Joshua Leigh & Co

How to avoid Lifetime ISA withdrawal penalties from HMRC 

Lifetime ISAs (LISAs) have become a popular way to save for a first home or retirement, offering a 25 per cent Government bonus on contributions.  

However, if you withdraw money for anything other than these specific purposes, you could face penalties from HM Revenue & Customs (HMRC). 

A freedom of information (FOI) request has revealed that in the 2022-23 tax year, the average penalty for the top 25 unauthorised withdrawals was £11,000.  

Over 15,000 savers had to hand back £1,000 or more in penalties, while more than 6,000 paid over £2,000 and 851 paid over £5,000. 

With the total value of LISA penalties reaching over £75 million in 2023-24, up 40 per cent from the previous year, it is clear that many savers are feeling the sting of these charges.  

So, how can you avoid becoming part of these statistics? 

What are the LISA rules? 

The 25 per cent withdrawal penalty is in place to ensure that LISAs are used for their intended purposes: buying a first home (worth £450,000 or less) or saving for retirement, which you can access tax-free from age 60.  

Any other withdrawals, unless due to terminal illness, will incur the charge.  

The penalty removes some of your own savings, making it more imposing than it first appears. 

Plan your savings carefully 

If you are considering using a LISA to buy a first home, it is vital to be aware of the £450,000 property price cap.  

House prices have risen considerably, particularly in the south of England, where many properties exceed this threshold.  

In London, for example, average house prices in areas like Barnet (£592,597), Camden (£858,303), and Hackney (£563,111) are far beyond the cap. 

Even outside the capital, areas such as Cambridge (£487,493), Oxford (£475,247), and Guildford (£516,489) have average property prices above the LISA limit, meaning you could be forced to either buy below the cap or face the penalty if you exceed it. 

Build an emergency fund 

One of the key reasons savers tap into their LISA early is due to unexpected financial pressures, whether that is an emergency or a change in circumstances.  

To avoid being tempted to withdraw from your LISA and incur a penalty, an emergency savings fund should be created that you can access when needed.  

This way, your LISA can remain untouched until it is time to use it for its intended purpose. 

Think long-term with your retirement savings 

If your goal is to use your LISA for retirement savings, make sure it forms part of a broader retirement strategy.  

Since you won’t be able to access the funds without penalty until age 60, other accessible savings or pension schemes should be available to you that allow for flexibility.  

That way, you can keep your LISA intact for the long haul without risking penalties. 

Keep track of your contributions 

You can contribute up to £4,000 per year to a LISA, with a maximum Government bonus of £1,000 annually.  

Staying on top of these limits can help you optimise your savings while making sure you are not relying too heavily on them, which could lead to early withdrawals and penalties. 

Stay informed 

Keep yourself up to date with any changes to LISA rules or allowances.  

The ever-changing property market can affect your plans for using your LISA, so staying informed will help you in the long run and give you a better chance of avoiding penalties.   

If you are looking for advice on how to manage your LISA and avoid penalties, contact our team today for expert guidance. 

What pension tax reforms could we see in the October Budget?  

For months, there was speculation that the upcoming Budget could bring major changes to pension tax relief, specifically a move towards a flat rate of tax relief for pension contributions.  

While nothing has yet been confirmed, reports in The Guardian suggest that these plans have now been dropped, leaving many wondering what this means for the future of pension policy. 

Why would pension tax reforms be abandoned? 

If the flat-rate tax relief proposal is indeed scrapped as suggested by reports in The Guardian, it could be due to the impact it would have had on public sector workers, many of whom benefit from generous defined benefit (DB) pension schemes.  

These schemes, which are largely unavailable in the private sector, offer guaranteed retirement income.  

A change to the tax relief system would result in higher tax bills for many workers. 

What does this mean for taxpayers? 

While the flat rate of tax relief looks to have been shelved, it does not mean pensions are completely off the table.  

The Government may still look for other ways to reform the system or raise revenue from pensions.  

For now, however, higher earners will continue to enjoy tax relief at 40 or 45 per cent, and those in defined benefit schemes look likely to be safe from additional tax charges to their contributions.  

The Chancellor might still consider smaller changes that affect the way pensions are taxed or the contribution limits. 

For example, the annual allowance, which is currently set at £60,000, could be reduced, especially for higher earners.  

This is the maximum amount an individual can contribute to their pension with tax relief each year.  

Reducing this limit would raise revenue for the Treasury and might still be seen as a way to target wealthier individuals without causing widespread disruption. 

