Employers looking to take on new staff may wish to consider employing two or more part-time workers rather than one full-time worker. This can save them National Insurance.

Employers are liable to pay secondary (employer’s) Class 1 National Insurance contributions on an employee’s earnings to the extent that they exceed the relevant secondary threshold. For 2023/24, the secondary threshold is set at £175 per week, £758 per month and £9,100 per year. Higher secondary thresholds apply where the employee is under the age of 21, an apprentice under the age of 25 or an armed forces veteran in the first year of their first civilian employment (set at £967 per week, £4,189 per month, £50,270 per year). Where the employer has physical premises in a Freeport tax zone, the secondary threshold is set at £481 per week (£2,083 per month, £25,000 per year) for the first 36 months of a new Freeport employee’s employment.

One secondary threshold per employee

An employer is entitled to one secondary threshold per employee. Consequently, if an employer takes on one full-time employee, they only benefit from one secondary threshold, whereas if instead they take on two part-time employees, they benefit from two secondary thresholds. The savings are illustrated in the following example.

Example

An employer is deciding whether to take on one full-time employee, who will be paid £4,000 a month, or two part-time workers who will each be paid £2,000 per month.

The employer will pay secondary Class 1 National Insurance of £447.40 (13.8% (£4,000 – £758)) per month on the earnings of the full-time employee.

By contrast, the employer will pay secondary Class 1 National Insurance of £171.40 (13.8% (£2,000 – £758)) on the earnings of each part-time employee – a total of £342.80 for both part-time employees.

By taking on two part-time employees rather than one full-time employee, the employer saves National Insurance of £104.60 per month -– an annual saving of £1,255. This is because the employer is able to benefit from an additional secondary threshold of £9,100 on which no contributions are payable.

The employees will pay primary contributions on their earnings to the extent that they exceed the primary threshold.

Employees can benefit too

Employees can also benefit from National Insurance savings if they have two or more part-time jobs, rather than one full-time job, as they benefit from the primary threshold in each job. Employee’s contributions are calculated separately for each job and are only payable to the extent that the earnings from that job exceed the primary threshold, set at £242 per week, £1,048 per month and £12,570 per year for 2023/24.

Beware the aggregation of earnings rules The aggregation of earnings rules are anti-avoidance rules that prevent a job from being split artificially to benefit from multiple thresholds. Where the jobs are with the same employer or the employers are carrying on business in association with each other, the earnings from the different jobs must be aggregated and the National Insurance liability calculated on the total earnings. An exception applies where it is ‘not reasonably practicable’ to aggregate the earnings.

Even if you pay all your tax through PAYE, you may still need to complete a Self-Assessment tax return if you are a high earner. For 2022/23 and earlier tax years, this is the case if your income is more than £100,000. However, for 2023/24 onwards, the trigger threshold is increased to £150,000.

Unless you have to complete a self-assessment tax return for another reason, if you are taxed under PAYE and your income is between £100,000 and £150,000, you will need to file a tax return for 2022/23 but will not need to do so for 2023/24 onwards. You must file your 2022/23 tax return online by 31 January 2024. It is important that you do this, as HMRC will charge you a late filing penalty of £100 if you miss the deadline, even if you have no tax to pay.

Reasons you may need to file a return

Even if you are employed and your income is below the Self-Assessment trigger threshold, you may still need to file a Self-Assessment tax return. This could be because you also had income of more than £1,000 from self-employment or because you were a partner in a business partnership. You may also need to file a Self-Assessment tax return if:

• you receive income of more than £1,000 from renting out properties;
• you receive dividend income in excess of the dividend allowance;
• you receive interest that is taxable;
• you have foreign income to report;
• you realise chargeable gains in the tax year; or
• you are liable to pay the high-income child benefit charge.

Remember that the additional rate threshold has been reduced from £150,000 to £125,140 from 2023/24. If your income is between £125,140 and £150,000, you will no longer receive a personal savings allowance as this is only available to higher and basic rate taxpayers. The allowance is set at £500 for higher rate taxpayers. If you were previously entitled to the allowance and you received savings interest of less than £500, you would not have had to pay tax on that interest. However, if you are now an additional rate taxpayer, any savings interest (other than that in a tax-free wrapper such as an ISA) is taxable and you will need to report it to HMRC.

Telling HMRC

If you think that you no longer need to file a Self-Assessment return because your income is below the new threshold and you have nothing else to report, or if you have retired, you will need to tell HMRC. You can do this online, either using HMRC’s digital assistant or by completing an online form. You can also write to HMRC or tell them by phone (although it should be noted that the Self-Assessment helpline is closed until 4 September).

