The Fizz! Blog

Avoiding the Child Benefit trap, revisited

The advice for parents trying to avoid being drawn into the High Income Child Benefit Charge (HICBC) has been unchanged since 2013, as none of the thresholds ever changed. Since they have, at last, been increased, here’s an update on actions you might take to avoid or mitigate the charge.

If the higher earner in a household that has received Child Benefit has income of more than £60,000, they have to start giving the Child Benefit back to the government again, on a sliding scale, via their Self Assessment Tax Return. If they have income of more than £80,000, they have to give it all back.

If both parents earn £60,000, that's therefore fine - nothing to give back, even though total household income is £120,000. But if one earns £80,000 and the other zero (or a single parent has income of £80,000) then all of the Child Benefit has to be given back, despite household income being £40,000 lower!

If you've two children, HICBC could mean giving back £2,200 of Child Benefit to the government.

The most obvious way you could avoid or reduce the charge is with pension contributions. If your income is £70,000, then paying £10,000 into a pension reduces your income to £60,000 for these purposes, and you get to keep all the Child Benefit (as well as saving £4,000 of tax too - the way the tax reliefs work means that getting £10,000 into their pension ends up costing that person only £6,000). Of course, if you're struggling with household income to begin with, or earning way over £80,000, things may not be as easy as that and HICBC may be unavoidable. But if you can stand the short-term cashflow hit, for those around the fringes of the charge, pension contributions can become very compelling - and the more children you have, the greater the saving!

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Is it time to start claiming Child Benefit again?

There was a big change in the Budget to the High Income Child Benefit Charge (HICBC), which obliges high earners to repay Child Benefit via their Self Assessment Tax Return. Since the initial threshold for being a high earner (£50,000) was not changed for 11 years, more and more people were dragged into its net, most of whom would not have been considered high earners in 2013. At long last the thresholds have been increased, though. Previously, a household where the higher earner had income over £50,000 had to begin repaying the Child Benefit on a sliding scale - if their income was over £60,000, all of it had to be repaid. This year, HICBC doesn’t start until the higher earner has income over £60,000, and the sliding scale is more gentle - it’s not until income of £80,000 that the whole lot must be repaid.

In practical terms, many households with someone earning over £60,000 just opted not to receive the payments in the first place, knowing they’d only have to give them back again.

What do the changes mean in practical terms?

If the higher earner has income between £50,000 and £60,000

Hopefully, you’ve been claiming all along, because you’d only have to repay part of it via a Self Assessment Tax Return, and would still have been better off. Now, you won’t have to repay anything at all. If you were only in the Self Assessment Tax Return system for the purpose of paying HICBC, good news - you won’t have to submit tax returns any more.

If the higher earner has income between £60,000 and £80,000

You may well have stopped claiming, knowing you’d only have to repay the whole lot to HMRC in the end. You should probably start claiming again! Some of it will need to be repaid, but not all. If the higher earner isn’t presently submitting Self Assessment Tax Returns, they’ll have to start, though, so if you’re going to have to repay 95% of what’s been received it’d be understandable if you decided to carry on not claiming.

If the higher earner has income over £80,000

Nothing has changed - if you claim, you’ll have to repay it all.

Two final things:

1. Even if you know the higher earner will have income over £80,000, it’s still advisable to claim Child Benefit, but then opt out of the payments. A claim means that a primary carer will get State Pension credits (aka their National Insurance stamp) until the child is 12, and that the child will automatically get their own National Insurance number at age 16.
2. We say the charge is based on income, but it’s more complicated than that - for instance, benefits in kind need to be added on too, but personal pension contributions are knocked off the figure. Someone with a salary of £59,000 but company car and medical insurance benefits of £6,000 has income for these purposes of £65,000 and on that basis will have to repay 25% of the Child Benefit received - but if they make personal pension contributions of £5,000 that’ll take their income for HICBC purposes back down to £60,000, meaning no HICBC need be paid.

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Your business probably isn’t going to pay for your retirement

It’s really common for business owners to believe that selling their business is going to be, or should be, what pays for their retirement. It’s very rare for that to really be the case.

First, most businesses are worth little or nothing. There’s nothing wrong with that! It’s just a fact of life. Your business may make a nice living for you, but that doesn’t mean that someone else is going to give you money to take it over - the revenue stream may be very much reliant upon your personal relationship with the customers, or it might just be a fair reward for the work and hours you put in. Some businesses are more or less jobs, and it’s unlikely anyone wants to buy your job.