Another possible area for reform could be the 25 per cent tax-free lump sum, which allows retirees to withdraw a portion of their pension pot without paying any tax.  

Reducing or capping this benefit could be an alternative way to generate tax revenue without directly increasing income tax or National Insurance. 

What about employer contributions? 

There have also been discussions about increasing mandatory employer pension contributions.  

Currently, employers are required to contribute at least three per cent to their employees’ pensions.  

If the Government follows Australia’s example, where employers contribute as much as 12 per cent, businesses could face significant cost increases.  

While this policy is not expected in this Budget, it remains a possibility for future reform. 

A move towards UK investment? 

Labour has expressed interest in encouraging pension funds to invest more in the UK economy.  

While there’s no specific policy announcement yet, there has been talk of requiring a portion of pension funds to be invested in UK assets.  

This could be part of a broader effort to boost domestic investment and stimulate economic growth, but it raises questions about whether such a mandate would be in the best interests of pension savers. 

Pension fund managers will need to weigh the potential risks and rewards of being required to invest in specific UK assets, particularly if they involve higher-risk investments. 

What to watch for next 

Chancellor Rachel Reeves has until 25 October to submit her final resolution on changing the Government’s fiscal rules ahead of the Budget, so we will likely know more about her final plans for pensions by then.  

Even though it looks probable that major pension tax reforms have been shelved for now, the Government’s need to raise revenue remains.  

Pensions are an attractive target for future changes, and individuals and businesses need to stay informed about any potential reforms. 

If you are a higher earner or a business owner concerned about how future changes could impact your pension contributions, now is a good time to review your pension strategy.  

Speak with our team to ensure you are prepared for any potential changes in pension policy. 

 

What are the benefits and challenges of a Management Buyout?

The upcoming Budget could see a rise in Capital Gains tax (CGT) rates so that they align with Income Tax rates.  

This rumour has led to many business owners considering the sale of their business before they are subject to these higher rates. 

For those considering an exit strategy, one option available is a Management Buyout (MBO). 

This exit strategy involves a business’ existing management team acquiring the business from its current owners.  

An MBO can be an appealing option for both the seller and the management team, as it offers continuity of business values.  

However, MBOs come with unique benefits and challenges that both parties need to consider, including tax implications. 

Benefits of an MBO 

With the management team taking over, there is a smooth transition of ownership, which ensures minimal disruption to the business’ operations, employees, and customers.  

For example, a manufacturing business with specialised machinery and long-standing relationships with suppliers would benefit from the continuity provided by an MBO. 

This is because the management already understands the specialised workings of the machinery and can continue the supplier relationships, maintaining business momentum. 

In addition, the management team is already familiar with the company’s inner workings, market conditions, and challenges.  

This familiarity reduces risks compared to a third-party acquisition.  

For instance, a retail business that relies heavily on seasonal trends can better manage stock levels and supplier relationships if the team that has historically managed these operations remains in charge.  

When the management team becomes the owner, they are directly invested in the success of the business.  

This can lead to more motivated leadership, as the team’s personal and financial success is now tied to the growth and profitability of the company.  

Challenges to consider 

An MBO is often financed through a mix of debt and equity.  

The management team typically secures bank loans backed by company assets or personal guarantees, sometimes supplemented by private equity.  

This can increase financial risk if the business experiences cash flow issues.  

For example, if a logistics company undergoing an MBO is suddenly hit by a rise in fuel costs, the additional debt could threaten its financial stability.  

The sale of a business to the management team will likely be subject to Capital Gains Tax (CGT).  

Business Asset Disposal Relief (BADR) can reduce the CGT rate to 10 per cent on qualifying gains, up to a lifetime limit of £1 million.  

However, if the Budget sees CGT rates align with Income Tax rates as speculated, a higher-rate taxpayer might see the CGT rate increase from 20 per cent to as much as 40 per cent, effectively doubling their tax liability.  

The Budget could also see the removal of BADR, which would mean losing access to reduced CGT rates altogether, impacting the financial attractiveness of selling through an MBO. 

The MBO process is demanding, and even once completed, the pressure continues.  

Managing high levels of debt while leading the company requires a unified management team. Any cracks in the management team can become exposed under the stress of the transition, potentially threatening the stability of the business.  

Is an MBO right for you? 

An MBO can be an ideal exit strategy if the management team is capable, unified, and ready to take on the risks of ownership.  

