Author: Steve Jones

Rising interest rates and frozen thresholds will force over one million more taxpayers to pay taxes on their savings interest this tax year, new data reveals.

Over 2.7 million individuals will pay tax on cash interest in the 2023/24 tax year, up by a million in a single year as more savers breach the personal savings allowance.

According to the figures, obtained by AJ Bell through a freedom of information request to HMRC, the Treasury will collect £6.6 billion in tax on earned savings interest.

The investment firm said that 1 in 20 basic-rate payers will pay tax on cash interest this tax year, rising to 1 in 6 higher-rate payers and around half of additional-rate payers.

It urged Chancellor Jeremy Hunt to end the freeze on the personal savings allowance, which has remained unchanged since 2016 despite wage inflation and surging interest rates yielding higher gains.

Tax is owed when a taxpayer earns more in interest than the personal savings allowance, which is £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers and non-applicable to additional-rate payers.

Furthermore, tax is paid either through self-assessment or deducted from income through a tax code adjustment. However, many taxpayers will be unaware that they owe tax until HMRC contacts them, AJ Bell said.

Laura Suter, head of finance at AJ Bell, said: “The figures highlight just how many taxpayers are facing a tax bill for their savings interest this year — a huge leap when compared to last year.

“The combination of higher interest rates and people having shunned ISA accounts in recent years means that the number paying tax on their savings has more than tripled in the past four years.

“Rising rates and a frozen personal savings allowance means some individuals are being taxed despite having relatively modest pots of cash set aside for a rainy day.”

Contact us for personal tax planning advice.

Growth remained sluggish between April and June 2023, with GDP growing by 0.2% in the second quarter of 2023 following a 0.1% rise in the first.

 Monthly estimates also show that GDP grew by an estimated 0.5% in June 2023 after falling by 0.1% in May and rising by 0.2% in April.

Growth of 1% in the information and communication sub-sector and a 1.6% increase in accommodation and food services made the largest contribution to increasing GDP.

However, these gains were partially offset by a 1% decline in professional, scientific and technical activities, which saw downturns in scientific research and development, architectural and engineering activities, and advertising and market research.

Prime Minister Rishi Sunak welcomed the figures as “good news”, adding “there’s still more work to do, but today’s figures show the plan is working.”

David Bharier, head of research at the British Chambers of Commerce, said the GDP figures were “better news than expected”, but stressed that the UK economy remains in a “precarious place”.

“While the UK remains on course to avoid a technical recession, small movements in one direction or the other won’t mean much for many firms facing the toughest trading conditions in years.”

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Real wages in June 2023 were higher than a year ago for the first time in 18 months, ending a pay squeeze across Britain.

Wages grew by 7.8% in the three months to June, the fastest annual rate since records began in 2001, according to figures from the Office for National Statistics.

Darren Morgan, ONS director of economic statistics, said: “Coupled with lower inflation, this means the position on people’s real pay is recovering and now looks a bit better than a few months back.”

Prime Minister Rishi Sunak said there was “light at the end of the tunnel” for the millions struggling with the cost of living.

However, inflation remains relatively high at 7.9% in June and 6.8% in July, meaning real wages including bonuses rose by 0.5% in the year to June and wages excluding bonuses rose by 0.1%.

Moreover, while rising wages is a win for workers, not everyone is as optimistic.

Following the data, Sushil Wadhwani, a former member of the Bank’s rate-setting Monetary Policy Committee, said financial markets believe an interest rate rise at the next meeting in September is a “virtual certainty”.

Nye Cominetti, senior economist at the Resolution Foundation, said: “Pay growth accelerated in June to end Britain’s painful 18-month pay squeeze.

“This welcome news for workers won’t be shared by policy makers at the Bank of England though, as it will put further pressure on their efforts to curb inflation. They will hope that rising unemployment and falling vacancies will take the steam out of pay rises in the coming months.”

The wage growth figures also highlight the “unrelenting workforce pressures businesses are facing”, according to Jane Gratton, deputy director of the British Chambers of Commerce.

“In a tight labour market, employers are struggling to contain wage inflation as the expectations of their staff and job candidates continue to rise,” she continued.

Speak to us for advice on employing staff.

