Personal and Business Tax changes that might affect you in the Tax year 2021-22

Personal and Business Tax changes that might affect you in the Tax year 2021-22

The 2021/22 tax year began on 6th April 2021. This blog has been written to highlight the main changes affecting individuals and businesses. 

Personal Tax and allowances

The amount you can earn before paying any Income Tax –  increases to £12,570 for the 2021-22 tax year (up from £12,500 in 2020-21) though only a small increase of £70 for the year. Anyone individual earning anything below £12,570 is not liable to pay any tax for 2021-22.

The threshold for paying the Higher Rate of income tax (which is 40%) also increases to £50,270 (from £50,000 in 2020-21). Both of these thresholds will then be frozen to 2026. The Personal Allowance is reduced by £1 for every £2 earned over £100,000.

The above are for the whole of the UK – except Scotland where the thresholds are slightly different. 

Dividend Allowance

There is no change to dividend tax rates or to the Dividend Tax Allowance for dividend income in the 2021-22 tax year. They remain the same as for the 2020-21 tax year. 

  • The tax-free dividend allowance is £2,000 – 0% tax 
  • Basic-rate taxpayers pay 7.5% on dividends
  • Higher-rate taxpayers pay 32.5% on dividends
  • Additional-rate taxpayers pay 38.1% on dividends.

Student Loans

From 6 April 2021

  • repayment threshold for pre-2012 (Plan 1) loans will rise to £19,895
  • repayment threshold for post-2012 (plan 2) loans will rise to £27,295 
  • repayment threshold for Postgraduate loans continues to be £21,000

Workplace pensions (auto-enrolment)

There are no changes to the minimum amount paid into an employee’s auto-enrolment workplace pension. Employee’s minimum contribution stays at 5% and the Employer’s at 3%. This means the total amount of employer and employee contributions remains a minimum of 8% of employee’s qualifying earnings.

Capital Gains Tax

The Capital Gains Tax annual exempt amount for individuals remains at £12,300 for the 2021/22 tax year and will be frozen at this level until 2025-26

Corporation Tax

Tax payable on company profits remains at 19% for the 2021-22 tax year, but at the March 2021 budget, the Chancellor has announced plans for a rise in the rate of Corporation Tax to 25% from April 2023. 

From April 2023 there will be a new small profits rate of 19% for companies with profits of less than £50,000 with a tapered increase to the rate as profits increase. 

Businesses earning profits over £250,000 will pay the main rate of 25% from April 2023.

VAT thresholds

Registration limit for Businesses exceeding the VAT taxable turnover is £85,000 and remains unchanged in 2021-22. Above this limit VAT registration is compulsory. These tax thresholds operate on a rolling 12-month period

  • 20% Standard rate applies to all VATable supplies 
  • 5% reduced rate : From 15th July 2020 to 30th September 2021, a reduced rate of 5% VAT will apply to supplies of food and non-alcoholic drinks from restaurants, pubs, bars, cafes to support the pandemic impact. 

From 1st October 2021 to 31st March 2022 rate increases to 12.5%.

  • 0% rate: Applied to some goods and services, such as food or children’s clothing

Personal pensions

The tax-free amount you can pay into a personal pension remains at £40,000 for the 2021-22 tax year. Lifetime allowance for pension savings also remains at £1,073,100 and will be frozen until the year 2026. The lifetime allowance is the maximum amount of tax relieved pension savings that an individual can build up over their lifetime. 

The maximum tax-free lump sum that an individual can normally have is 25% of their pension rights subject to an overall maximum of 25% of the standard lifetime allowance

Hope this gave you some insight and for further queries please contact [email protected]

Making Tax Digital (MTD) for VAT Returns: How to set up MTD on XERO?

Making Tax Digital (MTD) for VAT Returns: How to set up MTD on XERO?

MTD is an HMRC service that needs companies to have digital records and ask for VAT returns filing by utilising proper software. Making Tax Digital is an incredible help for businesses to move digital. It is obligatory for most organizations with an available turnover over the £85k VAT limit however discretionary for those beneath the threshold. This is a huge chance to move the accounting work of your business to cloud-based accounting tools. 

You should know that from April 2022, every single VAT-registered company will have to follow the MTD for VAT returns. Moreover, HMRC also declared that from April 2023, self-assessment taxpayers will be responsible to strictly adhere to Making Tax Digital guidelines for Income Tax. 

Why you should set up MTD on XERO?

There are multiple advantages of HMRC’s MTD on XERO software, some of them are: 

  • Expanded business efficiency: As per the Lloyds Bank UK Consumer Digital Index 2019, going digital could save one day of the seven days of business organization 
  • Less desk work 
  • Options to divert staff to other business work.
  • Option to see tax information even on cell phones
  • Decreased pressure and stress with regards to documenting tax returns 
  • More prominent precision and fewer blunders when submitting tax returns 

How to set up MTD on XERO?

Here we have talked about the stages to set up MTD in the XERO accounting software. 

