Year End Tax Review 2021/22

Working at home allowance

Where you are required to work at home, your employer can pay you a tax-free allowance of £6 per week (or £26 per month). This allowance is to cover the additional costs incurred by using your home as a workplace, such as heat, light, metered water, insurance and broadband fees.

If your employer doesn’t pay this allowance, but you are required to work at home for at least some of your working time, you can claim the same amounts as tax deductions from HMRC.

You don’t need to provide evidence of the additional home expenses incurred if you claim up to £6 per week. Where the additional costs exceed this value, you can claim for the actual expenses incurred, but you will be required to have proof in the form of receipts, bills or contracts.

A claim for home working expenses for 2021/22 can be submitted online, or as part of your self-assessment tax return, or using form P87. Claims for earlier years may be submitted on tax returns or form P87 and they must reach HMRC within four years of the end of the tax year to which they apply.

Where there’s a Will...

When you die, your executors or relatives need to sort out your affairs. This stressful task can be made easier if you leave a clear and up-to-date Will that has been drafted with tax in mind.

They may also need to pay inheritance tax (IHT) if the net value of your assets, including your home and any insurance policies that pay out to your estate on death, exceeds the nil rate band (NRB) of £325,000. The IHT rate above this threshold is 40%, or 36% if at least 10% of your estate (net of NRB) has been left to charity.

The NRB is expanded by up to £175,000 if you leave the value of your home to one or more of your direct descendants. If that is your wish, your Will must be clear about who receives the value of your home.

There are other ways to reduce the IHT payable on death, such as:

• use your annual IHT allowance of £3,000 to make gifts from your capital or savings; if you didn’t use this allowance in 2020/21 you can give away up to £6,000 in 2021/22
• make other gifts to individuals as early as possible, as they will fall out of the IHT calculation if you survive seven years after the date of the gift (but be careful not to trigger CGT charges on the gifts)
• make regular gifts out of your surplus income rather than out of accumulated income or capital – those lifetime gifts may escape IHT
• ensure that proceeds from your life assurance policies flow directly to a beneficiary – if the money lands in your estate on your death, this could trigger an IHT charge
• inform your pension fund managers of whom you wish to receive any undrawn funds by way of a wishes letter – such funds can be free of IHT if you die aged under 75

Don’t miss tax deadlines

If you miss the deadline for filing your self-assessment tax return (31 January for online filing) you will be charged a £100 penalty.

If the return is filed more than three months late, an additional £10 per day is charged and, after six months, another penalty is incurred (the higher of £300 or 5% of the tax due). The flat-rate penalties will stand even if the tax return shows no tax.

Your company’s corporation tax return is due a year after the end of the accounting period. The penalty for being even one day late is £100 and another £100 is imposed after three months, then 10% of the tax due if the return is six months late. If you make a habit of submitting late company returns, the fixed penalties rise to £500 each time.

If you have a ‘reasonable excuse’, HMRC may agree to cancel the penalty. However, what you think is a reasonable excuse may well be found not to be so by HMRC or a tax tribunal.

Paying tax late will also attract interest and sometimes a penalty. VAT penalties are changing from April 2022 to allow some leeway if the debt is paid within 15 days, but debts arising before then can trigger a penalty of up to 15% of the delayed payment, for even being one day late.

Where you will have difficulty in paying tax debts falling due, you should ask HMRC to set up a payment plan to spread the debt over up to 12 months. Do this as soon as possible.

Will you get a full state pension?

In order to receive the full state pension on reaching State Pension Age on or after 6 April 2016, you need to have accrued 35 complete years of National Insurance Contributions (NIC). To receive any amount of the UK state retirement pension, you need at least ten complete NIC years.

You can check how much state pension you are due to receive through your personal tax account on gov.uk. We can help you with this.

It is possible to plug gaps in your NIC record by paying voluntary Class 3 NIC. This payment generally needs to be made within six years of the gap year, but there are various exceptions that extend the period. Self-employed traders who don’t have to pay Class 2 NIC because their profits are below £6,515 can choose to pay Class 2 voluntarily instead of Class 3; paying Class 2 will be cheaper.

You may also qualify for NI credits for some years if you were claiming state benefits, Child Benefit or were a foster carer. The NI credits were not always applied automatically, so it’s worth checking your own NIC record.

If you have already paid enough NIC to get the full state pension, you may consider taking further amounts from your company in other forms (such as dividends or pension contributions).

A family view

In the UK, everyone is taxed as an individual, but social security benefits, including tax credits and Universal Credit, are awarded on the basis of the family’s total income. Child Benefit is clawed back based on the income of the higher earner in a couple, irrespective of who receives it.

Families with an unequal distribution of income will often pay more tax than couples who earn just enough each to cover their personal allowance (PA) and the basic rate band. The thresholds for restricting Child Benefit (£50,000), PA (£100,000) and pension annual allowance (£240,000) all operate for the individual, so disadvantage families where the income is concentrated in one person’s hands.

