£2,000 of digital tax allowances and how you can use them

In his Budget, the Chancellor trumpeted the benefits of special tax-free allowances for people making money from the internet.

From next year you will be able to earn £1,000 from selling stuff via ebay and other auction and selling websites.

And you'll be able to make another £1,000, tax free, by renting out your property in different ways. That's what many people are doing by using sites including airbnb and ownersdirect.

So who is likely to do well out of these allowances? And have we been dodging tax up until now, simply by making money from online sales?

Flogging on the net
If you make money from the internet, flogging goods stacked up in your garage, for instance, or renting out the garage itself, then that money can be taxable. That's if you are working as a trader.

George Osborne calls you a micro-entrepreneur, selling services online or renting out all or part of your home.

The first £1,000 of income from your online sales will be tax free, although you won't be able to take off your running expenses before calculating the total.

Micro-entrepreneurs only have to declare income above the £1,000 threshold for tax purposes.

When it comes to renting out furnished accommodation, there is already a Rent a Room scheme giving you £4,250 tax free, rising to £7,500 from next month.

You will be able to use the new property allowance at the same time, though not for the same part of the home.

So, for instance, you could rent out the spare room using the Rent a Room scheme and use the new £1,000 allowance to save tax on renting out a parking space on the drive.

Are you a trader?
The big question is whether you are a trader in the first place.

If you are simply selling junk from the attic, books and CDs, a spare bike or even your used car, it is unlikely that the proceeds would be taxable anyway.

These are one-offs. What the tax people are interested in are repeat sales, when the intention is to make a profit.

On the other hand, renting out parts of your home on a regular basis would normally be taxable.

That's if you have already used up your personal allowance, the amount - currently £10,600 - that you can earn before income tax kicks in.

How to work out if you are a trader or not, from the tax people at HMRC...

What we consider to be trading

It can sometimes be difficult to tell the difference between trading and not trading.

You are most probably trading if:

• you want to make a profit

• you have bought goods to sell them on

• you sell things often or regularly

• you register as a business seller on an internet auction site

• you sell from a market stall

• you buy things wholesale or through trade suppliers

• you change or improve things before selling them on

• you sell things that you have just bought

• you sell things that are related to another business that you run

• you have borrowed money to pay for the things that you are selling and you need

to repay that loan.

You are probably not regarded as trading if:

• you only sell things to cover your costs

• you sell a personal possession or something that you have been given or

have inherited

• you only make sales occasionally

• you are not registered as an online shop or trader on an internet auction site

• you make no changes or improvements to the items that you sell

• you occasionally sell a personal possession that you have acquired or bought

some time ago.

Help to Save criticised

The debt charity, Stepchange, has criticised the government's new Help to Save scheme for low paid workers, saying they will have to wait too long for the benefits.

The proposals, which will be fleshed out by the Chancellor in this week's Budget, would provide a 50% bonus to those who manage to save up to £50 a month.

As many as 3.5m people in low paid work and receiving working tax credit or universal credit would qualify, with the maximum level of help set at £1,200.

However, they will have to save for two years before getting any bonus.

Stepchange says such a wait may see families overtaken by events as they dip into funds for emergencies.

The charity warns that the thought of losing the bonus could act as a disincentive to save in the first place.

85,000 pension withdrawals

What we now know is that 85,000 people have taken money out of their pension plans using the new pension freedoms, withdrawing £1.3bn.

That's up until 28th June, so it takes in most of the three months since the launch in 6th April.

60,000 had taken out £1bn in the first two months.

So that confirms that the rate of withdrawal has faded a bit since the opening weeks. No doubt many had been waiting for the new regime to begin and moved quickly to cash in.

It also suggests that the average amount being withdrawn is £15,294, down from £16,666.

What the new figures don't tell is what they did with the money.


