Category: Tax

Tax

MTD for ITSA Delayed Until 2026

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In a statement made by the Financial Secretary to the Treasury, Victoria Atkins MP, the timetable for Making Tax Digital for Income Tax Self Assessment will once again be delayed.

The mandation of MTD for ITSA is now planned to be introduced from April 2026, with businesses, self-employed individuals, and landlords with income over £50,000 mandated to join first.

An increase in the income threshold from £10,000 to £50,000 is universally welcome, although many continue to question why this is not aligned with the £85,000 VAT threshold or indeed restricted to VAT registered individuals only. For some, the relaxation of the rules do not go far enough to give this programme a fighting chance of success in April 2026 and we may yet be having the same expectation of delay two years from now.

The new £50,000 threshold is only a temporary reprieve. This will be reduced to £30,000 from April 2027 with those below that threshold being kept under review.

Also under review is the fate of partnerships whose inclusion has been deferred from April 2025 to an as yet unknown future date.

The minister also confirmed that the new MTD penalty regime, coming into force for VAT from 1 January 2023, will come into effect from April 2026 for those falling within MTD for ITSA. The Government will also look to apply this same penalty regime to all income tax payers, including those falling outside of MTD for ITSA, although no implementation date was stated for this.

Conspicuous by its absence was any mention of basis period reform and the planned change from the current year basis of taxation to the tax year basis with effect from 6 April 2024. With the transitional year only three months away, it seems that we shall be left with this significant procedural burden that was brought in only to resolve HMRC’s inability to correctly account for basis periods within their MTD for ITSA framework.

Indeed, if we are to see a new Government in office before April 2026 then, rather than witness the long-awaited “death of the tax return” as announced by former Chancellor George Osborne, we may yet see a subsequent Chancellor announce the death of MTD for ITSA which will, certainly in accountancy circles, be widely revered.

Budget, PAYE, Tax

NIC Changes

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Employers’ class 1 NIC

The secondary class 1 NIC rates and thresholds (paid by employers) were not altered in the Spring Statement, and the rate is increasing from 13.8% to 15.05% on 6 April 2022. 

For 2022/23 the various secondary class 1 NIC thresholds are:

  Secondary class 1 NIC Thresholds
For most employees the employer pays at 15.05% on wages:
Per week:£175
Per month:£758
Per year:£9,100
If the employee is an apprentice or aged under 21 employer pays class 1 NIC at 15.05% on wages above:
Per week:£967
Per month:£4,189
Per year:£50,270
For new employees working at least 60% of their time in a Freeport site the employer can claim relief from class 1 NIC on wages up to: 
Per week:£481
Per month:£2,083
Per year:£25,000

Employees’ class 1 NIC 

The rates of primary class 1 NIC paid by employees are increasing on 6 April 2022 from 12% to 13.25% and from 2% to 3.25% for the upper rate.

The lower earnings limit (LEL) has not been changed from the proposed level for 2022/23, which will be: £123 per week, £533 per month, £6,396 per year. On earnings between the LEL and the primary threshold, the employee pays class NIC at 0%, thus receives NIC credit for those wages.

The upper earnings limit (UEL) has also not been changed by the Spring Statement, and will stay at the proposed thresholds for 2022/23 of £967 per week, £4,189 per month, £50,270 per year. On earnings above the UEL, the employee will pay class 1 NIC at 3.35% for 2022/23.

The complication introduced by the Spring Statement is that the primary threshold (PT) for class 1 NIC will change part way through the tax year on 6 July 2022. The employee will pay class 1 NIC at 13.25% on earnings between the LEL and the PT for 2022/23.  

Class 1 NIC primary thresholds 6 April to 5 July 2022 6 July 2022 to 5 April 2023 
Per week£190£242
Per month£823£1048
Per year£9,880£12,570

As NIC is paid according to the pay period, and is not cumulative, only nine months of earnings (from July 2022 to March 2023) will benefit from the higher PT.

Company directors tend to use an annual or quarterly earnings period. Those on quarterly pay will use the lower threshold for the first quarter to 5 July 2022, and the higher PT for the remainder of the year. Those on annual earnings period will use a PT of £11,908 for 2022/23 as specified in clause 4(2) of the National Insurance Contributions (Increase of Thresholds) Bill 2022.

