Top Ten Money Saving Tips: PAYE Tax Codes

By Ritchie Turnbull

THE new PAYE tax codes for the 2013–14 tax year came into effect last month. But taxpayers who wrongly assume their code is correct could be set for a nasty shock further down the line, with HM Revenue & Customs (HMRC) changing the rules that allow some individuals to have underpaid tax written off.

With this in mind, Ritchie Turnbull offers his top tips on tax codes.
Cracking the code

Aside from tax codes beginning with a “K”, the letter in the code is largely irrelevant and does not affect the amount of tax deducted at source. The number is the important part, as this represents the net tax-free allowance you’re entitled to receive against your income. The last digit is dropped from your net allowance to form the code, so your tax-free allowance is roughly ten times the number shown in your code. Only income over and above this is taxable. A code preceded by a “K” indicates that your net allowances are negative because the total deductions included in your tax code exceed the total allowances.

Check your payslip

The basic personal allowance has been increased to £9,440 for 2013-14. This gives a standard tax code of 944L (as opposed to 810L for 2012-13) where no other allowances or deductions are included in your tax code. In these circumstances, HMRC will not have issued you with a PAYE coding notice for the year, but your employer or pension provider should update the tax code in operation automatically, so you should check the tax code shown on your next payslip to ensure that this has happened.

Check your coding notice

Where your tax code comprises other items in addition to the personal allowance, HMRC should have sent you a PAYE coding notice detailing your code for the new tax year. In this case, check that the items included in your tax code are correct and also check your next payslip to ensure that the code operated by your employer or pension provider is the one issued by HMRC.

Ignorance is not bliss

Many of us assume that the tax being deducted from our income is correct. But HMRC does make mistakes and, if an incorrect code is allowed to operate over a prolonged period of time, it can result in a nasty shock at the end of the tax year. HMRC has become much stricter about collecting underpayments of tax and will reject any appeals against these unless you are able to prove that “it was reasonable for you to believe that your tax affairs were in order”.

Help the revenue get it right

Whenever you start a new job or begin receiving a pension you should hand your new employer or pension provider parts two and three of your P45 certificate from your previous employer, so that they can determine the correct tax code. If you have not left your job, so have not received a P45, you should complete a Starter Checklist form (or P46) – which you should get from your new employer or pension provider – so they may calculate the correct amount of tax to deduct.

Students

Students are liable to tax on their income, the same as anyone else, but as many only work part-time and their income rarely exceeds the personal allowance they do not actually pay any tax. A student who believes that tax has been deducted incorrectly, you should contact HMRC.

Extra income

When individuals have several sources of PAYE income, it is likely that their personal allowance will be allocated to one source, with the others being allocated a code of BR, D0 or D1 denoting tax deductions of 20, 40 and 50 per cent respectively.

State pension

This is taxable, but tax is never deducted from it at source. If you receive a private pension as well as state pension, your state pension will be deducted from your allowances and the resulting tax code will operate against your private pension, so, in effect, the tax due on both pensions is deducted from your private pension.

Seeking advice

HMRC is gradually becoming less accessible as it looks to reduce costs, a stark illustration being the planned closure of all 281 local enquiry centres next year. Although HMRC claims it will carry out a home visit for “those who need it”, the announcement all but ends the option of being able to take your documents to HMRC and have any questions answered face-to-face.

Don’t get hung up

As HMRC does not currently accept enquiries by e-mail, taxpayers are left with the choice of making contact by post or telephone. But HMRC contact centres failed to answer more than one in four phone calls in 2011-12, while call waiting times were anywhere up to half an hour. Therefore, a few minutes spent ensuring that your affairs are in order now may save a lot of time having to put things right in the future.

Please see attached flyer for more information.

tax surgery may2013 04 (105 KB PDF Document)

“The bank of Mum and Dad” is the key to getting a foothold on the housing ladder for a growing number of first-time buyers facing hefty deposit demands from lenders.

But actually buying a property for your children or providing direct finance isn’t necessarily the best way to help out. For some people there are far more advantages to using a trust to help children into the property market, according to Angela McMahon, a senior solicitor with Murray Beith Murray.

Here are her top tips on buying a home through a trust.

The purpose
There are several reasons for buying property through a trust. These days it is probably most commonly used by parents as a tax-efficient method of securing accommodation for offspring attending university, or to give young adult children a “leg up” on to the property market. In this situation the children are officially known as “beneficiaries”.

The process
A trust has to be set up before considering which property to purchase. Ideally, there should be at least three members or, as they are called officially, “trustees” (eg husband, wife and a solicitor), although other arrangements can be put in place to suit family circumstances (such as when the parents are divorced). While a trust requires professional legal structure it is not strictly necessary for a solicitor to be a trustee, albeit still advisable. Once the trust has been set up the “trustees” are then in a position to identify and purchase a property in the normal way.