One in five British importers have altered their supply chains because of geopolitical tensions, particularly with China, new research suggests.

A survey by the Institute of Directors (IoD), found that 20.5% of importers have altered their supply chains because of tensions abroad, while a further 14.5% were considering doing the same.

Just 42.4% of importers said their supply chain had been unaffected by the geopolitical tensions.

Many firms have become “more risk aware” since the pandemic and the invasion of Ukraine, the research suggested, and are looking for stability.

Some are particularly concerned about sudden disruptions to their supply chains if UK-China relations deteriorate as well as the security of their data in Chinese systems, according to the IoD.

Emma Rowland, trade policy adviser at the IoD, said: “It is clear businesses are sensing geopolitical-shaped clouds on the horizon, particularly while China’s standing with the US, Russia and Taiwan remains uncertain.

“The pandemic, coupled with the invasion of Ukraine, has exposed vulnerabilities in international supply chains and an overreliance on countries perceived to be high-risk to the UK.

“Ultimately, firms are pursuing long-term stability in their supply chains, so they can provide certainty to their customers.”

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In evidence submitted to the Public Accounts Committee’s Progress with Making Tax Digital inquiry, contributors from across the accounting profession handed down a blistering verdict on the project, and HMRC’s ability to deliver on its new timeline.

The written submissions criticised HMRC’s failure to consult with and listen to taxpayers, agents, professional bodies and software vendors, spoke of the Revenue’s ‘limited understanding’ of how businesses operate, and expressed frustration at a lack of clarity over how MTD would work in practice.

The tax digitisation project’s current timetable will see it deliver Making Tax Digital for income tax self assessment (MTD ITSA) eight years behind schedule, and a recent National Audit Office paper reported that the scheme will come in more than £1bn over budget.

However, HMRC officials told MPs they were confident about the prospect of delivering MTD ITSA to its new timelines – those with incomes above £50,000 will join the programme in 2026, the £30,000 to £50,000 bracket will join in 2027, while quarterly reporting for incomes between £10,000 and £30,000 is under review.

Yet the Association of Tax Technicians (ATT) said there remains “an enormous amount of work to do” to deliver MTD in a workable and valuable form by 2026.

With a project this wide-ranging and complex, there were always going to be problems the project’s architects needed to tackle. However, the following stumbling blocks have yet to be satisfactorily resolved:

• The treatment of jointly owned properties
• Accommodating taxpayers with multiple agents
• Providing a coherent definition of what a digital record should look like
• The frequency of updates and whether these can be made cumulative
• The interaction of the MTD reporting period with basis period reform

HMRC officials told MPs that since December 2022 it has been undertaking a series of ‘co-creation’ events involving unnamed stakeholders “with the ambition of resolving the most pressing design issues within the coming months”.

Contact us for advice on MTD for ITSA.

After “a successful trial period”, HMRC has decided to extend its call time information messages to more of its helplines in a bid to give taxpayers and agents a better understanding of how long they can expect to be waiting on the phone.

According to HMRC’s most recent stakeholder digest, the extension, which came into effect on 4 July, will allow callers to make an “informed choice about whether they want to hang on, use our digital services or call back another time”.

Callers who have dealt with HMRC’s PAYE helpline are likely to already be aware of HMRC’s automated wait time messaging. However, the extension now covers the following services:

• Child benefit ​
• Tax credits ​
• VAT ​
• Online services ​
• National insurance​
• Construction Industry Scheme​
• Employers

The driving force behind HMRC’s decision was the apparent success of introducing automated messaging into services such as the PAYE helpline, with a spokesperson noting that thanks to this addition, “wait times reduced from 40 minutes at the start of the trial, to consistently below 20 minutes”.

The spokesperson added: “We want to be open and transparent about how long our customers can expect to wait and encourage the use of our digital services which are quicker and easier than calling us.”

Meanwhile, HMRC is also showing the wait time for its web chat for self assessment. Taxpayers using this service see the message: “Thank you for your patience, your estimated wait time is…” and then a timer counts down from that point.

The extension comes only a month after the announced closure of HMRC’s self assessment helpline over the summer and the transfer of 350 of its call handlers to other telephone services during the three-month closure. HMRC said that the decision was taken to divert resources and improve overall customer service levels.

