This article looks at the changes made by the Finance Act 2018 (which is the legislation as it relates to the tax year 2018–19) and should be read by those of you who are taking TX-UK in an exam in the period 1 June 2019 to 31 March 2020.

The aim of the article is to summarise the changes made by the Finance Act 2018 and to look at the more important changes in greater detail. The article also includes details of legislation which was enacted prior to 31 July 2018, but has only come into effect from 6 April 2018. The Finance (No. 2) Act 2017 did not receive Royal Assent until 16 November 2017 and was therefore not examinable in exams falling in the period 1 June 2018 to 31 March 2019. Therefore, changes made by this act are included in this article even though most of the changes took effect from 1/6 April 2017.

With the exception of the loan relationship rules as regards interest payable and the calculation of indexation factors for the purposes of corporate chargeable gains, the article does not refer to any amendments to the TX-UK syllabus coverage unless they directly relate to legislative changes and candidates should therefore consult the TX-UK Syllabus and Study Guide for exams in the period 1 June 2019 to 31 March 2020 for details of such amendments.

Please note that if you are sitting TX-UK in the period 1 June 2018 to 31 March 2019, you will be examined on the Finance Act 2017, which is the legislation as it relates to the tax year 2017–18. Therefore this article is not relevant to you, and you should instead refer to the Finance Act 2017 article published on the ACCA website (see 'Related links').

You are reminded that none of the current or impending devolved taxes for Scotland, Wales, and Ireland is, or will be, examinable.

Income tax

Rates of income tax

The rates of income tax for the tax year 2018–19 are:

A starting rate of 0% applies to savings income where it falls within the first £5,000 of taxable income.

Personal allowance

The personal allowance for the tax year 2018–19 is £11,850.

This is gradually reduced to nil where a person’s adjusted net income exceeds £100,000. Adjusted net income is net income (total income less deductions for gross pension contributions to an employer’s occupational pension scheme, loss relief and interest payments) less the gross amount of personal pension contributions and gift aid donations.

The personal allowance is reduced by £1 for every £2 by which a person’s adjusted net income exceeds £100,000. Therefore, a person with adjusted net income of £123,700 or more is not entitled to any personal allowance ((123,700 – 100,000)/2 = £11,850). Where a person has an adjusted net income of between £100,000 and £123,700, then the effective marginal rate of income tax is 60%. This is the higher rate of 40% on income plus an additional 20% as a result of the withdrawal of the personal allowance. In this situation, it may be beneficial to make additional personal pension contributions or gift aid donations.

EXAMPLE 1

For the tax year 2018–19, June has a trading profit of £184,000. Her income tax liability is:

No personal allowance is available because June’s adjusted net income of £184,000 exceeds £123,700.

EXAMPLE 2

For the tax year 2018–19, May has a trading profit of £159,000. During the year, May made net personal pension contributions of £32,000 and a net gift aid donation of £9,600. Her income tax liability is:

• The gross personal pension contributions are £40,000 (32,000 x 100/80) and the gross gift aid donation is £12,000 (9,600 x 100/80).
• May’s adjusted net income is therefore £107,000 (159,000 – 40,000 – 12,000), so her personal allowance of £11,850 is reduced to £8,350 (11,850 – 3,500 ((107,000 – 100,000)/2)).
• The basic and higher rate tax bands are extended to £86,500 (34,500 + 40,000 + 12,000) and £202,000 (150,000 + 40,000 + 12,000) respectively..

Savings income

Interest received from bank and building societies is paid gross without any tax being suffered at source. Certain types of savings income are paid net of basic rate tax, but these are not examinable. Therefore, as far as TX-UK is concerned, all savings income is treated as paid gross.

Savings income benefits from a 0% rate. For basic rate taxpayers, the savings income nil rate band for the tax year 2018–19 is £1,000, and for higher rate taxpayers it is £500. Additional rate taxpayers do not benefit from any savings income nil rate band. Savings income in excess of the savings income nil rate band is taxed at the basic rate of 20% if it falls below the higher rate threshold of £34,500, at the higher rate of 40% if it falls between the higher rate threshold of £34,500 and the additional rate threshold of £150,000, and at the additional rate of 45% if it exceeds the additional rate threshold of £150,000.

EXAMPLE 3

For the tax year 2018–19, Ingrid has a salary of £48,900 and savings income of £1,800. Her income tax liability is:

Ingrid is a higher rate taxpayer, so her savings income nil rate band is £500.

The savings income nil rate band counts towards the basic rate and higher rate thresholds.

EXAMPLE 4

For the tax year 2018–19, Henri has a salary of £43,000 and savings income of £10,000. During the year, he made gross personal pension contributions of £4,000. His income tax liability is:

• Henri is a higher rate taxpayer, so his savings income nil rate band is £500.
• The savings income nil rate band of £500 counts towards the basic rate threshold of £38,500 (34,500 + 4,000).

Savings income can also benefit from the starting rate of 0%. However, the starting rate only applies where savings income falls within the first £5,000 of taxable income. If non-savings income exceeds £5,000, then the starting rate of 0% for savings does not apply.

EXAMPLE 5

For the tax year 2018–19, Ali has pension income of £13,600 and savings income of £6,000. His income tax liability is:

• Non-savings income is £1,750 (13,600 – 11,850), so £3,250 (5,000 – 1,750) of the savings income benefits from the starting rate of 0%.
• Ali is a basic rate taxpayer, so his savings income nil rate band is £1,000.

When it comes to tax planning for a married couple, or a couple in a civil partnership, the availability of the savings income nil rate band means that transferring income from the partner paying tax at a higher rate to the partner paying tax at a lower rate is not necessarily the most beneficial option.

EXAMPLE 6

Samuel and Samantha are a married couple. For the tax year 2018–19, Samuel will have a salary of £90,000. Samantha will have a salary of £30,000 and savings income of £1,500.