Discretion assured
The trust provides flexibility in relation to the financial arrangements used to purchase the property and the ultimate transfer of the property or its sale proceeds to the beneficiaries. By holding the property in trust, the trustees have complete discretion regarding the distribution of the property or sale proceeds on the ending of the trust arrangement.

Control
The trustees retain complete control over the financial position for the lifetime of the trust. If buying a property for an adult child the property would have to be put in the name of the son or daughter to avoid it being classed as a “second home”, which would have tax implications (see Tip 6). If the house was in the name of the adult child, then the parent or parents funding the purchase would not have any control over the sale of the property or any proceeds.

Open-ended
Once set up, “the trust” can buy as many properties as are required. Take the hypothetical example of an Edinburgh family buying a flat for child 1 attending university in Glasgow. Four years later child 2 goes to university in Aberdeen, so the trust buys another flat there. When the age gap between the two children is wide enough and their time at university does not overlap as in this scenario, the trust could sell the Glasgow flat and use the proceeds to buy the one in Aberdeen. It is not necessary to set up a new trust to purchase a second or subsequent property.

Tax-free gain
Because the flat is owned by a “trust” and not by an individual, it does not count as a second home. Any profit realised on the eventual sale of the property is not subject to capital gains tax provided it has been occupied by the beneficiary of the trust.

More relief
The beneficiary is entitled to claim “rent a room relief” on the letting of another room up to the current maximum of £4,250 a year.

IHT implications
The gift of funds into the trust and the subsequent withdrawal from the trust are chargeable events for inheritance tax. However, that liability can be avoided with some simple structuring.

Later life
Once in place, there are significant benefits in allowing the trust to continue. For example, once the “beneficiary” leaves university and starts paid employment the trustees could purchase a larger property more suited to his or her changing needs. For some parents this is preferable to handing over a large sum as a deposit to a son or daughter.

Safety net
While the property is held in trust, it does not become matrimonial. This means that in the event of one’s son or daughter experiencing a marital breakdown his or her estranged spouse will not have any claim on the property as could be the case in a situation where husband and wife were joint owners.

Angela McMahon, Trust & Estate Practitioner

Following the end of the tax year, many people will be reviewing their tax position to ensure that they have paid the correct amount of tax for the year or determine whether they are required to submit a tax return to HM Revenue & Customs.

In order to assist you with this review, we have created the attached summary of the criteria that would require you to submit a tax return for 2012/13. If you are required to submit a tax return, you must notify HM Revenue & Customs of this by 5 October.

If you have any questions in relation to your tax affairs or whether you should be completing a tax return, please contact Sean Cockburn or Christine Burns.

For more information please see the attached document.

SA criteria (113 KB PDF Document)

PENSIONERS who use savings built over a working lifetime to maintain their standard of living complain that, since the financial crisis, they’ve been subject to a pincer movement through inflation and stealth taxes.

If true, then this double whammy is exemplified by the government’s intention to retain the current freeze on the threshold at which inheritance tax (IHT) becomes due until at least 2018. Inevitably, more people who do not consider themselves particularly wealthy will be drawn into the IHT net.

When a person dies, any assets he or she held worth more than £325,000 (double for a married couple) are taxed at 40 per cent. Since the then chancellor, Alistair Darling, froze the threshold at £325,000 in 2009, the sum has already lost 14 per cent of its real value – ie had the threshold kept pace with inflation it would now be £377,740. Presuming an annual inflation rate between now and 2018 of 2.5 per cent, the threshold would need to rise to £416,000 to equate to today’s £325,000.

However, while commentators tend to focus on the threshold, it is often forgotten that the £3,000 annual allowance – the sum an individual can give away in any one year and not have it assessed later for inheritance tax – was set in 1981. It is now only 29 per cent of the value it was then – had the allowance risen in line with inflation it would stand today at £10,422.

Although house prices have stalled since the onset of the banking crisis, huge increases in the decade before meant many people of relatively modest means faced the possibility that their estates may be subject to IHT after death, with consequences for their children.

The current threshold means that if a single, widowed or divorced person dies leaving a modest home worth £250,000, any other assets worth more than £75,000 will be liable for inheritance tax at 40 per cent. These assets are not restricted to savings and investments; personal items (eg car, leisure sailing craft, wine collection) are also considered part of the estate by the authorities.

So while you do not think of yourself as particularly rich, the taxman may have other ideas once you’ve gone.

Angela McMahon, Trust & Estate Practitioner

Please see attached PDF

Budget 2013 (224 KB PDF Document)

See attached PDF

CHS Article (248 KB PDF Document)

Hard as it might be to accept, there inevitably will come a time when the owner (or owners) of even the most successful family businesses has to ‘let go’. But doing so is not simply a choice between closing down, selling out to a competitor or passing ownership to close relatives, in most cases sons and/or daughters or younger siblings. The business needs to be so structured, preferably in advance, so as to allow the right people to take over the running of it, either on death or during lifetime of the owner. Succession planning is crucial to this aim.

