parents into higher tax repayments. According to the Institute of Fiscal Studies (IFS), the HICBC affected 1 in 8 families when the higher rate threshold was £42,475 – and are now expected to affect 1 in 5.

With this unfair and mismanaged policy seeming to punish parents, what options do they have?

Can you opt out of Child Benefit Tax?

If your income is above the threshold, or your partner’s, this will make one of you liable for HICBC payments. You have the choice to receive Child Benefit and repay the proportional charge at the end of the tax year, or opt out of receiving Child Benefit completely to avoid paying the HICBC.

However, it’s not as simple as just declining state child support payments. Claiming Child Benefit allows you to gain National Insurance credits
and allows each child to automatically receive a National Insurance number
when they turn 16. To avoid losing out on these advantages, you should register for Child Benefit, but opt out of receiving payments by unticking the ‘zero rate’ box.

This is a practical course of action for those earning over £60k, who would have to pay everything back at the end of the year anyway. It can be a trickier decision for those earning above £50k but below £60k – some might prefer to claim Child Benefit throughout then pay a percentage back.

In some cases, where one parent earns just a little over the threshold, clever tax planning could help to take your earnings below £50k. This would remove your HICBC liability. For example, ‘salary sacrifice’ schemes increase your employee pension contributions, putting more into your retirement pot and reducing your income for various tax thresholds – though this also cuts your take-home pay.

Given the complexities of state benefits and income taxes, it’s best to seek professional advice before taking such steps. If you need help with financial planning, why not contact GBAC, accountants in Barnsley, also covering Sheffield and Leeds, for expert assistance from our tax consultants?

Call 01226 298 298
or email info@gbac.co.uk
whenever you’re ready for a tax consultation, and the GBAC team will discuss our comprehensive services with you.

While the Making Tax Digital (MTD) scheme has been in place since April 2019, there were some exclusions. The first phase was registering businesses with an annual turnover of £85,000, while those below the threshold could register voluntarily. As of April 2022, the next phase requires all VAT-registered businesses to sign up to Making Tax Digital, regardless of their annual turnover.

Every VAT-registered business must also register with MTD, keeping VAT records and submitting VAT returns
digitally through the MTD software. Some lower-turnover businesses may already be doing this after registering voluntarily, but for those who aren’t yet, it’s no longer possible to delay.

What is Making Tax Digital?

Most business owners probably dread tax paperwork the most. After replacing the old Government Gateway with HMRC Online Services,
the government is phasing in Making Tax Digital with the aim of simplifying the confusing tax system to make things easier for business owners and accountants.

This modernisation involves either using the MTD software
or connecting their existing software to the MTD portal to file digital VAT records. With an accurate and consistent flow of information, old-fashioned annual tax returns will soon become a thing of the past, replaced by quarterly updates.

Not only should this make it simple to file VAT returns
correctly and on time, but there are also other benefits to digitalising your tax records. The more efficient and scalable system makes financial positions much clearer, aiding in cash flow control, data forecasts, and growth strategies.

How can I sign my business up for Making Tax Digital?

From 1st April 2022 onwards, all VAT-registered businesses must enrol with MTD and use the system to submit all VAT returns this way. If your annual return isn’t due until the end of the accounting period in December 2022, you may not need to sign up for and use MTD
until the beginning of 2023.

It’s best not to wait too long, however, as you must allow time to set up the software and for HMRC to confirm your registration. This can take up to 72 hours, so don’t leave it to the last minute. Even brief delays of a few working days could make returns and payments late, incurring a tax penalty.

Requiring all business on the VAT register to comply with MTD, not just those with an annual turnover above £85k, is only the second phase. In April 2024, we’ll see the introduction of MTD for Income Tax, which will affect landlords and the self-employed with annual income over £10,000. From April 2025, individuals in partnerships will also have to enrol, with more updates to come.

Why should I use Making Tax Digital software?

