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June questions and answers

Newsletter issue - June 2017.

Q. Before I became registered for VAT, I bought a capital item from a friend, which cost £1,000. As it was a private purchase, I did not pay any VAT. I have now joined the flat rate scheme (FRS) for VAT and have just sold the same item for £500. Should I have charged VAT on the sale and included the gross total in my calculation for flat-rate VAT?

A. HMRCs VAT Notice 733 at paragraph 15.9 confirms that where input tax is reclaimed on capital expenditure goods then, when the goods are eventually sold out of the business, you must account for output tax at the appropriate VAT rate for the sale (not at the flat rate). The guidance goes on to say that if you have not claimed input tax on capital items, either by choice or because it was not allowed, you must include the sale of those items in your flat rate turnover.

Q. I was made redundant from my job on 1 March 2016 and I received a termination package of £25,000. I was then re-employed by the same company on 1 November 2016, but was made redundant from that job too on 1 March 2017. I was paid a further redundancy payment of £10,000 when I left in March 2017. Does the £30,000 redundancy exemption apply to each payment I received?

A. I'm afraid not! Since your employer remained unchanged you are only entitled to one £30,000 exemption. The whole of the first payment of £25,000 is exempt, but only £5,000 of the second payment. You will be taxed on the remaining £5,000 in 2016/17.

Q. I reached state retirement age in March 2016 but deferred receiving my state pension for 12 months. I have been informed that I can now take a lump sum in addition to my regular state pension. Is the lump sum taxable?

A. The lump sum is taxed as income. In simple terms, the rate of tax that applies to the lump sum will be the highest rate that applies to your other income for that tax year. This means that:

  • if you are not liable to tax for that tax year on your other income, ignoring any deductions from that income for the marriage allowance or married couple's allowance, no tax should be deducted from any state pension lump sum you receive;
  • if you are liable to income tax, you will pay tax at one of the following rates:
    • 20% - where taxable income does not exceed the basic rate limit (£33,500 for 2017/18);
    • 40% - where taxable income exceeds the basic rate limit but does not exceed the additional rate limit of £150,000; or
    • 45% - where taxable income is over £150,000.

When working out what rate of tax you should pay on any state pension lump sum, the special rates that are used to tax savings income and dividend income falling within the basic rate band - the 0% starting rate for savings, savings and dividend nil rates (personal savings and dividend allowances), are ignored. So if all your other income falls within the basic rate band of tax, you will pay tax at 20% on your state pension lump sum.

Similarly if you are a higher rate taxpayer, you will pay tax at the rate of 40% on your state pension lump sum. This will also be the case if you have dividend income that is chargeable to tax at the rate of 32.5%.

If you are an additional rate taxpayer, that is, you pay income tax at the rate of 45% (or 38.1% on dividends), you will pay tax at the rate of 45% on your state pension lump sum.

Note that different income tax rates and bands apply to non-savings and non-dividend income for taxpayers who live in Scotland and Scottish taxpayers. You will need to check the amount of tax deducted from the lump sum at the end of the tax year in which it is paid - it may not be correct. If the wrong tax rate has been used, an overpayment of tax may arise or you may have to pay more tax to make up the difference. HMRC will make the adjustment after the year end.