Trusts are often looked at as a way of ‘grandfathering’ the business out of the direct control of the original owner but still allowing him or her to retain some influence and oversight over the assets and their management. Trusts can be set up with a number of trustees who exercise discretion over the business objectives and succession planning and this can allow long term views to be taken. This is a useful way of postponing vital decisions which the owner is not yet ready to make but at the same time wants to start the succession ball rolling.

It is certainly good for proprietors to open a dialogue with family members and their advisers and start forward planning as they reach retirement. While in some cases a business owner may pick out a particular family member to take over all or part of the enterprise, decisions should be part of an overall estate planning process, to avoid any family disputes or bitterness in the future. An individual who has established and grown the business over the span of his career is unlikely to want to hand everything over in one go. There are, in many cases, ways to structure the transfer of ownership to allow for a transitional period and a staggered release of control.

One of the worst case scenarios is where no thought has been given to the succession of the business before the death of the owner and the assets might end up passing under an unsatisfactory will (which may or may not have been drafted with the succession of the business in mind). Worse still, there may not even be a will, in which case the general laws of succession come in to play, potentially leading to serious disagreement, some of it quite unpleasant, among family members and even long term bitterness from which the business may not recover.

Another possibility is that, rather than death, mental incapacity or frailty will affect the owner, also leaving the business in a state of inertia. Restructuring after the event is not without difficulties and can be expensive to sort out and, again, there may be disagreement among the family members as to what should happen. Also, when a business is struck by the death (or incapacity) of the owner, consideration needs to be given to the position of any widow (or widower) and his or her continuing involvement, personal reliance on profits or liability for business debts. The will needs to be drawn up so as not to conflict with the provisions of the company’s constitution (e.g. Memorandum and Articles of Association, or Partnership Agreement). There are likely to be specific provisions in the governing document of the business which set out what is to happen on the death of the owner.

For example, there may be cross options included within the Articles of Association which given certain family members and/or other stakeholders pre-emptive rights to take up shares or interests in the firm. These need to be taken into account.

In the run up to the sale of a family business, all professional advice tends to be focused on corporate tax aspects of the sale, asset valuation and the exit strategy, including the structure of the sale and heads of terms (including share sale versus asset sale, the possibility of pre-sale dividends, ‘earn-outs’ and the possible issue of loan notes).

As a result, it is easy to forget about the position of the business owner as an individual which is likely to change dramatically after the sale takes place. From a tax perspective, he or she is “protected” against Inheritance Tax to the extent that the business may qualify for Business Property Relief. Post sale, however, (and in the event that the business is effectively converted to cash), Inheritance Tax liability on death may become a concern.

The point here is that, quite often, in the run up to any business sale, there are some initiatives which can be taken from a private client tax planning perspective that can be used to soften the blow of the loss of Business Property Relief and also allow for succession planning. The principal objective for many who find themselves in this situation is to pass wealth down the generations – and do so without rancour.

Peter Shand

See attached Flyer

Clean slate for the new year Flyer Jan13 v7 (127 KB PDF Document)

The norovirus epidemic could provide the first big test of how bosses and their employees interpret a recent judgment by the European Court of Justice, which confirmed that workers can reschedule their annual leave should they fall ill on holiday.

The issue came to the fore again last year in a case brought by several Spanish trade unions. It was then referred to the European Court of Justice, which ruled in favour of the employees. This country is obliged to interpret UK law in line with the judgments of the court.

Larger organisations are likely to be conversant with the ruling, but small and medium-sized enterprises with limited human resources capacity may be unwittingly pressurised into acceding to requests for paid time off at a later date from workers struck down by the norovirus, (or any other sickness for that matter) while on leave over Christmas.

Therefore, all firms should be aware that the requirement to allow an employee’s leave to be rescheduled applies only to that covered by the European working time directive, which is four weeks in any one year. Employees who fell sick while on leave over Christmas cannot demand that their employers reschedule that leave to a future date if four weeks of their annual holiday entitlement had been used up.

It is common for company holiday years to end on 
31 December. In this scenario, many employees who fell sick while on a festive break are likely to have already used more than four weeks’ holiday, in which case entitlement to rescheduled paid leave will not be valid.

Employer commitments to paying rescheduled leave are also governed by the level of restrictions placed on someone with a holiday illness. Just because a sprained ankle or tummy bug spoils the enjoyment of someone’s holiday, that individual may not be automatically entitled to paid leave being rescheduled. The test will be whether the worker was unfit to do the job. So, employers can ask themselves, if they were at home rather than on holiday, would they still have been able to attend work?

Given the European judgment, this seems an opportune time for employers to review their absence management provisions, in contracts and staff handbooks.

Sarah Chilton is deputy head Employment