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Monthly GDP fell by 0.1% in May after growth of 0.2% in April, according to the Office for National Statistics (ONS), suggesting the economy remains on shaky ground.

In the three months to May 2023, GDP has “shown no growth” when compared with the three months to February, the ONS added.

The services sector also showed no growth in the three months to May, while production grew by 0.4% and construction grew by 0.2%.

A range of manufacturing and construction businesses cited the additional bank holiday for King Charles’s Coronation as a reason for reduced output.

There was also anecdotal evidence submitted to the ONS that industrial action in May 2023 had an impact on industries to varying degrees.

Martin McTague, national chair of the Federation of Small Businesses described the fall in GDP as “unwelcome, but not a surprise”.

“Small firms have been telling us they are facing pressure from all directions, such as interest rate rises, cost inflation and an ongoing late payment culture by big corporations”, he added.

Jeremy Hunt, Chancellor of the Exchequer, said: “The best way to get growth going again and ease the pressure on families is to bring inflation down as quickly as possible”.

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How to find the best option for your business.

In today’s fast-paced and competitive business environment, having the right tools and systems in place is crucial for success. However, one tool that sometimes goes overlooked is accounting software, which can help you manage your finances more effectively, save time and reduce the risk of costly errors.

But with so many types of accounting software, finding the best solution can take a lot of time. This article will guide you through how to choose the most suitable accounting software for your specific needs.

Cloud or desktop software?

Let’s begin by looking at the two main types of accounting software: desktop and cloud software.

With desktop software, the more ‘traditional’ type of accounting system, your accounting software and financial data reside on your desktop or laptop computer after manually installing it.

Cloud accounting software, meanwhile, is stored online — no installation required.

Each type of software has positives and negatives, but the advantages of cloud technology mean it will, in most cases, suit the average business owner of the 21st century.

For instance, as your data is stored online, you can view it in real-time from anywhere, on any device with an internet connection, making it easier to remain productive on the move.

It also makes recording expenses and income easier, as you can integrate your software with other apps, such as ones that allow you to collect and store expense records. You can also integrate bank feeds without the need for manual imports or third party plugins.

If you connect your account with your accountant, they’ll also be able to see your data in real time, helping them provide more accurate and relevant financial advice.

Assess your business requirements

Before you embark on your search for the right accounting software, it’s essential to assess your business requirements to narrow down your options and focus on software that will actually help you in the long run.

You can begin by identifying your primary needs and objectives. Do you need inventory management? Are you looking for integration with other software applications? Do you travel a lot and therefore require an online solution?

Consider scalability

As your business grows, so will your accounting needs. Therefore, it’s crucial that you choose accounting software that can scale with your business.

So, stay on the lookout for solutions that can handle an increasing number of transactions, users and features. Picking one that can scale with you now will save you the hassle of switching to a new system later down the line.

Scalability is another feature that makes cloud accounting software stand out. For example, Sage’s desktop software requires you to purchase a licence to use the program for each additional user; however, with Sage’s regular cloud offer, you can enrol up to 20 users onto the system. Xero, meanwhile, allows unlimited users.

Evaluate user-friendliness

Not everyone in your organisation that uses your accounting software will have an accounting background, so it’s crucial to choose software that is easy to navigate.

The good thing is you can test platforms by taking advantage of the free trials that some providers, including Xero and Sage, offer.

Make sure to also take a look at providers’ resource libraries and check what support systems they have in place.

Integration capabilities

Your accounting software doesn’t exist in isolation; you probably have a lot of other software applications you use in your business.

If this is the case, cloud accounting software may make more sense for you, as there are lots of opportunities to integrate other types of software with it. In practice, this means information entered into a connected app will update information on your main software and all other connected applications.

So, make sure to check the app stores of different software providers, such as Xero, before you make your decision.

Read reviews and seek recommendations

Before you make a decision, make sure to take the time to read reviews and seek recommendations from trusted sources.

Online reviews and testimonials from real people and businesses similar to yours, in particular, can provide invaluable insights into the pros and cons of each accounting software option available to you. Pay close attention to factors important to you, such as ease of use, quality of customer support, reliability and overall user satisfaction.