It provides continuity for the business and rewards the people who have been integral to its growth.  

The potential changes in the upcoming Budget make it even more important to consider the timing and structure of your sale.  

If CGT rates rise to align with Income Tax rates, or BADR is scrapped, the financial implications could be substantial, potentially reducing the attractiveness of selling now compared to later.  

If you are a business owner considering an MBO or need advice on structuring the deal, speak with our team of experts today. 

 

How SMEs can capitalise on continued optimism

Optimism is on the rise among small and medium-sized enterprises (SMEs) for the third consecutive year.  

According to recent research from banking firm American Express, nearly seven in 10 business leaders are feeling confident about the future of their companies, a steady increase since 2022.  

So, how can you translate this optimism into concrete success?  

Set clear goals for growth 

When optimism is high, it is the perfect time to set ambitious yet achievable goals for growth.  

These goals could include setting up a business plan or reviewing your existing business plan to make sure it still aligns with your vision for the business.  

For example, your existing business plan may have objectives that are either unobtainable or have already been reached, so a review could see you tweak these objectives to better match your needs.  

The setting up or review of your business plan can be aided by our team of accountants to optimise your strategy.  

You could also look at expanding your product and service offering, or removing or adjusting any that are not doing well. 

Having a clear vision of what success looks like will help you stay focused.  

Make sure these goals are measurable and have a clear timeline.  

This way, you can track progress and celebrate milestones along the way. 

Reinvest in your business 

With more than half of SMEs planning to invest more in the next 12 months, consider how you can best reinvest in your own operations.  

This could be in the form of upgrading technology, hiring skilled employees, or diversifying your product or service range.  

Capital allowances are a great way to invest and at the same time offer tax reliefs.  

These allowances can be claimed on equipment, machinery and vehicles for business use.  

Smart investments today can position your business for growth tomorrow. 

Strengthen customer relationships 

With customers less focused on price and more on value according to the American Express research, now is the time to focus on building relationships and enhancing your customer experience.  

Consider ways you can add value beyond your products or services. 

This could be through improved customer communication, loyalty programmes, or personalised service.  

Strong relationships create loyalty, which helps support sustainable growth. 

Embrace Innovation and Technology 

The research also indicated that almost half of SMEs are planning to adopt AI-led solutions in the coming year, especially for improving efficiency in accounting and customer service.  

Embracing technology can free up valuable time and resources, allowing you to focus on strategic growth initiatives.  

Such use of technology might see your business eligible for Research & Development (R&D) tax reliefs. 

R&D tax credits are given to projects that look to advance in a certain field or are developing a new process or service.  

For more on the eligibility criteria for R&D tax credits, our team can provide you with advice and assistance.  

Review your financial health 

Optimism is a great motivator, but it should always be grounded in financial reality.  

Now is the perfect time to review your financial health.  

Take a close look at your cash flow, budgeting, and financial projections.  

Understanding where you stand will help you make better decisions about the investments you plan to make.  

A proactive financial review can also identify opportunities for cost savings and efficiencies that will support your growth plans. 

Stay agile 

Market conditions are always changing, and while confidence is high, agility remains crucial.  

Being able to pivot quickly in response to new opportunities or challenges can make the difference between merely surviving and truly thriving.  

Encourage adaptability within your business and be open to feedback and new ideas.  

This kind of flexibility will help you make the most of the opportunities that lie ahead. 

Ready to take your business to the next level? Our experienced team is here to help you grow with confidence.  

Contact us today to discuss how we can support your business goals. 

 

IFRS S1 and S2 and the future of ESG reporting standards

Sustainability has become a core part of how businesses are expected to operate, whether we like it or not.  

You might think that all the talk about environmental, social, and governance (ESG) issues is only relevant to big corporations or public companies, but that’s not quite the case anymore.  

Even though adopting International Financial Reporting Standards (IFRS) might be optional for smaller businesses right now, the new IFRS S1 and IFRS S2 standards are worth understanding, as they could shape the future of sustainability for businesses of all sizes.  

What are IFRS S1 and S2? 

In June 2023, the International Sustainability Standards Board (ISSB) launched two new sustainability reporting standards: 

• IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information. 

• IFRS S2 – Climate-related Disclosures. 

These standards are currently under review here in the UK, and the Government is planning to endorse them by March 2025.  

The idea is to create a common language around sustainability reporting, helping businesses communicate clearly and consistently about how they’re managing risks and opportunities related to ESG.  

