Adrian Mooy & Co - Accountants Derby

The tax implications of renting a room to another family member such as a sibling.

Recent statistics show that in 2023, 28% of all young people aged 20 to 34 years were living at home with their parents. Whatever the scenario, having an extra adult in the household means extra costs such as increased utility bills, groceries, and other living expenses, leading many to pay rent.

That’s a relief

There are tax implications in doing so, although if the amount is kept under £7,500, the amount received may be covered by rent-a-room relief.

The rent-a-room relief scheme was introduced in the UK on 6 April 1997, its objectives being to increase the supply and variety of low cost accommodation, and labour mobility (e.g., enabling workers to use short-term accommodation to move around the country). In addition, by allowing individuals to earn tax-free income from letting out furnished accommodation in their main residence, HMRC’s administration has been reduced by simplifying the tax reporting requirements.

Over the years, the threshold has been updated, and as of the tax year 2023/24 (and 2024/25) it stands at a gross amount of £7,500 per year. A quirk in the rules allows more than two persons a share of the property income, with relief being set at £3,750 each.

Therefore, should three persons own (and live in) a property together and sub-let a room to a lodger, overall the relief is £11,250 (i.e., 3 x £3,750 relief). There are no National Insurance contributions levied on this income.

The relief is automatically applied, eliminating the need for a claim. The income limit covers all charges relating to the rental service, such as cleaning, laundry, or meals. This simplicity makes the relief accessible to a wide range of homeowners, including those running a bed-and-breakfast or a guest house.

Conditions for the relief

As ever with tax, there are conditions to be met.

The relief cannot be applied where:

 • the room is let as office accommodation, a storeroom or a garage;

 • the taxpayer is absent from the residence due to working overseas;

 • the letting is to or by a company or partnership;

 • the residence is permanently divided into two or more residences; or

 • the property is buy-to-let, or a holiday let not also occupied by the landlord.

Note that the rules state that the room must be in a property that is the landlord’s main residence and as such, a claim could be possible should the landlord rent the property from another (although permission to sublet would be needed from the actual owner).

Rental income less than £7,500

If the rental income is less than the limit, the relief applies automatically, and there is no tax to pay or anything to report. If the sibling does not pay market rent but contributes to household expenses, it might not be considered as taxable rental income for the parents and, as such, non-declarable in any event.

However, if the rent charged is significantly below market rate, HMRC could consider the payment to be an informal gift rather than rent, which may trigger inheritance tax considerations in the future.

Rental income in excess of £7,500

The landlord can still benefit from the scheme should the rental income exceed £7,500 (or more than £3,750 per person where more than one person receives the income).

In this instance, tax is payable on the excess over the rent-a-room limit. This time, the relief is not automatic, and a claim is required via completion of a tax return. ... continued ...

Disapplying the relief

Rent-a-room relief is not compulsory, and the taxpayer may elect to disapply, calculating profits using the usual income less expenses method. Once the election is made for a tax year, it is applied for all subsequent years until such time as it is withdrawn, or the receipts are under the £7,500 (or £3,750) limit and the taxpayer chooses to claim rent-a-room relief.

Under the election, HMRC must be advised within the time limit, which is within one year of 31 January following the end of the tax year. Disapplying the relief is more likely where there is a loss.

Losses

A loss cannot be created by deducting the rent-a-room limit from the gross amount received rather than actual expenses incurred. If a loss has been calculated under the usual income less expenses method, it will be more tax-efficient to opt out of the scheme and preserve the loss, which is then available to be carried forward and set against any future profits. To opt out, a tax return needs to be completed.

Importantly, a loss brought forward from previous years may be deducted from any excess of rental income over the limit in the subsequent years under a rent-a-room claim.

Impact on capital gains tax

HMRC accepts that the letting of accommodation which is an integral part of a main residence will not affect the principal private residence capital gains tax (CGT) exemption when the property is sold.

Note that should more than one property be owned, it is a question of fact which is the main residence. No election is possible, unlike the position for CGT generally.

Renting a room for short periods

The relief is intended to cover short-term rental and is aimed at people who take in lodgers. However, rent-a-room relief is increasingly being claimed by people who let their homes while being temporarily absent (e.g., where the property is near to a major sporting venue, such as Wimbledon). Also, HMRC has been concerned that the relief is being ‘abused’ by the letting out of entire properties via websites such as Airbnb and the property owner temporarily staying elsewhere.

As a result, HMRC undertook a consultation on the workings of the relief in 2018, proposing that it be restricted to situations where the taxpayer was resident for most of the letting period when the ‘lodger’ was paying. However, this condition would have prevented people from claiming the relief whilst they were on holiday and the property remains a main residence; therefore, the relief for such properties remains.

Let whilst absent

The question of whether rent-a-room relief is possible while the taxpayer is away for an extended work period could be denied because to claim, the property must be the taxpayer’s main residence.

Whether a property is a ‘main residence’ is a question of fact, but it may be difficult to prove (e.g., if the taxpayer is working away for an extended period and a room is being rented out). However, rent-a-room relief may still be possible even if HMRC can successfully argue against the property being a main residence.

