Money Matters (Part 7) - Scottish Rate of Income Tax

HM Revenue and Customs has announced that it will be introducing the Scottish Rate of Income Tax as of 6^th April 2016, as part of the UK-Wide income tax system. The new scheme will be applied to the non-savings income of those defined as Scottish taxpayers. We’ve got the latest information you need on this topic below, so keep on reading!

Background

The SRIT was introduced in the Scotland Act 2012 to give the Scottish Parliament greater control over a significant proportion of the Scottish budget and how the money is raised. It replaces the Scottish Variable Rate (SVR), which has been in place since 1999 (but never implemented).

Scottish taxpayers will pay the SRIT. Their income tax rates will be calculated by reducing the UK basic, higher and additional income tax rates by 10p in the pound. The Scottish Parliament will set a single rate each year that will be added to the reduced rates.

The Scottish Government is expected to announce the Scottish rate for tax year starting 6 April 2016 in its draft budget in autumn 2015.

Scottish Taxpayers

The definition of a Scottish taxpayer is based on where an individual lives, not where they work. Therefore, a Scottish taxpayer is someone who is resident in the UK for tax purposes and who has their sole or main place of residence in Scotland for more of the tax year than in another part of the UK.

Individuals who move around the UK without having an identifiable main place of residence for the majority of the tax year will need to count the number of days they spend in Scotland compared to the rest of the UK. Additionally, there are also special rules for Scottish Parliamentarians.

HMRC are aiming to contact individuals in autumn 2015 if their records indicate they are a UK taxpayer and their place of residence is in Scotland. If an individual believes their status is incorrect they should contact HMRC. Further information, including relevant tax codes will be issued in early 2016.

Employers

For employers, HMRC will tell employers whom they should regard to be a Scottish taxpayer; identifying them with a Scottish tax code will do this. Similarly, HMRC will also be making changes to the Self-Assessment and Pensions relief at Source processes and systems. These changes will be a result of the introduction of the Scottish rate.

Furthermore, employers will also need to operate tax tables and perform a tax calculation appropriate to the SRIT set by the Scottish Parliament. However, the current processes that employers operate for income tax will continue. Employers will be advised of the appropriate tax code by HMRC, which they will need to apply to their employees’ payroll processes. 

Money Matters (Part 6) - Charitable Giving

There are a wide variety of tax efficient ways to donate to charity. If you want to do this, there are many tax incentives and schemes available to help you get the most from the donation. We’ve put together this short article to outline some of the schemes.

In order to claim back a charitable donation, the organisation you give to must be recognised as a charity for tax purposes by HM Revenue and Customs. You can check this by asking the charity to confirm that it has an HMRC charity reference number. Depending on the type of gift you make, you may have to make a claim to receive the tax relief (either on your Self Assessment tax return or by contacting your own Tax Office).

Donations through Gift Aid or a CASC

With this, your donation is treated as if the donor has already deducted basic rate income tax. Charities and CASCs can then subsequently reclaim that tax from HM Revenue & Customs.

If you wish to make a Gift Aid donation, you must pay at least as much Income Tax (and/or Capital Gains Tax) as the amount of tax reclaimed by the charity or CASC. This is currently 25p for every pound you donate. Basic rate tax is 20 per cent, so this means that if you give £10 using Gift Aid, it's worth £12.50 to the charity.

If you make a number of Gift Aid donations, you must pay enough UK tax on the total amount of those donations. If you don't pay enough tax you may have to pay HMRC any shortfall in tax paid.

Giving through your pay or pension

You can give money to charity directly from your pay or company/personal pension using the Payroll Giving scheme.

It costs you less because your donation is given to charity from your gross salary before any tax is taken off - so you don't pay tax on it.

You can give to as many charities as you want and you can cancel your Payroll Giving agreement at any time.