Summer Budget Red Book p51

Pension and savings flexibilities 

1.227
Over 85,000 people have taken advantage of the new flexibilities for accessing pensions that were introduced in April 2015. The government believes it is important that all consumers can access free, high quality guidance on their choices. Following the successful launch of Pension Wise in April 2015, the government is extending access to this free and impartial guidance service to those aged 50 and above, and is launching a comprehensive nationwide marketing campaign to further raise awareness of the service.

1.228 The government also wants to ensure that people can access the new flexibilities easily, and at reasonable cost. The government will consult before the summer on options aimed at making the process for transferring pensions from one scheme to another quicker and smoother, including in relation to any excessive early exit penalties. If there is evidence of such penalties, the government will consider imposing a legislative cap on these charges for those aged 55 or over.

1.229 The government wants existing annuity holders to have the freedom to sell their annuity income. The government will set out plans for a secondary annuities market in the autumn, and agrees with respondents to the recent consultation that implementation should be delayed until 2017 to ensure there is an in-depth package to support consumers in making their decision.

Will there be a June Budget?

So what does George Osborne do next, now we know he remains Chancellor?

There's been talk of a mini-Budget in June to lay out his plans for the next five years. But does he even need one? Perhaps not.

"There's no need. He doesn't have to bother," says Patrick Stevens, policy director at the Chartered Institute of Taxation.

The fact is that the Chancellor could decide to stage a quick Budget for political reasons, to whip up excitement and mark the launch of the new Tory programme.

He could even provide more detail about the staging posts to raising the personal allowance for income tax to £12,500. He could map out the route to a £50,000 threshold for 40% tax.

And he could toss in more discussion of his £1m inheritance tax allowance for couples passing on their homes.

On the other hand, it might look distinctly odd to start explaining so soon how his £12bn of further benefit cuts will be implemented.

It would only be weeks after the Conservatives had told voters - before the election - that they didn't know what the measures would be.

Chas Roy-Choudhury from the accountancy body, ACCA,  says Mr Osborne should "Hold fire!" and consult about some of the tax changes he is planning.

He argues there is plenty of time to look carefully at some of the plans, for instance the cuts to the tax relief high earners get on their pension contributions, which are complicated.

The fact is, we already have a list of pre-announced moves, from the March Budget or the manifesto:

£12,500 personal allowance, up from £10,600

£50,000 higher rate tax threshold

£1m inheritance tax allowance for couples (£325,000 each plus £175,000 each for family home)

No change to main VAT, income tax or NI rates

Triple lock promise to uprate pensions maintained

£12bn of further benefit savings,

Including freezing most working age benefits until April 2018, reducing benefit cap to £23,000, removing housing benefit from 18-21s on Job Seekers Allowance.

On pensions, reducing the annual allowance for highest earners, maximum contributions down from £40,000 to £10,000 a year.

And raising £4.6bn from further clampdown on tax evasion and avoidance

Budget means higher house prices

Higher house prices and more transactions are the likely result of the Chancellor's package of measures to reactivate the property market, called Help to Buy, according to housing experts.

In yesterday's Budget, George Osborne announced that help for first time buyers to purchase newly built homes - called First Buy - would be extended to people who already have a home but want to move.

They will qualify for interest-free loans from the government to make sure they can put down a sizeable deposit.

And he announced a system of government guarantees for up to £130bn worth of mortgages, to open the market for older homes to thousands of buyers who can only put up a 5% deposit.

The mortgage guarantees will not be available until January next year, but mortgage broker Ray Boulger of John Charcol thinks the expectation of more house purchases will drive prices higher towards the end of 2013.

He had been forecasting a 2% rise. Now he thinks 3.5% is more likely this year, with a 20% jump in transactions expected next year. That could mean 100,000 more deals.

"Clearly if you put extra finance into the mortgage market, the net result is that prices will be higher," Ray Boulger says.

The impact may seem modest, but a market in which prices are increasingly steadily and the number of deals is rising would be a major shift from the past four years of stagnation.

Simon Rubinsohn of the Royal Institution of Chartered Surveyors says it's too difficult to forecast next year's prices, given the uncertain economic backdrop in the UK and the eurozone, but he can see a marked impact as well.