Self-employed class 4 

The lower profits limit (LPL), from which class 4 NIC becomes payable, is also increased to align with the personal allowance of £12,570, but over two years. The upper profits limit is frozen at £50,270.

Tax Year Main rate Additional rateLPLUpper profits limit
2022/2310.25%3.25%£11,908£50,270
2023/2410.25%*3.25%*£12,570£50,270

* Including Health and Social Care levy

For 2022/23 the LPL will be £11,908, that is nine months of the increased level, to make it equivalent to the same NIC allowance enjoyed by employees. Although the self-employed individual will pay class 4 NIC at the main rate of 10.25%, which is three percentage points lower than the class 1 NIC paid on the same income band by an employee.  

Self-employed class 2 NIC

The class 2 NIC paid by the self-employed creates a contribution record for the individual, unlike the class 4 NIC, which is a pure tax. 

The class 2 small profits threshold (SPT) will remain in place from April 2022, but the individual will not be liable to pay class 2 NIC until their profits exceed the lower profits threshold for the tax year, which is aligned with the lower profits threshold for class 4 NIC.

Tax year Flat rate per week   Small profits threshold  Lower profits limit 
2022/23£3.15£6,725£11,908 
2023/24TBATBA £12,570

New class 2 NI credit 

Where the individual has annual profits between the SPT and the LPL, they will effectively build up a NI credit for that year, while paying zero class 2 NIC. Note that the taxpayer has to make profits at least equal to the SPT for the year in order to benefit from this class 2 NI credit. 

In order to receive the class 2 NI credit the taxpayer will have to submit a tax return, although if they have no other income in the year they will have no tax to pay. 

The introduction of the class 2 NI credit does not eliminate the need for voluntary class 2 NIC payments. Where the trading profits are less than the SPT the individual may still wish to pay voluntary class 2 NIC in order to maintain their contribution record and qualify for the state pension, as well as for other contributory benefits.

DMS Posts, PAYE, Tax

Sunak aligns NIC and income tax in Spring Statement

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The Chancellor is

aligning the class 1 national insurance contributions primary threshold with the personal allowance of £12,570. 

As I predicted it is impossible to implement this change in payrolls run for April 2022, as it takes time to rewrite payroll software, but it will come into force from 6 July 2022. 

Note that the secondary class 1 NIC threshold, where employers start paying class 1 NIC, will not be raised to align with the primary threshold. Employers will pay class 1 NIC at 15.05% on most employees’ salaries above £9,100 from 6 April 2022. Different secondary class 1 NIC thresholds apply for apprentices and freelance employees. 

Self-employed NICs

The Chancellor has gone further than I expected, with plans to align the thresholds where the self-employed start paying class 2 NIC and class 4 NIC, with the personal allowance, but not immediately. 

The class 4 NIC lower profits limit will rise to £11,908 for 2022/23 and then be aligned with the personal allowance of £12,570 from 6 April 2023. This two-step increase is presumably implemented to shadow the delayed rise in class 1 NIC from 6 July 2022.

Class 2 NIC is currently payable once the individual’s profits for the year exceed the small profits threshold of £6,515. This relatively low payment threshold exists to allow self-employed individuals with small profits to build up a contribution record for the state pension and other benefits. 

From 2022/23 the threshold for paying class 2 NIC will be aligned with that for paying Class 4 NIC: £11,908 for 2022/23, then £12,570 for 2023/24. However, this large step up could leave many low-profit traders with no national insurance contributions for many tax years. 

To solve this problem from 6 April 2022 self-employed traders with profits below the lower profits limit will be treated as if they had paid class 2 NIC, but in fact they will make no actual NICs payment.  

The Government has already published a draft National Insurance (Increase of Thresholds) Bill 2022, which will bring these changes into effect. This Bill will be fast-tracked through Parliament.    

Employment allowance 

In a sop to small businesses the employment allowance will rise from £4,000 to £5,000 from 6 April 2022. This allowance can only be claimed by employers that had a class 1 NIC liability of no more than £100,000 in the previous tax year. The increase will allow an eligible employer to pay one extra person on the national minimum wage without having to pay employer’s class 1 NIC.

