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What you need to know about tax changes taking effect from 6 April 2018

The new tax year starts on 6th April and with it comes changes to the tax rates and thresholds.

Below we have summarised what we consider the most important changes.

 

Dividend Allowance:

The tax-free dividend allowance will be reduced from £5,000 to £2,000 per year for 2018/19 onwards. This will mostly affect directors of small businesses who pay themselves through dividends rather than salary and investors with dividend-generating shares. This change will bring an additional tax liability of £225 for a basic-rate taxpayer, £975 for higher-rate taxpayer and £1,143 for an additional-rate taxpayer.

Capital Gains Tax:

The Capital Gains Tax annual exemption increases from £11,300 to £11,700 from the new 2018/19 tax year.

Minimum Wages:

The National Living Wage (NLW) will increase from £7.50 to £7.83 an hour while the National Minimum Wage (NMW) for those employed under 25 will also increase as following:

Category of worker Hourly rate in 18/19 Hourly rate in 17/18
Aged 25 and above (national living wage rate) £7.83 £7.50
Aged 21 to 24 inclusive £7.38 £7.05
Aged 18 to 20 inclusive £5.90 £5.60
Aged under 18 (but above compulsory school leaving age) £4.20 £4.05
Apprentices aged under 19 £3.70 £3.50

Personal Allowance:

In this new tax year, the amount that can be earned before start paying tax will increase from £11,500 to £11,850, setting up the basic tax code at 1185L.

Income Tax Bands:

The income tax bands of taxable income will rise as well as shown in the table below:

Band Tax rate Taxable income 2018-19 Taxable income 2017-18
Personal Allowance 0% Up to £11, 850 Up to £11,500
Basic rate 20% £11, 851 to £46,350 £11,501 to £45,000
Higher rate 40% £46,351 to £150,000 £45,001 to £150,000
Additional rate 45% over £150,000 over £150,000

Mortgage Interest:

Up to April 2017, mortgage interest was fully deductible against rental profit. This allowable expense was reduced to 75% of the total mortgage interest in 2017/18 and is now further reduced to 50%. The remaining 50% will be given as a tax relief to the basic rate of income tax, currently at 20%. This will be further reduced to 25% and 75% available as a tax relief from 2019/2020 and from 2020 all financial costs will be given as a basic rate tax deduction.

Pension Contributions:

The minimum contributions for automatic enrolment pensions will increase as following:

Employer Minimum Contributions Employee Contributions Total Minimum Contribution
Until April 18 1% 1% 2%
6 April 18 – 5 April 19 2% 3% 5%
6 April 19 onwards 3% 5% 8%

National Insurance Contributions for self-employed people:

National Insurance Contributions (NICs) for sole traders will be set as per the below:

  • Class 4 NICs are payable at 9% on business profits between the Lower Profits Limit of £8,424 (£8,164 in 2017/2018) and Upper Profits Limit of £46,350 (£45,000 in 2017/2018) and 2% on profits above £46,350 a year.
  • Class 2 NICs, paid on profits of £6,205 or more, will rise from £2.85 to £2.95.

How to treat VAT on recharged expenses

When providing services to your client, occasionally you might need to pay for items on their behalf. How do you then treat the VAT on the expenses that you recharge to the customer?

There is one simple rule that you need to keep in mind: all recharged expenses carry VAT, unless the item is a disbursement.

If you pay an expense on behalf of your customer and that is purely an expense of the customer then you consider this as being a disbursement. For example, an accountant may pay the Companies House fee for filing the confirmation statement for one of its clients, but that fee belongs to the client. It is the client/company who gets the benefit of the fee payment, and who ‘uses’ what is paid for by the fee. As it is only the client that uses it, it is a disbursement, so no VAT can be charged.

However, if the accountant sends some documents to his client for signature by courier, this fee belongs to the accountant. It is an expense they have incurred as part of their work and chosen to recharge – as part of their work done and because it is related to the client. If such a cost is recharged to the client, it must carry VAT.

An important thing to keep in mind is that recharged expenses and disbursements need to be clearly labelled and distinguished on the VAT invoice.

If you’re looking to find out more about VAT on recharged expenses, contact us and have your questions answered by a tax return accountant in minutes.

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A little treat on this rainy day – Friday cakes! 

The Cloud

We have been busy working on the Cloud today, if you would like your bookkeeping posted by your accountant but still see all your transactions you can contact us for information on Sage Cloud Accounting

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