Member Article

Get ready for the new tax year

AAT often hears about individuals and companies taking action towards the end of one tax year to ensure that they do not overlook making use of tax breaks that may be available. As UK Plc is about to enter into a new tax year we thought we would be more proactive by giving out some tips that should help businesses to get off to the best possible start in the 2016-17 tax year.

Payroll

For most taxpayers, their personal allowance will increase by £400, from £10,600 to £11,000.

In most instances the required change will be taken into account through bulk tax code updates automatically generated by third-party software. In other, more limited situations employers will receive direction from HMRC of the specific change required to an individual employee’s code by way of a coding notice (P2T).

If this has not already been done, employees’ accumulated gross pay, tax and National Insurance (NI) contributions will need to be set to zero prior to the first payroll run of the new tax year.

Brian Palmer, tax adviser at AAT says: “It’s vital that the required adjustments to employees personal allowances, the zeroing of their gross pay, tax and NI contributions is undertaken before the first payroll run of the 2016/17 tax year.“

For those workers who benefit from receiving more than £100,000 in taxable income during a tax year their personal allowance is reduced by £1 for every £2 of additional taxable income received over and above the £100,000 threshold until at £122,000 it is exhausted.

Some employers may be eligible to claim an Employment Allowance (EA) of up to £3,000 (£2,000 last year) to set against their Employer’s NI contributions that they would otherwise be required to pay over to HMRC. This handy allowance means that in many cases smaller employers will not have to pay any Employers’ Nl.

Brian warns: “It should be noted that from the start of the 2016/17 tax year one-man companies are no longer eligible to claim the EA.“

The 1st April saw the introduction of the National Living Wage (NLW), which replaces the National Minimum Wage in order to help low paid workers. For those 25 and over it has been set at £7.20 an hour.

Brian says: “While the increase in the EA is positive for many SMEs its value to them will be diluted by increased payroll liabilities arising of the increase in wages that the NLW now demands.“

In an extension to the existing rules, from the 6 April 2016 non-cash vouchers and credit tokens can now be included under voluntary payrolling.

Dividends Tax

With effect from 6 April shareholding owner-managers have less ability to mitigate tax on profits extracted from their companies through the traditional approach of paying themselves a low salary and supplementing it with dividends.

In future the cash dividend received will be treated as gross income.

The concept of a 10% notional tax credit will no longer exist. Instead, it is replaced by a tax-free allowance, whereby up to the first £5,000 of gross dividend income received by an individual will not fall taxable.

Dividend income in excess of the tax-free allowance will be taxable at 7.5%, for basic rate taxpayers) and then 32.5% and 38.1% on amounts over the higher and additional rate allowances.

Brian Palmer says: “There is a real concern that this new measure might stifle entrepreneurship. Many owners and managers of small businesses may need to seek advice on how best to structure their salaries in the most tax-efficient way, which may not be the same as it was last week.“

Annual Investment Allowance (Capital Expenditure)

From the 1st of January 2016 the Annual Investment Allowance (AIAs) has been made permanent and is set at £200,000 for qualifying investment in plant and machinery.

Brian Palmer adds: “AIAs can certainly help businesses when planning their cash flow; a strategically timed purchase of capital equipment at the start of the year can result in a significant reduction in a business’s tax liability.“

This was posted in Bdaily's Members' News section by AAT (Association of Accounting Technicians) .