Samantha is a basic rate taxpayer, so her savings income nil rate band is £1,000. The remaining £500 of her savings income will be taxable at the rate of 20%. Samuel is a higher rate taxpayer, so his savings income nil rate band is £500. Transferring sufficient savings to Samuel so that he receives £500 of the savings income will therefore save income tax of £100 (500 at 20%) for 2018–19.

Dividends

The first £2,000 of dividend income for the tax year 2018–19 benefits from a 0% rate. This £2,000 nil rate band is available to all taxpayers, regardless of whether they pay tax at the basic, higher or additional rate. However, the dividend nil rate band counts towards the basic rate and higher rate thresholds.

Dividend income in excess of the £2,000 nil rate band is taxed at 7.5% if it falls below the higher rate threshold of £34,500, at 32.5% if it falls between the higher rate threshold of £34,500 and the additional rate threshold of £150,000, and at 38.1% if it exceeds the additional rate threshold of £150,000.

EXAMPLE 7

For the tax year 2018–19, Ezra has a salary of £59,000 and dividend income of £3,800. Her income tax liability is:

EXAMPLE 8

For the tax year 2018–19, Erica has a salary of £40,400 and dividend income of £8,200. Her income tax liability is:

The £2,000 dividend nil rate band counts towards the basic rate threshold of £34,500.

The order in which tax rates are applied to taxable income is firstly non-savings income, then savings income and finally dividend income. Deductible interest, trade losses and the personal allowance should initially be set against non-savings income and then savings income. 

EXAMPLE 9

For the tax year 2018–19, Joe has a salary of £43,000, savings income of £2,000 and dividend income of £6,000. During the year, he paid interest of £300 which was for a qualifying purpose. Joe’s employer deducted £6,230 in PAYE from his earnings. The income tax payable by Joe is:

• Joe is a higher rate taxpayer, so his savings income nil rate band is £500.
• The dividend nil rate band uses up the remaining basic rate threshold of £1,650 (34,500 – 30,850 – 500 – 1,500).

The savings income and dividend nil rate bands will mean that many taxpayers do not have any tax liability in respect of savings and dividend income.

EXAMPLE 10

For the tax year 2018–19, Ming has property income of £23,200, savings income of £700 and dividend income of £1,200. Her income tax liability is:

Ming is a basic rate taxpayer, so her savings income nil rate band is £1,000. This is restricted to the actual savings income of £700.

The availability of the dividend nil rate band (together with the savings income nil rate band) complicates tax planning for married couples and couples in civil partnerships.

EXAMPLE 11

Nigel and Nook are a married couple. For the tax year 2018–19, Nigel will have a salary of £160,000 and savings income of £400. Nook will have a salary of £60,000 and dividend income of £3,800.

Nigel is an additional rate taxpayer, so he does not receive any savings income nil rate band. Nook, as a higher rate taxpayer, has an unused savings income nil rate band of £500. Transferring the savings to Nook will therefore save income tax of £180 (400 at 45%) for 2018–19.

Nook has fully utilised her dividend nil rate band of £2,000, but Nigel’s nil rate band is unused. Transferring sufficient investments to Nigel so that he receives £1,800 of the dividend income will therefore save income tax of £585 (1,800 at 32.5%) for 2018–19.

Given the tax rates which apply to dividend income, incorporating the business of a sole trader or partnership will not result in a substantial tax saving. The rates also impact on the decision whether to extract profits from a company either as director’s remuneration or as dividends.

EXAMPLE 12

Sam is currently self-employed. If he continues to trade on a self-employed basis, his trading profit for the year ended 5 April 2019 is forecast to be £50,000. Based on this figure, Sam’s total income tax liability and national insurance contributions (NIC) for the tax year 2018–19 will be £11,999.

Sam is considering incorporating his business on 6 April 2018. The forecast taxable total profits of the new limited company for the year ended 5 April 2019 will be £50,000. After paying corporation tax of £9,500, Sam will withdraw all of the profits by paying himself dividends of £40,500 during the tax year 2018–19.

Sam’s income tax liability will be:

The total tax cost if Sam incorporates his business is £11,499 (9,500 + 1,999). This is an overall saving of just £500 (11,999 – 11,499) compared to continuing on a self-employed basis.

However, incorporation can provide other tax advantages. For example, the corporation tax rate on profits remaining undrawn within a company is just 19%. This compares to the higher and additional rates of 40% and 45% which can be payable by a sole trader or partners.

Transferable amount of personal allowance

The transferable amount of personal allowance (also known as the marriage allowance or marriage tax allowance) is £1,190 for the tax year 2018–19.

The benefit is given to the recipient as a reduction from their income tax liability at the basic rate of tax, so the tax reduction is therefore £238 (1,190 at 20%). If the recipient’s tax liability is less than £238, then the tax reduction is restricted so that the recipient’s tax liability is not reduced below zero.

EXAMPLE 13

Paul and Rai are a married couple. For the tax year 2018–19, Rai has a salary of £35,000 and Paul has a trading profit of £8,000. They have made an election to transfer the fixed amount of personal allowance from Paul to Rai.

Paul’s personal allowance is reduced to £10,660 (11,850 – 1,190), and because this is higher than his trading profit of £8,000 he does not have any tax liability.

Rai’s income tax liability is:

Employment income

Company car benefit

For the tax year 2018–19, the base level of CO₂ emissions used to calculate company car benefits is unchanged at 95 grams per kilometre. However, the base percentage has been increased from 18% to 20%. There are lower rates for company motor cars with low CO₂ emissions:

• For a motor car with a CO₂ emission rate of 50 grams per kilometre or less, the percentage is 13%.
• For a motor car with a CO₂ emission rate of between 51 and 75 grams per kilometre, the percentage is 16%.
• For a motor car with a CO₂ emission rate of between 76 and 94 grams per kilometre, the percentage is 19%.

The percentage rates (including the lower rates of 13%, 16% and 19%) are increased by 4% for diesel cars, but not beyond the maximum percentage rate of 37%.

