Tax information sheet - 2007/2008

This tax information sheet contains information that relates to the tax year running from 6 April 2007 to 5 April 2008, except where otherwise stated. Comparative figures for 2006/2007 are shown in (red). In some cases information is given regarding earlier years because it is still possible to claim allowances, or make payments, in respect of those earlier years. In other cases information is given regarding earlier years because company accounting periods straddle different tax years, and a combination of rates is therefore used within a single company accounting period.

Income tax and Capital Gains Tax

Rates of tax

Allowances are set off first against earned income, then against savings and then against dividends. Dividends are therefore treated as the top slice of total income. A tax credit of 1/9th of the net dividend is added before tax is calculated, and this tax credit is then deducted from the calculated tax to arrive at the amount due. The tax credit cannot be recovered by non-taxpayers.

The Emergency code represents a single person’s allowance on a non-cumulative basis (Month 1), and is used by employers in the absence of any other code, until otherwise notified by HM Revenue & Customs (HMRC).

Income tax allowances

Capital Gains Tax for individuals

Capital gains are taxed as if they were the top slice of a taxpayer's income for the year, at 10% if the gains when added to total income are within the starting rate band, at 20% if they are within the basic rate band and at 40% if above the higher rate threshold.

The annual exemption for individuals is £9,200 (£8,800). With transfers between spouses/civil partners the recipient takes on the transferor’s acquisition cost and original date of acquisition.

Indexation relief

Indexation relief was frozen at April 1998, after which time chargeable gains realised by individuals and trustees are reduced according to how long the asset has been held for periods after 5 April 1998 (i.e. taper relief). The maximum rate for individuals (for assets owned since 31 March 1982) is 104.7%.

Taper relief

Gains on business assets have a more generous level of taper relief than non-business assets. Care is needed over the definitions of business and non-business assets and in the calculation of holding periods. Remember that the definition of business assets includes employee shareholdings, and in these cases care is needed over the apportionment of gains for such shareholdings held prior to April 2000, when different rules applied.

Taper relief is applied after offsetting any capital losses brought forward and is applied as follows:

Income tax on dividends

The amount distributed as dividend is deemed to be a net dividend after deduction of 10% (10%) income tax, however this is only a notional tax credit in that it cannot be reclaimed by a non-taxpayer. If a taxpayer's total taxable earned income is below the basic rate threshold of £34,600 (£33,300), any dividend receipts in addition to earned income and up to the basic rate threshold will pay income tax at 10%, and any dividend receipts that produce a total taxable income in excess of the basic rate threshold will pay income tax at 32.5%. The 10% tax credit will be set off against the tax due on the dividend receipts.

Filing of self assessment tax returns

For 2006/07 self-assessment tax returns must reach HMRC by 30 September 2007 (six months after the end of the tax year) if you wish HMRC to compute your tax liability and to advise you how much tax is to be paid. However, if you are including a calculation of tax liability in your return, the deadline is extended until 31 January 2008 (ten months after the end of the tax year).

Individuals do not have to fill in the CGT pages if their chargeable gains (net of taper relief) do not exceed the annual exempt amount, unless sale proceeds exceed four times the exempt amount, or they have allowable losses. Where no return is issued, an individual who has income or capital gains on which tax is due must give notice of chargeability within six months of the end of the relevant tax year i.e. by 5 October. Simplified tax returns will be issued to people who have simpler tax affairs.

For 2007/08 and subsequent years, in respect of which tax returns will be issued on or after 6 April 2008, there will be different filing dates for paper and online self assessment tax returns. The two separate filing dates will be:

• For paper returns: 31 October i.e. 31 October 2008 for tax year 2007/08; and
• For returns filed online: 31 January i.e. 31 January 2009 for tax year 2007/08.

HMRC will allow extra time for the minority for whom online facilities are not yet available. Also, for taxpayers who want HMRC to calculate their tax liability for them, the cut off date will move from 30 September to 31 October, aligned with the new paper return filing deadline.

There is an automatic fine of £100 if your SA tax return is not recorded as received by HMRC by 31 January (ten months after the end of the tax year), and interest will be charged on any tax not paid at that date. A surcharge will be made of 5% of any tax not paid by 28 February (eleven months after the end of the tax year). There is a further automatic fine of £100 if your tax return is not received by 31 July (sixteen months after the end of the tax year), together with a further surcharge of 5% of any tax still not paid by this date.