"Providing the mortgage guarantee scheme goes ahead and there's a big take up, prices will go up faster than we envisaged," he suggests.

Even forecasters who have been talking about a likely drop in prices have changed their view.

Ed Stansfield from Capital Economics had pencilled in house price falls this year and next year. Now he believes there will be no significant change.

There could be a substantial knock-on effect if Help to Buy enables people to move house when otherwise they would have stayed put.

"It'll mean more successful chains," explains Ray Boulger, "Other transactions will happen because the Help to Buy transactions have gone ahead".

The expanded First Buy scheme is designed to assist 74,000 to move to brand new homes over three years.

£50 gain from new tax allowance

Detail on the impact of the new £10,000 Personal Allowance - the level at which you have to start paying 20% income tax.

From the Treasury:

The increase in the personal allowance to £10,000 will take 257,000 
individuals out of income tax altogether in 2014-15. 

By April 2014, the cumulative effect of this Government’s increases in the 
personal allowance will lift 2.7 million people out of the income tax system. 
In 2014-15, the increase will provide 24.5 million individuals with a real 
terms gain (over and above that from normal indexation) averaging £50. 

Of these, 20.4 million will be basic rate taxpayers and 4.2 million higher 
rate taxpayers (figures may not sum due to rounding). 

0.47 million individuals will have an average loss of £50 in 2014-15. All of 
these have incomes above the breakeven level near £120,000 at which 
the personal allowance is tapered to zero and so no benefit is derived 
from the personal allowance increase.

Who pays 40% tax

The £10,000 starting rate of tax is great news for millions.

In the same year, 2014-15, the starting rate for the higher 40% rate will be £41,865 as previously planned.

So although the previous plans were likely to result in more people being drawn into the 40% band, there isn't a specific measure today to bring even more into that bracket.

The threshold for 40% tax is £42,475 this year.

In 2013-14, so starting in April, it will be £41,450.

And in 2014-15, it will be £41,865

2p on income tax?

OK brace yourselves for the tax rises of 2015...

Will it be income tax, will it be VAT? Will it be a combination of different taxes, including more on house sales, inheritance or National Insurance?

Today's Green Budget from the respected Institute for Fiscal Studies points out that by the 2014-15 financial year the Chancellor will be borrowing £64bn more than originally planned to cover his spending.

And that's factoring in all the spending cuts, welfare reductions and tax changes which the government has brought in since 2010.

The borrowing is continuing while the government tries to heave the economy out of its rut and stagger towards the next election.

The point is, what then?

The IFS says:

Over the last 30 years tax rises announced in the year after a general election have averaged £7.5bn.

Considering this trend, and in the context of the current fiscal situation, further tax rises following the next election would not be surprising.

So, maybe an emergency budget after the June, 2015 election, and tuppence on income tax - raising £10bn a year.

Child Benefit freeze

Remember: Child Benefit is being cut in two different ways. Everyone who receives it is losing out.


Today plans to take it from high earning families have been condemned by chartered accountants as "seriously flawed in principle and in practice".


This change, due to be implemented from January could end up being a "disaster".


The Chancellor will remove the benefit in part from households with someone earning over £50,000 and entirely if someone brings in over £60,000.


It's a controversial policy. Some say Child Benefit should be simple and universal, others that the rich shouldn't have it, while these accountants say Osborne's plan is too complicated as well as being unfair.


I think people shouldn't forget that there are actually two cuts being imposed: the value of the benefit has been frozen as well. 


The Treasury saves £1.5bn next year from taking Child Benefit from high earners.


And it saves £1.25bn in the same year by freezing the rates for everyone. The freeze has already started.


Anyway, here's an extract from the Institute of Chartered Accountant's (ICAEW's) findings:

As currently set out, the legislation is seriously flawed in principle and in practice. Unless the government withdraws this clause and schedule with a view to tabling a more workable alternative in time for the Bill’s third reading, we believe the new tax charge could be an operational and reputational disaster for the government and HMRC.