The company car benefit information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2019 to 31 March 2020 is:

Car benefit percentage

The relevant base level of CO₂ emissions is 95 grams per kilometre.

The percentage rates applying to petrol cars with CO₂ emissions up to this level are:

EXAMPLE 14

During the tax year 2018–19, Fashionable plc provided the following employees with company motor cars:

Amanda was provided with a new petrol powered company car throughout the tax year 2018–19. The motor car has a list price of £12,200 and an official CO₂ emission rate of 84 grams per kilometre.

Betty was provided with a new petrol powered company car throughout the tax year 2018–19. The motor car has a list price of £16,400 and an official CO₂ emission rate of 109 grams per kilometre.

Charles was provided with a new diesel powered company car on 6 August 2018. The motor car has a list price of £13,500 and an official CO₂ emission rate of 127 grams per kilometre.

Diana was provided with a new petrol powered company car throughout the tax year 2018–19. The motor car has a list price of £84,600 and an official CO₂ emission rate of 198 grams per kilometre. Diana paid Fashionable plc £1,200 during the tax year 2018–19 for the use of the motor car.

Amanda

The CO₂ emissions are between 76 and 94 grams per kilometre, so the relevant percentage is 19%. The motor car was available throughout 2018–19, so the benefit is £2,318 (12,200 x 19%).

Betty

The CO₂ emissions are above the base level figure of 95 grams per kilometre. The CO₂ emissions figure of 109 is rounded down to 105 so that it is divisible by five. The minimum percentage of 20% is increased in 1% steps for each five grams per kilometre above the base level, so the relevant percentage is 22% (20% +  2% ((105 – 95)/5)). The motor car was available throughout 2018–19, so the benefit is £3,608 (16,400 x 22%).

Charles

The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 30% (20% + 6% ((125 – 95)/5) + 4% (charge for a diesel car)). The motor car was only available for eight months of 2018–19, so the benefit is £2,700 (13,500 x 30% x 8/12).

Diana

The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 40% (20% + 20% ((195 – 95)/5)), but this is restricted to the maximum of 37%. The motor car was available throughout 2018–19, so the benefit is £30,102 ((84,600 x 37%) – 1,200). The contribution by Diana towards the use of the motor car reduces the benefit.

Company van benefit

The annual scale charge used to calculate the benefit where an employee is provided with a company van has been increased from £3,230 to £3,350.

Company car fuel benefit

The fuel benefit is calculated as a percentage of a base figure which is announced each year. For the tax year 2018–19, the base figure has been increased from £22,600 to £23,400.

The percentage used in the calculation is exactly the same as that used for calculating the related company car benefit.

EXAMPLE 15

Continuing with example 14.

Amanda was provided with fuel for private use between 6 April 2018 and 5 April 2019.

Betty was provided with fuel for private use between 6 April 2018 and 31 December 2018.

Charles was provided with fuel for private use between 6 August 2018 and 5 April 2019.

Diana was provided with fuel for private use between 6 April 2018 and 5 April 2019. She paid Fashionable plc £600 during the tax year 2018–19 towards the cost of private fuel, although the actual cost of this fuel was £1,000.

Amanda

The motor car was available throughout 2018–19, so the benefit is £4,446 (23,400 x 19%).

Betty

Fuel was only available for nine months of 2018–19, so the fuel benefit is £3,861 (23,400 x 22% x 9/12).

Charles

The motor car was only available for eight months of 2018–19, so the fuel benefit is £4,680 (23,400 x 30% x 8/12).

Diana

The motor car was available throughout 2018–19, so the benefit is £8,658 (23,400 x 37%). There is no reduction for the contribution made by Diana since the cost of private fuel was not fully reimbursed.

Company van fuel benefit

The fuel benefit where private fuel is provided for a company van has been increased from £610 to £633.

Approved mileage allowances

Approved mileage allowances were previously known as authorised mileage allowances. The rates themselves are unchanged, with a rate of 45p per mile for the first 10,000 business miles, and 25p per mile for business mileage in excess of 10,000 miles.

Tax free childcare

A new tax free childcare scheme for working families has been introduced, with this scheme replacing childcare vouchers.

Childcare vouchers are therefore no longer examinable. The new tax free childcare scheme is not examinable.

The rules for employer-supported childcare are not affected and continue to be examinable.

Official rate of interest

The official rate of interest is used when calculating the taxable benefit arising from a beneficial loan or from the provision of living accommodation costing in excess of £75,000.

For exams in the period 1 June 2019 to 31 March 2020, the actual official rate of interest of 2.5% for the tax year 2018–19 will be used.

Capital allowances

Annual investment allowance

The annual investment allowance (AIA) limit is unchanged at £200,000.

The AIA provides an allowance of 100% for the first £200,000 of expenditure on plant and machinery in a 12 month period. Any expenditure in excess of the £200,000 limit qualifies for writing down allowances as normal. The AIA applies to all expenditure on plant and machinery with the exception of motor cars. The £200,000 limit is proportionally reduced or increased where a period of account is shorter or longer than 12 months. For example, for the three-month period ended 31 March 2019, the AIA limit would be £50,000 (200,000 x 3/12).

Motor cars

The motor car CO₂ emission thresholds have been reduced:

• The CO₂ emissions limit to qualify for a 100% first-year allowance has been reduced from 75 grams per kilometre to 50 grams per kilometre.
• The CO₂ emissions limit to qualify for writing-down allowances at the rate of 18% has been reduced from 130 grams per kilometre to 110 grams per kilometre.

This means that writing-down allowances at the rate of 18% are available where a motor car’s CO₂ emissions are between 51 and 110 grams per kilometre, and at the rate of 8% where CO₂ emissions are over 110 grams per kilometre.

These changes apply from 1 April 2018, and a question will not be set involving the CO₂ emission thresholds that applied prior to this date.