Due dates of payment for income received in 2007/2008

Tax and National Insurance on earnings from employment is paid under PAYE rules. The due dates of payment for other sources of income are:

31 January 2008 (2 months prior to end of tax year)
First payment on account (50%), based on previous year's liabilities, in respect of:

• Business income (Sch D1 & 2)
• Income from property (Sch A)
• Other untaxed income (Sch D3-6)
• Income taxed at basic rate

31 July 2008 (4 months after end of tax year)
Second payment on account (50%), based on previous year’s liabilities, in respect of:

• Business income (Sch D1 & 2)
• Income from property (Sch A)
• Other untaxed income (Sch D3-6)
• Income taxed at basic rate

31 January 2009 (10 months after end of tax year)
Capital Gains Tax
Balancing payment in respect of:

• Business income (Sch D1 & 2)
• Income from property (Sch A)
• Other untaxed income (Sch D3-6)
• Income taxed at basic rate

Benefits in kind

In principle, benefits in kind are not only taxable at your marginal rate of tax, but are also subject to employer NI (Class 1A). The extra tax payable by an individual on benefits in kind has to be found out of net salary (which has already been subject to both employer and employee NI, and tax). This means that there is no monetary gain from making such payments through the company. In certain instances, however, such as with medical insurance, it may be cheaper to make payment through the company, simply because insurance companies sometimes offer better rates to companies than to individuals.

Use of company owned mobile phones
No taxable benefit arises from the provision by an employer of mobile phones, including line rental and private calls, as long as these are paid for directly by the employer. The contract with the service provider must be in the name of the company. Note that from 6 April 2006 the exemption is limited to one mobile per employee and also the exemption will no longer extend to phones loaned to members of an employee’s family or household.

Use of company-owned computers
Prior to 6 April 2006, where employees have the use of computers loaned to them by their employers, the benefit in kind arising may be exempt from tax. With effect from 6 April 2006 this exemption will be removed where these are made available to employees for private use.

Christmas parties
An annual Christmas party open to all staff, or an alternative function of a similar nature, is acceptable as a business expense, and will not be taxed on the employee as a benefit in kind, provided the cost is no more than £150 per head. This is an all-inclusive allowance and VAT should not be claimed. The amount should be classified as 'entertaining' and, as with all other entertaining, will be disallowed in the company corporation tax assessment.

Incidental expenses while away from home
You may claim an amount not exceeding £5 (inc VAT) per night spent away from home in the UK, or £10 (inc VAT) per night spent outside the UK, to cover the cost of personal incidental expenses while away on business. VAT should not be claimed and these amounts should be charged to 'travel & subsistence'. This is intended to cover items of a personal nature such as newspapers, laundry and telephone calls home.

Tax free mileage rates

The following rates may be paid tax and NI free to employees for journeys made in their own cars on business. Travel from home to a temporary place of work (ie one not lasting or expected to last for more than 24 months) qualifies as business travel. Each kind of vehicle (i.e. car, motorcycle, pedal cycle) is dealt with separately, though different vehicles of the same kind are dealt with as though they were the same vehicle.

Rate per mile 2007/2008 and 2006/2007

Pay As You Earn (PAYE)

Your company PAYE scheme is registered with HMRC for the locality in which your principal place of business (i.e. your home address) is situated. If employment through your own company is your only source of earned income, that tax office will be responsible for your tax affairs. However, if you also receive a pension, your local tax office would normally pass overall responsibility for your tax affairs to the tax office that is responsible for your pension scheme.

Filing of returns

Forms P14 and P35 must reach HMRC by 19 May (six weeks after the end of the tax year) and forms P11D by 6 July (three months after the end of the tax year). Employers must provide employees with form P60 by 31 May (two months after the end of the tax year) and details of the information on their form P11D by 6 July (three months after the end of the tax year).

Use of BR and DO tax codes

These codes are used in all instances where an individual has more than one source of income (including pension income) and allowances are being given against that other income. The BR code is appropriate if total taxable income is unlikely to exceed £34,600 in the current tax year, but if total taxable income is expected to exceed £34,600, then the DO code should be used. It is the responsibility of the taxpayer to ensure that the right code is being used, and you should contact us if you think that the right code is not being used. All income subject to a BR code is taxed at 22%. All income subject to a DO code is taxed at 40%.

National Insurance

You must pay either Class 1 contributions as an employee if in employment, or Class 2 and Class 4 contributions if you are a sole trader. Alternatively, if you are not working, you may be credited with contributions by the Benefits Agency on a weekly basis. National insurance contributions are not payable on dividends.

If your earnings reach or exceed the lower earnings limit £4,524 (£4,368), but do not exceed the earnings threshold £5,200 (£5,035), you will be treated as having paid Class 1 contributions for benefit purposes (including basic state pension).

However, at this level, no national insurance contributions are actually payable and you would therefore be well advised to pay yourself a salary in excess of the earnings threshold £5,200 (£5,035) so that a permanent record of tax and national insurance is created.

