Marginal Tax Rates

What rate of tax would you pay on an additional £1 of earnings? If your annual income is between £41,865 and £150,000 you may think the tax rate would be 40%, but the peculiarities of the UK tax system mean you could pay much more.

To start with earned income above the 40% threshold carries a national insurance charge (NICs) of 2% so for every £1 you earn above £41,865 (for 2014/15) you will pay 42% in tax and NICs.

Child benefit is withdrawn from the highest earner in the family at the rate of 1% of the benefit for each £100 of income exceeding £50,000 per year. This translates into an effective marginal tax rate of 60% on income between £50,000 and £60,000.

When your income exceeds £100,000 your personal allowance is withdrawn at the rate of £1 for every £2 of income above £100,000. This is an effective tax rate of 62% including NICs.

From 6 April 2015 married couples will be able to transfer up to 10% of their personal allowance between them. This will allow up to £1,050 of the allowance to be transferred from the person who earns less than £10,500, to their spouse who earns up to the 40% threshold. Thus £1 of additional income that takes you over the 40% threshold will mean you lose the whole of that transferable allowance - an infinite marginal tax rate.

If you are able to control the level of your taxable income, perhaps because you run your own business, it makes sense to adjust your income to avoid those high marginal tax rates. Perhaps you could employ other members of your family, or take them into business with you as partners, to spread the business income.

Payments of pension contributions and Gift Aid donations can stretch your 40% threshold, so the higher earner in the family should making those charitable donations and pay pension contributions. We can help you plan to avoid the highest tax rates and make the best use of all allowances available.

Real Time Information (RTI) Interest

In the past some employers would play the PAYE system, holding on to the PAYE deductions until the last payment date of the year, and then paying the balance due before interest was charged. That is no longer possible under real time information (RTI), as interest is now charged on late paid PAYE and CIS deductions on a monthly basis throughout the tax year.

The interest is applied to payments which fall due on and after 19 May 2014, which are paid late. If you check your business tax dashboard on the HMRC website, you may see interest accrued from 19th of the month. Where you pay the PAYE due electronically the payment is due by 22nd of the month. In the case of an electronic payment the interest charged from 19th to 22nd should be cancelled.

However, there is a known problem which HMRC are working to fix. If your business made no full payment submissions (FPS) for a tax month (perhaps because no wages were paid), HMRC may have estimated the PAYE due and added that estimated amount to your PAYE account. The estimated PAYE debt is called a "specified charge". Interest accrues on the specified charge as if it was real PAYE due. 

The way to get rid of a specified charge is to submit a nil Employer Payment Summary (EPS) for each of the tax months for which the specified charge has been raised for. This should also remove the interest accrued on the specified charge, but currently it doesn't. HMRC say this interest will not be pursued, and it will be removed from the PAYE account when the software is fixed.

VAT and discounts

Do you offer prompt payment discounts to your customers - known as PPDs?

Under UK law VAT is payable on the net amount after deducting the discount, whether or not the customer takes advantage of the discount.

Say you sell a carpet for £1,000 + VAT, and offer 3% discount if the customer pays with 10 days. VAT is charged at 20% on £970 ie £194, rather than as 20% of £1,000 which is £200. Even if the customer takes two weeks to pay and thus doesn't qualify for the PPD, the amount due will be £1194.

This is a ripe loophole ready for blocking, and that is exactly what the Government is going to do from 1 April 2015. From that date it is proposed that VAT will be due to the amount the customer actually pays. So in the example above where the customer doesn't take up the PPD he pays the full £1000 plus VAT of £200.

The PPD VAT-dodge has been widely exploited by suppliers of telecommunications and broadcasting services, so the use of PPDs to reduce VAT due has already been blocked in those sectors from 1 May 2014, where the customer can't recover the VAT charged. Those will be non-business customers.

If you offer PPDs you may need to change your sales software. We will keep you informed of the details of the changes, when they are announced nearer the time.

Auto-enrolment

Auto-enrolment is the term for the law that requires all employers to register their employees into a qualifying workplace pension scheme. This requirement is being rolled-out to the largest employers first and will eventually apply to the smallest employers from June 2015 onwards.

For example if you have 62 to 89 employees you have to apply auto-enrolment from 1 July 2014. Those with larger payrolls should already have auto-enrolment in place.

There are let-outs; auto-enrolment only applies to employees working in the UK who are aged 22 to state pension age, and who earn more than the personal allowance (£10,000 for 2014/15). After being enrolled in to a pension scheme, each employee has an opt-out period of one month whereby they can receive a full refund of any contributions already made. Another opt-out opportunity must be offered every three years. 

Once the workplace pension scheme is running both the employee and the employer must make contributions, which will start at 1% of qualifying earnings rising to a total of 8%. Qualifying earnings consist of pensionable pay in the range £5,772 to £41,865 (for 2014/15). The employee's employment contract will define what "pensionable pay" is.

We can help you work out what auto-enrolment may cost you, and which employees will be covered. There is a lot to think about, and if you haven't already got a suitable pension scheme in place you will need to set one up. There are significant penalties for employers who fail to enrol employees on time, so don't let the auto-enrolment timetable overtake you.

June Questions and Answers

Q. My father resigned as a director of our family business in March, and started to draw his pension, but he retained 15% of the shares in the company. It seems likely that company will be sold later this year. Will my father get entrepreneurs' relief on any the gain he makes on his shares?

A. Unfortunately not. To qualify for entrepreneurs' relief the shareholder must be an employee or officer (director or company secretary) for the full 12 months that ends with the sale of the shares, or the date the company ceases to trade. If you reappoint your father as a director (he doesn't have to get paid for that role) and then wait for 12 months before the sale, he should qualify for entrepreneurs' relief. 

Q. I have just received my renewal pack for claiming working tax credits, but the income figure for 2013/14 doesn't agree with my P60 form and payslips from my employer - by a wide margin. What's gone wrong and what should I do?

A. The difference between the figures could be due to any of the following;

- Where you have more than one source of income (perhaps a redundancy payment from a previous employment) your tax credits renewal notice will show the total from all the sources that you received inc ome from in 2013/14.
- Your pay shown on the P60 may have been corrected a late stage after the Tax Credits Office extracted the figures used for the renewal notice.
- Your income counted for tax credits includes the value of certain benefits in kind such as the provision of a company car, which isn't included in the amounts reported on the form P60 or on payslips. The value of those benefits will be reported on a form P11D which you should receive by 6 July.

If you believe the tax credits income figure for 2013/14 is wrong ring the number given in the renewal pack and report the correct figure. 

Q. I run a small independent chemist which has three employees. I was told that my business would not qualify for the employment allowance as a good deal of our work involves dispensing NHS prescriptions. Is that true?

A. The initial guidance from HMRC appeared to indicate that pharmacies would not qualify for the employment allowance, which is worth up to £2000 per year. However, revised guidance from HMRC confirms that independent pharmacies that conducting a business, including over the counter sales as well as dispensing NHS prescriptions, are entitled to claim the employment allowance.

June Key Tax Dates

19/22 - PAYE/NIC and CIS deductions due for month to 5/6/2014