Unless there is private use, motor cars qualifying for writing down allowances at the rate of 18% are included in the main pool, whilst motor cars qualifying for writing down allowances at the rate of 8% are included in the special rate pool. Motor cars with private use (by a sole trader or partner) are not pooled, but are kept separate so that the private use adjustment can be calculated.

The capital allowances information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2019 to 31 March 2020 is:

Rates of allowance

EXAMPLE 16

Ling prepares accounts to 31 December. On 1 January 2018, the tax written down value of plant and machinery in her main pool was £16,700.

The following transactions took place during the year ended 31 December 2018:

Motor car (1) purchased on 8 April 2018 has CO₂ emissions of 100 grams per kilometre. This motor car is used by Ling and 20% of the mileage is for private journeys. Motor car (2) purchased on 14 April 2018 and sold on 12 December 2018 has CO₂ emissions of 135 grams per kilometre. Motor car (3) purchased on 2 September 2018 has CO₂ emissions of 105 grams per kilometre. Motor car (4) purchased on 19 November 2018 has CO₂ emissions of 45 grams per kilometre.

Ling’s capital allowance claim for the year ended 31 December 2018 is:

• Motor car (1) is kept separately because there is private use by Ling. This motor car has CO₂ emissions between 51 and 110 grams per kilometre and therefore qualifies for writing down allowances at the rate of 18%.
• Motor car (2) had CO₂ emissions over 110 grams per kilometre and therefore qualifies for writing down allowances at the rate of 8%. Even though it is the only asset in the special rate pool, there is no balancing allowance on the disposal of this motor car because the expenditure is included in a pool.
• Motor car (3) has CO₂ emissions between 51 and 110 grams per kilometre and therefore qualifies for writing down allowances at the rate of 18% in the main pool.
• Motor car (4) has CO₂ emissions of up to 50 grams per kilometre and therefore qualifies for the 100% first year allowance.

Leased motor cars

The CO₂ emission threshold for leased motor cars has been reduced from 130 grams per kilometre to 110 grams per kilometre. This means that there is no adjustment where the CO₂ emissions of a leased motor car do not exceed 110 grams per kilometre. Where CO₂ emissions are more than 110 grams per kilometre then 15% of the leasing costs are disallowed in calculating taxable profits.

EXAMPLE 17

Fabio Ltd makes up its accounts to 31 March. On 1 April 2018, the company commenced the lease of two motor cars. The first motor car has CO₂ emissions of 95 grams per kilometre and was leased at a cost of £4,800 during the year ended 31 March 2019. The second motor car has CO₂ emissions of 130 grams per kilometre and was leased at a cost of £6,000 during the year ended 31 March 2019.

When calculating its taxable profits for the year ended 31 March 2019, Fabio Ltd will have to disallow leasing costs of £900 (6,000 x 15%).

Allowances for miscellaneous income

Two £1,000 allowances have been introduced which can be used against miscellaneous trading income and miscellaneous property income. These £1,000 allowances are not examinable.

Cash basis for small businesses

When the cash basis is used, most purchases of equipment are deducted as an expense. However, the cost of motor cars, land and buildings is not deductible.

Certain other items have been added to the list of non-deductible capital expenditure, but these items are not examinable.

Property income

Cash basis

The cash basis is now the default basis for calculating property income for individuals and partnerships. However, it is still possible to opt to use the accruals basis, and the accruals basis must be used if property income receipts exceed £150,000.

Limited companies continue to use the accruals basis.

In many cases, there will be no difference between the cash basis and the accruals basis. The following are treated the same under both the cash basis and the accruals basis:

• Security deposits (these are returned to the tenant on the cessation of a letting, less the cost of making good any damage, so they are therefore initially not treated as income).
• Replacement furniture relief.
• Relief for property income losses.
• Premiums received.
• The restriction to finance costs (see below).

However, rent will be included on a received basis (rather than a receivable basis), with expenses (such as insurance) deducted on a paid basis (rather than a payable basis).

In any examination question involving property income for individuals and partnerships, it should be assumed that the cash basis is to be used unless specifically stated to the contrary.

As for the cash basis for small businesses, most purchases of equipment are deductible as an expense, with the exception of motor cars, land and buildings. The other items which have been added to the list of non-deductible expenditure are not examinable.

Use of mileage allowances

Individuals and partnerships can now use HM Revenue and Customs’ (HMRC) approved mileage allowances when calculating property income. This is as an alternative to using the actual motor expenses incurred.

EXAMPLE 18

On 6 July 2018, Nim purchased a freehold house. The property was then let throughout the period 6 July 2018 to 5 April 2019 at a monthly rent of £800, although the rent for March 2019 was not received until 8 April 2019.

On 6 July 2018, Nim paid property insurance of £600 for the year ended 5 July 2019.

During July 2018, Nim furnished the property with a cooker costing £440. The cooker was sold during March 2019 for £110, and replaced with a similar model costing £460.

During the period 6 July 2018 to 5 April 2019, Nim drove 80 miles in her motor car in respect of her property business. She uses HMRC’s approved mileage allowances to calculate the expense deduction.

Nim’s property income is:

• No relief is available for the initial cost of the cooker. Relief for the replacement cooker is reduced by the proceeds of £110 from the sale of the original cooker.
• Under the cash basis, rent and insurance are calculated on a received and paid basis. If Nim had instead used the accruals basis, then rent receivable would have been £7,200 (800 x 9) and insurance payable would have been £450 (600 x 9/12).

Finance costs

Tax relief for finance costs in respect of residential property, such as mortgage interest, is to be restricted to the basic rate. However, this restriction is being phased in over four years, and for the tax year 2018–19 only 50% of finance costs are subject to the basic rate restriction.

It makes no difference whether the finance was used to purchase the property or was used to pay for repairs.

The restriction does not apply where finance costs relate to a furnished holiday letting or to non-residential property such as an office or warehouse. The restriction only applies to individuals and not to limited companies.

