Finance Act 2017

This is the Finance Act 2017 version of this article. It is relevant for candidates sitting the Taxation – United Kingdom (TX-UK) (F6) exam in the period 1 June 2018 to 31 March 2019. Candidates sitting TX-UK (F6) after 31 March 2019 should refer to the Finance Act 2018 version of this article (to be published on the ACCA website in 2019).

From the September 2018 session, a new naming convention is being introduced for all of the exams in the ACCA Qualification, so from that session, the name of the exam will be Taxation – United Kingdom (TX-UK). June 2018 is the first session of a new exam year for tax, when the exam name continues to be F6 Taxation (UK). Since this name change takes place during the validity of this article, TX-UK (F6) has been used throughout.

The aim of the article is to summarise the changes made by the Finance Act 2017 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 2017, but has only come into effect from 6 April 2017. The article does not refer to any amendments to the TX-UK (F6) syllabus coverage unless they directly relate to legislative changes and candidates should therefore consult the TX-UK (F6) Syllabus and Study Guide for the year 1 June 2018 to 31 March 2019 for details of such amendments.

Please note that if you are sitting F6 Taxation (UK) in either December 2017 or March 2018, you will be examined on the Finance Act 2016, which is the legislation as it relates to the tax year 2016–17. Therefore this article is not relevant to you, and you should instead refer to the Finance Act 2016 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 2017–18 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 2017–18 is £11,500.

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 £123,000 or more is not entitled to any personal allowance ((123,000 – 100,000)/2 = £11,500). Where a person has an adjusted net income of between £100,000 and £123,000, 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 2017–18, 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 £123,000.

Example 2

For the tax year 2017–18, 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 £11,500 is reduced to £8,000 (11,500 – 3,500 ((107,000 – 100,000)/2)).
• The basic and higher rate tax bands are extended to £85,500 (33,500 + 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 (F6) 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 2017–18 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 £33,500, at the higher rate of 40% if it falls between the higher rate threshold of £33,500 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 2017–18, Ingrid has a salary of £47,600 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 2017–18, Henri has a salary of £42,000 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 £37,500 (33,500 + 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 2017–18, Ali has pension income of £13,200 and savings income of £6,000. His income tax liability is:

• Non-savings income is £1,700 (13,200 – 11,500), so £3,300 (5,000 – 1,700) 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 2017–18, 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 2017–18.
 

Dividends

The first £5,000 of dividend income for the tax year 2017–18 benefits from a 0% rate. This £5,000 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 £5,000 nil rate band is taxed at 7.5% if it falls below the higher rate threshold of £33,500, at 32.5% if it falls between the higher rate threshold of £33,500 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 2017–18, Ezra has a salary of £58,000 and dividend income of £6,800. Her income tax liability is:

Example 8

For the tax year 2017–18, Erica has a salary of £36,400 and dividend income of £11,200. Her income tax liability is:

The £5,000 dividend nil rate band counts towards the basic rate threshold of £33,500.

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 2017–18, Joe has a salary of £42,000, savings income of £2,000 and dividend income of £9,000. During the year, he paid interest of £300 which was for a qualifying purpose. Joe’s employer deducted £6,100 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 £1,300 (33,500 – 30,200 – 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 2017–18, Ming has property income of £22,800, 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 2017–18, 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 £8,000.

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 2017–18.

Nook has fully utilised her dividend nil rate band of £5,000, but Nigel’s nil rate band is unused. Transferring sufficient investments to Nigel so that he receives £3,000 of the dividend income will therefore save income tax of £975 (3,000 at 32.5%) for 2017–18.

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 2018 is forecast to be £50,000. Based on this figure, Sam’s total income tax liability and national insurance contributions (NICs) for the tax year 2017–18 will be £12,263.

Sam is considering incorporating his business on 6 April 2017. The forecast taxable total profits of the new limited company for the year ended 5 April 2018 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 2017–18.

Sam’s income tax liability will be:

The total tax cost if Sam incorporates his business is £11,300 (9,500 + 1,800). This is an overall saving of just £963 (12,263 – 11,300) 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 £1,150 for the tax year 2017–18. This is 10% of the actual personal allowance.

