April 6, 2020, is the start of the 2020/21 tax year. Here, we will discuss some of the major changes that can affect both individuals and businesses.
Personal Tax, Thresholds And Allowances
The amount that you need to earn before you start paying your income tax is the Personal Allowance. For the 2020/21 tax year, it stays at £12,500. On the other hand, the threshold for the Higher Rate of income tax, which has a rate of 40%, still stays at £50,000. Take note that this includes the Personal Allowance.
If you are both a director and a shareholder in your company, then there is a great chance that you can maximise your tax efficiency for the 2020/21 tax year. This can be done if your company will pay you a salary of £8,788 and earn a dividend of up to £41,212. In this way, you will be able to apply all the basic rate band of tax, wherein you will be paying a tax rate of 20%. This is assuming that you do not have any other income. Furthermore, you can expect that you will have a total personal tax payment of £2,662.50.
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In case you are taking more earnings in dividends, then you will have to pay more tax using the higher rate of 32.5%. If you would like to know how these amounts are calculated or you want to receive more salary on your limited company, then you should talk to one of our accountants. They can provide you with personal advice.
Scottish Income Tax
Residents of Scotland have their own income tax rates. Some of these thresholds remain the same while the others were changed for the 2020/21 tax year.
The starter rate has a tax rate of 19%. For the 2019/20 tax year, its threshold is from £12,501 to £14,549. For 2020/21 tax year, its threshold is from £12,501 to £14,585.
The basic rate has a tax rate of 20%. The threshold for the 2019/20 tax year is from £14,550 to £24,944, while the threshold for the 2020/21 tax year is from £14,550 to £25,158.
The intermediate rate has a tax rate of 21%. It has a threshold of £24,945 to £43,430 for the 2019/20 tax year and £25,159 to £43,430 for the 2020/21 tax year.
The higher rate has a tax rate of 41% with a threshold of £43,431 to £150,00 for the 2019/20 tax year and the 2020/21 tax year.
An additional rate of 46% will be used for thresholds over £150,000.
The personal allowance remains at £12,500, both for the 2019/20 tax year and the 2020/21 tax year. Also, the Personal Allowance will be decreased by £1 for every £2 earned, which is applicable if earnings go beyond £100,000. This is just similar to the rest of the UK.
For the 2020/21 tax year, there are no changes on the tax-free dividend allowance, it still remains at £2,000.
Minimum Wage Changes
National Minimum Wage and National Living Wage
There are some changes implemented on the 2020/21 tax year. An increase in the National Minimum Wage and National Living Wage was introduced on April 1, 2020. However, the minimum hourly rate that you should pay your employees will likely depend on their age as well as their status, specifically, if they are working as an apprentice.
Beginning on April 1, 2019, the rate for adults who are 25 years and above is £8.21, £7.70 for adults between 21 and 24 years old, £6.15 for adults between 18 and 20 years old, £4.35 for those who are less than 18 years old, and £3.90 for the Apprentice rate 1.
On April 1, 2020, there were some changes being made on the rates. Adults who are 25 years and above will receive £8.72, £8.20 for adults between 21 and 24 years old, £6.45 for adults between 18 and 20 years old, £4.55 for those who are less than 18 years old, and the Apprentice rate 1 is £4.15.
Company Cars, Vans and Fuel Benefit
Starting on April 6, 2020, there is an increase in the benefit in kind (BiK) tax rates for company cars. The increase in the percentage being used on the list price of the car will likely depend on the CO2 emissions issued by the Vehicle Certification Agency. Additionally, HMRC has issued a ready reckoner which can be utilized in computing your company car tax.
Company Vans and Fuel Benefit for Company Cars
BiK occurs when the company permits personal use of a company van and pays for the fuel that they use personally. These fuel benefit charges are only applicable if the fuel was for personal use. Starting on April 6, 2020, the tax paid on these benefits increased. The BiK is a fixed amount intended for company vans. The changes below are for directors as well as employees.