Consider the Browns – they have two children and claim Child Benefit. In 2021/22 George Brown earns £90,000 and pays higher rate tax, but Sally Brown has no income. As George’s income is over £60,000, the family’s total Child Benefit is clawed back from him as a tax charge.

In contrast, John and Joy Green each earn £45,000, so they keep their Child Benefit and pay less Income Tax, as their highest marginal tax rate is 20%. Both Greens make use of their full PA and most of their basic rate band.

Roger and Rose White are in a worse tax position. Rose’s total income is £210,000 and her employer contributes £40,000 into her pension scheme every year. Roger and Rose have no effective PA, as Roger has no income to set his allowance against and Rose’s PA is entirely withdrawn, because her income exceeds £125,140.

Rose is treated as having income of £250,000 (£210,000 + 40,000) for pension relief purposes. Her pension annual allowance is therefore reduced to £35,000, so she suffers an annual allowance charge at 45% on £5,000 of the pension contribution made by her employer.

These examples show that families can save tax if they transfer some income from the higher earner to the lower earner, in order to take advantage of the PA or lower tax bands and to avoid the reduction of PA or the clawback of Child Benefit. This is not always easy to do, but the following methods are permissible:

• make an outright gift of investments which produce taxable income
• put savings and investments into joint names and share the income
• employ the spouse or partner in the other person’s business
• take the spouse or partner into partnership in that business

HMRC can challenge some of these methods if they think the transfer is not genuine – always take tax advice to be sure that your plan will work.

Crossing the threshold

When your total income reaches certain levels, it tips any extra income into a tax band where a higher rate of tax is charged. This can also mean you lose part or all of your personal savings allowance (PSA), personal allowance (PA) or pensions annual allowance.

Taxpayers who live in Scotland have slightly different tax thresholds than those that apply in the rest of the UK (see Scottish Taxes), but the principle is the same. You may be able to save tax by moving income from 2021/22 to 2022/23, or by making certain payments in 2021/22 rather than in 2022/23.

Say you are a 20% taxpayer in 2021/22 but expect that a lump sum termination payment due in March 2022 will tip you into the 40% band (over £50,270). If you ask your employer to delay paying the termination payment until after 5 April 2022, you’ll pay the tax on that income later. You will also retain all of your 2021/22 £1,000 PSA and may still stay out of the 40% band for 2022/23. The main thresholds for 2021/22 are:

• PA: £12,570 – basic rate tax (20%) starts
• Higher rate threshold: £50,270 – 20% rate increases to 40% and PSA reduces from £1,000 to £500
• Married couples: transfer of £1,260 of PA is possible where the higher earner has income up to £50,270
• Child Benefit clawback: income between £50,000 and £60,000
• Withdrawal of PA: income between £100,000 and £125,140
• Additional rate threshold: £150,000 – 40% rate increases to 45%, Savings Allowance removed
• Pension annual allowance reduced where income (including employer pension inputs) above £240,000

Income that can easily be moved from year to year includes:

• bonus from your own company
• dividends from your company
• encashments of life assurance bonds
• withdrawal of taxable income from pension schemes in ‘drawdown’.

Note, however, that moving earnings or dividends into 2022/23 will make them subject to the higher NIC and dividends rates that are being introduced.

Let properties

Individual landlords of residential properties can no longer deduct interest or finance costs from their rental income for tax purposes. In place of the blocked interest the landlord receives a 20% tax credit to set against their income tax bill. This restriction of interest deductions doesn’t apply to corporate landlords, nor to individuals letting furnished holiday accommodation (if the qualifying conditions are met).

Where your property business is supported by borrowing, the restrictions on interest deductions could push your total income into higher tax bands, leading to the loss of personal allowance or potential clawback of your family’s Child Benefit.

If your residential property business is supported by large borrowings, you should consider how you could restructure that business to reduce your higher tax bills. Your choices may include

• selling one or more residential properties to reduce your borrowings
• selling some residential property and reinvesting in commercial buildings, where the interest restrictions don’t apply
• letting homes as Furnished Holiday Lettings
• transferring the properties into a company

The last option is not easy, as the lender will have to agree to transfer your property loans to the company. The transfer of properties is likely to incur land tax charges for the company and may well generate a taxable capital gain in your hands.

Individual landlords with turnover of no more than £150,000 should use the ‘cash basis’ to draw up their accounts. This has the effect of taxing income in the year it is received and relieving expenses in the year they are paid. It may benefit you if your tenants tend to pay late. You can opt out of the cash basis if you wish.

We can help you model the financial future for your residential property lettings.

Risk with tax breaks as a reward

The Government encourages individuals to make high-risk investments in small trading companies or charities by providing income tax relief for investors in the following schemes (limits for 2021/22):

• Social Investment Tax Relief (SITR): 30% relief on up to £1 million
• Enterprise Investment Scheme (EIS): 30% relief on up to £2 million
• Seed Enterprise Investment Scheme (SEIS): 50% relief on up to £100,000
• Venture Capital Trust (VCT): 30% relief on up to £200,000

The amounts invested under EIS, SEIS or SITR can be treated as made in the previous tax year if the investment limit for the earlier year has not been reached.