A property only needs to be a main residence at any time during the ‘basis period’ for rent-a-room relief to apply. The basis period starts either at the beginning of the tax year or, if later, when the letting begins and ends on the last day of the tax year or, if earlier, when the letting income ceases. Therefore, by allowing a lodger to move in before the owner moves to the ‘temporary property’, a rent-a-room claim can be valid for that tax year. Equally, the relief will be available for the tax year in which they return so long as the owner moves back while the lodger is still in residence.

Practical tip

Rent-a-room relief is a valuable relief should the conditions apply. Even if not, a measure of tax relief may be possible under the property allowance, which permits annual gross property income to be received of £1,000 or less, with no tax implications.

The impact of the increases to employers’ National Insurance contributions announced in Autumn Budget 2024 and what action might be taken in mitigation.

Employers fared badly in Autumn Budget 2024 as the Chancellor looked to them to provide £25bn of the additional £40bn that she needed to raise. The revenue target will be achieved by raising the rate of employers’ National Insurance contributions (NICs) and reducing the secondary threshold so that employers will be required to make contributions at a higher rate on more of their employees’ earnings.

However, the axe will not fall evenly, as the employment allowance is also increased from £5,000 to £10,500, which will mean some of the smallest employers will not pay any more in employers’ contributions than they do currently, and may even pay less. However, despite increased access to the employment allowance, the cost to larger employers will be significant. The changes take effect from 6 April 2025. Employers providing taxable benefitsin-kind or using a PAYE settlement agreement will face further increases. The rate of Class 1A and Class 1B NICs are aligned with the secondary Class 1 NICs rate and these, too, are increased to 15% from 6 April 2025. There are no changes to the contributions paid by employees which will remain at their current level for 2025/26.

Nature of employer contributions Employers pay secondary Class 1 NICs on their employees’ earnings. The liability arises on all earnings over the relevant secondary threshold. Unlike primary contributions, there is a single secondary rate, and contributions are payable at this rate on all earnings above the threshold.

The secondary threshold is set at £9,100 a year (£175 per week, £758 per month). From 6 April 2025, it will fall to £5,000 (£96 per week, £416 per month). To encourage employers to take on certain categories of workers, higher secondary thresholds apply to workers under the age of 21, apprentices under the age of 25, armed forces veterans in the first year of their first civilian employment since leaving the armed forces and new employees working in special tax sites. Where an upper secondary threshold applies, the employer only pays secondary contributions if earnings exceed that threshold, and only on earnings in excess of that threshold.

The upper secondary threshold for under 21s, the apprentice upper secondary threshold and the veterans upper secondary threshold are set at £50,270 (£967 per week; £4,189 per month) for 2024/25. They remain at this level for 2025/26. The special tax site upper secondary threshold, which applies in respect of the earnings of a new employee for the first 36 months of their employment in a freeport or investment zone is set at £25,000 (£481 per week, £2,083 per month) for 2024/25. It, too, remains at this level for 2025/26.

Employment allowance

Eligible employers are able to claim an employment allowance, which they offset against their secondary Class 1 NICs liability until it is used up. This reduces the amount that they need to pay over to HMRC. If an employer’s liability for the year is less than the employment allowance, they do not pay any employers’ NICs. However, the allowance is capped at their liability for the year. For 2024/25, the allowance is set at £5,000. It is increased to £10,500 for 2025/26.

Not all employers benefit from the employment allowance. For 2024/25, it is only available to employers whose Class 1 NICs liability in 2023/24 was £100,000 or less. This restriction is lifted from 6 April 2026, meaning larger employers will be able to benefit from the allowance, mitigating some of the impact of the rise in employer contributions. However, the employment allowance is not available to personal companies where the sole employee is also a director, and this remains the same for 2025/26. However, family companies with at least two employees are able to claim the allowance.

Impact of the changes

The impact of the changes to employers’ secondary Class 1 NICs from April 2026 will depend on the number of employees that they have and the amount that they are paid. The following table shows the increase in employer contributions at different salary levels before taking account of the employment allowance.

When starting a business, there are various decisions to make and tasks to perform. One of the first questions to address is whether to run the business as a sole trader, whether to set up a partnership with others or whether to form a company. The way in which a business is operated will determine the taxes that are payable and legal obligations that must be met.

A person operating as a sole trader is in business for themselves. This is arguably the simplest way to run a business.

Registering with HMRC

A person operating as a sole trader will need to register with HMRC for Self Assessment if they have trading income of £1,000 or more. This is the total from all unincorporated businesses, not per business.

If a person is already registered for Self Assessment, for example, because they have investment income or income from property to report to HMRC, they do not need to register again. Rather, they will simply need to complete the Self-Employment pages of the return to report details of their business income.

If a new trader is not registered for Self Assessment, they will need to do so by 5 October following the end of the tax year in which they first became liable to register. For example, if a person started a business in 2024/25 and their turnover was more than £1,000, they will need to register for Self Assessment no later than 5 October 2025. A person can register via the Gov.uk website (see www.gov.uk/register-for-self-assessment).

A person who has previously been registered for Self Assessment, but did not file a return for the last tax year, will need to register again to reactivate their account.

