In this month’s news we report on forthcoming restrictions in interest relief on residential property, HMRC’s latest ‘tax cheat’ targets and revised student loan deduction guidance for employers.
Please contact us if you would like further guidance on any of the areas covered.
Residential property income and interest relief
The government has issued guidance and examples on the restriction of income tax relief for interest costs incurred by landlords of residential properties. The new rules, which are phased in from April 2017, only apply to residential properties and do not apply to companies or furnished holiday lets.
From April 2017 income tax relief will start to be restricted to the basic rate of tax. The restriction will be phased in over four years and therefore will be fully in place by 2020/21. In the first year the restriction will apply to 25% of interest, then 50% the year after and 75% in the third.
The restriction may result in additional amounts of tax being due but will depend on the marginal rate of tax for the taxpayer. Basic rate taxpayers should not be substantively affected by these rules. A higher rate taxpayer will, in principle, get 20% less relief for finance costs. However the calculation method may mean that some taxpayers move into the higher rate tax brackets.
Other complications
It should be noted that the tax reduction cannot be used to create a tax refund. So the amount of interest relief is restricted where either total property income or total taxable income (excluding savings and dividend income) of the landlord is lower than the finance costs incurred. The unrelieved interest is carried forward and may get tax relief in a later year.
Child benefit is clawed back if ‘adjusted net income’ is above £50,000. Interest will not be deductible in the calculation of ‘adjusted net income’.
The personal allowance is reduced if ‘adjusted net income’ is above £100,000.
HMRC latest ‘tax cheat’ targets
HMRC have launched a new taskforce to tackle wealthy tax cheats who are living beyond their means in Northern Ireland and expect the campaign to recover approximately £18 million.
HMRC have announced that they are using Land Registry and Merchant Acquirer data to identify those ‘badges of wealth’ such as large houses, aeroplanes, boats and undeclared offshore bank accounts which are not in keeping with the information they report to HMRC.
Updated student loan deduction guidance
HMRC have issued guidance to employers on how to deal with student loan deductions via the PAYE system.
Employers should familiarise themselves with the guidance which has been updated to reflect the introduction of plan 2 loans which are repayable from a different threshold but at the same nine percent basis.
With effect from the 2016/17 tax year there are two plan types for student loan repayments:
- plan 1 with a threshold of £17,495 (£1,457 a month or £336 per week)
- plan 2 with a threshold of £21,000 (£1,750 a month or £403 per week)
The updated guidance includes the following advice on identifying the plan type:
‘Start making student loan deductions from the next available payday using the correct plan type if any of the following apply:
- your new employee’s P45 shows deductions should continue – ask employee to confirm their plan type
- your new employee tells you they’re repaying a student loan – ask your employee to confirm their plan type
- your new employee fills in a starter checklist showing they have a student loan – the checklist should tell you which plan to use
- HM Revenue and Customs send you form SL1 ‘Start Notice’ – this will tell you which plan type to use
If your employee doesn’t know which plan type they’re on, ask them to contact the Student Loan Company. If they’re still unable to confirm their plan type, start making deductions using plan type 1 until you receive further instructions from HMRC.’
If you would like further advice or help with payroll matters please get in touch.