Leaving gifts in your will to charity or CASC

If you leave a gift to a charity or CASC in your will, its value will not be included when valuing your estate (your money, possessions and property) for Inheritance Tax purposes. Inheritance Tax is usually paid on an estate when somebody dies.

Gifts made to a charity in the seven years before your death are exempt from Inheritance Tax.

Keeping records of your donations to charity

You must keep records of your donations to charity to make sure that you claim the correct amount of tax relief and pay the right amount of tax.

For every tax year, you should keep the following records:

·      Details of Gift Aid donations showing the date, the amount and the charities or CASCs involved

·      Legal documents showing the sale or transfer of assets to charity - including share transfer documents or certificates or land transfer documents

·      Any documentation from a charity asking you to sell land or shares on its behalf

The Budget 2014 Debugged (Part 4) - National Insurance Contributions

We’re continuing with our breakdown of The Budget 2014 report; this week we’re focusing on all the key information about National Insurance Contributions and the benefits associated with it.

Who pays National Insurance?

National Insurance Contributions (NICs) are only paid if you are an employee or self-employed and you’re:

·      Aged 16 or over

·      Earning more than £153 per week

·      Self employed and making a profit over £5,885 a year (unless you get an exception)

The exact amount of your NIC also depends on how much you earn and whether or not you are employed or self-employed. Furthermore, if you’re employed, you will stop paying National Insurance contributions as soon as you reach State Pension age.

State Pensions

There have been multiple changes to the State Pension age, as demonstrated below:

Date of Birth Bracket	State Pension Age	Phase Period
6th April 1950 to 5th December 1953	65	April 2010 to November 2018
6th December 1953 to 5th April 1960	66	November 2018 to September 2020
After 5th April 1960	67	May 2026 to February 2028

How much National Insurance do you pay?

The amount and type of NICs depends on how much you earn, and also whether you’re employed or self employed. The grid below is based on the 2014-2015 tax year for those who are employed.

Wage Bracket (per week)	National Insurance Contribution
£153 - £805	12% of earnings
More than £805	2% of earnings in excess

All contributions are deducted from your wages automatically by your employer.

If you are self-employed, you stop paying:

·      A – Class 2 contributions as soon as you reach State Pension age (or up to 4 months after this to pay off any contributions you owe)

·      B – Class 4 contributions from the start of the tax year after the one in which you reach State Pension age.

Class 2 National Insurance contributions are paid at a flat rate of £2.75 a week. Class 4 National Insurance contributions are paid as a percentage of your annual taxable profits - 9% on profits between £7,956 and £41,865, and a further 2% on profits over that amount.

If your profits are expected to be less than £5,885 you may not have to pay Class 2 National Insurance contributions.

Your Class 2 National Insurance contributions payments are due on 31 January and 31 July, the same time as your Self Assessment tax bill. You pay Class 2 National Insurance contributions either monthly or six monthly by Direct Debit - follow the first link below for more information about payment dates.

Additionally, you must contact HMRC immediately if there is a change in circumstances, for example if your address and/or name change. This also applies if you start or stop self-employment.

National Insurance Numbers

Your National Insurance number is your own personal account number, which makes sure you’re contributions are properly recorded on your account. It also acts as a reference number for the entire social security system.

Every National Insurance number is different. It's made up of letters and numbers like this:

QQ 12 34 56 A.

(Please note that this National Insurance number is just an example and should not be used as your own number).

Your National Insurance number never changes even if you go abroad, marry, register as a civil partner, change your name, etc.

Your entitlement to many state benefits depends on your National Insurance contribution record (see the section below 'State benefits that depend on National Insurance contributions').

Several companies use National Insurance numbers and you should give them to:

·       HM Revenue & Customs

·       Your employer

·       Department for Work and Pensions (which includes Jobcentre Plus and Pension, Disability and Carers Service), if you claim state benefits

·       your local council, if you claim Housing Benefit

·       the Student Loans Company, if you apply for a student loan

You also have to give your National Insurance number if you open an Individual Savings Account (ISA) - follow the first link below for more information.