Tax and National Insurance

A sole trader must pay income tax on their profits. Their profits form part of their total taxable income, which will be liable to income tax to the extent that it exceeds their personal allowance for the tax year. For 2024/25 and 2025/26, the personal allowance is £12,570. Income tax is charged at 20% on the first £37,700 of taxable income. Taxable income in excess of £37,700 up to £125,140 is taxed at 40%, and anything over £125,140 is taxed at 45%. Where adjusted net income exceeds £100,000, the personal allowance is reduced by £1 for every £2 of income in excess of £100,000, such that anyone with adjusted net income in excess of £125,140 does not receive a personal allowance.

Self-employed individuals must pay Class 4 National Insurance if their profits exceed £12,570. This is payable at a rate of 6% on profits between £12,570 and £50,270 and at 2% on any profits in excess of £50,270. Where profits exceed the small profits threshold (set at £6,725 for 2024/25 and increasing to £6,845 for 2025/26), no Class 4 National Insurance contributions are payable. However, the trader will earn a National Insurance credit which will provide them with a qualifying year for state pension purposes. Sole traders with profits which are below the small profits threshold can opt to pay voluntary Class 2 contributions to build up their state pension entitlement. At £3.45 per week for 2024/25 (increasing to £3.50per week for 2025/26), this is a much cheaper option than paying voluntary Class 3 contributions, and may be beneficial if the sole trader would not otherwise secure a qualifying year.

Tax and Class 4 National Insurance contributions must be paid by 31 January following the end of the tax year. Once the tax and Class 4 liability reaches £1,000, payments on account must be made for future tax years.

VAT

A sole trader will need to register for VAT if their VATable turnover exceeds the VAT registration threshold of £90,000 in the previous 12 months, or is expected to do so in the next 30 days.

Records

The sole trader will need to keep records of their business income and expenses to enable them to work out their taxable profits. It is a good idea to have separate personal and business bank accounts to avoid personal and business expenses getting mixed up. The trader should also keep invoices, receipts, etc.

The favourable tax regime that applies to landlords letting furnished holiday accommodation comes to an end on 5 April 2025. For 2025/26 and later tax years, furnished holiday lets will be treated in the same way as other residential lettings. While this will absolve the landlord from the need to hit letting and availability targets (other than the less onerous ones needed for business rates purposes), the ability to benefit from valuable capital gains tax reliefs will also be lost. However, there remains a very limited window in which to access these reliefs.

Business Asset Disposal Relief

Business Asset Disposal Relief (BADR) is a valuable relief that reduces the rate of capital gains tax payable on the disposal of a qualifying asset on gains up to the lifetime limit of £1 million.

Under the tax regime for furnished holiday lets that applies until the end of the 2024/25 tax year, an unincorporated landlord is able to benefit from BADR as long as the associated conditions are met. The rules allow BADR to be claimed on disposals of business assets made within three years of the date on which the business ceased.

Under the transitional rules that apply to furnished holiday lettings, as long as the landlord met the conditions for BADR in relation to a FHL business that ceased prior to 6 April 2025, the landlord has three years in which to dispose of the business assets and claim the relief.

This is a good deal. As long as the landlord ceases their FHL business on or before 5 April 2025, and sells their properties within three years of the cessation date, they will benefit from the reduced rate of capital gains tax applying to gains eligible for BADR. However, it is important to note that the business must cease; the relief does not apply if a landlord has a number of furnished holiday lets and sells some but not all of them. In this scenario the business would be ongoing, albeit with less properties.

Ceasing the business prior to 6 April 2025 and securing BADR on the disposal of the properties may be particularly attractive where the properties are pregnant with gains, as the ability to benefit from BADR can deliver significant savings. The exact amount of the savings depends on the date of disposal. Where the disposal takes place in 2024/25, the capital gains tax rate is 10% where BADR applies (offering potential savings of up to £140,000). The rate increases to 14% for qualifying disposals in 2025/26 (and the potential savings fall to £100,000). The rate is further increased to 18% from 6 April 2026, reducing the potential value of the relief to £60,000.

Gift holdover relief

Gift holdover relief allows the gain that would arise on the gift of business assets to be held over, reducing the recipient’s base cost. Where the disposal is to a connected person, the gain would be computed by reference to the market value of the property. Holdover relief is very useful here, as where the property is gifted, there are no proceeds from which to pay the tax. The relief must be jointly claimed by both parties. The gift of the furnished holiday let must be made before 6 April 2025 to benefit from this relief. Making use of the relief can be a good way to pass on a holiday let to the next generation.

Most employees can identify their permanent place of work because it is where they regularly go to work. However, post-Covid, many workers work primarily from home, splitting their time between home and office. With more employees having the legal right to request flexible working arrangements, tax issues may arise concerning the reimbursement of travel expenses.

Particular areas of concern include:

• expenses relating to temporary workplace arrangements;
• ascertaining whether travel can be claimed between two workplaces; and
• understanding the definition of 'ordinary commuting’, for which no tax deduction is available.

Temporary workplace

HMRC permits travel expenses to be tax deductible should the employee be required to work from a 'temporary workplace'. HMRC defines a 'temporary workplace' as a location where 'an employee attends for the purpose of performing a task of limited duration or for some other temporary purpose'. HMRC looks for irregularity and limited time, e.g., if an employee based in Birmingham is required to work in London for a year, the London location would qualify as a 'temporary workplace' under these rules, making all travel expenses tax deductible.