The personal allowance is set at £12,570 for 2023/24. However, not everyone is able to benefit from the personal allowance.

A taper applies which gradually reduces the personal allowance until it is lost. The taper applies when adjusted net income exceeds £100,000. It operates by reducing the personal allowance by £1 for every £2 by which adjusted net income exceeds £100,000.

Example

William has an adjusted net income of £110,000 for 2023/24.

As his adjusted net income exceeds £100,000, his personal allowance is reduced.

At £110,000, his income exceeds £100,000 by £10,000. The taper reduces his personal allowance by £1 for every £2 of the excess – a reduction of £5,000. Consequently, William will only receive a personal allowance of £7,570 for 2023/24 (£12,570 – £5,000).

The personal allowance is lost in its entirety once adjusted net income reaches £125,140.

The taper threshold has remained unchanged at £100,000 since its introduction, bringing more people within its scope as wages rise due to inflation.

60% marginal rate of tax

The combined impact of the personal allowance taper and the higher rate of tax (at 40%) applying in this band means the marginal rate of tax between £100,000 and £125,140 is 60%. It drops to 45% (the additional rate) once income reaches £125,140.

A 60% marginal rate of tax is a high rate. However, when National Insurance contributions, pension contributions and student and post-graduate loans are taken into the mix, the marginal rate of deduction in this zone can climb to 80%.

Preserving the allowance

There are some steps that can be taken to preserve the personal allowance where income falls in the abatement zone.

Option 1 – timing

Where it is possible to control the timing of payments, as may be the case in a personal or family company, consideration can be given to deferring income so that it is received in 2024/25 instead. This will be useful if it will reduce income in 2023/24 such that either the personal allowance is preserved or less of it is lost, without triggering the taper in 2024/25.

Deferring £15,000 of income so that adjusted net income is £105,000 in 2023/24 rather than £120,000 will mean that the personal allowance is £10,070 in 2023/24 rather than £2,570.

Option 2 – pension contributions

Making pension contributions can be tax-efficient, with the added benefit of building up funds for retirement. The increase in the annual allowance to £60,000 for 2023/24 and the abolition of lifetime allowance charges pave the way for making higher pension contributions in 2023/24. Making a pension contribution of £30,000 to reduce adjusted net income from £130,000 to £100,000 will recover the personal allowance in full. The contribution will also attract tax relief.

Option 3 – donations to charity

Individuals who want to make charitable donations can take advantage of the gift aid rules to make charitable gifts while reducing their adjusted net income and preserving their personal allowance.

Most people do not want to give money to the taxman when they die. However, while it is said that inheritance tax (IHT) is a voluntary tax that can be avoided by giving away money during your lifetime, there is the practical issue that people need money to live on while they are alive. This is compounded by the fact that most people do not know when they are going to die, making planning with any certainty difficult.

Despite these limitations, there are some simple steps which can be taken to allow money to be given away IHT-free.

Nil rate band

Everyone has a nil rate band – set at £325,000 and remaining at this level until at least 5 April 2028. Any unused portion of the nil rate band can be used by the deceased’s spouse or civil partner’s estate on their death. There is no IHT on gifts sheltered by the nil rate band.

Residence nil rate band

A separate nil rate band applies where a main residence is left to a direct descendant, such as a child or grandchild. This is set at £175,000. However, it is reduced by £1 for every £2 by which the deceased’s estate exceeds £2 million (so not available where the value of the estate is at least £2.35 million). As with the standard nil rate band, any unused portion can be claimed by the estate of the deceased’s spouse or civil partner.

Gifts from income

The gifts from income exemption is a very useful exemption. It allows an individual who does not need all their income to make regular gifts of that income free of IHT, rather than simply letting it accumulate in a bank account and attracting a potential IHT charge if passed on when the individual dies.

There are conditions. The gift must be made regularly and must leave the individual with enough to meet their outgoings. The gifts must be made from income rather than depleting the individual’s capital.

This exemption could be used by a parent to help a child with their rent or mortgage payments – here it is usually advisable to set up a regular standing order. Alternatively, a grandparent can pay a grandchild’s school fees.

Inter-spouse exemption

There is no IHT to pay on anything left to a spouse or civil partner. The ability to transfer any unused nil rate band eliminates worries about leaving the surviving spouse or civil partner provided with sufficient funds for the remainder of their life while passing on the estate in a tax-efficient manner. Both parties’ nil rate bands can be used when the estate is passed on following the death of the surviving spouse/civil partner.

Other exemptions

There are a number of small exemptions that can be useful. The first is the annual exemption set at £3,000 a year. Where it is not used one year, it can be carried forward to the next year and used once the exemption for that year has been used. Over 20 years, this exemption allows £60,000 to be given away IHT-free, saving IHT of up to £24,000.