Many businesses keep their VAT records in spreadsheets, with most using specialist accounting software
like Sage or Xero. If you don’t want to switch to MTD
completely, it’s possible to use compatible bridging software to connect your existing system with MTD, allowing you to submit information digitally in compliance with HMRC rules without having to scrap your current system.

Even if you prefer to stick with bridging software, your business will still benefit from switching to digital VAT submissions. Phasing out manual paperwork should help to reduce errors, keeping records safely in one place where you can access them easily as and when you need to check your data or calculations. As a time-saving solution, MTD should also increase employee productivity.

No more losing receipts or digging through cabinets for poorly organised documents. Stress-free VAT records and returns, instead of a last-minute panic before the annual deadline. What’s not to like? When it comes to software costs, there are plenty of options for businesses at all income levels, plus the Help to Grow: Digital scheme – and you can also claim expenses back under business tax relief.

How can Making Tax Digital help my business?

Small businesses may be wary of the changes that come with digitalisation, but this modern overhaul of the old tax system is long overdue. HMRC has been mailing letters to VAT-registered businesses who are now required to sign up for MTD, but even if you haven’t received these instructions yet, or your small business isn’t currently included, it never hurts to be prepared.

If you’re ready to register and make the most of digital VAT software, you can learn more about HMRC-recognised MTD software on the government website. Should you need help evaluating whether your business is required to enrol or qualifies for an MTD exemption, or need assistance with VAT accounting and relevant software, you can always contact GBAC for expert guidance.

Contact the GBAC team by email at info@gbac.co.uk or by phone on 01226 298 298 today.

The Department for Education (DfE) is introducing new rules for student loan repayments for students starting university from September 2023. This is part of a response to a 2019 review of the higher education system, and an attempt to tackle the problem of soaring national student debt.

With the nation’s student debt currently at £161 billion, and only around 25% of undergraduates starting courses in 2020-2021 expected to fully repay their student loans, the government believes that lowering thresholds and extending schedules will lead to more students repaying loans in full.

More students enter higher education every year, with many taking on debt for low-quality courses that don’t lead to long-term employment opportunities. This means the current loan system isn’t sustainable, but under the new system, an estimated 70% of students will be able to repay in full.

Current student loan repayment rules

The current rules for students in England and Wales give undergraduates a repayment schedule of 30 years. Monthly repayments won’t begin until the graduate earns more than £27,295 a year – if their annual income exceeds this amount, they will start repaying 9% of the excess every month.

Once you begin repaying a student loan under the current rules, any outstanding debt will be wiped after 30 years. With many graduates struggling to find high-paying jobs, even someone earning a good income may not be able to pay off their loans and the accumulated interest within this time.

For current and former students whose loans fall under these rules, there’s no need to stress about retrospective changes. The new rules won’t apply to student loans taken out for academic years prior to 2023-2024. However, the threshold for Plan 2 repayments – which applies for students who went to university in England or Wales from September 2012 – is frozen until 2025 at £27,295.

New student loan repayment rules

The major changes to student loan repayments that will take effect from September 2023 include:

The most contentious change is that future students will have to continue making repayments for 40 years before any leftover debt is wiped. Additionally, they’ll have to begin repaying their loans sooner due to the reduced threshold. This means they’ll have to repay more over a longer period.

However, students starting university between 2023 and 2025 won’t have to worry about higher tuition fees, as they’re frozen at the current rate until then. There’s also the benefit of less interest, so these students may actually pay less over time than those under the current plan, who could be paying as much as RPI + 3% accrued on top of their actual tuition and maintenance loan balance.

Who will be affected by the student loan repayment changes?

As mentioned above, the most recent student loan changes will only affect new students who start a university course in September 2023 or later in that academic year. Undergraduates who plan to complete their course in the 2026-2027 academic year will be the first to experience these effects.