However, there is a further rule preventing a workplace from being a temporary workplace where an employee attends for a period of continuous work that lasts, or is likely to last, more than 24 months (the '24-month rule'). 'Continuous work' is defined by section 339(6) ITEPA 2003 as a period during which the duties of the employment are performed to a significant extent at that place. HMRC views 'significant' as when the employee spends or is expected to spend 40% or more of their working time at that particular workplace. In such cases, the workplace is classified as permanent, and travel between that location and home would be regarded as ordinary commuting, making it non-tax deductible.

Should it be known from the outset that a contract at an alternative location will last at least 24 months, travel expenses cannot be claimed from the start. However, if the duration of the contract is uncertain, tax relief can be claimed if it is assumed that the agreement to work at the temporary location will not extend beyond 24 months.

Expectation

Complications can arise when expectations change. In the Employment Income Manual, HMRC gives an example of an employee who has worked for their employer for ten years and was sent to perform full-time duties at a workplace for 28 months. In this case, the workplace is deemed permanent because the attendance is continuous, and it is initially expected to exceed 24 months. As a result, the 24-month rule means that no travel expenses can be claimed as tax deductible.

However, if after ten months the assignment is reduced to 18 months, employees cannot claim deductions for travel costs during the first ten months, but can claim for the final eight months. Due to the initial expectation that the assignment would meet the 40/24 test, the workplace is considered permanent for the first ten months, becoming a temporary workplace afterwards, even if the actual duration turns out to be different.

Practical point

While a home office can be a worker's permanent workplace, allowing for the possibility of claiming travel expenses to a company's office, HMRC has stated that it usually views home office working as a 'personal choice' rather than a business requirement. Consequently, HMRC tends to disallow any expense claims related to home office working.

A reminder to those with secondary sources of online income that they may be subject to tax or National Insurance contributions liabilities.

Although it was originally recorded in use in the 1900s, the expression ‘side hustle’ has been increasingly used in the present century. Various definitions can be found, but generally this will be along the lines of an activity carried out for income to supplement that received from a main source.

One of the most popular means of generating additional income is by selling goods or services online through marketplaces such as eBay, Amazon, Etsy and others. Assuming their sales efforts are successful, an individual must then consider whether the income generated is subject to tax. This could potentially be income tax, capital gains tax (CGT) and if the £90,000 registration threshold for all sources is exceeded, value added tax (VAT).

Non-trading

There will be online sales that clearly will not be seen as trading – most commonly, this might be by selling unwanted items (e.g., clothing, ornaments, etc.), that have been owned for some time and were not purchased with a view to being sold. Although the profit (if there is any) from such sales – maybe after clearing the loft or garage – would not be subject to income tax, CGT could apply if more expensive items are sold.

Chattels (i.e., personal possessions) are exempt unless sold for more than £6,000, a limit that applies to single items and sets such as chess pieces, books by the same author or on the same subject or matching ornaments. Special rules apply in calculating the taxable gain for chattels.

Trading

Individuals who are buying, making or perhaps ‘upcycling’ items and then selling them online will potentially be subject to income tax and National Insurance contributions (NICs) in the same way as anyone carrying on a trade or profession. The same will apply to those providing a service they advertise online. HMRC gives examples of gardening and repairs, dog walking, taxi driving, delivering food, tutoring, babysitting and nannying, hiring out equipment, and creating online content. Once such activities are being done with a view to making a profit, it is likely that a trade is being carried on and HMRC may need to be advised, and a tax return completed.

There is a trading allowance of £1,000, which can be set against income from such activities, and if gross income is below that threshold, the sales do not have to be reported to HMRC. Above this amount, the allowance can be deducted from the gross income and tax and NICs paid on the excess as applicable. Instead of claiming the trading allowance, any expenses incurred wholly and exclusively in carrying on the activity can be deducted to calculate the taxable income. If a loss arises, it may be beneficial not to claim the allowance because the loss could be deducted from other income in calculating overall income tax liability.

Information disclosure

Since 1 January 2024, online marketplaces have been obliged to collect details of individuals and their sales activity, and this may be reported to HMRC if there are more than 30 sales in a calendar year which generate income of more than 2,000 euros (about £1,700). HMRC will be able to check this information against an individual’s tax return, and interest and penalties may be added to undeclared tax and NICs liabilities. On the plus side, the marketplace must provide the seller with a copy of the information that has been sent to HMRC so this should help with the preparation of a tax return.

In conclusion, income and expenses relating to online activities should be accurately recorded to determine whether and how there is a taxable profit to be declared.

Practical tip

As well as trading income, the principles above will also apply to income from land or property, such as renting a room or even the use of a driveway for parking, which may be done through an online platform.

Landlords will be impacted by Making Tax Digital when it comes into effect in April 2026.

Making Tax Digital (MTD) is going to mean big changes for the majority of landlords who submit self assessments.

You’ll need to use software to keep track of your income and expenses and to make quarterly MTD submissions.

This applies to income from rental properties or self-employment is over £50,000 a year from April 2026 and over £30,000 from April 2027.

Instead of submitting a yearly Self Assessment you’ll need to update HMRC every quarter.

