Tag Archive | "pensioners"

Will income tax for Scottish residents be more or less than in England?

Scottish accountants could find themselves paying a different rate of income tax to their English counterparts in four years time after the Scotland Act was given Royal Assent.

The Scottish Parliament has been given the power to set its own rate of income tax and it is thought this will start happening in April 2016. The Scotland Act also allows for the creation of new taxes north of the border as well as the devolution of additional taxes.

HMRC will apply any changes to income tax through the PAYE system for employees and pensioners. Prior to April 2016, employers will receive tax codes from the Revenue, which will identify Scottish taxpayers. Employers will then need to deduct the appropriate rate of tax, which could be lower, higher or the same as the rate for other UK taxpayers.

The Revenue will issue further guidance, but the issue of residency is already causing concern. The new rates will only apply to taxpayers whose permanent abode is in Scotland.

Michael Moore, the secretary of state for Scotland, said that the granting of Royal Assent marked a historic day for the country and its voters.

The Scottish parliament has been given the power to make huge decisions that will impact the economy. The Scottish parliament will have the responsibility for raising about 33% of the country’s budget.

It’s taken a long time and a lot of hard work to get these new powers, but they are essential if the country is going to proceed with devolution, he added.

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Taxation of pensioners comes under the OTS spotlight

Accountants may be interested to learn that the OTS has identified several areas regarding the taxation of pensioners that need to be addressed urgently and it hopes to provide the Chancellor with its final recommendations before next year’s Budget.

Among the areas flagged for attention are the age related and married couples allowances, the taxation of savings and the admin processes pensioners have to contend with.

The OTS is investigating the way in which the tax system affects pensioners and identifying ways to simplify it. It has already reported its finding to George Osborne and will now look at ways of simplifying the system before making its final recommendations.

John Whiting, the tax director at the OTS, said that far too many people think the tax system gets more complicated the older they get. The OTS has taken the time to fully document the current system and take into account the concerns of pensioners before making any solid recommendations for change.

The OTS has now identified some ways to alleviate the problems facing pensioners and hopes that its final recommendations will help older people understand the tax system and find it easier to deal with their responsibilities.

During the compilation of its report, the OTS held meetings and roadshows around the UK and sought input from pensioners, representative bodies and tax advisers.

Robin Williamson, the technical director at the Low Incomes Tax Reform Group, said he thought the OTS had done a comprehensive job identifying and explaining the problems pensioners have with the current tax system and the LITRG is happy to have contributed to the review process.

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IR35 – The war is not won….yet

Big news of the day is the release of the Office for Tax Simplification’s report on Small Business Taxation. Well, big news for freelance contractors anyway. This is because this is the report that lays out what they think should happen to IR35. And it’s received a resoundingly cautious welcome from people like the PCG.

So not all good news then?

The main recommendation is that HMG bites the bullet and merges PAYE and NICs into a single tax. This is something that’s been around for a while – the Mirrlees report said exactly the same thing last year, as did a Treasury consultation from 2007. Except we didn’t really have a functional government back then and it went in the “Too difficult” box.

However merging the two has a lot of useful side effects, such as eliminating the advantage of payment through dividends, which among other things would make IR35 completely unnecessary. Which has to be a good thing in anybody’s book.

The snag is this will take years to bring into effect and the more you look at what’s involved the more complicated it gets. For example, the tax system recognises the difference between earned income and risk-based investment income and taxes them separately so as to encourage entrepreneurialism. Pensioners don’t pay NICs, so would need their own separate tax treatment. And so on – getting from here to there is a complicated and politically dangerous road.

But the report goes on to say that if that basic principle is adopted, then IR35 should be suspended with immediate effect. This suspension would allow HMRC to focus on other, frankly rather more important areas of tax gathering – you know, the ones that actually return more than they cost to collect – as well as showing what would happen to tax revenues if IR35 was simply abolished outright. So, for example, all those people who work through umbrella companies out of fear of IR35 may well incorporate and get the benefits of being a real contractor. There may be a rush of companies pushing their employees into turning freelance, which is what IR35 was supposed to prevent (it didn’t, as it happens, but let’s not go into that right now). There’s also a whole industry built on the existence of IR35 that would go into a sharp decline. So lot’s of potential issues to be resolved.

To be fair the report also suggests two other options; firstly that IR35 remains and HMRC are far more sensible, responsible and systematic in the pursuit of its enforcement (which caused me some hilarity and probably wins this weeks Littlejohn prize for “You couldn’t make it up”) or secondly the adoption of a series of tests that put you outside the scope of the IR35 legislation, clearly and simply.

So why a “cautious welcome” from the PG, who have been pushing for the abolition of IR35 for a long time? They are totally in favour of the suspension of IR35 as a step towards its removal but suspensions can be reversed, so it’s not the 100% solution they were hoping for. They also support the idea of the “in business” tests (as does the IoD, come to that), but are not exactly in favour of the “HMRC taking more care option” – to quote them, “This is widely regarded as risible”. And of course, it is all dependent on Mr Osborne taking note of and accepting the main recommendation for merger.

Still, it is a huge step forward and PCG deserve all credit for their work in getting us to this point. The war is not yet won, but we have perhaps now won the El Alamein battle for the abolition of IR35.

About the author: Alan Watts

Alan has worked in IT for most of the last 35 years, and first went freelance in 1996. He has been a PCG member from its start and has been spreading the message that freelancing is a professional career choice for many years. Alan also runs Malvolio’s Blog, a personal but highly informative take on the life of the modern freelance.

Alan Watts, Principal Consultant, LPW Computer Services

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