Theoretically, the new student loan repayment system should drastically increase the number of graduates who repay their loans in full before the expiration of the repayment term. In real life, some economists believe this will only have a positive impact on high earners, who could afford to repay their loans anyway, while low to middle earners will be saddled with higher repayments.

Due to the changes in interest rates, higher earners will accrue much less interest and repay faster, while lower earners will repay more over their lifetime. This is a bigger burden for such graduates who are trying to save for their future, limiting their ability to buy a house or invest in a pension.

However, the average graduate salary is still below the new threshold – though it may not seem like much of a plus side that most students won’t be earning more than £25,000 a year after graduating.

It’s worth noting that these changes affect domestic undergraduates only. They will not apply for international students, who can’t access government loans, or for postgraduate students, whose degrees will have different repayment plans. Nor will they apply to student loans in Scotland – where students start repaying at a £25,000 threshold, with a 30-year term and 1.5%
interest rate.

Is taking out a student loan in 2023 worth it?

If you, your child, or a family member plans to go to university in the near future, they might find it beneficial to start a course during the 2022-2023 academic year. After that, they’ll be subject to the new student loan repayment terms, meaning they’ll have to start repaying higher amounts sooner.

Similarly, sixth form college leavers who planned to take a gap year before going to university in 2023 might be better off scrapping those plans to stay within the current system’s repayment rules.

In any case, whenever the university course starts and however much you’ll owe in student loans, taking out tuition and maintenance loans from the Student Loans Company is still better than relying on commercial loans. You can learn more about this in our blog on student debt rules.

If you’d like more information on the changes explored in this article, click through to read the relevant report by the Institute for Fiscal Studies. For graduates already in employment, who may be in need of financial advice
to help manage student loan repayments and arrears, the team at GBAC
is always happy to offer expert guidance. You can get in touch with us whenever you’re ready.

Just as employees must build up National Insurance Contributions (NICs) throughout their working life in order to access state benefits, so must those in self-employment. However, employers usually set up the PAYE system to deduct Class 1 NICs automatically for their workers, while self-employed people must pay Class 2 and/or Class 4 contributions directly to HMRC after submitting a tax return.

Following an announcement last September, the government has introduced a 1.25% increase to NICs from April 2022 – known as the Health and Social Care Levy. Despite this increase, it seems that self-employed people with profits within a certain limit could actually pay less in NICs in 2022.

Let’s look into the latest changes for self-employed NICs
and what they’ll mean for you this year.

How do National Insurance Contributions work for self-employed people?

If you need a quick refresher on the basics of National Insurance Contributions, these are payments that people earning a sufficient amount must pay between 16 years old and state retirement age. You must make a minimum amount of NI contributions throughout your lifetime to access the State Pension, certain unemployment benefits, Maternity Allowance, or Bereavement Support payments.

As mentioned, employees on a payroll will have Class 1 contributions deducted from their wages, while their employers will also contribute Class 1A/Class 1B contributions. As those who are self-employed is unlikely to have a payroll system, they must pay a different class of NICs on their profits.

This means that anyone in self-employment is required to submit an annual self-assessment tax return, which HMRC uses to calculate how much the person owes in Income Tax and National Insurance Contributions for that year. When it comes to NICs, they may have to only pay the Class 2 flat rate, but they may also be liable for the Class 4 higher rate on profits above a particular amount.

Even if your self-employment earnings are below the threshold for Class 2 and Class 4 NICs, or you are eligible for reduced rate NI contributions, you can still choose to make NIC payments if you can afford to. These voluntary contributions are categorised as Class 3, and help you to fill gaps in your NIC record that could otherwise have a negative impact on your eligibility to claim state benefits.

How are Class 2 National Insurance Contributions changing?

Previously, the threshold for fixed-rate Class 2 NI contributions was £6,515, and was due to rise to £6,725 this tax year. After the Spring March Statement, the threshold is now set at £11,908
for the 2022-2023 tax year. It’s then due to align with the Personal Allowance of £12,570 for 2023-2024.