Will all landlords be affected by MTD?

MTD impacts all landlords with personally owned properties earning more than £50,000 a year from rental properties or self-employment from 2026, and those earning £30,000 or more from 2027.

Property income in scope for MTD includes:

• Residential buy to lets
• HMOs and student lets
• Furnished holiday lets (FHL)
• Commercial property
• Non-UK property, such as a holiday apartment abroad

This is £50,000 of rental income, so gross profit before deducting your expenses, rather than net profit.

I own rental property in a partnership. Will MTD affect me? - HMRC has said it will announce dates for other types of partnerships, including LLPs and those with corporate partners, at a later date.

I’m a landlord that’s registered as a limited company. Will MTD affect me? - lf You own your properties in a limited company, you don’t need to worry about MTD for Income Tax yet.

Does MTD mean you need to pay tax four times a year? - No, how you pay self-assessed income tax is not changing.

How does Making Tax Digital work for joint landlords? - If the rental income is from a jointly owned property, this is based on the share of ownership - i.e. 50% if both parties have equal shares in the property. If your share of the rental income is over £50,000, then you'll be in scope for MTD from April 2026.

To conclude - if you currently complete a Self Assessment for your property income, and you earn over £50,000 from property or self-employment, you’re going to need to switch to use software to make quarterly MTD submissions from April 2026.

Latest developments in making tax digital.

We are now little more than a year away from the phased introduction of making tax digital (MTD) for income tax self assessment (MTD ITSA), as follows:

Annual aggregate turnover (all sources) Implementation date

More than £50,000                       5 April 2026

More than £30,000 and up to £50,000     5 April 2027

More than £20,000 and up to £30,000     Before this Parliament ends (2029)

This last new, lowest band was announced as part of the Autumn Statement 2024 on 30 October 2024:

‘The government will expand the rollout of MTD to those with incomes over £20,000 by the end of this Parliament, and will set out the precise timing for this at a future fiscal event.’

Up to that point, many advisers were daring to hope that MTD might perhaps baulk at going lower than the initial £50,000 per annum threshold.

Key points It is perhaps worth emphasising:

 • The thresholds are measured across one’s annual gross income across all business sources (i.e., rents are broadly lumped in alongside all trading receipts – but see also below).

 • The measurement year for testing whether one is caught for April 2026 (being the start date for those individuals in the vanguard) will be 2024/25, the actual numbers for which may only just have been finalised and filed by 31 January 2026.

 • Thus, do the results for 2024/25 (now) dictate the MTD status for 2026/27?

 • Likewise, the measurement year for whether MTD for ITSA will apply for the lower £30,000 annual threshold from April 2027 (i.e., 2027/28) will be the actual results for 2025/26.

 • But each separate trade and property business* will still need its own set of quarterly returns ‘updates’.

 • Once a taxpayer is caught by MTD ITSA, that annual aggregated business turnover will need to fall below the threshold for three successive years in order to break free of its clutches.

*Generally, all property sources are rolled into a single property business; however, one might have separate UK and offshore rental businesses or lettings in different ‘capacities’, such as sole or joint tenancies, as against a full property partnership.

Given that the annual threshold is intended to have fallen to just £20,000 by 2029, one will presumably have to hope for another means of escape, such as business cessation (see also below).

Income boxes and joint property details

HMRC will monitor taxpayers’ incomes and corresponding MTD obligations by reference to specific boxes on their submitted tax returns – the gross trading income and rental receipts sections. This should be reasonably straightforward, but a quirk has arisen in relation to joint lettings.

Landlords holding only a proportion of joint property are, of course, reliant on whoever prepares that property’s accounts for their income and expenditure details. They are also allowed to choose to include only the net income figure from joint lettings in their current-format tax returns (whether as part of a larger portfolio or not).

In July/August 2024, HMRC confirmed that this easement would continue under MTD, despite the risk of the landlord understating their ‘true’ gross annual income by potentially including only the net amounts for co-owned property letting income.

Audit trail abandoned  When the quarterly ‘update’ regime was originally devised, it was intended that each return would report only that quarter’s results, and that any amendments to previous quarters in the tax year would have to be reported in the next available return but flagged separately so that HMRC could track any changes made.

HMRC has since walked back from this approach and announced in November 2023 that each quarterly return will now hold simply ‘year-so-far’ amounts without further analysis into separate quarters, etc.

Quarterly update deadlines On 22 February 2024, the latest regulations then published included that the quarterly updates’ filing deadlines would be extended by two days, to 7 August/November/February/May, thereby aligning with the usual VAT stagger group filing deadline for calendar quarters.

End of the ‘end of period statement’ Did anyone realise that, when the Chancellor announced ‘the end of the annual tax return’ back in July 2015, what he actually planned instead was a ‘final declaration’, plus four quarterly returns (‘updates’) for each separate business of theirs, plus an annual end of period statement for each business to cover all of the usual annual tax adjustments for disallowed expenses, capital allowances, etc?

But never mind because, ever keen to cut down on taxpayers’ administrative burdens, the government has magnanimously decided to remove the proposed end of period statement and just include all those tax adjustments in the final declaration, instead.