After a period of unemployment and/or change of status, it is particularly important to obtain a state retirement pension forecast which will show whether or not you have been credited with sufficient contributions for each year to be treated as a qualifying year. If during the last six years you have gaps in your contribution record, you may rectify any deficiencies by paying Class 3 voluntary contributions.

National Insurance - Class 1 - individuals in employment

Employees' contributions. Employees pay contributions in respect of all receipts of salary between the earnings threshold and the upper earnings limit. If salary is below the earnings threshold, no contributions are payable. For salary above the upper earnings limit, contributions are paid at 1% of gross salary.

Employers' contributions. Employers pay contributions for every employee in respect of salary paid above the earnings threshold, with no ceiling. If salary in the year is below the earnings threshold, no contributions are payable.

In the table that follows the first set of figures is based on annual salary which is appropriate for directors, and the second set is based on monthly salary which is appropriate for other employees. It is referred to as Table A and is used for all male employees aged 16 to 64 and female employees aged 16 to 59 who have not contracted out of the State Earnings Related Pension Scheme (SERPS).

Not contracted out rates

Maximum employee's contribution - £3,260.40 (£3135.55) (or pro-rata for the number of weeks in the year as a director) plus 1% of gross salary above the upper earnings limit.

Contracting out

You may choose to contract out of SERPS and in order to do so you should set up a suitable pension policy with advice from a pensions advisor. Depending on the type of policy, this may result in paying slightly reduced contributions.

SERPS. The maximum contribution to SERPS is achieved when salary reaches the upper earnings limit.

National Insurance - Class 1A – Paid by employers on benefits in kind

Directors' National Insurance

For an employee who is not a director, NI contributions are payable each month as soon as salary exceeds 1/12th of the earnings threshold.

For a director, NI contributions are calculated cumulatively on an annual basis. If the director is appointed before the beginning of the tax year, no NI contributions are payable in the tax year until salary exceeds the earnings threshold - £5,200 (£5,035). If the director is appointed during the tax year, the earnings threshold is reduced, pro-rated according to the number of weeks remaining from the date of appointment to the end of the tax year, and NI contributions are payable when salary reaches this reduced level.

After this point NI contributions are payable on the entire salary, subject to a maximum employee's contribution of £3.260.40 (£3,135.55) (reduced pro-rata if the director is appointed during the tax year) plus 1% of gross salary above the upper earnings limit.

Deferment of employees NI contributions

If you are an employee and you pay Class 1 contributions with two or more separate employers during the year, your total contributions may exceed the prescribed annual maximum amount of NI contributions payable. In this case you should be able to apply for a deferment of contributions.

If you have more than one employment and expect your earnings in one or more of these employments to exceed the NI upper earnings limit in a full year, you may apply to defer payment of contributions in any other employments you have. If deferment is granted, you will be required to pay only 1% of gross salary in those other employments unless the total contributions you have paid at the end of the tax year are less than the annual maximum.

The form to apply for deferment can be downloaded from the internet on the following address: www.hmrc.gov.uk/nic/forms.htm

If no individual employment exceeds the limit, or if you have not applied for deferment, and your contributions exceed the prescribed annual maximum, you will receive a refund of contributions after the end of the tax year.

Deferment may be applied if earnings in one or more employments exceed:

National Insurance - Class 3 - voluntary contributions

Class 3 contributions may be paid in order to protect basic state pension rights for the current year and the previous six years by those who are not liable in a particular year to pay Class 1 (employed earners - as above) or Class 2 (self employed earners) contributions, and who have not been credited with contributions by the Benefits Agency. Note, however, that contribution rates are increased to the same level as for the current year after the end of the second tax year following the one in which they were due.

The rates for Class 3 contributions paid in 2006/07 are as follows:

Pension Contributions

The maximum amount of contributions on which an individual can claim tax relief in 2007/2008 is the greater of:

• The ‘basic’ amount – currently £3,600; and
• The amount of the individual’s relevant UK earnings chargeable to income tax for the tax year up to a maximum of £225,000 (£215,000).

In certain circumstances it may be possible to contribute more than the above, but specialist advice should be sought.

From 6 April 2006 a tax charge of 55% on the surplus benefit - Lifetime Allowance Charge - potentially arises if the value of the aggregate retirement benefits exceeds the lifetime allowance. The pension scheme lifetime allowance for 2007/2008 is £1,600,000 (£1,500,000).

Pre 6 April 2006

Pre 6 April 2006 Retirement Annuity Contracts (RACs) are a type of pension plan that individuals could take out before 1 July 1988, when the current form of Personal Pension Plan (PPP) was introduced. After that date no new RACs could be taken out but people with such contracts were able to contribute to them. While the new PPPs were designed on similar lines to RACs, there were some areas where they differed, and RACs were allowed to retain some features that did not apply to PPPs.