This means that you now won’t have to pay Class 2 NICs
on self-employment earnings above the small profits threshold of £6,725. You’ll only have to make Class 2 NIC payments for any earnings over the lower profits limit of £11,908. The Class 2 NIC rate for 2022-2023 is now £3.15 a week.

If you won’t be making enough profit to pay any National Insurance Contributions, you might have concerns about maintaining your NI record. There’s no need to worry, because anyone with annual self-employment profits between £6,725 and £11,908 can benefit from deemed NI contributions.

You’ll still be building up your NIC record, even though you technically won’t be paying for those contributions. This is especially important to get enough qualifying NICs for the State Pension.

What is happening to Class 4 National Insurance Contributions?

While the 1.25% levy doesn’t apply for Class 2 NICs, it does apply for Class 4. The Class 4 NIC rates
were therefore due to increase from 9% to 10.25% for self-employment profits over £9,880. Like the Class 2 threshold changes, the Class 4 threshold now set at £11,908 instead, and will also align with the Personal Allowance for 2023-2024 (£12,570). The higher rate threshold is frozen at £50,270.

So, if you earn annual profits between £11,908 and £50,270, you’ll be liable for NI contributions at a rate of 10.25%. For profits above £50,270, you’ll now pay a reduced NIC rate of 3.25%
(up from 2% the previous year due to the levy). The threshold boost means fewer people will be liable for both Class 2 and Class 4 contributions, allowing self-employed earners to keep more of their profits.

As a self-employed earner, you’ll no longer have to make Class 2 contributions from the date that you reach State Pension age, just like employees who pay Class 1 NICs. If you’re liable for them, you’ll continue paying Class 4 contributions until the start of the next tax year following this date.

How does this affect my NIC liabilities?

According to the government’s Spring Statement factsheet, the majority of people who pay NICs will pay less than they would have before the changes. Whether they work for an employer or are self-employed, lower earners can keep more of their money whilst still protecting their NIC record.

Here are some examples of the impact of these self-employed NIC changes at various profit levels:

Profits

2021/2022

2022/2023 (Previous)

2022/2023 (New)

£10,000

£197

£176

£0

£15,000

£647

£689

£481

£20,000

£1,097

£1,201

£923

£30,000

£1,997

£2,226

£2,018

If you’re still not sure about your NIC liabilities, or you need professional assistance with self-employment tax management, contact GBAC on 01226 298 298. Our accountants can provide a variety of financial services, from bookkeeping
to tax planning. When you call our team, or email us at info@gbac.co.uk, we can help you to make the most of the changing NIC thresholds in 2022.

It’s no secret that the pandemic has had a huge impact on the UK’s finances, with the government looking to recoup the costs of various COVID-19 economic support packages. At the end of 2020, a newly launched independent think-tank called the Wealth Tax Commission published a report that pushed the idea of a UK wealth tax back into popular discussion.

The Wealth Tax Commission report suggested that restructuring the tax system is the most viable option, and that the government should be taxing wealth and other types of income instead of only increasing taxes on employment earnings.

Many economists think that such a wealth tax could be the solution to the UK’s soaring public debt and financial inequality crises. Yet none of the Chancellor’s budget announcements in the last two years has explored the concept – so what happened to introducing a wealth tax?

What is the wealth tax?

Technically, we do already have forms of wealth tax in the UK, such as Inheritance Tax (IHT) and Capital Gains Tax (CGT). Nonetheless, there are undoubtedly very wealthy people with highly valuable assets that are not being taxed efficiently, if at all.

The idea of taxing wealth has been floating around for decades, but the wealth tax
specifically suggested by the Commission would be a one-off charge that could raise enough funds to offset the estimated cost of the COVID-19 pandemic on the public purse.