Presumably, the government is banking on nobody spotting that the updated final declaration will now function almost exactly like the tax return whose demise was promised almost a decade ago, just now with a load of extra form-filling obligations that nobody outside of HMRC ever asked for.

Exemptions and exclusions The list of specific exemptions from MTD ITSA has grown slightly:

 • Trustees;

 • Personal representatives of someone who has died;

 • Lloyd’s members;

 • Individuals without a National Insurance number (announced Autumn Statement 2023); and

 • Foster carers (announced Autumn Statement 2023).

However, just because someone is a Lloyd’s name or foster carer does not mean that they are entirely exempt from MTD; if they have ordinary non-exempt sources, they can be ‘caught’ for those. Likewise, the National Insurance Number exemption will, for most people, last only until they receive their notification – usually just before their 16th birthday.

A wider exemption may be accepted where the taxpayer can show that they are unable to comply with the requirements of MTD, such as by reason of:

 • old age or infirmity;

 • remoteness of location (poor Internet access); or

 • religion.

It seems that, so far, HMRC has resisted the temptation to hide the ‘digital exclusion’ application process behind an online application form.

Conclusion The greatest menace in MTD is not the digital filing and reporting, but the digital record-keeping; having to set up and maintain financial records in a manner tailored more to HMRC’s wants than your own business needs. This is the other, as-yet-unseen nine-tenths of the MTD iceberg.

But in promising to drop the entry threshold to as low as £20,000 per annum, the government has signalled to taxpayers (and to software companies) how firmly it has committed us to this project. For now, there are no precise dates on when MTD for ITSA will be extended to partnerships or to companies (‘avoiding’ MTD might soon be one of the few remaining tax-based incentives to incorporate) but, again, keep in mind that partners will not automatically be safe from MTD if they also have non-partnership business interests.

Overview

• Many possible changes were the subject of speculation leading up to the Budget: this list includes things that have been ruled out, as well as changes that the Chancellor announced
• These key points include measures that were announced previously but are about to come into force
• Measures which will not take effect until future dates are listed separately below

​​​​​​​​​​​​Implemented immediately

• Capital Gains Tax rates for disposals on or after 30 October 2024 rise from 10% to 18% (basic rate taxpayers) and 20% to 24% (higher rate taxpayers); the higher rate for residential property remains 24%
• Lifetime limit for gains qualifying for Investors’ Relief is reduced from £10 million to £1 million for disposals on or after 30 October 2024
• Stamp Duty Land Tax surcharge for purchase of additional dwellings increased from 3% to 5% for purchases from 31 October 2024
• Rules tightened for close company loans to participators, transfers of UK pension funds abroad, Employee Ownership Trusts, Employment Benefit Trusts and liquidation of Limited Liability Partnerships to close loopholes from 30 October 2024

From January 2025

• Confirmation that VAT will apply to private school fees from 1 January 2025

From April 2025

• Increase in rate of Employer National Insurance Contributions (ERNIC) from 13.8% to 15%, together with reduction of Secondary Threshold from £9,100 to £5,000
• Increase in Employment Allowance for small businesses’ ERNIC from £5,000 to £10,500 for 2025/26
• Certain ‘double cab pickup vans’ to be treated as cars for some tax purposes
• Extension until March 2026 of the 100% first year allowance for qualifying expenditure on zero-emission cars and charging points for electric vehicles
• Abolition of the remittance basis of taxation for foreign domiciled individuals, to be replaced by a ‘residence-based scheme’
• CGT rate on disposals qualifying for Business Asset Disposal Relief increased from 10% to 14%
• CGT rate on ‘carried interest’ increased to 32%
• IHT Agricultural Property Relief to be extended to land managed under an environmental agreement with government or other approved bodies
• 40% business rates relief for retail, hospitality and leisure businesses for 2025-26 on values up to £110,000
• Charitable business rates relief no longer available for private schools
• Fuel duty remains frozen, and the temporary 5p cut announced in March 2024 will be extended to 22 March 2026
• Rate of interest on late paid tax will increase by 1.5 percentage points
• Security for certain tax reclaims increased by introduction of a requirement for a digital signature
• Above inflation increases in National Living Wage and State pension
• As previously announced, the advantageous tax treatment of Furnished Holiday Lettings no longer applies in 2025/26

From April 2026

• CGT rate on disposals qualifying for Business Asset Disposal Relief increased from 14% to 18%
• ‘Carried interest’ moved to the income tax regime, with a discount for certain qualifying disposals
• IHT Agricultural Property Relief and Business Property Relief at 100% will only apply to the first £1 million of combined value; above that limit, the maximum relief will be 50%
• IHT Business Property Relief restricted to 50% for all ‘unlisted’ shares which are quoted on recognised stock exchanges such as the Alternative Investment Market
• Tightening of rules on charitable tax reliefs and closure of an avoidance scheme involving company cars from 6 April 2026
• Confirmation of the introduction of Making Tax Digital for Income Tax Self-Assessment from April 2026

No change, or later

• Unused pension funds and death benefits payable from a pension will be included in a person’s death estate for IHT purposes from 6 April 2027
• No changes to the ability to draw tax-free lump sums from pension funds, or reintroduction of a lifetime allowance
• The freezing of personal income tax allowances and rate bands will end with 2027/28: inflationary increases will be reintroduced for 2028/29
• Corporation tax rates appear to be fixed for the duration of the Parliament
• Inheritance tax nil rate bands will be frozen at their present levels until April 2030 (extended by two years from the previously announced date); no change to the availability of the additional Residence Nil Rate Band
• ISA and Junior ISA investment limits fixed at their current levels until April 2030
• Company car tax rates announced for 2028-29 and 2029-30, to provide long-term certainty; the incentives for purchasing electric vehicles will be maintained
• Previous Government’s proposal to base High Income Child Benefit Charge on combined household income will not be taken forward – HICBC still based only on the income of the higher earner of a couple

Changes to business asset disposal relief and why timing matters.