Why stop there? You could also reach out to business owners and industry professionals for their recommendations and experiences. Their first-hand feedback can help you make a more informed decision.

Trial the software

As we mentioned earlier, many accounting software providers offer trial periods or demo versions of their programs. Make sure to take advantage of these offers to test all the features and integrations and to find out whether it’s the right fit for you.

Pricing and cost considerations

Accounting software varies in cost, depending on its features, the number of users it supports and other factors. It can also vary in payment models, although most providers nowadays offer a subscription model and different packages depending on your needs. Comparing these packages and their fees is therefore recommended.

Make sure to stay alert for extra costs, however. For example, both Sage and Xero have multiple types of software depending on your needs, including separate programs for accounting, payroll HR and financial management.

So, make sure to factor extra costs into your budget, and don’t just rely on the headline fee advertised on websites. Yes, the costs may mount up if you need a lot of tools, but at least you won’t be paying for software you end up never using.

Which does your accountant use?

Finally, check which accounting software your accountant uses, as they’ll be proficient with that particular software. As such, you’ll be able to get far more value from your relationship as your accountant will be able to help you get set up. They’ll also be able to manage your finances more easily as they’ll know how to use the software themselves.

If you don’t use the same software as they do, don’t assume they won’t be able to help at all — the point is don’t expect them to know everything right away!

Talk to us about your accounting needs; we might be able to recommend the right solution for your business.

Hunt says changes will unlock £75bn of investment.

On the evening of Monday 10 July 2023, Chancellor Jeremy Hunt delivered a speech at Mansion House in the City of London framed around “looking further ahead”, rather than just dealing with the immediate inflationary issues the country faces.

“I want to lay out our plans to enable our financial services sector to increase returns for pensioners, improve outcomes for investors and unlock capital for our growth businesses,” Hunt said.

These plans, or the so-called ‘Mansion House reforms’, promise to “boost returns and improve outcomes for pension fund holders while increasing funding liquidity for high-growth companies”.

Specifically, Hunt said his changes to the pension system could unlock up to £75 billion of corporate investment and boost the pension pots of retirees by 12%, equivalent to £1,000 a year.

The need for investment

The UK economy is more than 15 years into a period of low economic growth, underpinned by stagnant growth in labour productivity.

There are a range of contributing factors to Britain’s productivity problem, but “one area of broad agreement”, as the Resolution Foundation puts it, is the country’s low investment rate.

“The UK’s low rates of business investment have persisted for many years. When combined with lacklustre investment in the public sector, the result has been a marked fall in the rate of growth of capital per person or per employee”, the think tank wrote.

Business investment is lower in the UK than any other country in the G7, and 27th out of 30 OECD countries, ahead of only Poland, Luxembourg and Greece.

Hunt seemed to recognise the problem at Mansion House. “Currently we have a perverse situation in which UK institutional investors are not investing as much in UK high-growth companies as their international counterparts”, he said.

Pension reforms

Hunt’s announcements on pensions came with five reforms. Some consultations will be necessary to hammer them out, but all final decisions will be made ahead of the Autumn Statement later this year, Hunt said.

The Mansion House Reforms will be guided by the Chancellor’s three golden rules: to secure the best possible outcome for pension savers; to always prioritise a strong and diversified gilt market as the Government seeks to deliver an evolutionary, rather than revolutionary, change in the pensions market; and to strengthen the UK’s position as a leading financial centre to create wealth and fund public services.

First, CEOs of the largest defined contribution pension schemes, including Aviva, Nest and Aegon, have signed a ‘Mansion House Compact’ committing them to allocating at least 5% of their default funds to unlisted equities by 2030.

The UK currently invests under 1% of funds in unlisted equity, compared to between 5% and 6% in Australia.

“If the rest of the UK’s defined contribution market follows suit, this could unlock up to £50bn of investment into high growth companies” by the end of the decade, Hunt said.

Second, the Government will “facilitate” a programme of defined contribution consolidation “to ensure that funds are able to maintain a diverse portfolio of bonds, equity and unlisted assets and deliver the best possible returns for savers”.

As such, pension schemes that are not achieving the “best possible outcome for their members” will face being wound up by the Pensions Regulator.