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 £230 (1,150 at 20%). If the recipient’s tax liability is less than £230, 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 2017–18, 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 £10,350 (11,500 – 1,150), 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 2017–18, 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 16% to 18%. 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 9%.
• For a motor car with a CO₂ emission rate of between 51 and 75 grams per kilometre, the percentage is 13%.
• For a motor car with a CO₂ emission rate of between 76 and 94 grams per kilometre, the percentage is 17%.

The percentage rates (including the lower rates of 9%, 13% and 17%) are increased by 3% 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 year 1 June 2018 to 31 March 2019 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 2017–18, Fashionable plc provided the following employees with company motor cars:

Amanda was provided with a new petrol powered company car throughout the tax year 2017–18. 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 2017–18. 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 2017. The motor car has a list price of £13,500 and an official CO₂ emission rate of 137 grams per kilometre.

Diana was provided with a new petrol powered company car throughout the tax year 2017–18. The motor car has a list price of £84,600 and an official CO₂ emission rate of 208 grams per kilometre. Diana paid Fashionable plc £1,200 during the tax year 2017–18 for the use of the motor car.

Amanda
The CO₂ emissions are between 76 and 94 grams per kilometre, so the relevant percentage is 17%. The motor car was available throughout 2017–18, so the benefit is £2,074 (12,200 x 17%).

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 18% is increased in 1% steps for each five grams per kilometre above the base level, so the relevant percentage is 20% (18% +  2% ((105 – 95)/5)). The motor car was available throughout 2017–18, so the benefit is £3,280 (16,400 x 20%).

Charles
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 29% (18% + 8% ((135 – 95)/5) + 3% (charge for a diesel car)). The motor car was only available for eight months of 2017–18, so the benefit is £2,610 (13,500 x 29% x 8/12).

Diana
The CO₂ emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 40% (18% + 22% ((205 – 95)/5)), but this is restricted to the maximum of 37%. The motor car was available throughout 2017–18, 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 £3,170 to £3,230.

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 2017–18, the base figure has been increased from £22,200 to £22,600.

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 2017 and 5 April 2018.

Betty was provided with fuel for private use between 6 April 2017 and 31 December 2017.

Charles was provided with fuel for private use between 6 August 2017 and 5 April 2018.

Diana was provided with fuel for private use between 6 April 2017 and 5 April 2018. She paid Fashionable plc £600 during the tax year 2017–18 towards the cost of private fuel, although the actual cost of this fuel was £1,000.

Amanda
The motor car was available throughout 2017–18, so the benefit is £3,842 (22,600 x 17%).

Betty
Fuel was only available for nine months of 2017–18, so the fuel benefit is £3,390 (22,600 x 20% x 9/12).

Charles
The motor car was only available for eight months of 2017–18, so the fuel benefit is £4,369 (22,600 x 29% x 8/12).

Diana
The motor car was available throughout 2017–18, so the benefit is £8,362 (22,600 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 £598 to £610.

Tax free childcare
A new tax free childcare scheme for working families has been introduced, with this scheme eventually replacing childcare vouchers. The new tax free childcare scheme is not examinable.

Childcare vouchers continue to be available until April 2018, so they remain examinable in the year 1 June 2018 to 31 March 2019.

The existing 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 year 1 June 2018 to 31 March 2019, the actual official rate of interest of 2.5% for the tax year 2017–18 will be used.
 

Capital allowances

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 2018, the AIA limit would be £50,000 (200,000 x 3/12).

The capital allowances information which will be given in the tax rates and allowances section of the examination for exams in the year 1 June 2018 to 31 March 2019 is:

Rates of allowance

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.

Example 16

Ling prepares accounts to 31 December. On 1 January 2017, 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 2017:

Motor car (1) purchased on 8 January 2017 has CO₂ emissions of 120 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 2017 and sold on 12 December 2017 has CO₂ emissions of 155 grams per kilometre. Motor car (3) purchased on 2 September 2017 has CO₂ emissions of 125 grams per kilometre. Motor car (4) purchased on 19 November 2017 has CO₂ emissions of 70 grams per kilometre.