For company vans, its BiK increased from £3,430 to £3,490. When it comes to the van’s fuel provided for personal use, it increased from £655 to £666. Unfortunately, the computation of the fuel benefit for cars is a bit more complicated.
Employees or directors using company cars and free fuels from their employer should pay a tax equivalent to the benefits that they received every tax year. This is a fixed amount that must be paid each year and on April 6, 2020, it increased from £24,100 to £24,500.
The BiK charge is computed based on a certain percentage, then multiplied by the fixed amount which is £24,500 for the 2020/21 tax year. For instance, if your company car has a BiK percentage of 13%, then 13% of £24,500 is £3,185. This is the BiK amount on the fuel that the employee or director used personally.
Increase on Student Loan Plan 1 and Plan 2 Threshold
The Department for Education recently affirmed that starting on April 6, 2020, an increase in the earnings threshold will take effect. This is the amount before a student loan will be repaid.
For Plan 1 loans, it was previously £18,935 then it was increased to £19,390. For Plan 2 loans, the amount was £25,725, then increased to £26,575.
If you are the director of your company and you are receiving a salary and dividends, and you have a student loan that you need to pay back, then you have to consider that the threshold for repayment will depend on your total income.
This is applicable to all recent and future student loans wherein the companies will make the student loan deductions. Hence, if you are deducting student loans from your employees, you have to check the type of student loan they have so you can make appropriate deductions.
Postgraduate Master’s Loan and Postgraduate Doctoral Loan (New)
The government recently introduced a new type of loan known as Postgraduate Master’s Loan. The purpose of this loan is to help students with their course fees and living expenses while they are studying a postgraduate master’s course.
The repayment scheme for Postgraduate Loan is just similar to any other type of student loans. Also, the interest that will be charged to you will start from the day that you have obtained the first payment.
For students in England and Wales with an income of more than £21,000, the repayment rate is 6%. On the other hand, for Scottish and Northern Ireland students who earn an income of more than £18,330, the repayment rate is 9%.
Other Personal Tax Reliefs and Allowances
For the 2020/21 tax year, there are no changes on the tax-free amount for paying personal pension, it still remains at £40,000. However, there is an increase in the lifetime allowance for pension savings. Starting on April 6, 2020, it will be £1,073,100, instead of £1,055,000 in the 2019/20 tax year.
Capital Gains Tax
There is an increase in the Capital Gains Tax annual exemption for individuals, instead of £12,000 for the 2019/20 tax year, it is now £12,300 for the 2020/21 tax year.
There is an enormous reduction on the Entrepreneurs Relief lifetime allowance limit. Previously, the limit was £10 million in the 2019/20 tax year and on April 6, 2020, it was decreased to £1 million.
Corporation Tax, Workplace Pensions and Allowances
If you have a business, then you are required to pay Corporation Tax for your profits at a rate of 19%.
Auto-enrolment Workplace Pensions
For the payment of your employee’s auto-enrolment workplace pension, the minimum amount stays the same. The means that the overall amount for employer and employee contributions is still 8% of the employee’s qualifying earnings.
Currently, the total minimum contribution is 8%, while the employer minimum contribution is 3%. Also, the staff is allowed to contribute up to 5% for the remainder.
Annual Investment Allowance (AIA)
Companies are permitted to claim £1 million as Annual Investment Allowance (AIA) for expenses acquired between January 1, 2019, and December 31, 2020, provided that it is spent on fixed assets such as plant and machinery. It is expected that on January 1, 2021, this allowance will be decreased to £200,000.
At present, the government is conducting a basic review on Business Rates. Also, it is anticipated that further consultation will be done by Autumn 2020.
Additionally, starting on April 6, 2020, businesses that are involved in leisure, retail, and hospitality industries are not required to pay any business rates for the whole year provided that they operate from premises and has a rateable value of less than £51,000. Restaurants, hotels, and coffee bars are also included.
On the other hand, pubs can avail an increase in the discount of their business rates, from £1,000 to £5,000, provided that they have a rateable value of less than £100,000 in England.
As we are starting a New Tax year, it is best that we should think of ways that could make us more efficient.