• HMRC will be using the tax system to claw back from one individual a benefit paid to another. The tax system is based on individuals, while the benefits system is based on households. This undermines the principle of individual taxation.
• Families in similar financial situations could be treated quite differently, undermining the policy’s ‘fairness’ objective, and creating very high marginal rates of tax for some.
• Changed family circumstances could make it difficult or impossible to calculate the claw-back, or who should pay it. In the period between the benefit being paid and then clawed back, the couple could be separated, involved in an acrimonious divorce, or completely out of touch with each other.
• Taxpayers could be penalised for failing to submit information they have no access to, particularly if the relationship breaks down.
• Taxpayers could find their confidentiality breached, as HMRC may need to share information about one partner’s (or former partner’s) income and tax affairs with the other.
• It could create 500,000 more self-assessed taxpayers, because taxpayers will have to assess their own liability for the new charge – very expensive for HMRC to administer.

Backtracking to a Granny Tax

BUDGET 2011 page 35

1.128  As announced in the June Budget 2010, the Government has reviewed how the CPI can
be used for the indexation of taxes and duties while protecting revenues. Consistent with this,
the default indexation assumption for direct taxes will be the CPI from April 2012. To
ensure employers and older people do not lose out, for the duration of this Parliament the
annual increases in the employer NICs threshold, and the age related allowance and
other thresholds for older people, will be over-indexed compared to the CPI, and will
increase by the equivalent of the RPI. The Government will review the use of the CPI
for indirect taxes once its fiscal consolidation plans have been implemented and the
duty increases it inherited from the previous Government have come to an end.

BUDGET 2012 page 34

Age-related Allowances...

1.200  To support the goal of a single personal allowance for taxpayers regardless of age, and
to spread the tax relief fairly across working age people and pensioners, from 6 April 2013
existing ARAs will be frozen at their 2012–13 levels (£10,500 for those born between
6 April 1938 and 5 April 1948, and £10,660 for those born before 6 April 1938) until
they align with the personal allowance. From April 2013, ARAs will no longer be
available, except to those born on or before 5 April 1948. The higher ARA will only
be available to those born before 6 April 1938. These changes will simplify the system and
reduce the number of pensioners in Self Assessment.

Taxing child benefit

The government will be taxing child benefit -- that's the effect of the new approach to removing it for higher earners.

This autumn HMRC will be writing to people it thinks are earning over £50,000 and have a child benefit claimant in the household.

From January 2013, when the change comes into effect, they will pay an income tax charge which will rise gradually so that all the benefit is removed once income reaches £60,000.

What it means is that all these people will need to fill in a self-assessment tax form so that the tax charge can be worked out.

If their tax affairs are very simple, it's possible that the need to fill in the form will be removed in future. The adjustment will be included in their tax codes.

How much is the tax cut worth?

How do you assess the rise in Personal Allowance to £9,205?

It will apply from 2013-14.

The 2012-13 figure is £8,105.

So, in comparison, a basic rate taxpayer would gain £220 in a year. (20% of the difference).

However, an RPI increase was already promised for 2013, which would suggest a gain of around £170 a year.

AND tax accountants have been working on the basis that 2013 would see a rise to £8,735 anyway, because the 2010 Budget Report implied that increase would come at a rate of £630 a year.

On that basis the gain for a basic rate taxpayer would be £94 a year.

Illiogical tax break will discourage giving

The country's leading tax body has branded government plans to encourage charitable giving in legacies as "arbitrary, complex and illogical".

The plans, announced in this year's budget, would give a tax discount to people who give 10% or more of their estates to charity.

Currently, any money and other assets above a threshold of £325,000 are taxed at 40%. Qualifying charitable givers would be charged a lower rate of 36% from April next year.

But the Chartered Institute of Taxation has protested that the proposals are complicated, capricious and counterproductive.

