12 June 2023
The earlier after the end of the tax year taxpayers review their tax affairs and calculate their expected tax liability, the more time they have to consider options to improve their tax efficiency, prepare their self-assessment tax return (SATR) and plan how to meet their tax liability. However, many individuals need a deadline to spur them into action, as evidenced by the fact that around 800,000 2021/22 SATRs (over 6.6% of the total for the year) were filed on 31 January 2023, the filing deadline for that year’s tax returns.
Rising interest rates and an evolving tax landscape provide added incentives for individuals to review their 2022/23 tax position earlier this year.
The rising cost of late tax payments
Ordinarily, the thought of penalties for late filing or late payment is a key driver for individuals to review their tax position. Whilst late payment penalties can usually be mitigated where time to pay arrangements are agreed in time with HMRC, late payment interest will still accrue on any tax liabilities paid late. For most taxes, HMRC sets its annual late payment interest rate at 2.5% above the Bank of England base rate, which is presently 4.5% and is expected to rise in the coming months. At 7.00%, the late payment interest rate is at its highest level in 15 years and should itself be a significant deterrent to paying tax late.
By reviewing their tax position at an early opportunity, individuals will have sufficient time to review and amend any costly oversights in the previous tax year, consider tax efficient planning options for all open tax years and going forward, and plan how to meet their current tax liability. Even forgetting about penalties and interest, if an SATR is not prepared and filed until the last minute, there is a good chance that any costly oversights from the previous year could be repeated in the current tax year.
Due to cost-of-living crisis, managing cash flow and meeting tax liabilities is becoming a greater concern for a higher proportion of taxpayers. However, it is likely to be a particular issue for certain taxpayers, such as seasonal workers who may not be able to reliably forecast their income, and crypto investors who may wish to ensure they keep enough cash aside to pay any tax and ensure these funds are not exposed to crypto market volatility.
Unincorporated business owners and landlords of residential property may also be in for a shock over the next couple of tax years as recent tax changes impact their tax bills.
Unincorporated residential property landlords
Buy-to-let landlords of residential property, excluding furnished holiday lets, may be surprised to see that their 2022/23 tax bill has not gone down much, even though their mortgage costs may have increased significantly. This is because tax relief on finance costs is restricted for most unincorporated residential property landlords. As a result, most of these landlords can, at best, only claim a 20% tax reduction on their related finance costs, regardless of their marginal tax rate. Whilst this change took full effect from 6 April 2020, the 2022/23 tax year may be the first tax year in which some landlords see a significant impact, due to the substantial increase in the cost of borrowing in the year, during which the Bank of England base rate increased by more than four-fold.
This combination of factors mean it is quite possible that many residential property landlords will have to pay tax for the 2022/23 tax year, and going forwards, despite making a commercial loss. They may therefore need time to establish how they will find the funds to pay any tax liability and consider their tax planning and other options to mitigate their tax exposure.
Transferring interests in rental properties to a lower-earning spouse may be one solution. Alternatively, landlords might wish to consider transferring their rental properties to a company, which may benefit from a full deduction for finance costs, although such a transfer will give rise to a number of other tax and commercial implications that need to be properly considered and understood. Finally, individuals may be forced to consider selling their properties or taking other more significant action, like converting their properties into furnished holiday lets, which may benefit from an advantageous tax regime, including full relief for finance costs. None of these decisions should be taken lightly as they all have wider implications or conditions that need to be met, so landlords may wish to undertake initial calculations to identify their expected tax liability and seek tax advice as soon as possible.
Unincorporated business owners
Sole traders and those in partnership should note that we are now in the transitional year for ‘basis period reform’. From the 2024/25 tax year, nearly all unincorporated businesses will be taxed on profits generated in the tax year, ie 6 April to the following 5 April, although they may opt to treat an accounting period ended between 31 March to 4 April as ending on 5 April.
For taxpayers whose unincorporated business does not have an accounting year aligned with the tax year, the transitional period will see them being subject to income tax on additional profits for the period from their accounting period end to the following 5 April. As a default, 20% of the transitional period profits arising will be taxed annually for five successive tax years. Looking at their tax affairs early could enable unincorporated business owners to consider whether they should change their accounting period end in the 2022/23 tax year. Whilst this could bring forward the tax on their profits, it could allow taxpayers to maximise the benefit of the 2022/23 tax rates, bands and allowances and may provide more peace of mind and visibility of their upcoming tax payments.
For more information, please get in touch with Jackie Hall or your usual RSM contact.