Ling’s capital allowance claim for the year ended 31 December 2017 is:

• Motor car (1) is kept separately because there is private use by Ling. This motor car has CO₂ emissions between 76 and 130 grams per kilometre and therefore qualifies for writing down allowances at the rate of 18%.
• Motor car (2) had CO₂ emissions over 130 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 76 and 130 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 less than 75 grams per kilometre and therefore qualifies for the 100% first year allowance.

Cash basis for small businesses

Sole traders and partnerships can use the simplified cash basis to calculate their trading profit.

The revenue limit for using the scheme has been increased to £150,000 (the limit was previously set at the VAT registration threshold). The scheme can then be used until revenue is £300,000 (the limit was previously set at twice the VAT registration threshold).

The revenue limit of £150,000 will be given in the tax rates and allowances section of the examination.
 

Property income 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 2017–18 only 25% 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.

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

Example 17

On 6 April 2017, Fang purchased a freehold house. The property was then let throughout the tax year 2017–18 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 2017–18.

The other expenditure on the property for the tax year 2017–18 amounted to £1,300, and this is all allowable.

For the tax year 2017–18, 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 2017–18 has been increased from £15,240 to £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.

A new lifetime ISA has been introduced to help first-time home buyers and to save for retirement. The lifetime ISA is not examinable.
 

National insurance contributions (NIC)

Class 1 and class 1A NIC
For the tax year 2017–18, the rates of employee class 1 NIC are unchanged at 12% and 2%. The rate of 12% is paid on earnings between £8,164 per year and £45,000 per year, and the rate of 2% is paid on all earnings over £45,000 per year.

The rate of employer’s class 1 NIC is unchanged at 13.8% and is paid on all earnings over £8,164 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 2017–18 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 HM Revenue and Customs (HMRC). For example, if a business’s total employer’s class 1 NIC for the tax year 2017–18 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 year 1 June 2018 to 31 March 2019 is:

Example 18

Simone Ltd has three employees who are each paid £50,000 per year. One of the employees was provided with the following taxable benefits during the tax year 2017–18:

The class 1 and class 1A NIC liabilities are:

Class 2 NIC
For the tax year 2017–18, the rate of class 2 NIC has been increased to £2.85 per week.

Class 2 NIC is payable where profits exceed a small profits threshold of £6,025.

Class 4 NIC
The rates of class 4 NIC are unchanged at 9% and 2%. The rate of 9% is paid on profits between £8,164 and £45,000, and the rate of 2% is paid on all profits over £45,000.

The class 4 NIC information which will be given in the tax rates and allowances section of the examination for exams in the year 1 June 2018 to 31 March 2019 is:

Example 19

Jimmy and Jenny are both self-employed. Their trading profits for the tax year 2017–18 are respectively £25,000 and £50,000. The class 4 NIC liabilities are:

Pension schemes

Annual allowance
The annual allowance for the tax year 2017–18 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 20

For the tax year 2017–18, 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 2017–18 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 2017–18 if a tapered annual allowance applies for this year. However, it is the tapered annual allowance for 2017–18 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 21

Monica and Nicola have made the following gross personal pension contributions during the tax years 2014–15, 2015–16 and 2016–17:

Monica was not a member of a pension scheme for the tax year 2014-15. 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 2015–16 and £12,000 (40,000 – 28,000) from 2016–17, so, with the annual allowance of £40,000 for 2017–18, a total of £60,000 (40,000 + 8,000 + 12,000) is available for 2017–18. She was not a member of a pension scheme for 2014–15, so the annual allowance for that year is lost.

Nicola
Nicola has unused allowances of £21,000 (40,000 – 19,000) from 2015–16 and £40,000 from 2016–17, so, with the annual allowance of £40,000 for 2017–18, a total of £101,000 (40,000 + 21,000 + 40,000) is available for 2017–18. The annual allowance for 2014–15 is fully utilised, but Nicola was a member of a pension scheme for 2016–17 so the annual allowance for that year is available in full.

The annual allowance for the tax year 2017–18 is utilised first, then any unused allowances from earlier years with those from the earliest year used first.