Mel Stride, secretary of state for work and pensions, explained the decision, saying: “Analysis shows that over a five-year period there can be as much as 46% difference between the best and worst performing pension schemes.

“This means that a saver with a pot of £10,000 could have notionally lost £5,000 over a 5-year period from being in a lowest performing scheme.”

Third, ahead of the Autumn Statement, the Government will explore whether it can establish investment vehicles via the British Business Bank.

Hunt said: “Ahead of Autumn Statement, we will test options to open those investment opportunities in high-growth companies to pension funds as a way of crowding in more investment.”

Fourth, Hunt moved on to defined benefit schemes, which number over 5,000 and operate under a different regular regime, announcing a “permanent superfund regulatory regime” to provide a “scaled-up way of managing defined benefit liabilities”.

Finally, the Government will open a consultation on doubling existing investments held by local Government pension schemes (LGPS) in private equity to 10%, which could unlock £25bn by 2030.

The consultation proposes a deadline of March 2025 for all LGPS funds to transfer their assets into pools and that each pool should hold more than £50bn of assets.

Hunt said: “Today’s announcements could have a real and significant impact on people across the country.

“For an average earner who starts saving at 18, these measures could increase the size of their pension pot by 12% over their career — that’s worth over £1,000 more a year in retirement.

“At the same time, this package has the potential to unlock an additional £75bn of financing for growth by 2030, finally addressing the shortage of scale up capital holding back so many of our most promising companies.”

Proposals welcomed by some experts

Dr Yvonne Braun, director of policy, long-term savings, health, and protection at the Association of British Insurers welcomed the Mansion House reforms, saying:

“We want to see successful, enduring pensions policies that help deliver better returns for savers as well as boosting the UK economy, and we fully support the Government’s ambition to achieve this.”

Director general of the British Chambers of Commerce, Shevaun Haviland, also broadly supported the Mansion House Reforms, commenting: “Boosting investment is key to remaining globally competitive, increasing economic growth and strengthening UK capital markets.”

“Challenges around public investments, such as HS2, illustrate the importance of leveraging more private sector investment into UK infrastructure projects, which can complement the UK’s already strong track record in encouraging private investment into infrastructure such as maritime ports, water supply and airports.”

However, she added that the Government should not neglect channelling investment into local economies and supply chains.

“With SMEs accounting for 80% of the UK’s economy, these businesses must also benefit from easier access to capital funding,” she said.

The ‘urgent’ need for a roadmap

Something that was noticeably missing from Hunt’s speech and the Government’s follow up publications was a roadmap for the Mansion House pension reform package. That fact prompted pensions and financial company Aegon to call for one to avoid “mind boggling complexity and chaos”.

Just like many in the pensions industry, Aegon also welcomed the reforms, describing it as “all guns blazing”. However, Steven Cameron, pensions director at Aegon warned that: “charging ahead without a well thought-through overarching plan could lead to chaos”.

“Pensions are some of the longest-term investments individuals make, and while government, regulators and industry should always be looking for improvements, a mad rush to implement too much, too soon without a full understanding of the consequences could be highly risky.”

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The Chartered Institute of Taxation (CIOT) is warning that HMRC’s efforts to tackle abuse of the R&D tax relief system are resulting in them rejecting legitimate claims and stone-walling others.

 In a letter to HMRC, the CIOT wrote that the ‘volume compliance’ approach adopted by the tax authority since the second half of 2022 does not work because of the complex nature of the relief.

Ellen Milner, CIOT director of public policy, said: “We are receiving a large number of reports about the difficulties being encountered by firms carrying out genuine R&D.

“Valid claims are being rejected and businesses are being deterred from challenging HMRC by the disproportionate financial and time cost of doing so.

The volume compliance approach is based on frequent challenge and standardised letters with little or no opportunity for businesses and their advisers to explain the R&D activity they were engaged in.

It’s part of a drive to reduce error and abuse within the scheme, which, in HMRC’s 2021/22 annual report and accounts document, was shown to equal 4.9% of total R&D tax relief expenditure.

However, Milner also recognised that “HMRC has recently engaged with us to discuss our concerns”.

HMRC intends to publish a compliance action plan that addresses some of the issues raised by CIOT and others.

Talk to us about your R&D claim.