Budget 2017
This year's tax updates have proved to be challenging, to say the least, but this seems to be the norm now rather than the exception. Whilst the Office of Tax Simplification seem to be focused more on making tax returns easier for the majority of individuals, this is actually leading to much more complicated and confusing legislation, which is becoming harder to model over time. Below are just some of the provisions that have been added to JCS recently.
Scottish Income Tax
This year sees the first time that Scottish Parliament has set different rates and thresholds for Scottish taxpayers from the rest of the UK. The only change this year is the threshold at which individuals start to pay higher rate tax on earned income, however, this hides a whole level of complexity that now needs to be taken into account when calculating the tax liability of a Scottish taxpayer. As the Scottish higher rate threshold is only applicable to non-savings and non-dividend income (earned income), any savings or dividend income must take into account the UK tax rates and thresholds, meaning that a Scottish taxpayer with both earned income and savings income is subject to both Scottish and UK rates and bands at the same time.
Due to a quirk of the actual thresholds set for this year, an individual with both earned and savings income, could in theory, be liable to (Scottish) higher rate tax on their earned income, but only pay (UK) basic rate tax on their savings income. This is likely to cause confusion if an individual's earned income falls within the band of £43,000 - £45,000, and also has savings or dividend income.
Below is a worked example demonstrating this quirk, which can be replicated in JCS if desired.
John is a Scottish taxpayer with an salary of £43,002, and bank interest of £1,500 in the tax year 2017/18.
His total taxable income is £44,502, but his personal allowance of £11,500 reduces this to £33,002.
He will pay income tax at Scottish rates and thresholds on his earned income, but will pay income tax at UK rates on his savings income.
His earned income is taxed at Scottish Basic Rate (20%) in the band £0 to £31,500. Then at Scottish Higher Rate (40%) in the band £31,501 to £31,502.
John's marginal tax rate is now 40% (according to Scottish rates and thresholds).
He then needs to consider his savings income of £1,500 at UK rates and thresholds, but taking into account the income already taxed at Scottish rates. The UK Basic Rate falls in the band £0 to £33,500, but his earned income at Scottish rates has used up the first £31,502 of this band, leaving an available band of £31,503 to £33,500.
Since John is not a higher rate taxpayer (according to the UK threshold of £33,500), he is entitled to a Personal Savings Allowance of £1,000 which is taxed at 0% but uses up the basic rate band.
His savings income will be taxed in the UK Basic Rate band (20%) of £31,503 to £33,003, where the first £1,000 is taxed at 0% due to the Personal Savings Allowance.
John's marginal tax rate is now 20% (according to UK rates and thresholds)
The tax calculations in JCS have been carefully tested to ensure that they follow the updated tax legislation for Scottish Income tax, both now and for future tax years.
It has also been made ready for plans for devolution of tax to Wales in 2019.
Lifetime ISAs
The 2017/18 tax year sees the introduction of the controversial Lifetime ISA. The latest version of JCS will now allow the creation of a number of different ISA types, including the Lifetime ISA and the Innovative Finance ISA.
We see the Lifetime ISA as being one of the few products (other than pensions) that has been specifically designed to provide for income in retirement, and as such JCS allows you to include Lifetime ISAs in the Income in Retirement calculator, in the same way as DC pensions can currently be included. When used in this way, the 25% government bonus will be automatically applied to all future personal contributions for planning purposes.
Property and Trading Allowances
In the 2016 budget, two new allowances were announced to take effect from April 2017. Both of these were intended to make the reporting of tax easier for individuals with low levels of income from either property, or goods and services. It means that if an individual's income from these sources is less than £1,000, they do not need to include it on their tax return at all. However, if their income from these sources is higher than £1,000, the individual can elect to either use the allowance as a straight reduction of their income (no expenses are taken into account in this option), or calculate the reported profit based on income less expenses. An individual must elect to use these allowances, and there may be situations where the individual will decide to either elect to use the allowance, or not use the the allowance, even though the decision may not be financially beneficial to them (such as reduced time and effort involved in expense receipts etc).
For this reason, JCS does not automatically make use of these allowances in the tax calculations, unless they have been selected in the "Tax Allowances" section of client Fact Find. If any of your clients are likely to make use of these allowances, make sure you review the options available in this section.
MPAA and the subsequent government U-Turn
In the 2017 Budget, the Chancellor confirmed that the MPAA for pension contributions would reduce from £10,000 to £4,000 with effect from 6th April 2017. However, when the Finance Act 2017 was given Royal Assent at the end of April, this is one of the provisions that was removed in order to ensure the legislation could be completed before Parliament was dissolved in the run up to the General Election.
The Budget release of JCS initially included the reduction to £4,000, but this will be reverted back to £10,000 in the May 2017 release to reflect current legislation.
It should be noted that the reduction in the MPAA still remains government policy, according to the Treasury, and depending on the outcome of the General Election, the MPAA may still be reduced with effect 6th April 2017. This uncertainty is not very helpful for planning purposes, but we will ensure that JCS is updated promptly when, and if, any changes are announced.
Inheritance Tax - Residential Nil Rate Band
With effect April 2017, individuals are now able to make use of the new Residential Nil Rate Band (RNRB) when calculating Inheritance Tax liability. Unfortunately, the way RNRB has been implemented in legislation does not make for a simple calculation.
JCS has been updated significantly in the inheritance tax area to handle RNRB, transferred RNRB from a deceased spouse, downsizing addition, and how the total amount of RNRB can be tapered away for estates in excess of £2 million.
The maximum RNRB available in 2017/18 is restricted to £100,000, increasing to £175,000 by 2020/21.
If you have not seen the detailed IHT computations from JCS, have a look in the Estate Planning and Wills section of the Fact Find.