Example 22

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 2017–18 has used all of Perry’s annual allowance of £40,000 for 2017–18 and £8,000 (48,000 – 40,000) of the unused allowance of £18,000 (40,000 – 22,000) from 2014–15. Perry therefore has unused allowances of £9,000 (40,000 – 31,000) from 2015–16 and £21,000 (40,000 – 19,000) from 2016–17 to carry forward to 2018–19. The remaining unused allowance from 2014–15 cannot be carried forward to 2018–19 because this is more than three years ago.

Example 23

Chong has made the following gross personal pension contributions:

Chong’s adjusted income for the tax year 2017–18 is £250,000, but for previous tax years it did not exceed £150,000.

Chong’s tapered annual allowance for 2017–18 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 2015–16, £21,000 (40,000 – 19,000) from 2016–17 and £2,000 (£10,000 – £8,000) from 2017–18 to carry forward to 2018–19.

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 24

For the tax year 2017–18, 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 2017–18. 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 2017–18.
• 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 £78,500 (33,500 + 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 year 1 June 2018 to 31 March 2019 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 2017–18 is unchanged at £1,000,000.

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 2017–18 has been increased from £11,100 to £11,300.

Rates of capital gains tax

The lower rate and the higher rate of capital gains tax for the tax year 2017–18 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 £33,500, 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 25

For the tax year 2017–18, Adam has a salary of £41,000. During the year, he made net personal pension contributions of £4,400. On 15 June 2017, Adam sold an antique table and this resulted in a chargeable gain of £19,600.

For the tax year 2017–18, Bee has a trading profit of £60,000. On 20 August 2017, she sold an antique vase and this resulted in a chargeable gain of £19,100.

For the tax year 2017–18, Chester has a salary of £39,000. On 25 October 2017, he sold a residential property and this resulted in a chargeable gain of £46,100.

Adam
Adam’s taxable income is £29,500 (41,000 less the personal allowance of 11,500). His basic rate tax band is extended to £39,000 (33,500 + 5,500 (4,400 x 100/80)), of which £9,500 (39,000 – 29,500) is unused.

Adam’s taxable gain of £8,300 (19,600 less the annual exempt amount of 11,300) 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 £48,500 (60,000 – 11,500), so all of her basic rate tax band has been used. The capital gains tax liability on her taxable gain of £7,800 (19,100 – 11,300) is therefore £1,560 (7,800 at 20%).

Chester
Chester’s taxable income is £27,500 (39,000 – 11,500), so £6,000 (33,500 – 27,500) of his basic rate tax band is unused. The capital gains tax liability on Chester’s taxable gain of £34,800 (46,100 – 11,300) is therefore:

In each case, the capital gains tax liability will be due on 31 January 2019.

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 26

For the tax year 2017–18, Douglas does not have any income. On 15 June 2017, he sold an antique vase and this resulted in a chargeable gain of £14,800. On 28 August 2017, he sold a residential property and this resulted in a chargeable gain of £38,800.

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 2017–18, 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 27

On 25 January 2018, 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 2011 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 2017–18.

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 28

On 30 September 2017, Mika sold a business which she had run as a sole trader since 1 January 2011. The sale resulted in the following chargeable gains:

The assets were all owned for more than one year prior to the date of disposal. The warehouse had never been used by Mika for business purposes.

Mika has taxable income of £4,000 for the tax year 2017–18. She has unused capital losses of £28,000 brought forward from the tax year 2016–17.

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 (33,500 – 4,000) 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 year 1 June 2018 to 31 March 2019 is:

Inheritance tax

Rates of inheritance tax

The nil rate band for the tax year 2017–18 is unchanged at £325,000.

However, an additional nil rate band has been introduced where a main residence is inherited on death by direct descendants (children and grandchildren). For the tax year 2017–18, the residence nil rate band is £100,000.

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 29

Sophie died on 26 May 2017 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 £250,000.

The inheritance tax (IHT) liability is:

The residence nil rate band of £100,000 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 30

Timothy died on 19 June 2017 leaving an estate valued at £700,000. Under the terms of his will, Timothy’s estate was left to his children. The estate included a main residence valued at £300,000.

Timothy’s wife died on 5 May 2006. She used all of her nil rate band of £325,000.

Timothy’s IHT liability is:

• Timothy’s personal representatives can claim the wife’s unused residence nil rate band of £100,000.
• The amount of residence nil rate band is therefore £200,000 (100,000 + 100,000).