And, once the Government gives the green light, these standards are going to be part of a broader Sustainability Disclosure Reporting framework. 

They will play a big role in how UK-listed companies report sustainability-related information to investors.  

What’s happening next? 

Once endorsed in March 2025, the Financial Conduct Authority (FCA) is expected to roll out these requirements for public companies, and there’s a consultation process to see if private companies, including SMEs, should also follow these rules. 

The Government will also be looking at the cost of these reporting requirements for smaller businesses, but they’ll be weighing that against the benefits for investors and the wider economy.  

There’s even talk of introducing a green taxonomy – which basically helps define what counts as environmentally sustainable. 

If you are curious about how IFRS standards could apply to your business or want to improve your ESG reporting, get in touch with us today. 

How changes in tax receipts and National Insurance may affect you 

With tax and National Insurance (NI) receipts making headlines, many people are understandably concerned about what this means for their tax obligations.   Read More

What if Inheritance Tax is affected by the 2024 Autumn Budget?

In our latest blog, we continue our look ahead to the 2024 Autumn Budget and how it could affect taxpayers.   Read More

HMRC updates bank details for tax payments – What businesses need to know 

Keeping up with tax payments is something every business owner knows is important.  

On that note, HM Revenue & Customs (HMRC) has recently updated its payment details for certain tax regimes. 

Bank transfers remain one of the easiest ways for businesses to pay taxes.  

Businesses must use the correct payment information and understand the payment processing times to ensure HMRC receives payments promptly. 

HMRC’s new bank details 

The new bank details for HMRC affect the below tax regimes: 

• Plastic Packaging Tax 

• Biofuels or gas for road use — Fuel Duty 

• Economic Crime Levy 

• Soft Drinks Industry Levy 

• Trust Registration Penalty 

Use the following details depending on where your business bank account is based. 

If your business account is in the UK: 

• Sort code – 08 32 10 

• Account number – 12529599 

• Account name – HMRC General Business Tax Receipts 

If your business account is overseas: 

• IBAN – GB86 BARC 2005 1740 2043 74 

• BIC – BARCGB22 

• Account name – HMRC General Business Tax Receipts 

All payments must be made in pounds sterling. Banks may charge if any other currency is used. 

Tax return and payment deadlines for businesses 

Meeting tax deadlines is crucial to avoid penalties. There are two main deadlines businesses need to keep in mind: 

• Tax return filing deadline – The deadline for submitting your tax return is 12 months after the end of the accounting period it covers. Failing to file on time will result in penalties. 

• Corporation Tax payment deadline – The deadline to pay your Corporation Tax bill is usually nine months and one day after the end of the accounting period. 

Penalties for late filing of tax returns 

If you do not file your Company Tax Return by the deadline, you will face penalties. These penalties increase over time: 

• One day late – £100 penalty 

• Three months late – Another £100 penalty 

• Six months late – HMRC will estimate your Corporation Tax bill and add a penalty of 10 per cent of the unpaid tax 

• 12 months late – Another 10 per cent of any unpaid tax 

If your tax return is late three times in a row, the £100 penalties increase to £500 each. 

Penalties for tax returns more than six months late 

If your tax return is more than six months late, HMRC will issue a tax determination, estimating the amount of Corporation Tax owed.  

This is a legally binding assessment, and you cannot appeal against it. You must pay the Corporation Tax due and file your return. 

Once your return is submitted, HMRC will recalculate the interest and penalties you need to pay. 

HMRC charges interest on unpaid tax from the due date until the payment is made. As of 20 August 2024, the late payment interest rate is 7.50 per cent. 

Appeals against penalties 

If you have a reasonable excuse for missing a deadline, you can appeal against late filing penalties online.  

After completing the online form, print it and send it to the address provided on the form.  

However, you must file your Corporation Tax return before appealing. 

What you’ll need to appeal: 

• Your company’s Unique Taxpayer Reference (UTR) 

• The date on the penalty notice 

• The penalty amount 

• The end date of the accounting period the penalty relates to 

• An explanation of why you missed the deadline 

For personalised advice on managing your tax obligations, contact our team of accountancy professionals who can provide expert advice.  

Boosting confidence in tough times – How SMEs can adapt to financial challenges

The burden on small and medium-sized enterprises (SMEs) is already quite heavy due to the current economic climate, but it may worsen in the coming months, with potential changes to Capital Gains Tax (CGT) being considered in the October Budget.   Read More