The Commission’s recommendation was to apply the wealth tax on an individual basis, at a flat rate of 5% of any wealth over £500,000. This would cover total wealth, including property and pension values, and payable in annual 1% instalments (plus interest) over 5 years.

According to their calculations at the time, over 8 million individuals could be liable for paying this tax, which would raise £260 billion net. However, the latest estimates on public spending during the pandemic are closer to £410 billion – clearly requiring a different model.

Why does the UK need a wealth tax?

Even before the spiralling costs of the pandemic, growing wealth inequality was increasing the gap between the richest and poorest people in the UK. At the same time as the Wealth Tax Commission published its report, the Joseph Rowntree Foundation also published a report on destitution.

This report found that over a million households were unable to afford 2/5 of essentials (food, heating, lighting, clothes, and hygiene) at some point in 2019. Earlier this year, the Office for National Statistics (ONS) published the results of the Wealth and Assets Survey, finding that the wealthiest 10% consistently held almost 50% of the nation’s wealth between 2010 and 2020.

The richest individuals have a median net wealth in the hundreds of thousands, including property and private pensions, with a median bank balance of £90,000. By contrast, the poorest have a median net wealth of zero, with less than 50% owning property or having a pension pot. This means that more than half of the poorest people have significant debts that outweigh their savings.

As the cost of living continues to rise, with inflation outpacing wages, energy prices rocketing, and National Insurance Contributions increasing next month, the growing pressure on the poorest families could push even more people into poverty – but a wealth tax could ease this pressure.

How would a wealth tax affect me?

Initially, the thought of more taxes fills the average taxpayer with dread, but a wealth tax is only likely to target a relatively small percentage of taxpayers. If the government were to implement the Wealth Tax Commission’s proposals, they would only apply to those with more than £500,000 in accumulated wealth, and the tax would only apply to any wealth above this amount.

As the majority of Brits have not amassed £500,000 or more, such a tax would affect most people not in the top 10% by actually easing their financial strain. If the government sourced funding from excess wealth rather than increasing taxes on the limited income of the poor, this could help to prevent the potential poverty crisis that currently looms over most of the British public.

There’s also the issue of fiscal drag or ‘stealth tax’. With Income Tax thresholds frozen until 2026, if wages increase along with inflation then at least a million people could find themselves dragged into a higher tax bracket and suddenly having to pay at least 20% more tax. Without the freeze, the tax thresholds increasing would most likely have kept them in the same tax band as before.

While people tend to be wary when it comes to taxes, the idea of a wealth tax is actually fairly popular amongst Brits. Back in 2020, a poll by global research company Ipsos
found that 41% of respondents ranked a wealth tax as the most preferable option over cutting public services or increasing other taxes instead (such as Council Tax, Capital Gains Tax, Income Tax, or VAT).

Will the UK government introduce a wealth tax?

No UK government has ever implemented a wealth tax, and it does not seem that the current government will, either. The closest this came to happening was in 1974, when the Labour Party promised to introduce an annual wealth tax, but did not do so before leaving office in 1979.

Chancellor Rishi Sunak is against a wealth tax of any kind, but even a one-off tax like the policy suggested by the Wealth Tax Commission could be successful. However, one of the biggest issues with enforcing such a levy is categorising and valuing wealth, because not all assets are liquid.

At any rate, the Conservative Party has made no mention of current or future plans to introduce any kind of UK wealth tax. It would be far more likely for them to increase Capital Gains Tax rates before the end of their current office term (while Inheritance Tax rates will remain frozen until 2026).

If you have any concerns about your income, savings, or taxes, the highly qualified accountants at GBAC
would be happy to help you with financial planning and management. Simply call us on 01226 298 298, send an email to info@gbac.co.uk, or browse our website to learn more about our services. Our accountants in Barnsley, Leeds and Sheffield will be delighted to help.
 