Business asset disposal relief (BADR) reduces the rate of capital gains tax (CGT) payable on a qualifying disposal of business assets. The relief (which was formerly known as entrepreneurs’ relief) is available to individuals and some trustees when they dispose of all or part of their business, their business assets or shares in their personal company.

Currently, the relief reduces the rate of CGT on qualifying disposals within the lifetime £1m limit to a very attractive 10%. However, there remains only a small window of opportunity to benefit from this rate. As announced by Rachel Reeves in her first Budget on 30 October 2024, the rate of CGT on assets qualifying for BADR is to rise to 14% from 6 April 2025 and to 18% from 6 April 2026.

Individuals looking to dispose of their business in the near future may wish to reconsider the timing to ensure that they are able to benefit from the best possible rate of BADR. However, before making a disposal, they must check that the necessary qualifying conditions have been met throughout the qualifying period.

Nature of the relief

The relief applies to reduce the rate of CGT payable on disposals of qualifying assets. The relief is subject to a lifetime limit of £1m. However, spouses and civil partners each have their own £1m limit, so by making use of the ability to transfer assets between spouses and civil partners at a value that gives rise to neither a gain nor a loss, it is possible for a couple to benefit from the favourable capital gains rate on gains of up to £2m.

However, each individual must meet the qualifying conditions for the necessary two-year period to access the relief.

Qualifying conditions

The availability of BADR is contingent on the qualifying conditions being met throughout the requisite two-year period. The precise conditions depend on the nature of the disposal.

BADR is only available on the disposal of business assets where there is a disposal of all or part of the business; relief is not available for disposals of business assets by a continuing business. To qualify, the business must be owned by the individual, either directly or by a partnership in which the individual is a member, for a period of at least two years up to the date on which the business is sold or otherwise disposed of.

Relief is also available where a business is closed, as long as it was owned by the individual or a partnership in which the individual was a member for at least two years up to the date of cessation. The qualifying business assets must be disposed of within three years of the date on which the business ceased to benefit from BADR.

The relief may also be available on the disposal of an asset owned by the individual personally and used by the business or partnership if the disposal is an associated disposal.

An individual may also be able to benefit from BADR, where they dispose of shares in or securities of their personal company. However, again there are conditions to satisfy. The company must be a trading company or the holding company of a trading group.

It must also be the individual’s personal company, which will be the case if they hold at least 5% of the ordinary share capital, and this gives them at least 5% of the voting rights, entitles them to at least 5% of the profits available for distribution and at least 5% of the distributable profits in a winding-up. The individual must also be entitled to at least 5% of the proceeds in the event of a company sale.

These conditions must be met for the two-year qualifying period, which normally runs to the date on which the shares are sold. However, although relief may still be available if the company ceases to be a trading company or a member of a trading group in the three-year period prior to the date on which the shares are sold, in this situation, the two-year qualifying period runs to the date on which the company ceased to be a trading company or a member of a trading group.

Landlords selling a furnished holiday letting are able to access BADR if they cease the furnished holiday lettings business on or before 5 April 2025 and dispose of the property within three years of cessation, assuming the qualifying conditions have been met.

Qualifying assets The relief is only available on the disposal of qualifying assets. The following count:

 1. Assets, with the exception of goodwill in certain cases, used in the business. Business premises count as qualifying business assets; however, shares, securities and other assets held as investments do not count.

 2. Assets that were used in the client’s business or a partnership in which the client was a partner.

 3. Assets comprising shares in or securities of the client’s personal company.

 4. Assets owned by the client personally but used by a business carried on either by a partnership in which the client is a partner or by the client’s personal trading company or, where the client’s personal company is a holding company, by a trading company in that group. The disposal will only qualify for BADR if it is associated with a qualifying disposal of the partnership of the shares or securities in the client’s personal company.

It is important to note that where the disposal of the business is to a close company in which the individual (or a relevant connected person) owns at least 5% of the ordinary share capital, BADR will not apply to any gain on goodwill. However, in certain cases, this rule does not apply if the shares are sold within 28 days.

Timing

To minimise the CGT payable on a disposal of business assets, timing is everything.

The best rate of 10% applies to disposals made in the current tax year (i.e., on or before 6 April 2025). Where a disposal is in process, accelerating the disposal date so that it falls within 2024/25 is only beneficial if the qualifying conditions have been met for the two-year qualifying period on the new disposal date. If the conditions have been met for less than two years, BADR will not be available, and gains will be taxed at the standard CGT rates, which since 30 October 2024 is 18% where income and gains fall within the basic rate band, and 24% thereafter.