There is also a specific exemption for wedding gifts – set at £5,000 for a gift to a child, £2,500 for a gift to a grandchild and £1,000 for other wedding gifts. There is also an exemption for small gifts of up to £250 per person (as long as they have not benefitted from another IHT-free gift, such as a wedding gift).

Seven-year rule

Gifts made at least seven years before death fall out of account for IHT purposes. Where the gift is made at least three years before death, a taper applies. Making early lifetime gifts can save IHT, but the donor cannot continue to benefit.

Trusts

Trusts can be effective at saving IHT; however, consideration of trusts is outside the scope of this article. Professional advice should be sought.

Dividends are a popular and tax-efficient way to extract profits from a personal or family company once a small salary has been paid. However, the rules surrounding dividends are strict and failure to comply may mean that HMRC will tax payments purporting to be dividends as employment income rather than as dividends. This will mean a higher tax bill, plus National Insurance.

Paid from retained profits

Dividends are a distribution of profits and can only be paid if a company has sufficient retained profits from which to pay the planned dividend. Before paying a dividend, the director(s) must consider the company’s financial position, particularly if it has changed since the last set of accounts was prepared.

Any dividend paid in excess of the retained profits is an illegal dividend.

Paid in proportion to shareholdings

Where more than one person holds shares of a particular class, dividends must be paid in proportion to shareholdings. In a family company, this restriction may be overcome by using an alphabet share structure to provide the flexibility to tailor dividend payments to the shareholder’s personal circumstances.

Types of dividends

There are two types of dividends – interim dividends and final dividends. Interim dividends are paid throughout the year, for example, to a director to meet their living expenses. A final dividend is paid annually after the end of the accounting period.

Declaring dividends

Dividends must be properly declared in accordance with company law requirements. While the directors can simply decide to pay an interim dividend, a final dividend must be declared in accordance with the procedure set out in the Articles of Association. Where the Model Articles have been adopted, a final dividend should be declared by ordinary resolution. The directors must recommend the amount of the dividend and this must be agreed by the shareholders in a general meeting. This normally happens at the AGM.

The company should prepare Board minutes. These should contain:

• The name of the company.
• The date that the dividend was approved.
• The name of the director(s).
• The company’s address.

The minutes should set out the amount of the dividend (per share), the type of shares in respect of which it is being paid, the date it is being paid and the date on which shareholders need to be registered at Companies House in order to be eligible to receive the dividend.

Dividend voucher

Whenever a dividend is paid, the shareholder should be given a dividend voucher. The dividend voucher should contain:

• The name and address of the shareholder receiving the dividend.
• The company’s name, registered office and registration number.
• The date of issue.
• The amount of the dividend paid.
• The signature of the company director(s) or a company officer.

The shareholder should retain the dividend vouchers as these will be needed when completing their personal tax return.

A new penalty regime was introduced for VAT from 1 January 2023. The new regime comprises late submission penalties and late payment penalties. Here we look at the penalty regime for late returns.

Late VAT returns

The late submission penalty regime kicks in whenever a VAT return is filed late. It applies regardless of whether VAT is owed to HMRC or whether the business is reclaiming VAT back from HMRC. For repayment traders this is a new concept as they have not previously had to worry about penalties for filing their VAT returns late.

Penalty points

The penalty regime works on a penalty point system. A VAT-registered business will receive a penalty point each time they file their VAT return late. Once the number of penalty points that they have been given reaches a certain level, the business will receive a financial penalty of £200.

The penalty threshold depends on how frequently the business files VAT returns. The thresholds are as follows:

• Annual returns: 2 penalty points.
• Quarterly returns: 4 penalty points.
• Monthly returns: 5 penalty points.

Penalty points have a lifetime of two years, after which they expire.

Once the penalty threshold has been reached and a penalty charged, the clock will only start again once the business has achieved a period of compliance. To do this, they must meet all submissions in their compliance period, which is 24 months for businesses filing annual VAT returns, 12 months for businesses filing quarterly returns and 6 months for businesses filing monthly returns. They must also have made all the submissions that were due for the preceding 24 months (regardless of whether the submissions were initially late). Once these tests have been met, the penalty points total is reset to zero.

HMRC have the discretion not to charge a penalty if they consider this to be appropriate. Time limits also apply during which penalty points must be levied, and points cannot be issued outside this window. The window runs from the date the return was due and is set at 48 weeks where VAT returns are submitted annually, at 11 weeks for quarterly returns and at 2 weeks for monthly returns. HMRC must also issue a financial penalty within two years of the failure that took the penalty points to the penalty threshold.