The restriction has no impact on basic rate taxpayers.

The 50% finance costs restriction will be given in the tax rates and allowances section of the examination.

EXAMPLE 19

On 6 April 2018, Fang purchased a freehold house. The property was then let throughout the tax year 2018–19 at a monthly rent of £1,000.

Fang partly financed the purchase of the property with a repayment mortgage, paying mortgage interest of £4,000 during the tax year 2018–19.

The other expenditure on the property for the tax year 2018–19 amounted to £1,300, and this is all allowable.

For the tax year 2018–19, Fang has a salary of £80,000.

Fang’s property income is:

His income tax liability is:

Individual savings accounts

The individual savings account (ISA) investment limit for the tax year 2018–19 is unchanged at £20,000. The £20,000 limit is completely flexible, so a person can invest £20,000 in a cash ISA, or they can invest £20,000 in a stocks and shares ISA, or in any combination of the two – such as £10,000 in a cash ISA and £10,000 in a stocks and shares ISA.

The availability of the savings income nil rate band for basic and higher rate taxpayers means that there is no tax benefit to investing in cash ISAs for many individuals. However, cash ISAs are advantageous for additional rate taxpayers and for other individuals where their savings income nil rate band is already utilised.

The availability of the dividend nil rate band means that there is no tax advantage to receiving dividend income within a stocks and shares ISA for many individuals. However, chargeable gains made within a stocks and shares ISA are exempt from capital gains tax. Stocks and shares ISAs are therefore advantageous where chargeable gains are made in excess of the annual exempt amount.

National insurance contributions (NIC)

Class 1 and class 1A NIC

For the tax year 2018–19, the rates of employee class 1 NIC are unchanged at 12% and 2%. The rate of 12% is paid on earnings between £8,424 per year and £46,350 per year, and the rate of 2% is paid on all earnings over £46,350 per year.

The rate of employer’s class 1 NIC is unchanged at 13.8% and is paid on all earnings over £8,424 per year. Note that this limit is now aligned with the employee limit.

The rate of class 1A NIC which employers pay on taxable benefits provided to employees is also unchanged at 13.8%.

Employment allowance

The annual employment allowance for the tax year 2018–19 is unchanged at £3,000. This can be used by businesses to reduce the amount of employer’s class 1 NIC which is paid to HMRC. For example, if a business’s total employer’s class 1 NIC for the tax year 2018–19 is £4,600, then only £1,600 (4,600 – 3,000) will be paid to HMRC. If total employer’s class 1 NIC is £3,000 or less, then the liability will be nil. The employment allowance is not available to companies where a director is the sole employee.

The class 1 and class 1A NIC information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2019 to 31 March 2020 is:

EXAMPLE 20

Simone Ltd has three employees who are each paid £55,000 per year. One of the employees was provided with the following taxable benefits during the tax year 2018–19:

The class 1 and class 1A NIC liabilities are:

Class 2 NIC

For the tax year 2018–19, the rate of class 2 NIC has been increased to £2.95 per week.

Class 2 NIC is payable where profits exceed a small profits threshold of £6,205.

Class 4 NIC

The rates of class 4 NIC are unchanged at 9% and 2%. The rate of 9% is paid on profits between £8,424 and £46,350, and the rate of 2% is paid on all profits over £46,350.

The class 4 NIC information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2019 to 31 March 2020 is:

EXAMPLE 21

Jimmy and Jenny are both self-employed. Their trading profits for the tax year 2018–19 are respectively £25,000 and £55,000. The class 4 NIC liabilities are:

Pension schemes

Annual allowance

The annual allowance for the tax year 2018–19 is unchanged at £40,000.

The annual allowance is reduced by £1 for every £2 by which a person’s adjusted income exceeds £150,000, down to a minimum tapered annual allowance of £10,000. Therefore, a person with adjusted income of £210,000 or more, will only be entitled to an annual allowance of £10,000 (40,000 – ((210,000 – 150,000)/2) = £10,000).

The definition of adjusted income is net income plus any employee contributions to occupational pension schemes (these will have been deducted in calculating net income) plus any employer contributions to either occupational or personal pension schemes. For the self-employed, adjusted income will simply be net income.

EXAMPLE 22

For the tax year 2018–19, Juliet has a trading profit of £196,000. She has never previously been a member of a pension scheme.

Juliet’s tapered annual allowance for 2018–19 is £17,000 (40,000 – ((196,000 – 150,000)/2)).

Carry forward

If the annual allowance is not fully used in any tax year, then it is possible to carry forward any unused allowance for up to three years.

It is still possible to use brought forward unused annual allowances in the tax year 2018–19 if a tapered annual allowance applies for this year. However, it is the tapered annual allowance for 2018–19 which is used to establish whether any carried forward is available from this year to future tax years.

Carry forward is only possible if a person is a member of a pension scheme for a particular tax year. Therefore, for any year in which a person is not a member of a pension scheme the annual allowance is lost.

EXAMPLE 23

Monica and Nicola have made the following gross personal pension contributions during the tax years 2015–16, 2016–17 and 2017–18:

Monica was not a member of a pension scheme for the tax year 2015–16. Nicola was a member of a pension scheme for all three tax years. Neither Monica nor Nicola’s adjusted income exceeds £150,000 for any tax year.

Monica

Monica has unused allowances of £8,000 (40,000 – 32,000) from 2016–17 and £12,000 (40,000 – 28,000) from 2017–18, so, with the annual allowance of £40,000 for 2018–19, a total of £60,000 (40,000 + 8,000 + 12,000) is available for 2018–19. She was not a member of a pension scheme for 2015–16, so the annual allowance for that year is lost.

Nicola

Nicola has unused allowances of £21,000 (40,000 – 19,000) from 2016–17 and £40,000 from 2017–18, so, with the annual allowance of £40,000 for 2018–19, a total of £101,000 (40,000 + 21,000 + 40,000) is available for 2018–19. The annual allowance for 2015–16 is fully utilised, but Nicola was a member of a pension scheme for 2017–18 so the annual allowance for that year is available in full.