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 31

Una died on 10 July 2017 leaving an estate valued at £600,000. Under the terms of her will, Una’s estate was left to her children. The estate included a main residence valued at £200,000 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 £70,000 (200,000 – 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 32

Maud died on 22 April 2017 leaving an estate valued at £700,000. Under the terms of her will, Maud’s estate was left to her grandchildren. The estate included a main residence valued at £360,000.

On 30 April 2015, Maud had made a potentially exempt transfer of £400,000 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 33

Victor has an estate valued at £1,200,000, including a main residence valued at £400,000. He has not made any lifetime gifts. Victor’s wife died on 17 May 2007 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 £400,000 of other assets, with the main residence being included within the residue. A residence nil rate band of £200,000 (100,000 + 100,000) would then be available, saving IHT of £80,000 (200,000 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.

There are other aspects to the residence nil rate band. None of the following are examinable:

• The tapered withdrawal of the residence nil rate band where the net value of an estate exceeds £2 million.
• The protection of the residence nil rate band where an individual downsizes to a less valuable property or where a property is disposed of.
• Nominating which property should qualify where there is more than one main residence.

The inheritance tax information which will be given in the tax rates and allowances section of the examination for exams in the year 1 June 2018 to 31 March 2019 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 2017, the rate of corporation tax has been reduced from 20% to 19%. This single rate applies regardless of the level of a company’s profits.

Example 34

For the year ended 31 March 2018, Simplified Ltd has taxable total profits of £600,000.

For the year ended 31 December 2017, Moderate Ltd has taxable total profits of £900,000.

Simplified Ltd
Corporation tax is £114,000 (600,000 at 19%).

Moderate Ltd
Because the company’s accounting period straddles 31 March the corporation tax liability is calculated as:

The corporation tax information which will be given in the tax rates and allowances section of the examination for exams in the year 1 June 2018 to 31 March 2019 is:

Losses

The treatment of carried forward trading losses was due to change from 1 April 2017, but this legislation was omitted from the Finance Act 2017. Therefore, the existing basis of relieving losses remains examinable for exams in the year 1 June 2018 to 31 March 2019.

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 2017. For exams in the year 1 June 2018 to 31 March 2019, the assumed rate of late payment interest will therefore be 2.75% and the assumed rate of repayment interest will be 0.5%. Note that the rate of late payment interest (2.75%) is no longer 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 has been increased from £83,000 to £85,000. The deregistration limit has been increased from £81,000 to £83,000.

Standard rate of VAT

The standard rate of VAT is unchanged at 20%.

Example 35

Gwen is in the process of completing her VAT return for the quarter ended 31 March 2018. 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 2018, 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 2018

Flat rate scheme

Under the flat rate scheme, a business calculates its VAT liability by simply applying a flat rate percentage to total turnover. A flat rate of 16.5% has been introduced for those businesses which have no, or only a limited amount of, purchases of goods.

You will not be expected to establish whether the flat rate of 16.5% is applicable, but a question could be set where this rate applies.

There is very little advantage to using the flat rate scheme if the 16.5% rate applies because it is equivalent to a rate of 19.8% on the net turnover compared to the normal VAT rate of 20%. If a business has much input VAT, then the flat rate scheme will not be beneficial if the 16.5% rate applies.

Example 36

Omah registered for VAT on 1 January 2015 and uses the flat rate scheme to calculate his VAT liability. For the year ended 5 April 2018, he has annual standard rated sales of £100,000, and these are all made to the general public. Omah has annual standard rated expenses of £16,000. Both figures are exclusive of VAT. The relevant flat rate scheme percentage for Omah’s trade is 16.5%.

• If Omah continues to use the flat rate scheme, then he will pay VAT of £19,800 ((100,000 + 20,000 (output VAT of 100,000 x 20%)) x 16.5%).
• Using the normal basis of calculating the VAT liability, Omah would have to pay annual VAT of £16,800 ((100,000 – 16,000) x 20%), which is an annual saving of £3,000 (19,800 – 16,800).

Written by a member of the Taxation – United Kingdom (TX-UK) (F6) examining team