Beware of tax costs of pension liberation
HM Revenue & Customs (HMRC) is warning people against schemes that claim to be able to provide early access to pension savings by exploiting tax loopholes.
Most pension scheme rules set an age at which you can expect to start taking your pension. In some circumstances it may be possible to take the pension earlier or later. From a tax perspective, the earliest age at which you can take your pension without triggering a tax charge is 55, unless you retire earlier on health grounds.
Pension liberation arrangements work by transferring pension savings from the existing scheme to another pension scheme to allow you to access the funds early. However, if you withdraw your pension funds early, you will have to pay tax on the amount withdrawn. At 55% the tax charge is high, and is made up of an unauthorised payment charge of 40% and an unauthorised payment surcharge of 15%.
HMRC is aware that some unscrupulous outfits advertise pension liberation arrangements, which claim to exploit tax loopholes to access pension savings early and free of tax. It warns that there are no tax loopholes and the 55% unauthorised payments charge will apply. The tax charge will be payable even if you did not realise that you had broken the rules. It’s like your grandmother always told you: if it sounds too be good to be true, that’s because it is.
Example
Richard is 45. He has pension savings of £25,000 in a registered pension scheme. He receives a letter offering early access to his pension savings. Richard thinks this is a good idea because he needs a new kitchen. He transfers £15,000 of his pension savings to the new scheme and withdraws £10,000.
Because Richard is under 55, the payment is unauthorised. He receives a tax bill for £5,500 (being the unauthorised payment charge of 40% (i.e. £4,000) and the unauthorised payment surcharge of 15% (i.e. £1,500).
After tax, Richard is only left with £4,500 of the funds released, which does not cover the cost of his kitchen. He must also pay commission to the adviser.
Suspected pension scams can be reported to Action on Fraud on 0300 123 2040.
Simpler income tax rules for the self-employed
Small businesses and the self-employed can use the simpler cash basis, rather than the more complicated accruals basis, to work out their taxable profits thanks to changes that took effect from 6 April 2013.
Profits and losses are normally determined on the accruals basis, which account for all work invoiced and all bills received, regardless of whether they have been paid. This means that you need to take account of stock, debtors, prepayments, creditors and accruals.
The cash basis is much easier, because you only need to take account of income when you receive it and bills when you pay them. The cash basis works on a more straightforward ‘money in and money out’ principle.
If you are a small business or self-employed (in other words, a sole trader or a partner in a partnership comprised only of individuals), you now have the option of using the cash basis instead of the accruals basis to work out your profits, as long as your turnover is less than the VAT registration threshold (£79,000 for 2013/14).
The cash basis cannot be used by limited companies and limited liability partnerships.
You can still use the cash basis if you have chosen to register for VAT, as long as your turnover is below the VAT registration threshold. Once you have moved over to the cash basis, you can continue to use it if your turnover rises above the VAT registration threshold until it reaches £158,000, above which you will need to revert to the accruals basis. If you want to use the cash basis, you must elect to do so.
New way to report expenses and benefits online
HM Revenue & Customs (HMRC) is now offering employers the option to submit some expense and benefits information online.
Where an employer provides employees with non-cash benefits to employees, the employer must report details of those benefits to HMRC to arrive no later than 6 July following the end of the tax year to which they relate. This means that benefit and expenses forms for 2012/13 must be with HMRC by 6 July 2013.
There are three main expenses and benefit returns.
- Form P11D: the return of expenses and benefits provided to directors and employees earning at a rate of at least £8,500 a year.
- Form P9D: the return of expenses and benefits provided to employees earning at a rate of less than £8,500 a year.
- Form P11D(b): Class 1A return and employer’s declaration that all required expenses and benefit returns have been submitted.
The forms can be submitted online, although this is not compulsory, or in hardcopy.
It is no longer possible to submit online using the Basic PAYE Tools software package from 2012/13, but you can still file online using the PAYE Online Service.
A new online service became available from April 2013. The new service, called Online end of year Expenses and Benefits forms, is a web-based set of forms aimed at small and medium-sized employers for use when submitting employees’ expenses and benefits information online. There are only two online forms available at present.
- Employer No Return of Class 1A contributions, which can be used by an employer who has no expenses or benefits payments to return on P11D.
- Employer Notification of Payrolled Benefits, which can be used by an employer who has payrolled all benefits and expenses paid to employees in the year, and who intends to file P11D information online. ‘Payrolling’ is where the employer has included the taxable amount of a benefit in an employee’s gross pay for payroll purposes.
Agent versions of the forms are also available. Further information on the new forms is available on the HMRC website: www.hmrc.gov.uk/payerti/exb/onlineforms.htm.
Submitting outstanding P45s and P46s for 2012/13
Most employers migrated to operating PAYE through Real Time Information (RTI) from April 2013. HM Revenue & Customs (HMRC) has issued guidance on the procedures to be followed in submitting outstanding P45 and P46 information for employees who started with or left the employer in 2012/13.
If you have been mandated to join RTI (i.e. told by HMRC that you must), you will no longer be able to file outstanding starter and leaver forms P45 and P46 online. HMRC has received a number of queries from employers who have tried to do this and received error code 7818 and the message: “This PAYE In Year Movement Submission cannot be accepted as the employer has been invited to join RTI.”
HMRC has confirmed that this error message is correct because it no longer accepts forms P45 or P46 from employers who were required to join RTI on or before 6 April 2013. If this applies to you, you must have been operating PAYE in real time from that date. You must not submit in-year forms online, even if they relate to a period before you joined RTI.
If you have to join RTI and have outstanding P45s and P46s from 2012/13, you should:
- Enter the leaving date on the employee’s 2012/13 P14, instead of submitting form P45. (If you have already submitted your 2012/13 P35 and P14s without entering a leaving date, you do not need to take any further action.)
- Include starters on the full payment submission (FPS) or employer alignment submission EPS, either with a start date of 6 April 2013 or leave the start date field blank.
You should not:
- Submit a revised P14.
- Include the employee on your first FPS or EAS. The employee’s employment will end automatically on 5 April 2013.
You can continue to send 2012/13 P45s and P46s to HMRC online if you are not required to use RTI.
Sleeping partners to pay NICs
Sleeping and inactive partners will be liable to pay Class 2 and Class 4 national insurance contributions (NICs) from April 2013, following HM Revenue & Customs’ (HMRC’s) review of its interpretation of the law.
HMRC previously accepted that sleeping and inactive partners who took no part in running a business were not liable to Class 2 and Class 4 NICs. It has now reviewed the law, however, and decided that sleeping and inactive partners are ‘gainfully employed.’ HMRC now says that an NI liability does exist.
Sleeping and inactive partners must pay weekly Class 2 NICs, set at £2.70 a week in 2013/14, from 6 April 2013. Those whose earnings are below the small earning exception limit (£5,725 in 2013/14) can claim exception from liability. If you are a sleeping or inactive partner and not currently paying contributions, you will need to register for liability on form SA401.
HMRC’s position now is that, for 2013/14 onwards, sleeping and inactive partners are liable for Class 4 NICs on their profits.
