Happy New Tax Year!

06 April 2020

Business & Personal Tax Rates from 6th April 2020

The 2020/21 tax year commences today, 6th April 2020 – here’s a summary of all the thresholds pf which you need to be aware:

Personal Tax Thresholds & Allowances

The Personal Allowance – the amount you can earn before paying any Income Tax – remains at £12,500 for the 2020/21 tax year. Pensioners do not receive a higher personal allowance than other age groups. The threshold for paying the Higher Rate of income tax (which is 40%) also remains at £50,000 (this amount includes the Personal Allowance) The additional rate income tax (45%) is charged on earnings over £150,000.

If you are a Company Director and shareholder, to maximise your tax efficiency in the 2020/21 tax year, your company should pay you a salary of £8,788 and dividends of up to £41,212. This allows you to use all of the basic rate band of tax, where you pay tax at 20%, and assumes you have no other income – your total personal tax bill would then be £2,662.50.

If you take more income in dividends you will pay tax on these at a rate of 32.5% as a higher rate taxpayer. The Personal Allowance is reduced by £1 for every £2 earned over £100,000 – so anyone earning £125,000 has no personal allowance.

Dividend Allowance

The tax-free Dividend Allowance for the 2020/21 tax year remains at £2,000. On dividends received above the £2,000 threshold, basic rate taxpayers pay 7.5% tax and higher rate taxpayers pay 32.5%. Additional rate taxpayers will be charged 38.1% tax on dividend income over the allowance.

The dividend tax does not apply to investments held in an Isa or a pension.

National Minimum Wage and National Living Wage

Whilst not strictly a tax year change, National Minimum Wage and ‘National Living Wage’ amounts increase from 1st April 2020. The minimum hourly rate that your staff are entitled to depends on their age and whether they are an apprentice.

Company Cars

From 6th April 2020, benefit in kind (BiK) tax rates are increasing for company cars. The percentage applied to the list price of the car will increase based on the CO2 emissions published by the Vehicle Certification Agency. HMRC has published a ready reckoner you can use to calculate your company car tax.

Company vans and fuel benefit for company cars

When your company pays for fuel you have used personally or allows personal use of a company van, it is a BiK. These fuel benefit charges only apply if fuel is provided for personal use.

The tax paid on such benefits is being increased from 6th April 2020. The BiK is a fixed amount for vans and the changes are as follows for directors and employees:

• The BiK on company vans increases to £3,490 (from £3,430)
• The BiK on fuel for a van provided for personal use increases to £666 (from £655).

The fuel benefit calculation for cars is more complex:

A director/employee who is provided with a company car and also receives free fuel from their employer, is taxed on the cash equivalent value of the benefit each tax year. The cash equivalent amount is fixed each year and increases to £24,500 (from £24,100) on 6th April 2020.

The BiK charge is calculated by using an appropriate percentage, which is the same as the rate for company car benefit purposes (see above) and then multiplying by the fixed amount (£24,500 in 2020/21). So if the BiK percentage for your company car is 13%, your BiK amount on the fuel provided for personal use is £3,185 (13% of £24,500).

Corporation Tax

Corporation Tax payable on business profits remains at 19%.

Workplace Pensions (auto-enrolment)

There are no changes to the minimum amount you need to pay into your employee’s auto-enrolment workplace pension. This means the total amount of employer and employee contributions remains a minimum of 8% of your employee’s qualifying earnings, with the employer minimum contribution being 3%.

Annual Investment Allowance (AIA)

Companies will be able to claim £1 million as AIA for expenditure incurred between 1st January 2019 and 31st December 2020 on fixed assets such as plant and machinery. The allowance is expected to reduce to £200,000 on 1st January 2021.

Business Rates

The government is carrying out a fundamental review of Business Rates, with further consultation expected by Autumn 2020.

From 6th April 2020, businesses in the retail, leisure and hospitality sectors operating from premises with a rateable value of less than £51,000 will not pay any business rates in the year.

The discount that pubs receive on their business rates will increase from £1,000 to £5,000, as long as their rateable value is below £100,000 in England.

In light of the current Coronavirus outbreak, there are also rates based grants available for certain qualifying businesses – read more here.

Student Loans

The Department for Education has confirmed that from 6th April 2020 the earnings threshold before you start to repay a student loan for:

• Plan 1 loans will rise to £19,390 (from £18,935)
• Plan 2 loans will rise to £26,575 (from £25,725).

If you’re a director being paid salary and dividends from your company, and you’re paying back a student loan, you must remember the threshold for repayment is based on your total income.

This will apply to all current and future student loans where employers make student loan deductions. So if you run a payroll for any employees who have student loan deductions, you need to ensure you have a record of what type of loan they have, so that the correct deductions are made.

Postgraduate Master’s Loan and Postgraduate Doctoral Loan (New)

A Postgraduate Master’s Loan is a new type of loan introduced by the government to help with course fees and living costs while you study a postgraduate master’s course. The repayment of your Postgraduate Loan is treated the same as any other Student Loan and interest is charged from the day you get the first payment.

Repayment will be at 6% for students in England and Wales on income above £21,000. The rate is 9% for Scottish and Northern Ireland students with income above £18,330.

Personal Pensions

The tax-free amount you can pay into a personal pension remains at £40,000 for the 2020/21 tax year. The lifetime allowance for pension savings increases from 6th April 2020 to £1,073,100 (from £1,055,000 in the 2019/20 tax year). Pensions contributions receive full income tax relief; this means it costs basic rate (20%) taxpayers £80 to save £100 into their pension, while higher rate (40%) taxpayers only need to pay £60 to save £100.

ISAs

You can once again save a total of £20,000 in an Isa this tax year, where all your earnings will be completely free of tax. The limit applies to Cash Isas, Stocks and Shares Isas and Innovative Finance Isas, and the allowance can be spread between the three types.

You can save £4,000 a year into a Lifetime Isa, and this can be used towards the cost of buying a first home or for retirement. Those who opened a Help to Buy Isa before the Isa closed to new savers in December 2019 can save up to £3,400 in the first year and then £2,400 each year afterwards.

Finally, the Junior Isa allowance has risen dramatically for the 2020/21 tax year, from £4,368 to £9,000. This same limit applies to Child Trust Funds (CTFs).

Capital Gains Tax

The Capital Gains Tax annual exempt amount for individuals increases to £12,300 for the 2020/21 tax year (the 2019/20 tax year allowance was £12,000). Lower rate taxpayers pay 10% tax on capital gains, and higher and additional rate taxpayers pay 20%.

The only exception is for second properties, including buy-to-let investments. Capital gains on these investments will be taxed at 18% for basic rate taxpayers, and 28% for higher and additional rate taxpayers.

Entrepreneurs’ Relief

From 6th April 2020 the Entrepreneurs Relief lifetime allowance limit will be capped at £1 million. This is a significant reduction from the 2019/20 tax year when the limit was £10 million.

Inheritance Tax

Inheritance tax (IHT) is payable at the rate of 40% if the value of your estate exceeds the nil rate band (NRB), which is £325,000.

The residence nil rate band (RNRB), or home allowance, is an additional threshold that reduces the IHT payable on your estate and is designed to make it easier for families to pass on the family home. It stands at £175,000 in 2020/21 and applies if you’re giving away your home to your direct descendants (defined as children or grandchildren including adopted, foster and step-children)

The RNRB is added to the NRB, therefore, in 2020/21 a couple’s total IHT threshold is £1,000,000 (£325,000 + £175,000 x 2) (although the RNRB allowance is limited to the value of the home bequeathed)