#Stage 1: Sign Up for MTD with HMRC for VAT returns 

You will have to apply with the HMRC, this is done on their page online and normally takes between 48-72 hours to get finished. You’ll get an email from the HMRC to tell you that everything has been set up effectively. Try not to file your VAT return until you have that affirmation.

When your annual income for any one-year time frame hits over £85,000, you need to enrol for VAT or the HMRC may automatically enlist you. Ensure you’ve got the complete details of the business you are enrolling for and the Government Gateway ID and Password. 

#Stage 2: Integrate your software with HMRC for VAT 

When you start configuring XERO with HMRC for your VAT returns, ensure you have the below-mentioned things in your hands:

  • The affirmation email from HMRC saying that you have been moved over to the MTD. 
  • The Government Gateway ID and Password 
  • Verify whether your VAT number in your Xero Financial Settings is right. 

Now, you’re prepared to use MTD in Xero. Just Log in to your XERO accounts and choose the VAT return and set it up. Also, don’t forget to connect it with HMRC and grant authority. 

Stage 3: Checking MTD for VAT Returns in the software 

Now that you’ve set up everything. Just go through your dashboard once, it will be your XERO homepage dashboard. Check all the VAT Returns and which ones are due. You will get notifications on your mobile phones and emails from XERO regarding your deadlines and other things. 

Closing Note: 

As we have also said above, you can save money related to MTD because of the decreased measure of time needed to plan manual tax returns and less paperwork. Indeed, there are some extra costs that MTD may force on firms, including the expense of viable software, like-  XERO (for record-keeping) but that is not a big amount.

Get in touch if you need help setting up! 

Call us on +44 7535 6176 81 or email us at [email protected]

Also read: Working from home and charging your business rent as a director

Working from home and charging your business rent as a director

Working from home and charging your business rent as a director

The coronavirus pandemic has shaken and changed a large number of our centre beliefs. Previously, working from home was not common practice for small businesses. However nowadays, having a solid wifi connection and a fast operating laptop, an employee could be sitting on the opposite side of the world and be as productive as in the office pre-pandemic.

Working from home has its own multiple benefits. Staying away from the daily drive sets aside your employees time and cash and gives them greater adaptability to plan their work in their own style. The efficiency benefits are incredible for accountants too as long as the wifi connection is uninterrupted!

Another great idea for Directors of limited companies is to charge rent to the business as the cost of working from home in order to save on Corporation Tax.

How does it work? 

Those who run their own limited company know the difficulties they face related to various overhead costs. Charging your business rent won’t add to the costs further but help you save money while filing taxes. 

In case you’re a limited firm, you’ll save corporation tax at 19% (current rate) and have the option to pull out this money tax-free from the firm. Indeed, there are a few things you need to do to set up this. You need to set up a contract between you (the property holder) and your limited firm. This commercial contract must justify all the amounts included. 

How to calculate the rent? 

When you utilize your home in a significant manner to do your work, you can charge for any costs brought about. Nonetheless, you should have the option to prove every claim. Dissimilar to the rules which exist for sole traders, you can just claim the additional costs brought about because of remote working. 

Remember, any costs you would have borne in any case by the actual idea of running a house can’t be claimed. Just like those expenses which have both individual and business use; however, can’t be isolated. 

You can work this out by determining the expense of suitable costs, for instance – gas, power and water; as per the number of rooms you have on your property and the time you spend working in them. As a limited company director, you can’t claim for any fixed expenses because HMRC says that you would have needed to pay for these at any rate; like  Rent, Mortgage Interest and Council Tax.

You can just claim for the expense of broadband and phone bills if the bills are under your company’s name. If your bills can show specific sums were caused absolutely by the business, you can claim them effortlessly. 

A formal contract with your own company

Alternatively, you may opt for a third option – drawing up a rental licence between you and your own limited company.

This must be a commercial agreement, based on your real working arrangements, and ‘market rent’ must be paid. With this in mind, it may be worth your while asking a local estate agent to provide you with a formal rent valuation.

You should take care when drafting such an agreement (clearly we recommend you seek the help of a professional), and be able to justify the amounts involved.

Although your company will receive tax relief on the rental payments, you will incur personal tax on the rent received when you fill in your annual self-assessment return. If you co-own your home, then when it comes to tax return time, the rent must be split according to the proportion of your home each person owns.

Costs that don’t need justifications

Assuming you just work remotely sometimes, HMRC permits your company to pay you nominal costs to take care of the overall costs you may cause. Your limited company must compensate you (the worker) £6 each week or £26 each month to take care of ‘use of home’ costs. This pre-concurred total doesn’t need to be approved. 

You know, this may appear to be a small amount but when you charge this each month, it becomes £312 each year. A total which usually would be dependent upon Corporation Tax, and afterwards personal taxes whenever taken some other way.

To sum up: 

Please talk to an accountant before doing all that as it can be a mind-boggling task for you. 

Try not to utilize any room in your home all the time for business work as this could lead to capital gains tax issues. Also, ensure if running a business from home goes against your home insurance policy or not. 

Also, compare the sum you are charging your business with local market rates for similar office space; it will guarantee you are not essentially charging more from your business.

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