The super-deduction, which allowed companies to claim an immediate deduction of 130% of their qualifying expenditure, came to an end on 31 March 2023. It was replaced with full expensing. As with the super-deduction, unincorporated businesses cannot benefit from full expensing (although the Annual Investment Allowance (AIA) will secure a 100% deduction for qualifying expenditure up to the annual AIA limit of £1 million).

Nature of full expensing

Full expensing allows companies to claim, in the form of a capital allowance, immediate relief for the full amount of qualifying capital expenditure. Although at a rate of 100% of qualifying expenditure, the rate of relief is the same as under the AIA, unlike the AIA, there is no cap on the amount of the expenditure which can benefit.

As with its predecessor, the availability of full expensing is time-limited – it only applies to qualifying expenditure which is incurred in the three-year period from 1 April 2023 to 31 March 2026. Expenditure is eligible for full expensing if it would otherwise qualify for main rate writing down allowances and is not excluded expenditure. The main category of excluded expenditure is that on cars (although a 100% first-year allowance is available for expenditure on new zero emission cars).

Full expensing will benefit companies making significant capital investment in excess of the £1 million limit applying under the AIA. It can be used instead of the AIA to leave the AIA limit free for use against qualifying expenditure that would otherwise qualify for special rate writing down allowances.

As with other capital allowances, full expensing is optional and must be claimed.

Balancing charges will apply if the asset is sold, the disposal proceeds being brought into account. Consequently, if the intention is only to keep the asset for a short time and to dispose of it before it has lost much of its value, it may be preferable to claim writing down allowances instead to avoid a clawback of the relief in the not-too-distant future.

50% first-year allowance

A 50% first-year allowance was introduced alongside the super-deduction. It allowed companies to claim an immediate 50% deduction for expenditure that would otherwise qualify for special rate writing-down allowances (such as that on thermal insulation). The 50% first-year allowance has been extended and is now available without limit for qualifying expenditure incurred in the three-year period from 1 April 2023 to 31 March 2026. As with full expensing, the 50% first-year allowance is not available to unincorporated businesses.

The 50% first-year allowance will be useful where the AIA limit of £1 million has already been used up. If some or all of the AIA limit remains available, this should be used first as it will provide a higher rate of relief.

Claims for the 50% first-year allowance are optional. Where the allowance is claimed, the balance of the expenditure is allocated to the special rate pool and relieved by writing down allowances (at the rate of 6% on a reducing balance basis) in subsequent years.

Annual Investment Allowance

The AIA limit of £1 million has now been made permanent.

Spouses and civil partners enjoy certain tax breaks, including the ability to transfer assets between them at a value that gives rise to neither a gain nor a loss. Prior to 6 April 2023, a couple are only able to benefit from no gain/no loss transfers until the end of the tax year in which they separate. However, from 6 April 2023, the rules are relaxed in certain situations.

New three-year rule

The window during which separating and divorcing couples are able to transfer assets between them at a value that gives rise to neither a gain nor a loss is extended. From 6 April 2023, separating and divorcing couples will have up to three years from the tax year in which they cease to live together to make no gain/no loss transfers. The no gain/no loss rule will continue to apply until the earlier of:

• the end of the third tax year following that in which the couple cease to live together; or
• the day on which the court grants an order or decree for their divorce, the annulment of their marriage, the dissolution or annulment of their civil partnership, their judicial separation or a separation in accordance with a separation order.

It should be noted that while making a no gain/no loss transfer prevents a chargeable gain arising on the transferor spouse/civil partner, the transferee assumes the transferor’s base cost. The gain at the date of disposal is effectively transferred to the transferee spouse/civil partner and will crystallise when they dispose of the asset. This may not be what they want.

Assets forming part of a formal divorce agreement

From 6 April 2023, assets that form part of a formal divorce agreement can be transferred between the former spouses/civil partners on a no gain/no loss basis without time limit.

Matrimonial home and private residence relief

The rules on the availability of private residence relief where a person disposes of a retained interest in their former main home in which their former spouse or civil partner continues to live have been amended. From 6 April 2023, where one partner transfers their share of the former matrimonial home to their former spouse/civil partner but under an agreement is entitled to receive a share of the profit made on the eventual disposal of the property, they will be entitled to private residence relief in the same proportion that qualified for relief on the original disposal to their former partner. Where the original disposal was made on a no gain/no loss basis, private residence relief is available for the proportion of the gain that qualified for the no gain/no loss treatment.