Its tax experts are worried that the new system would discourage would-be givers from handing money to charity via regular giving or in their wills.

Instead they recommend that any charitable gift in a legacy receives an automatic 11% tax perk for the charity.

Another step to £10,000 allowance...

Look ahead to the election campaign of May 2015. Wouldn't it be nice, thinks Chancellor Osborne - if it's still him - to go into it with a £10,000 personal tax allowance already implemented?

That would mean a £10,000 allowance starting in April 2015.

The 2011-12 allowance is £7,475. To get to £10,000 by the next election requires four steps.

If each step was equal, the annual jump in the allowance would be £631.

What's the rumour about today's Budget announcement? That there will be a £600 rise. No surprises then...

A reminder of what they said in the Coalition Agreement:

"We will further increase the personal allowance to £10,000, making real term steps each year towards meeting this as a longer-term policy objective."

Osborne's No-Budge Budget

The Chancellor isn't expected to budge on cuts or raising tax, save for some tinkering round the edges and a rethink on fuel duty.

In fact today's news that inflation is rising even faster, now reaching 4.4% (or 5.5% on the RPI measure), limits Osborne's room for manoeuvre because any retreat from his hard stance might add to pressure on the the Bank of England to raise interest rates.


Fuel duty.
Due to go up by inflation plus a penny, the fuel duty escalator.
Will he forget about the 1p, or forgo the whole increase, or postpone it, staggering the hike over the rest of the year?

Duty on booze.
Will Osborne bottle on the other duty escalator?
A rise of inflation + 2% is pencilled in, which might mean 3p on a pint, or even more once suppliers add their mark-up.
One populist measure could be to forgo some of the increase.
He is likely to announce a lower rate of duty for weak beers and a higher rate for strong beers.

Lots on pensions.
More detail expected on a £140 flat-rate pension, planned for 2015.
Reaction to Hutton Report on public sector pensions.
Possible mention of giving pension savers early access to their money.

Junior ISA
At new tax-free savings scheme has been promised for the autumn. More information is expected.

Unifying Income Tax and National Insurance
Let's face it, this would be terrible news for pensioners if it was done crudely, because there's no National Insurance on pensions.
The Office for Tax Simplification said it might be a good idea, so expect a study.
The OTS also wanted a review of inheritance tax.

Air Passenger Duty
There have been rumours of a freeze, to soften the impact of fuel surcharges on holidaymakers.
And maybe there'll be an update on per flight duty to replace Air Passenger Duty (promised in the coalition agreement).

Crackdown on cheap CDs
He could close the VAT loophole for CDs, DVDs costing under £18 from the Channel Islands. Costs £130m a year.

There are lots of changes already happening in April. The ones he'll wanted to re-mention are:

*Personal allowance rising to £7,475 from £6,475, to £10,000 in 2015-16
*Corporation tax cut to 27% from 28%, small profits rate to 20% from 21%
*£50,000 annual limit on pension contributions.
*5% stamp duty for £1m homes

He might want to gloss over:

*National Insurance going up
*Benefits and tax credits only increased by CPI
*40% tax threshold lowered

Brace! Brace! Tax impact coming

Whatever happens in the Budget in a fortnight's time, plenty of tax and benefit changes are already set to be implemented in April. Tick them off as they arrive...

National Insurance. Employees pay 12%, an extra 1%.

Threshold for 40% tax. Reduced from £43,875 to £42,475, dragging 750,000 onto the higher rate.

Duty on alcohol. Up by inflation plus 2%. Possible 5p on a pint.

Tax credits. Faster reduction as earnings rise.

Benefits and tax credits increased by CPI not the higher RPI.

Baby element of Child Tax Credit, worth £545, is removed.

£500 Sure Start maternity grant restricted to one child.

5% stamp duty on £1m homes.

Inheritance tax threshold frozen at £325,000.

Child benefit rates frozen.

Fuel duty, the one to watch in the Budget.
Rise of inflation +1% is pencilled in. But expect some or all of it to be postponed.