Second, businesses that are worth something are rarely worth life-changing amounts. A typical rule of thumb is that a small business that generates steady profits that aren’t reliant on its owner and are above and beyond a normal commercial wage for them could be worth three or four years’ worth of profits. If you build up your business over 20 years, it’ll be nice to get a bonus of another three years’ worth of income at the end, for sure. What are you going to do in year four, though?  OK, if the income generated by your business is miles in excess of your domestic spending, the money you get from selling it might last much longer. But if you’ve got to a place where your business was generating a lot more money than you're spending personally, you’ll have plenty of money saved up anyway and won’t be so reliant on selling the business.

We often hear people expressing concern that they won’t be able to sell their business when they retire. Someone with a well-paid job doesn’t have anything to sell when they step away from it either, but should be able to plan for retirement regardless. As a business owner, you are not immune from having to save up like everyone else!

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I’m moving abroad - is this going to affect me and my limited company?

20 or 25 years ago, international tax was something you studied a bit when training as an accountant, but in practical terms only those advising the very wealthy really had to engage with it. There was far less global mobility, relatively few freelancers moving to and from the UK, and digital nomads hadn’t been invented yet.

How things have changed! Now it’s really common for people - especially knowledge workers - to move in and out of the UK. International tax is no longer a theoretical subject!

So, it’s very common for us to have clients who arrive in, or leave, the UK. If you’re a sole trader or an employee, it’s probably fairly straightforward; mostly, people making “clean”, permanent moves are going to get something called “split year treatment”. That means that in the year of arrival only their income post-arrival goes on their tax return, and in the year of their departure only their income pre-departure. There can be some minor friction where they’ve moved to a country that considers them to have become resident there before or after they’ve ceased to be resident here, they may have other things going on (like property or investment income) that are more complex, and when moves aren’t so clean the deceptively complicated Statutory Residence Test comes into play, but most cases are pretty simple.

But if you have a limited company it’ll be messier. In our experience, it’s vanishingly rare for the continued use of a UK company to be a good idea post-departure. If you were a non-UK resident starting a new business, the circumstances under which a UK company would be the best vehicle would be somewhere between rare and non-existent. Leaving the UK whilst in possession of an LTD doesn’t change that underlying reality. Sometimes you might need to persist with your UK LTD for a bit (perhaps there’s an ongoing contract in progress that you need to finish), but in the end you’re going to want to set up whatever structure is most advisable in your new home.

Unfortunately, it can be quite difficult to execute this at the other end! It seems to be very common for someone to go to an accountant in France, for example, only to be told to just keep their head down and pay taxes as if they continue to reside in the UK. As UK taxpayers, we are quite happy for people to pay tax money into UK coffers rather than those of another country! However, as Chartered Accountants, that can put us in a difficult position; we can’t collaborate on a setup where we know that taxes aren’t being paid appropriately, or National Insurance credits being built up by someone who is not really entitled to them, or UK pension contributions being made in excess of the modest “run-off” amount available for a few years to someone leaving the UK, and so on.

It can be further complicated because often people won’t know their plans for sure. Someone who expects to be in Portugal for a year or two might not want to go to great efforts to set up a structure that they’re soon going to dismantle. But that’s always been the case; we’re quite likely to advise someone who comes to the UK with the intention of staying for a couple of years differently to someone who intends it as their forever home.

So, if you’re leaving the UK, please go and see an accountant in your new intended home as soon as you can! Your accountant here may be able to tolerate a period where you’re getting things set up at that end and continuing to run things at this end as you have been. But they won’t be able to tolerate it indefinitely.

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Can my company get a grant towards an electric car charging point at home?

The government will provide a grant to an employer installing a charger for an electric car.  It’s only a maximum of £350 at present, and it involves filling a form and sending it to the not-always-tremendously-efficient DVLA, but every little helps.

What if you work from home, though?  Well, if your electric car is a company car, your company can definitely pay for, and save tax on, the installation of the charger there.  But you might not think it worth claiming the grant, because of the eligibility criteria.  To qualify, your home must either be a) the company’s Registered Office, which you probably don’t want, or b) registered with the council for Business Rates, which you almost certainly don’t want.  Given the modest grant and the prospect of dealing with the DVLA, you probably just want to move on!

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There is no new tax on “side hustles”

Unsurprisingly, there’s been a lot of irresponsible reporting about the news that online platforms like Ebay, Airbnb, JustPark and Deliveroo are going to be compelled to pass details of people they’ve paid on to HMRC. It’s been reported that this was a new side hustle tax. It isn’t! The rules on whether an activity is taxable or not haven’t changed for decades, aside from the introduction of the £1,000 Trading Allowance and similar Property Allowance a few years ago, which means people with very low levels of such income don’t have to report it or pay tax on it.