Employees often need to undertake business trips and it is common practice to reimburse the employee’s fuel costs by means of a mileage allowance. The tax rules allow mileage payments to be made tax-free up to certain limits. However, the rules are different depending on whether the employee is driving their own car or a company car.

Employees using their own cars

If an employee uses their own car for business, you can pay mileage allowances tax-free up to the ‘approved amount’. This is set for the tax year, rather than for each individual journey, and is found by multiplying the business mileage in the tax year by the approved mileage rate. For cars and vans, the approved mileage rate is set at 45p per mile for the first 10,000 business miles in the tax year and at 25p per mile for any further business miles. For motorcycles, the rate is 24p per mile and for cycles the rate is 20p per mile.

The approved amount is the maximum amount that can be paid tax-free, even if the actual cost exceeds the approved amount.

Example

An employee drives 12,000 business miles in the tax year using his own car. The maximum that can be paid tax-free is £5,000 (10,000 miles @ 45p per mile plus 2,000 miles @ 25p per mile).

If the amount that is paid is less than the approved amount, the employee can claim tax relief for the difference between the approved amount and the mileage allowance paid, if any.

If the employee gives a lift to one or more colleagues, you can also make a tax-free passenger payment of 5p per passenger per business mile. There is no corresponding relief if you choose not to make passenger payments.

Company car drivers

If an employee has a company car but pays for the fuel, you can meet the cost of business mileage tax-free, as long as the amount paid does not exceed the current advisory fuel rate. The advisory fuel rates are set by HMRC and are updated quarterly. They are lower than the approved mileage rates because the approved rates also reflect depreciation and running costs, as well as the cost of the fuel. By contrast, the advisory rates are fuel-only rates.

The advisory rates applying from 1 March to 31 May 2023 are as shown in the table below.

Engine size	Petrol – rate per mile	LPG – rate per mile
1,400cc or less	13p	10p
1,401cc to 2,000cc	15p	11p
Over 2,000cc	23p	17p

Engine size	Diesel – rate per mile
1,600cc or less	13p
1,601cc to 2,000cc	15p
Over 2,000cc	20p

If the employee drives an electric company car, you can pay a mileage rate of 9 pence per mile tax-free.

In his March Budget, the Chancellor announced a number of changes to the pension tax rules, including an increase in the annual allowance and the abolition of the lifetime allowance.

Annual allowance

The annual allowance places a cap on tax-relieved pension savings. Individuals can obtain tax relief on contributions to a registered pension scheme of up to 100% of their earnings or, if greater, £3,600 as long as their available annual allowance is sufficient to cover their contributions. Employer contributions are not subject to the earnings limit, but they do count towards the annual allowance.

The annual allowance is increased to £60,000 from £40,000 for the 2023/24 tax year.

Unused allowances can be carried forward for up to three years. However, the current year’s allowance must be used before utilising unused allowances from earlier years.

Annual allowance taper

High earners have a reduced annual allowance. The taper applies where threshold income exceeds £200,000 and adjusted net income exceeds £260,000. Threshold income is, broadly, income excluding pension contributions, whereas adjusted net income includes pension contributions.

The taper reduces the annual allowance by £1 for every £2 by which adjusted net income exceeds £260,000 until the minimum amount of the allowance is reached. For 2023/24, this is set at £10,000. Consequently, individuals with threshold income of at least £200,000 and adjusted net income of at least £360,000 will only receive the minimum allowance of £10,000 for 2023/24.

For 2020/21 to 2022/23 inclusive, the taper applied where adjusted net income exceeded £240,000 and threshold income exceeded £200,000, reducing the allowance by £1 for every £2 by which adjusted net income exceeded £240,000 until the minimum allowance of £4,000 was reached.

Lifetime allowance

The lifetime allowance places a cap on lifetime tax-relieved pension savings. It is set at £1,073,100. If tax-relieved pension savings exceeded the lifetime allowance, a tax charge applied for 2022/23 and earlier tax years. The charge was set at 55% of the excess where this was taken as a lump sum and at 25% of the excess where it was taken as a pension. The lifetime allowance charges are abolished from 6 April 2023. Legislation in a future Finance Bill will abolish the lifetime allowance. This paves the way for individuals whose pension pot has reached £1,073,100 to start making pension contributions again.

As a result of these changes, a cap is placed on the amount that can be taken as a tax-free lump sum. This is now 25% of the pension pot or, where lower, £268,275. The figure of £268,275 is 25% of the lifetime allowance of £1,073,100.

Money purchase annual allowance

The money purchase annual allowance (MPAA) is a lower annual allowance that applies where a person has flexibly accessed their pension pot having reached the age of 55. The MPAA is set at £10,000 for 2023/24.