The annual allowance for the tax year 2018–19 is utilised first, then any unused allowances from earlier years with those from the earliest year used first.

EXAMPLE 24

Perry has made the following gross personal pension contributions:

Perry’s adjusted income does not exceed £150,000 for any tax year.

The pension contribution of £48,000 for 2018–19 has used all of Perry’s annual allowance of £40,000 for 2018–19 and £8,000 (48,000 – 40,000) of the unused allowance of £18,000 (40,000 – 22,000) from 2015–16. Perry therefore has unused allowances of £9,000 (40,000 – 31,000) from 2016–17 and £21,000 (40,000 – 19,000) from 2017–18 to carry forward to 2019-20. The remaining unused allowance from 2015–16 cannot be carried forward to 2019–20 because this is more than three years ago.

EXAMPLE 25

Chong has made the following gross personal pension contributions:

Chong’s adjusted income for the tax year 2018–19 is £250,000, but for previous tax years it did not exceed £150,000.

Chong’s tapered annual allowance for 2018–19 is the minimum of £10,000 because his adjusted income exceeds £210,000. Chong therefore has unused allowances of £9,000 (40,000 – 31,000) from 2016–17, £21,000 (40,000 – 19,000) from 2017–18 and £2,000 (£10,000 – £8,000) from 2018–19 to carry forward to 2019–20.

Although tax relief is available on pension contributions up to the amount of earnings for a particular tax year, the annual allowance acts as an effective annual limit. Where tax relieved contributions are paid in excess of the annual allowance (including any brought forward unused allowances), then there will be an annual allowance charge. This charge is subject to income tax at a person’s marginal rates.

EXAMPLE 26

For the tax year 2018–19, Frank has a trading profit of £97,000 and made gross personal pension contributions of £45,000. He does not have any brought forward unused annual allowances. Frank’s income tax liability is:

• Frank has earnings of £97,000 for 2018–19. All of the pension contributions of £45,000 therefore qualify for tax relief.
• Frank’s adjusted income is clearly less than £150,000, so the full annual allowance of £40,000 is available for 2018–19.
• The annual allowance charge of £5,000 is the excess of the pension contributions over the annual allowance.
• Frank will have paid £36,000 (45,000 less 20%) to the personal pension company.
• Higher rate tax relief is given by extending the basic rate tax band to £79,500 (34,500 + 45,000).

The amount of annual allowance for the tax year 2015–16 was subject to some complex transitional rules which meant that it could have actually been more than £40,000. The transitional rules were not examinable, and you should assume that in any exam question involving the carry forward of unused annual allowances only an annual allowance of £40,000 was available for the tax year 2015–16.

The pension scheme information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2019 to 31 March 2020 is:

Pension scheme limit

The maximum contribution that can qualify for tax relief without any earnings is £3,600.

Lifetime allowance

The lifetime allowance for the tax year 2018–19 has been increased from £1,000,000 to £1,030,000.

The lifetime allowance applies to the total funds which can be built up within a person’s pension schemes. Where the limit is exceeded, there will be an additional tax charge when that person subsequently withdraws the funds in the form of a pension.

Capital gains tax

Annual exempt amount

The annual exempt amount for the tax year 2018–19 has been increased from £11,300 to £11,700.

Rates of capital gains tax

The lower rate and the higher rate of capital gains tax for the tax year 2018–19 are unchanged at 10% and 20%. The residential property rates are also unchanged at 18% and 28%. These apply where a gain arising from the disposal of residential property is not fully covered by the principal private residence exemption.

Chargeable gains are taxed at the lower rate of 10% (or 18%) where they fall within the basic rate tax band of £34,500, and at the higher rate of 20% (or 28%) where they exceed this threshold. The basic rate band is extended if a person pays personal pension contributions or makes a gift aid donation.

EXAMPLE 27

For the tax year 2018–19, Adam has a salary of £41,000. During the year, he made net personal pension contributions of £4,400. On 15 June 2018, Adam sold an antique table and this resulted in a chargeable gain of £20,000.

For the tax year 2018–19, Bee has a trading profit of £60,000. On 20 August 2018, she sold an antique vase and this resulted in a chargeable gain of £19,500.

For the tax year 2018–19, Chester has a salary of £40,000. On 25 October 2018, he sold a residential property and this resulted in a chargeable gain of £46,500.

Adam

Adam’s taxable income is £29,150 (41,000 less the personal allowance of 11,850). His basic rate tax band is extended to £40,000 (34,500 + 5,500 (4,400 x 100/80)), of which £10,850 (40,000 – 29,150) is unused.

Adam’s taxable gain of £8,300 (20,000 less the annual exempt amount of 11,700) is fully within the unused basic rate tax band, so his capital gains tax liability is therefore £830 (8,300 at 10%).

Bee

Bee’s taxable income is £48,150 (60,000 – 11,850), so all of her basic rate tax band has been used. The capital gains tax liability on her taxable gain of £7,800 (19,500 - 11,700) is therefore £1,560 (7,800 at 20%).

Chester

Chester’s taxable income is £28,150 (40,000 – 11,850), so £6,350 (34,500 – 28,150) of his basic rate tax band is unused. The capital gains tax liability on Chester’s taxable gain of £34,800 (46,500 – 11,700) is therefore:

In each case, the capital gains tax liability will be due on 31 January 2020.

Where a person has both residential property gains and other gains, then the annual exempt amount and any capital losses should initially be deducted from the residential property gains. This approach will save capital gains tax at either 18% or 28%, compared to either 10% or 20% if used against the other gains.

However, how any unused basic rate tax band is allocated between chargeable gains does not make any difference to the overall capital gains tax liability.