It's very important you keep your number safe and don't give it to anyone who does not need it. This will help prevent identity fraud - follow the second link below to find out more about protecting your identity.

Money Matters (Part 5) – VAT

VAT – Everyone has grown to love to hate it. Whether you’re an employer or self-employed, the processes involved in registering for VAT can be challenging and frustrating. That being said, we thought we’d provide you with everything you need to know so that any processes you go through in the future are plain sailing.

What is VAT?

VAT, or Value Added Tax, is a tax charge on goods and services in the UK, which are considering to be luxury items. It is also charged on goods and some services that are imported from outside the European Union (EU) and brought into the UK from other EU countries.

People often refer to VAT-registered businesses as mini tax collectors. They charge customers VAT on top of their sales price, collect the cash and then pay it over to HM Revenue & Customs – minus any VAT they’ve incurred on their purchases.

Who can and can’t register for VAT?

If you are wanting to register for VAT, you can do so only if you’re part of a business. Here, the individual or organization that is in the business would be known as the ‘taxable person’. Furthermore, in order to register for VAT, you must also be one of the following:

·      An individual

·      A partnership

·      A company

·      A club

·      An association

·      A charity

·      Any other organisation or group of people acting together under a particular name, such as an educational or health institution, exhibition, conference, etc.

·      A trust

·      A Local Authority

There are only a few exceptions where you can’t register for VAT, these being:

·      You sell only goods or services that are exempt from VAT

·      You aren't in business according to the definition that HM Revenue & Customs (HMRC) uses for VAT purpose

You can find out more about exempt and partially-exempt businesses for VAT purposes here. - http://www.hmrc.gov.uk/vat/managing/reclaiming/partial-exemption.htm

When to register for VAT

You are required to register for VAT when you go over the £81,000 threshold, or if you know that you will in a 30-day period. The threshold is based on your VAT taxable turnover, which is defined as the total of everything sold that isn’t VAT exempt. Similarly, you may also need to register for VAT if you take over an existing business that is VAT-registered.

However, if you or your business is not based in the UK, then there is no threshold. Though you must register as soon as you supply any goods and services to the UK (or if you expect to in the next 30 days).

There is also an obligation to register if you think your business’ turnover will exceed the threshold within just 30 days, but for most businesses, this would not apply. There are other scenarios when VAT registration becomes compulsory, for instance if you are trading outside of the UK.

Failure to register on time may lead to late registration penalties and/or ‘failure to notify’ penalties. Furthermore, surcharges and interest are likely to be charged for late payment if the business has a VAT liability. If your business’ turnover exceeds the VAT registration threshold temporarily, you can ask HMRC for an exception from registration.

If the taxable turnover of your business does not exceed the current VAT registration threshold, you can still register for VAT voluntarily.

There are two main reasons why a business might opt to register for VAT:

·      Customers are predominately other VAT-registered businesses and therefore any VAT they are charged can be recovered, so it makes no difference to their customers whether they are VAT registered or not

·      They are often in a refund position with HMRC, so the business is actually better off being VAT registered.

The different rates of VAT

Name	Current rate	Description and examples
Standard	20%	The standard rate of VAT is the default rate – this is the rate that’s charged on most goods and services in the UK unless they’re specifically identified as being reduced or zero-rated.
Reduced	5%	Domestic fuel and power, installation of energy-saving materials, sanitary hygiene products, children’s car seat, etc.
Zero	0%	Food (not meals in a restaurant or hot takeaways though), books/ newspapers, children’s clothes/ shoes, public transport etc.
Exempt	Not applicable	The law stipulates that exempt items must not have any VAT charged on them. Examples include insurance, providing credit, education, fundraising, membership, etc.
Outside the scope	Not applicable	Items that are completely outside of the UK VAT system. Examples include drawings, wages, MOT tests, rates, etc.