When you dispose of shares acquired under these schemes, any capital gains you realise will be free of CGT if you’ve held the investment for at least three years (except VCTs, where there is no minimum period).

Tax due on capital gains made from selling other assets can be deferred by reinvesting under the EIS or SITR within three years of making the gain. However, the SITR scheme will only be open for investments until 5 April 2023.

Reinvesting the gain in SEIS shares will halve the tax on that gain if the investment limits and conditions are not breached.

If you acquire unquoted trading company shares on or after 17 March 2016 in a company for which you do not work and hold them for at least three years, any gains made on the disposal can qualify for Investors’ Relief, meaning the rate of CGT due is only 10% on gains up to £10m.

These tax reliefs won’t turn a bad investment into a good one, but they will make a good one better and will reduce the risk involved in investing. You should, however, always take advice from a qualified financial adviser on where to put your money.

If you are thinking of investing in one of these schemes, you may want to do so before 6 April 2022 to maximise the benefit.

Tight CGT reporting deadline for residences

Contrary to popular belief, the profit you make when you sell your home, or a former home, is not automatically exempt from CGT.

This tax exemption applies to gains that relate to periods in which you lived in the property as your main home. However, it can be extended to certain periods when you were not living in that property.

For example, the last nine months of ownership are exempt from tax, which is extended to 36 months where the owner or their spouse is disabled or has moved into residential care.

Where you sell or transfer any UK residential property, any capital gain producing a CGT liability needs to be reported, and the CGT paid to HMRC, within 60 days of completion of the disposal.

The gain must be reported through your online UK Property Account and on your self-assessment tax return for the year, if you are someone who has to file one (e.g. due to being self-employed or having rental income). We can help you with this reporting.

Talk to us if you are planning to sell a residential property, so we can collect all the information needed to calculate the gain within the 60-day reporting period. There are automatic penalties if the reporting deadline is missed.

Claim for your company’s losses

Companies can take advantage of an extended carry back period for trading losses arising in accounting periods that end between 1 April 2020 and 31 March 2022.

The trading losses from these periods can be carried back to set against total profits of accounting periods ending in the previous three years.

There are two £2 million caps (one for each financial year in which the loss is generated) for the losses carried back to the two earliest years of the three.

Claims for losses can be submitted as soon as the accounting period has ended, as long as the loss can be quantified appropriately and supported with draft accounts or management accounts.

Your company does not have to finalise its accounts for the year or submit its corporation tax return before making a claim.

HMRC will accept loss claims for up to £200,000 for this extended carry back period outside of the corporation tax return. Larger loss claims must be made on the corporation tax return.

Remember any covid business support grants the company has received form part of its trading income for the accounting period, so will reduce any trading loss.

Excited about electrics

The taxable benefit for having the private use of an electric company car is currently just 1% of list price. From 6 April 2022 the taxable benefit will rise to 2% of list price; it will then be fixed at that level until April 2025. However, even at 2% of list price, this is a bargain, as the company will cover the capital cost of the car, the insurance and any repairs or servicing.

If you want a hybrid car, those models that can drive at least 130 miles on electric power only also have a taxable benefit of just 2% of list price. Driving an electric van is even more beneficial, as there is zero taxable benefit for the driver!

Where a business buys a new electric car or van, it can claim 100% of the cost as a capital allowance in the year of purchase. For an electric car to qualify for this 100% First Year Allowance it must be acquired brand new (not second-hand) before 1 April 2025.

Companies that acquire brand new vans can claim a super-deduction of 130% of the price, if the van is acquired before 1 April 2023.

Where the business installs electric vehicle charging points before 31 March 2023, it can claim 100% of the cost in the year of purchase. There are also Government grants available for individuals who install electric vehicle charging points at their home.

Where employees are permitted to freely charge up electric vehicles at work, there is no taxable benefit for the use of that electricity. Drivers of electric company cars who pay for their own charging can claim a tax-free allowance from their employer of 4p per business mile driven.

Drivers who use their own electric cars for business journeys can claim the normal mileage rates of 45p per mile for the first 10,000 miles and 25p for any additional business miles driven in the tax year.

R&D tax breaks

Companies that invent new production methods or products can claim enhanced tax relief for the Research and Development (R&D) costs. Small and medium-sized companies can claim 230% of qualifying R&D costs and a 14.5% payable tax credit if this extra deduction results in a loss!

This is a very attractive relief and it’s easy to claim. You can ask HMRC for an advance assurance that your company, and its R&D projects, will meet the requirements. We can help you do this.

The main benefit of advance assurance is that HMRC won’t raise further questions about your initial R&D claim or for R&D claims submitted in respect of the next two accounting periods.

You need to apply for the R&D tax relief within two years from the end of the accounting period in which the R&D costs were incurred. So, if your company has been innovative in the recent past, don’t delay your application for R&D tax relief!