Further bad reporting stemmed from the de minimis levels below which the platforms *won’t* have to give any information to HMRC. If you sell fewer than 30 items and make less than 2,000 euros (it’s a global OECD campaign) then nothing will be passed on to HMRC. It’s been reported that selling 30 or more items a year is taxable but selling fewer is not. That’s wrong too! If you bought and sold 25 grandfather clocks in a year for profit it’s taxable. If you sold 150 of your old CDs it’s not. It’s just a threshold relating to the reporting from the platform to HMRC, nothing more. It has no relationship to tax legislation of any sort.

For more detail, the ATT’s explainer is really good.

If you’ve been regularly buying stuff in order to sell it on at a profit, it’s probably always been taxable. If you’ve been declaring it and paying tax on it, you might actually find the new system helpful, as the platform will be sending you the handy record of your transactions as well as sending it to HMRC! But if you’ve not been reporting it, either because you didn’t realise you had to, or you did realise you had to but didn’t do it anyway, tell your accountant! It’s better to go to HMRC before they come to you.

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Company income and expenditure to go on the public record

It’s recently been confirmed that, in a year or two, all limited companies will have to file a Profit and Loss Account at Companies House. For many years now, the vast majority have not had to do that, with only the largest of companies having to make details of the year’s income and expenditure publicly available. The snapshot of a company’s year-end position - its Balance Sheet - goes on the public record, giving a broad overview of assets, liabilities and solvency, but not the story of how that position was reached.

This is going to be unwelcome news to many company owners. Some may not want their rivals, customers or suppliers knowing the margins or the profits they’re making. Others may not want to give friends, family, staff or exes an insight into their personal finances! Your claim to be unable to afford to pay more than the National Minimum Wage is going to be undermined slightly if your staff can see you’re making £1m a year yourself.

There will also be people who don’t want the world to see how poorly they are doing! Maybe because they’re worried it’ll spook potential (or even existing) customers, or maybe they’re faking it until they make it at networking events and the like and would prefer the truth to remain obfuscated!

The change is a classic case of being seen to be doing something, even though anyone who understands the issue knows that the thing being done doesn’t actually address the issue. The idea is to try to take some action against rogues who hide behind companies. But those who file rubbish to conceal what they’re really doing will continue to file rubbish, of course, and Companies House will still lack the resources or mandate to do anything about it. And it’s argued that it’s important that the authorities can see in more detail what companies are doing - but HMRC have always received a full version of the accounts, with a far more detailed version of the P&L than is being proposed for the public record!

In any case, barring a u-turn by one government or another, the change is coming. So, if you’re concerned about it (and we should say that the majority of company owners we’ve discussed it with aren’t actually too bothered), is there anything to be done?

Some people will be perfectly happy and able to run their business without a limited company. The effective tax rates of limited company owners and those with unincorporated businesses aren’t that different these days (the main tax benefit of a limited company is the ability to shelter profits from higher rate tax if you don’t need them right now, whereas a sole trader or partner in a partnership pays tax on the lot in the year they make it). If you’re also comfortable giving up limited liability (which is no substitute for adequate insurance anyway), you might well just decide to operate as a sole trader or partnership instead.

Others won’t have the choice. They might be in an industry or a niche where a company is essentially compulsory as people won’t do business with you otherwise. Or sheltering income from higher rate tax might be important enough to them to outweigh any transparency downsides.

Finally, it’s just possible we might see the emergence of unlimited companies as a more popular choice. They give the tax regime (and therefore sheltering possibilities) of a company - but without the protection of limited liability. They don’t have to file accounts at all, but given that they offer no liability protection to their owners, they’re rarely seen in practice (the long-gone clothing chain C&A used to be the most prominent example!) - up until now, anyway.

We’ll all probably get used to it in the end. The exact format of the profit and loss account to be filed has not yet been set, and it may include less detail than people fear. In any case, looking at accounts at Companies House can already be highly instructive under the current regime, but it’s rare that anyone (aside from accountants, anyway) thinks to actually do it. Even if more information is made available, people probably will take less advantage of it than they could.

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The cash basis becoming the default for self-employed people’s taxes, why it’s happening, and why it’s stupid

The default for preparing accounts for sole traders and partnership is the accruals basis - or what we habitually refer to as proper accounts. That means they show how much profit you really made in a period, regardless of when you remembered to send an invoice, or when your customers actually paid you, or when you paid your suppliers and so on. Accounts are supposed to be a useful record of how a business is really doing, giving you important information about what’s working and what’s not working, and, in extremis, whether you’re wasting your life and should get a job. They’re not just a glorified bank statement or a reflection of the admin inefficiencies of you, your customers or your suppliers in sending out paperwork or making payments.

