September 2023 Tax News

The Government’s Tax-Free Childcare Accounts provide a 25% subsidy towards the cost of childcare. The account can be used to pay nursery fees, breakfast clubs, after school clubs and registered childminders. The scheme operates by topping up savings of up to £8,000 per child by 25%, potentially an extra £2,000 a year from the Government to spend on qualifying childcare. The scheme generally applies to children under 12. In the case of disabled children the age limit is 16 and the amount that can be saved is £16,000 a year, topped up by the Government by a further 25% to potentially £20,000. Unlike childcare vouchers, still provided by some employers, tax free childcare accounts are available to both employees and the self-employed. To be eligible, the parent generally needs to be working and earning at least the National Minimum Wage or National Living Wage for at least 16 hours a week on average. However, parents are not eligible if either of the parents’ adjusted net income is more than £100,000 a year. Note that where an employer provides Childcare Vouchers then the parents are not allowed to set up a Tax-Free Childcare Account as well. Please contact us for advice on whether or not it would be beneficial to leave your employer’s Childcare Voucher Scheme, noting in particular that the voucher scheme applies to children up to age 16, rather than age 12.

Parents and carers need to be aware that if either of the couple have ‘adjusted net income’ in excess of £50,000 then the one with the higher income will potentially be charged to tax on some or all of the child benefit and will need to request a self-assessment tax return to report the amount of child benefit received in the tax year. The High Income Child Benefit Charge (HICBC) was introduced in 2012/13 and imposes a 1% charge on the amount of child benefit received for every £100 that the taxpayer’s adjusted net income exceeds £50,000. ‘Adjusted net income’ is an individual’s total taxable income before any allowances, but after deducting Gift Aid, pension contributions, and trade union subscriptions. Where the adjusted net income is £60,000 or more, then 100% of the child benefit is charged, effectively fully clawing back the child benefit. Note that the £50,000 threshold has not been increased since it was introduced in 2012 which means that more and more parents are being caught by the HICBC each year. It has recently been announced that in future years the government plans to deduct HICBC directly from salaries via PAYE. It is possible to opt out of receiving Child Benefit payments where adjusted net income exceeds £60,000. Consequently, the HICBC would not apply and the child benefit would not need to be reported on the tax return. That may mean that a taxpayer who has their tax collected under PAYE would not be required to submit a self-assessment tax return.  It is important to still fill in the Child Benefit claim form but state on the form that you do not want to get payments. That is important as the claimant would then receive National Insurance credits for that year, which count towards their State Pension entitlement. One of the problems with the HICBC is that those taxpayers who pay their tax under PAYE are not normally required to file a self-assessment tax return. However, if they are parents and one of the couple is in receipt of child benefit then they are required to request a self-assessment tax return from HMRC to report the child benefit if their adjusted net income exceeds £50,000 a year. HMRC have started assessing taxpayers to HICBC where they have not reported their child benefit in earlier years. Several taxpayers have successfully challenged these assessments through the courts in a number of recent tax cases. Whether or not a successful appeal can be made will depend on the circumstances in each case.

Currently, where an individual pension holder dies before age 75, drawdown pensions paid to a successor can generally be received free from income tax. Where the pension holder dies over the age of 75, then the amounts drawn by the successor are taxed at their marginal income tax rate. Note also that the current tax rules provide that the value of the fund passes free of inheritance tax to the successor and thus forms an important part of estate planning. Policy documents published in July 2023 include draft legislation to abolish the pension lifetime allowance and associated income tax charge. These were previously announced as part of Budget Day measures to lure workers aged over 50 back into work and are generally welcomed. However, the policy documents regarding changes to the taxation of pensions also included a suggestion that certain beneficiaries of pensions of members who died under age 75 may become subject to income tax as part of future tax changes, possibly from 2024/25. This would align with the tax position for beneficiaries of pensions where the member dies over age 75.

Draft legislation released for consultation on 18 July indicates that business and individual taxpayers will be required to provide more information to HMRC in the next few years. It is proposed that from 2025/26, employers will be required to provide more detailed information on employee hours worked via real time information (RTI) PAYE reporting. The information to be reported will be set out in separate regulations. From 2025/26 shareholders in owner-managed businesses will also be required to provide additional information via their self- assessment tax returns. These shareholders will be required to disclose the amount of dividends received from their own companies separately from other dividend income, as well as the percentage shareholding that they hold in their own companies. Self-employed individuals will be required to provide information on the start and end dates of their businesses via their self-assessment returns.