We provide a summary of the Budget announcements relating to Income Tax, which include the areas of low income trusts and estates, payrolling benefits in kind for agents, and cash basis for the self employed.
Low income trusts and estates
Following consultation last year, the government will now legislate proposals so that trusts and estates will have a simplified taxation process. The entirety of discretionary trust income will now be taxed at trust rates, rather than the first £1,000 being taxed at basic rates of tax. Trusts and estates will not need to pay tax on income as it arises if the income is less than £500, nor will beneficiaries be taxed on income that falls within that £500 limit. This will be effective from April 2024, giving just over a year for more detail and guidance to be released and for software providers to be able to make these changes.
Payrolling benefits in kind for agents
As the end of the tax year comes ever closer, we are mindful of the reporting of benefits that employees receive. The government has today stated that they will deliver IT systems to enable agents to payroll benefits in kind on behalf of their clients. This will enable our payroll team to report benefits throughout the year through payroll, rather than an additional process of needing to report benefits separately and after the fact. We look forward to this system being put in place so that we can better support our clients and reduce the burdens on employers at year end, which should ultimately streamline the process.
Cash basis for the self employed
Businesses with turnover of less than £300,000 are currently able to use the cash basis for income tax purposes, however only 29% of those eligible have taken this up. The government will be consulting on this until early June, considering reforms to four key areas.
- Increasing or removing the restriction on thresholds. Currently, a business must have turnover of less than £150,000 to join the cash basis, and must exit the basis if turnover exceeds £300,000. The government are considering increasing this threshold to match the VAT cash basis, being less than £1.35m to enter and £1.6m to exit, or scrapping the threshold entirely. Being cash basis for one purpose and accruals basis for another can lead to complications, and bringing the thresholds in line would enable the simplification of matters
- Cash basis as default. Presently, the cash basis is an opt-in measure, and not automatic, which may be the cause of low uptake – seven in ten eligible businesses are not currently using this. Making the cash basis the default would increase the use and improve access to this. Accruals and prepayments can be confusing, and therefore moving to cash basis as a default may simplify the accounts required of a self employed person and reduce barriers to financial understanding of a business.
- Increasing the restriction on interest. With interest rates rising, the cap on allowable interest being £500 for the cash basis may discourage the use of it. The government are considering increasing this to £1,000, which would open the opportunity for businesses to make use of the cash basis where previously they were limited. However, the interaction of other consultations may mean that if a business is limited to £1,000 of finance costs, increasing the turnover limit to £1.35m (or removing it entirely) may not have the same uptake as £1,000 is far smaller a percentage of costs.
- Allowing losses to be used sooner. If a taxpayer uses the cash basis, losses can only be carried forward. However, losses may be able to be used against general income of the same period, such as employment, or carried back to set off against income from earlier years. Self employed individuals are likely to make losses in the early years of trading, and so having tax relief from other sources of income may prove attractive in those situations, enabling repayments of tax paid previously on income.
If you have any questions about how the budget or its proposed reforms might affect you, do get in touch on 01242 776000 or tax@randall-payne.co.uk.