A recent First-Tier Tribunal (FTT) ruling in favour of the taxpayer has challenged HMRC’s belief that renting out a room or piece of land alone is not exempt from VAT. In the case of HMRC vs Errol Willy Salons, the FTT dismissed HMRC’s VAT assessment in support of aggrieved salon owner Errol Willy.

The case started back in 2017, when the salon owner decided to let out two unused rooms. Each room was fairly plain and nondescript, though they both had a sink. The beauticians who rented the rooms provided all the tools of their trade by themselves, controlling their own hours and prices.

Though Errol Willy had little to no involvement in the work of the beauticians, other than collecting a percentage of their monthly takings as rent, HMRC issued a huge VAT bill of £18,649. According to HMRC, the salon supplied taxable rated services – but the owner disagreed, and now so has the FTT.

HMRC’s assessment of room rental VAT

Generally, the supply of a rented room should be exempt from UK VAT, with the exceptions of rooms hired for catering or sleeping accommodation. HMRC had yet to draw a line between what counts as VAT-exempt room hire and when it counts as a supply of services that’s liable for VAT.

In the case of Errol Willy’s salon in Cardiff, HMRC
argued that the room rentals were not exempt from the standard 20% VAT rate because they were part of a larger package of taxable services.

While the beauticians were self-employed and not registered for VAT, they were able to access the staff toilets and break areas, and made use of heating and lighting. They also had minimal use of the salon’s reception and advertising. HMRC judged all of this to be a service package inclusive of rent.

When Errol Willy received the unexpected VAT assessment, he of course decided to challenge it and appeal against HMRC’s decision at a tribunal. The salon owner was not charging the beauticians for use of these basic facilities, but HMRC believed that the situation was similar to a previous case.

In the Byrom case, HMRC successfully proved that self-employed masseuses hiring rooms at a massage parlour were also supplied with services such as a reception desk, a kitchen, showers, linen and towels, and a washing machine – so the standard VAT rate was applicable to the rental income.

However, as the FTT acknowledged, Errol Willy did not
provide such an extensive service package.

The First-Tier Tribunal’s decision on room hire VAT

Luckily for Errol Willy, the FTT did not agree with HMRC
that his case and Byrom’s were comparable.

While the masseuses in the Byrom case received a package of multiple services related to their purpose in hiring the rooms, the additional facilities in the salon that the beauticians had access to were either incidental or inessential to their business. The rooms they hired were more or less bare.

Therefore, the primary supply was simply room hire, and the salon owner was correct in treating these transactions as VAT exempt room hire. The court’s judgement was in the taxpayer’s favour, clarifying that supplying a room to rent is only liable for standard VAT rating if significant additional services are supplied as part of the hire – for example, if they had also supplied hairdressing chairs.

It’s evident that not every case of room hire which coincides with other minimal services qualifies as a supply package. Where the predominant supply is the letting of land, a VAT exemption is valid – so HMRC should judge these situations on a case-by-case basis, according to the specific circumstances.

What does this FTT ruling mean for my business?

You might be wondering how this individual taxpayer’s victory applies to you. If HMRC had won the case against Errol Willy Salons, other businesses letting out spare rooms could also find themselves liable for additional VAT charges at HMRC’s whim – even if any additional services were inessential.

The impact of this FTT ruling means that many small businesses, and even some large ones, have a precedent to refer to if they need to appeal against a VAT assessment like Errol Willy. However, HMRC
should now revise their room hire VAT exemption regulations to avoid a repeat of this issue.

If you would like to read more about the Byrom case and further examples of HMRC’s treatment of VAT liabilities, you can do so by clicking here. Following the Errol Willy Salons case, the government may pursue legislative changes to clarify the VAT rules. The best way to stay on top of these things and prevent similar VAT charges from HMRC is to make sure your account management is in order.

Do you need professional help with VAT returns? Or are you struggling with a tax investigation and need financial experts to handle the HMRC enquiry
on your behalf? In either case, our accountants in the North West would be happy to assist – simply contact GBAC to find out how we can help you.