For a few years now, small sole trade and partnership businesses have been able to base their tax returns on cash in and out instead, so as to make preparing tax returns easier (and also as an acknowledgement that many of them were doing it already). Accountants will rarely use this cash basis, as preparing proper accounts isn’t hard and gives you useful information, though sometimes there can be some benefit to using it for a year or two in niche circumstances where the timing of payments happens to result in a worthwhile tax saving. But generally, proper accounting is the way to go. It’s nice if accounts can be useful AND as easy to prepare as possible - but if you have to pick one, it should be the first.

Anyway, regardless of all that, from 2024 the cash basis will become the default for unincorporated businesses, with an option to use the accruals basis.

The reason for this is basically Making Tax Digital and the ongoing intention (which may or may not ever happen - we’re nine years into the process now) to make sole traders submit quarterly updates to HMRC of their income and expenditure. The government has realised that this will be easier to sell if people are just submitting what their bank statements say rather than having to properly account for their real earnings for the quarter. Part of the drive to this reporting is so as to be able to make more regular assessments of entitlement to things like Universal Credit and Tax-Free Childcare, and a sole trader with smooth underlying income but erratic payments from customers could have interesting problems with their claims if and when this quarterly reporting ever comes in. But for now, we’ll just need to watch this space. For avoidance of doubt, we (along with most or all other competent accountants, we imagine) will continue to default to proper accounts!

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Should my company pay for this?

A really common question asked by people who are new to limited companies - should I set up the direct debit for the company’s accounting fees from the company’s bank account, or my own?

The answer (which is - from the company’s bank account) is obvious to us, but it’s asked often enough that it’s clearly a reasonable question for a non-accountant to ask.

Extreme examples of companies paying for things might be helpful: you probably would not imagine that Richard Branson buys aeroplanes personally and then claims them back on his expenses from Virgin Atlantic, or that Mark Zuckerberg rents Facebook’s offices himself and gets reimbursed at the end of the month. Those companies happen to be very big, but it’s the same principle for smaller ones too. If an accountancy firm is providing services to a company, the company pays for the service. If the company needs a laptop for a director or employee to use, the company buys a laptop for them to use. If the company needs an office for directors or staff to work in, the company rents space for them to occupy. In fact, generally, directors need pay absolutely no company-related costs themselves at all. If you just set things up so that the company pays for all its own costs in the first place, you’ll have less admin to do - everything gets recorded once and once only. And you’ll have a better idea of where you stand financially - you’re not temporarily impoverished until your expenses are reimbursed, and your company doesn’t look richer than it really is because you’ve temporarily borne a bunch of costs yourself.

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Why isn’t PAYE perfect?

For people earning less than £50,000 who stay in employment all year and who have no other income, PAYE is a great system - it’ll usually collect the exact right amount of tax, spread evenly over the year.

For people earning between £50,000 and £100,000 with no other income, PAYE might get it exactly right, but it might not. Even in the absence of any other income, there are many other things that could affect your tax bill, in that bracket, including High Income Child Benefit Charge, higher rate tax relief on charitable donations and higher rate tax relief on pension contributions.

For people earning over £100,000, it’s highly unlikely that PAYE will get it exactly right. From that point you’ve got all the potential problems from the previous bracket, plus the gradual tapering away of the tax-free personal allowance, which the PAYE system does not cope with well.

For people earning over £125,000, the chance of PAYE getting it exactly right is close to zero. At lower levels, you’ve got a savings allowance, meaning £500 or £1,000 of interest is tax-free. Over £125,000, there’s no allowance, so £1 of interest is going to trigger a tax charge.

And if any of those people have some other form of taxable income, they’re going to have tax to pay. The PAYE system can’t possibly collect the right amount of tax on that, because it doesn’t know how much it is, or even if it exists. The PAYE system *will* try and collect an estimate of how much tax it thinks might be due based on previous years, but unless nothing changes, it won’t be right.

For high earners, the best way to look at PAYE is as a system that tries to collect approximately the right amount of tax, with the final bill to be established via your tax return (or an HMRC calculation if you don’t have to file a return). You can keep an eye on your PAYE coding notices (if you learn how to read them!) to check that HMRC’s estimates are reasonable in the light of what you know about your expected reliefs and other income, but don’t expect the deductions to be objectively correct - just see them as 12 reasonably estimated payments on account towards the eventual bill. And, if you do a tax return, try and get it done as quickly as you can after the end of the tax year so that you know about any shortfall (or receive any refund!) as soon as possible!

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