EXAMPLE 28

For the tax year 2018–19, Douglas does not have any income. On 15 June 2018, he sold an antique vase and this resulted in a chargeable gain of £15,800. On 28 August 2018, he sold a residential property and this resulted in a chargeable gain of £39,200.

Douglas’ capital gains tax liability is:

• The annual exempt amount is set against the residential property gain.
• The capital gains tax liability could alternatively be calculated as:

Entrepreneurs’ relief

Entrepreneurs’ relief can be claimed when an individual disposes of a business or a part of a business. For the tax year 2018–19, the lifetime qualifying limit is unchanged at £10 million.

Gains qualifying for entrepreneurs’ relief are taxed at a rate of 10% regardless of the level of a person’s taxable income.

EXAMPLE 29

On 25 January 2019, Michael sold a 30% shareholding in Green Ltd, an unquoted trading company. The disposal resulted in a chargeable gain of £800,000. Michael had owned the shares since 1 March 2012 and was an employee of the company from that date until the date of disposal.

He has taxable income of £8,000 for the tax year 2018–19.

Michael’s capital gains tax liability is:

Although chargeable gains which qualify for entrepreneurs’ relief are always taxed at a rate of 10%, they must be taken into account when establishing the rate which applies to other chargeable gains. Chargeable gains qualifying for entrepreneurs’ relief therefore reduce the amount of any unused basic rate tax band.

The annual exempt amount and any capital losses should initially be deducted from those chargeable gains which do not qualify for entrepreneurs’ relief (giving preference to any residential property gains). This approach could save capital gains tax at 20% (18% or 28% if residential property gains are involved), compared to just 10% if used against chargeable gains which do qualify for relief.

There are several ways of presenting computations involving such a mix of chargeable gains, but the simplest approach is to keep chargeable gains qualifying for entrepreneurs’ relief and other chargeable gains separate.

EXAMPLE 30

On 30 September 2018, Mika sold a business which she had run as a sole trader since 1 January 2012. The sale resulted in the following chargeable gains:

The warehouse had never been used by Mika for business purposes.

Mika has taxable income of £5,000 for the tax year 2018–19. She has unused capital losses of £28,000 brought forward from the tax year 2017–18.

Mika’s capital gains tax liability is:

• The capital losses and the annual exempt amount are set against the chargeable gain on the sale of the freehold warehouse because this does not qualify for entrepreneurs’ relief.
• £29,500 (34,500 – 5,000) of Mika’s basic rate tax band is unused, but this is set against the gains qualifying for entrepreneurs’ relief.

The capital gains tax information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2019 to 31 March 2020 is:

Inheritance tax

Rates of inheritance tax

The nil rate band for the tax year 2018–19 is unchanged at £325,000.

A residence nil rate band applies where a main residence is inherited on death by direct descendants (children and grandchildren). For the tax year 2018–19, the residence nil rate band is £125,000.

The residence nil rate band is only relevant where an individual dies on or after 6 April 2017, their estate exceeds the normal nil rate band of £325,000 and their estate includes a main residence. Any other type of property, such as a property which has been let out, does not qualify for the residence nil rate band.

EXAMPLE 31

Sophie died on 26 May 2018 leaving an estate valued at £800,000. Under the terms of her will, Sophie’s estate was left to her children. The estate included a main residence valued at £275,000.

The inheritance tax (IHT) liability is:

The residence nil rate band of £125,000 is available because Sophie’s estate included a main residence and this was left to her direct descendants.

In the same way in which any unused normal nil rate band can be transferred to a surviving spouse (or registered civil partner), the residence nil rate band is also transferable. It does not matter when the first spouse died.

EXAMPLE 32

Timothy died on 19 June 2018 leaving an estate valued at £750,000. Under the terms of his will, Timothy’s estate was left to his children. The estate included a main residence valued at £350,000.

Timothy’s wife died on 5 May 2007. She used all of her nil rate band.

Timothy’s IHT liability is:

• Timothy’s personal representatives can claim the wife’s unused residence nil rate band of £125,000.
• The amount of residence nil rate band is therefore £250,000 (125,000 + 125,000).

The value of the main residence is after deducting any repayment mortgage or interest-only mortgage secured on that property.

If a main residence is valued at less than the available residence nil rate band, then the residence nil rate band is reduced to the value of the residence.

EXAMPLE 33

Una died on 10 July 2018 leaving an estate valued at £625,000. Under the terms of her will, Una’s estate was left to her children. The estate included a main residence valued at £225,000 on which there was an outstanding interest-only mortgage of £130,000.

Una’s IHT liability is:

The value of Una’s main residence is £95,000 (225,000 – 130,000), so the residence nil rate band is restricted to this amount.

The residence nil rate band does not apply to lifetime transfers becoming chargeable as a result of the donor’s death within seven years.

EXAMPLE 34

Maud died on 22 April 2018 leaving an estate valued at £725,000. Under the terms of her will, Maud’s estate was left to her grandchildren. The estate included a main residence valued at £385,000.

On 30 April 2016, Maud had made a potentially exempt transfer of £400,000 (after the deduction of annual exemptions) to her son.

IHT liabilities are:

Given that the residence nil rate band is only available where inheritance is by direct descendants, rearranging the terms of a will can save IHT.

EXAMPLE 35

Victor has an estate valued at £1,250,000, including a main residence valued at £450,000. He has not made any lifetime gifts. Victor’s wife died on 17 May 2008 and all of her estate was left to Victor. Under the terms of his will, Victor has left his main residence to his brother, with the residue of the estate left to his children.

Currently, Victor’s estate will benefit from a nil rate band of £650,000 (325,000 + 325,000). The residence nil rate band is not available because the main residence will not be inherited by a direct descendant.

Victor could amend the terms of his will so that his brother inherited £450,000 of other assets, with the main residence being included within the residue. A residence nil rate band of £250,000 (125,000 + 125,000) would then be available, saving IHT of £100,000 (250,000 at 40%).