The detail in the Spring Statement also confirmed that the employment allowance will cover the employers’ liability for the Health and Social Care levy.   

Basic rate cut 

The promised cut in the basic rate of income tax from 20% to 19%, is slated to apply from 6 April 2024, but that is a long way off. As the past month has shown, the world can change significantly in a few weeks, and I wouldn’t like to predict where we will be in the spring of 2024.

In his Mais lecture last month Chancellor Rishi Sunak set out the principles that underpin his tax policy. At the core is a desire to cut taxes, but only where those cuts can be funded, and he restated that belief in his Spring Statement. 

To find out how much the tax cuts are all going to cost you need to dig into the Spring Statement 2022 policy costings document. For example, the increases in NIC thresholds to align with the personal allowance will cost £26.345bn over five years to 2026/27. 

The costings document sets out three additional sources of income for the Treasury:

  • HMRC compliance (tax enquiries): £3.156bn
  • DWP compliance (benefit fraud and error): £2.24bn
  • Student loans (frozen thresholds increased interest): £35.215bn

The conclusion must be that the next generation will be funding today’s tax cuts by paying handsomely in increased student loan repayments.   

Autumn plans 

Perhaps further detail on how the tax and NIC cuts will be funded will be revealed in the Autumn Budget. In Sunak’s 12-page Tax Plan was a vague reference to reforming tax reliefs and allowances and an aspiration to make the tax system “simpler, fairer and more efficient”.

Tax

MTD for VAT rules will apply to all VAT-registered clients from 1st April

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On 1st April 2022, Making Tax Digital (MTD), the government’s initiative to implement a fully digital tax system within the UK, will reach a new milestone: all VAT-registered clients will be required to follow MTD for VAT rules. 

What are the rules?

MTD for VAT requires affected clients to keep digital records and file their VAT returns through MTD-compatible software like FreeAgent. Currently, only VAT-registered clients with a turnover above the VAT registration threshold of £85,000 a year are required to follow MTD for VAT rules.

What’s changing?

From 1st April 2022, all VAT-registered clients, regardless of turnover, will be required to follow MTD for VAT rules, and the option to file VAT returns through HMRC’s website will no longer be available. 

The estimated 1.1 million business owners who will be affected by this change, they will need to start using MTD-compatible software to: 

  • store their business records digitally
  • send their VAT returns to HMRC
DMS Posts, Tax

Treasury to simplify Capital Gains Tax 

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Chancellor Rishi Sunak has confirmed that the government will implement some of the recommendations for simplifying Capital Gains Tax (CGT) put forward by the Office of Tax Simplification (OTS)

However, the OTS’ more radical proposals, such as aligning capital gains and income tax rates, will not be pursued.

As well as directing HMRC to improve its CGT guidance to taxpayers, the Chancellor has tasked HMRC with implementing reforms to:

  • Increase the filing deadline for the standalone CGT return on residential property gains from 30 days to 60 days (announced in the Autumn Budget 2021).
  • Extend the time window for no gain/no loss transfers of assets between separating/divorcing individuals by a year (there will be a consultation on this).
  • Expand CGT Rollover Relief to cover reinvestment in the form of enhancing land already owned (there will be a consultation on this).
  • Consider integrating the different ways of reporting and paying CGT into the ‘Single Customer Account’ that HMRC is developing.

In addition to accepting these recommendations from the OTS, HM Treasury is still considering:

  • The idea of a standalone CGT return system online (rather than the current combined income tax and CGT Self-Assessment return).
  • Treating individuals holding the same share or unit trust unit in more than one portfolio as holding them in separate share pools for CGT purposes (which would make calculations simpler and potentially facilitate automated online filing).
  • A review of the practical operation of Private Residence Relief nominations by taxpayers, and raising awareness of how the rules operate.
  • The way CGT exemptions for corporate bonds work.
  • The rules for Enterprise Investment Schemes to remove procedural or administrative issues that prevent their practical operation (the Treasury may carry out a much wider review of these reliefs).

However, there is to be no change to the CGT treatment of a disposal where proceeds are deferred, nor any change to the complex way that gains on foreign assets are calculated (converting values to sterling at each relevant date will continue).

The treatment of housing developments in a taxpayer’s garden will not change, nor will the treatment of a freeholder extending a lease.