TaxMatters with James Milne – January 2024

Happy New Year and welcome to the January edition of TaxMatters with James Milne. We hope that you find this informative. Please contact us if you wish to discuss any matters in more detail.

NEW YEAR RESOLUTIONS TO SAVE TAX

At this time of year, we think about New Year’s resolutions. It is also a good time to start planning your tax affairs before the end of the tax year on 5th April.

An obvious tax planning point would be to maximise your ISA allowances for the 2023/24 tax year (currently £20,000 each). You might also want to consider increasing your pension savings before 5 April 2024, as the unused annual pension allowance from 2020/21 lapses after three years.

YEAR END INHERITANCE TAX PLANNING

Many were expecting an announcement from the Chancellor in the Autumn Statement about cuts to, or the possible abolition of, inheritance tax (IHT). Maybe he is saving that for his Spring Budget, but in the meantime, it may be worth utilising the £3,000 gifts annual exemption for 2023/24 and, if available, the unused amount from 2022/23.

Note that £3,000 is the overall exemption for the tax year, not the amount for each gift. More generous amounts can be given away by taking advantage of the exemption for regular gifts out of income.

REGULAR GIFTS OUT OF YOUR INCOME CAN SAVE IHT

One tax planning opportunity that many thought the chancellor might restrict was the exemption from inheritance tax for regular gifts out of an individual’s surplus income. Inheritance tax is designed to tax transfers of capital, so if the donor can demonstrate that the gifts are from surplus income then the transfers are not taken into consideration for IHT. The exemption applies where there is regularity to the payments, such as a standing order to pay school fees or pension contributions on behalf of children or grandchildren. HMRC will also require proof that the payments are paid out of post-tax income and do not limit the donor’s normal lifestyle. Detailed records are required.

PENSION CONTRIBUTIONS ON BEHALF OF OTHERS

Normally an individual’s payments into a pension scheme are limited to their relevant earnings in a given tax year. This restriction does not apply where the contributions are less than £3,600 gross, allowing parents and grandparents to make payments on behalf of children and grandchildren with limited income. Payments of £2,880 a year would attract a 25% uplift from the government which could grow to a substantial amount by the time the child reaches retirement age (currently age 55 but increasing to 57 in 2028). The parent or grandparent may be able to justify that the payments qualify for the regular gifts out of income exemption from inheritance tax mentioned above if a standing order was set up for no more than £240 a month.

UPDATE PAYROLL SOFTWARE FOR THE JANUARY NIC CUT

The chancellor’s announcement of a 2% cut in national insurance contributions (NICs) for employees applies to payments on or after 6 January 2024. That doesn’t allow much time to update payroll software, particularly with the Christmas holidays in between. Note that for employees other than directors, NIC is not calculated on a cumulative basis so, where over-deductions are made, the error is not automatically corrected in later months.

ADVISORY FUEL RATE FOR COMPANY CARS

The table below sets out the HMRC advisory fuel rates from 1 December 2023. These are the suggested reimbursement rates for employees’ private mileage using their company car.

Where the employer does not pay for any fuel for the company car, these are the amounts that can be reimbursed in respect of business journeys without the amount being taxable on the employee.

Where there has been a change the previous rate is shown in brackets.

You can also continue to use the previous rates for up to 1 month from the date the new rates apply.
Note that for hybrid cars you must use the petrol or diesel rate. For fully electric vehicles the rate is 9p (10p) per mile.

DIARY OF MAIN TAX EVENTS

JANUARY/ FEBRUARY 2024