From 6 April 2006, under the new rules introduced by HMRC, RACs were put on the same basis as PPPs and almost all of their special features no longer apply so, for instance, it is no longer possible to carry back contributions for one tax year or carry them forward for up to six years. Further, the practice of paying RACs gross only continues until 5 April 2007, thereafter they must be paid net of tax under PAYE.

The final point to note is that pension schemes existing at 6 April 2006 automatically became registered pension schemes for a “transitional period” which ends on 5 April 2011. One feature, however, is that the Earnings Cap is preserved, being £108,600 for 2006/07 and £112,800 for 2007/08 (2005/06 £105,600).

Corporation Tax

Your company is registered for corporation tax purposes with HMRC in the locality in which your registered office address is situated, namely HMRC at the South London Business Centre in Croydon.

Corporation tax rates

Where the tax rate changes during the company's accounting period, the profits are apportioned on a time basis and charged at the respective rate in calculating the corporation tax for the accounting period.

Capital allowances

For the purposes of computing corporation tax, capital allowances must be substituted for the depreciation figure used in the company accounts. Capital allowances are made up of first year allowances and writing down allowances, and are available for capital expenditure incurred on the provision of furniture, fittings and equipment.

In principle, new expenditure is added to, and sales proceeds are subtracted from, the asset 'pool'. Writing down allowances at a rate of 25% pa on a reducing balance basis are given on the residue of expenditure in the pool. For expenditure on general plant and machinery by small companies the allowance in the first year (FYA) is 50% (50%). This temporary rate is extended for a further 12 months to apply to expenditure up to and including 31 March 2008. The rate of first year allowance for medium-sized companies and businesses remains unchanged at 40%. Capital allowances may be claimed in part where it is considered advantageous to do so.

Trading losses

Companies may carry back trading losses for relief against earlier profits. For trading losses arising on or after 2 July 1997 the carry back period is one year.

Filing of returns

A company must file its corporation tax return, accounts and supporting computations within twelve months of the end of each accounting period.

Due dates of payment

Mainstream corporation tax liability is due nine months and one day after the end of the accounting period.

Value Added Tax

The standard rate of VAT is 17.5 % and this applies to all supplies which are not zero-rated, charged at the reduced rate or exempt. A reduced rate of 5% for domestic fuel and power applies from 1 September 1997 (previously 8%), but this is not reclaimable.

VAT returns are required for each quarterly VAT period. The tax is due on submission of the VAT return. VAT returns must reach the VAT Central Unit in Southend within one month of the end of the VAT quarter, or seven days after that if payment is made separately through the banking system rather than being enclosed with the VAT return.

From 1 April 2007, registration is obligatory when annual taxable turnover reaches £64,000 (£61,000 from 1 April 2006).

When de-registering, you do not have to account for VAT on assets if the total VAT that would have been due on the assets is £1,000 or less.

VAT Flat rate scheme (FRS)

The VAT flat rate scheme (FRS) was introduced with the aim of simplifying the way small businesses account for VAT so that they spend less time and money keeping conventional VAT records. The scheme is open to companies with an annual turnover (excluding VAT) of £150,000 or less, but you cannot use it unless you have registered with HM Customs and Excise and have had your flat rate agreed.

Using the FRS, you add standard-rate VAT to your business supplies in the normal way, but apply a fixed percentage to the gross turnover to arrive at the amount of VAT payable to HM Customs and Excise.

Inheritance tax

The rates of inheritance tax for deaths occurring after 5 April 2007 are as follows:

The following thresholds have also been set:

Rates on chargeable lifetime transfers, for example to trusts established after 22 March 2006, are 50% of those on death.

Potentially exempt transfers within seven years before death are taxed at death rate with tapering relief as follows:

Trusts established after 22 March 2006, some accumulation and maintenance trusts from 6 April 2008, and all discretionary trusts are subject to a 10 year charge of 6% on assets in excess of the Nil rate band and pro rata on exit. Certain trusts established on death are not liable to these charges.

The main exemption, for transfers between spouses/civil partners (both UK domiciled), is unlimited. There is an annual exemption for IHT gifts per donor of £3,000, and a small gifts exemption per donee of £250. Regular gifts out of surplus income are also exempt.

Stamp duty

Stamp duty on share transfers: 0.5% (rounded up to the next £5).

Exempt: All assets other than land and property, shares and interests in partnership.

From October 2007 there will be no charge on Zero Rated Carbon Emission homes below £500,000. Above £500,000 the charge will be reduced by £15,000.

Financial planning

With constantly changing legislation in the field of pensions, investment and taxation it can be important to seek specialist advice.

For impartial advice from experts who are familiar with the complexities of interim management and consultancy, you may like to contact independent financial adviser Truestone Asset Management plc.