There is no reason why Victor’s brother could not purchase the main residence from the children following Victor’s death.

A question will make it clear if the residence nil rate band is available. Therefore, you should assume that the residence nil rate band is not available if there is no mention of a main residence.

A question will not be set where the residence nil rate band is available in respect of a death occurring during the tax year 2017–18.

The inheritance tax information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2019 to 31 March 2020 is:

Where earlier nil rate bands may be relevant, they will be given to you within the question.

Corporation tax

Rate of corporation tax

For the financial year 2018, the rate of corporation tax is unchanged at 19%. This single rate applies regardless of the level of a company’s profits.

EXAMPLE 36

For the year ended 31 March 2019, Simplified Ltd has taxable total profits of £600,000.

Simplified Ltd’s corporation tax liability is £114,000 (600,000 at 19%).

The corporation tax information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2019 to 31 March 2020 is:

Losses

Previously, a carried forward trading loss had to be relieved against the first available trading profits. A carried forward property business loss had to be relieved against the first available total profits.

Losses arising from 1 April 2017 can be relieved on a more flexible basis. Both carried forward trading losses and carried forward property business losses can now be relieved against total profits, and it is possible to restrict the amount of loss that is relieved.

A claim must be made within two years of the end of the accounting period in which the loss is relieved.

Additionally, a carried forward trading loss or property business loss can now be group relieved. A carried forward trading loss or property business loss can only be surrendered as group relief to the extent it cannot be set off against the surrendering company’s own total profits.

EXAMPLE 37

Flexible Ltd commenced trading on 1 April 2017. The company’s results are:

Flexible Ltd’s taxable total profits for the year ended 31 March 2019 are:

• The claim for loss relief must be made by 31 March 2021.
• The unrelieved losses of £14,200 (78,200 + 13,600 – 77,600) will be carried forward against total profits.
• If there had been any 75% group companies, then the unrelieved losses could have been surrendered as group relief.

The basis of relieving capital losses is unchanged, so carried forward capital losses can only be relieved against the first available chargeable gains

There is also no change to any other loss reliefs. A trading loss or a property business loss can therefore be relieved against total profits of the same accounting period. A trading loss can then be set against total profits of the previous 12 months. It is normally beneficial to claim loss relief as early as possible, but it may be worthwhile claiming against future total profits if this means that qualifying charitable donations can be relieved.

EXAMPLE 38

Giver Ltd commenced trading on 1 April 2017. The company’s results are:

Current year loss relief claim against total profits

Carry forward loss relief claim against total profits

• Claiming loss relief on this basis means that taxable total profits over the two years are £2,700 (59,500 – 15,500 – 41,300) lower.
• It is not possible to claim £2,700 of the loss against taxable total profits for the year ended 31 March 2019, with £15,500 then claimed against total income for the year ended 31 March 2018 – leaving sufficient total income to offset the qualifying charitable donation of £3,000.

A restriction on the amount of carried forward losses that can be offset has been introduced, but, given that this only applies to companies with profits in excess of £5 million, this restriction is not examinable at TX-UK.

A question will not be set involving carried forward losses arising prior to 1 April 2017.

Indexation allowance

An indexation allowance is given when calculating chargeable gains for a limited company. However, the indexation allowance has been frozen at December 2017. This means that:

• When an asset is purchased prior to December 2017 and subsequently sold, then the indexation allowance will be given from the month of acquisition up to December 2017.
• When an asset is purchased from January 2018 onwards and subsequently sold, then no indexation allowance will be available.

As far as TX-UK is concerned, where the indexation allowance is available then just indexation factors will be provided. Indexation factors (rounded to three decimal places) will also be provided where a share pool is involved. The calculation of the indexation factors themselves is no longer examinable.

You will still be expected to know that the indexation allowance cannot create or increase a capital loss.

EXAMPLE 39

Delta Ltd sold a factory on 15 February 2019 for £420,000. The factory was purchased on 24 October 1995 for £164,000, and was extended at a cost of £37,000 during March 2018.

Indexation factors are as follows:

There is no indexation allowance for the enhancement expenditure of £37,000 because this was incurred after December 2017.

Loan relationship rules as regards interest payable

Although not a Finance Act change, for exams in the period 1 June 2019 to 31 March 2020 onwards you will be expected to be able to identify whether loan interest payable is for trading or for non-trading purposes.

Trade purposes include loans used to:

• Purchase plant and machinery.
• Provide working capital.
• Purchase property used for trading purposes such as an office, warehouse or factory.

Non-trade purposes include loans used to:

• Purchase property which is then let out.
• Acquire the share capital of another company.

Administration

Late payment interest and repayment interest

The assumed rates of late payment interest and repayment interest on underpaid and overpaid income tax, class 4 NIC, capital gains tax and corporation tax are based on the actual rates in force (for income tax purposes) at 6 April 2018. For exams in the period 1 June 2019 to 31 March 2020, the assumed rate of late payment interest will therefore be 3.00% and the assumed rate of repayment interest will be 0.5%. Note that the rate of late payment interest (3.00%) is not the same as the official rate of interest (2.50%).

Value added tax (VAT)

Registration and deregistration limits

The limit of annual turnover above which VAT registration is compulsory is unchanged at £85,000. The deregistration limit is also unchanged at £83,000.

Standard rate of VAT

The standard rate of VAT is unchanged at 20%.

EXAMPLE 40

Gwen is in the process of completing her VAT return for the quarter ended 31 March 2019. The following information is available:

• Sales invoices totalling £128,000 were issued in respect of standard rated sales.
• Standard rated materials amounted to £32,400.
• Standard rated expenses amounted to £24,800.
• On 15 February 2019, Gwen purchased machinery at a cost of £24,150. This figure is inclusive of VAT.

Unless stated otherwise, all of the above figures are exclusive of VAT.

VAT Return – Quarter ended 31 March 2019

Written by a member of the Taxation – United Kingdom (TX-UK) examining team