Consequently, it is better to wait until the conditions have been met for two years so that BADR will be available. Where the disposal takes place in 2025/26, qualifying gains will be taxed at 14%. If the disposal does not take place until 2026/27 or later, gains will be taxed at 18%.

Prior to 30 October 2024, the rate of BADR was aligned with the CGT rate applying to basic rate taxpayers – both being set at 10%. From 30 October 2024, the CGT rate for basic rate taxpayers was increased to 18%, with the rate applying to BADR gains remaining at 10% for the remainder of the 2024/25 tax year.

Accessing BADR in this period is a very good deal, allowing an individual to save tax of up to £140,000 where the gains would otherwise be taxed at the higher CGT rate of 24% if BADR was not available. Basic-rate taxpayers, too, can benefit from savings by claiming BADR, where gains fall within the basic-rate band.

For 2025/26, the rate of BADR is 14%, but this is still below the CGT rate for basic rate taxpayers of 18%. A rate of 14% provides savings of up to £100,000, where the gains would be taxed at the higher rate of 24% in the absence of BADR. Basic rate taxpayers also save 4% on qualifying gains.

From 6 April 2026, the rate of tax for BADR gains is once again aligned with the CGT rate for basic rate taxpayers, both being set at 18%. Accessing BADR will save up to £60,000, where the gains would otherwise be taxed at the higher rate of 24%; however, there are no savings where the gains fall in the basic rate band.

Practical tip

As long as the qualifying conditions have been met for the two-year qualifying period, consider bringing forward a disposal of qualifying business assets to secure the best rate of BADR and minimise the CGT payable on the disposal.

A look at some tax planning opportunities for companies, with the end of the current financial year looming for corporation tax purposes.

This article briefly highlights some tax planning opportunities available to limited companies ahead of their year end to reduce tax liabilities and maximise profit extraction by the effective use of allowances and reliefs.

Capital allowances - When a company incurs capital expenditure for their business, capital allowances can be claimed, which will reduce the company’s taxable profits. Capital allowances are available at various rates depending on the type of expenditure incurred. To ensure the most tax-efficient use of allowances, businesses will need to analyse the costs between the various categories.

The main categories of allowances are:

 • Annual investment allowance (AIA) – maximum of £1m of qualifying expenditure*;

 • 100% first-year allowance (FYA) on brand new main pool expenditure and electric cars;

 • 50% FYA on brand new special rate pool expenditure;

 • 18% writing down allowance (WDA) on the general pool*;

 • 6% WDA on the special pool*;

 • 3% straight line allowance on qualifying structures and buildings*;

 • Small pool write-off where the balance is less than £1,000*.

 *Pro-rated for chargeable accounting periods of less than twelve months.

The maximum AIA allowance is restricted to £1m per year, which is split between a company and any associated companies. Companies are associated with each other where one company controls another, or both are under the control of the same person or persons. Where applicable, the AIA can be allocated between associated companies in any way, as long as the overall maximum is not exceeded.

Where the maximum AIA is exceeded and expenditure has been incurred on both general and special rate pool assets, in most cases, the AIA should be allocated to special rate pool expenditure in priority to the general pool. There is no restriction on FYA claims, which should be considered in addition to the AIA, particularly where the AIA allowance has been exceeded, in order to maximise claims.

For allowances to be claimed, expenditure must have been incurred before the end of the accounting period. The date on which expenditure is incurred is the date the obligation to pay becomes unconditional, which in most cases is on delivery. Where the requirement to pay falls more than four months after the date the obligation to pay becomes unconditional, capital allowances cannot be claimed until the year in which payment is made. For assets financed by hire purchases, this rule does not apply, but the asset must have been brought into use by the end of the period in order to claim allowances.

Pension contributions - When a company makes a pension contribution on behalf of its employees, subject to it satisfying the ‘wholly and exclusively’ conditions, it will be tax deductible. As an added benefit, company pension contributions are a tax-exempt benefitin-kind for the recipient. As HMRC generally accepts that remuneration paid to a controlling director will satisfy the ‘wholly and exclusively’ tests, pension contributions are an efficient way to extract remuneration from a company whilst simultaneously lowering corporation tax liabilities.

Corporation tax relief for pension contributions are generally available in the accounting period in which the payment is made (although larger pension contributions may be subject to spreading over more than one accounting period in certain circumstances, which are beyond the scope of this article). Therefore, companies must ensure that contributions have physically been made and payment has left the company bank account prior to the period end. An accounting provision for the expenditure would not be sufficient to satisfy this requirement.

Whilst theoretically a company can make contributions and receive tax relief without restriction, individuals do not receive corresponding treatment and are subject to an annual maximum pension input allowance. The annual maximum for individuals is based on a tax year, which may not be the same as the company’s year end, so the timing of contributions will be important. From 6 April 2023, the annual maximum pension allowance for individuals is £60,000.

In addition to this, any unused allowances from the previous three tax years can be utilised as long as the individual was a member of a pension scheme during this period. In addition to any gross personal contributions and defined benefit scheme growth a recipient may have, company contributions count towards the annual limit. Where the annual allowance is exceeded, an income tax charge will arise on the recipient at their marginal rate of tax. Companies planning large pension contributions ahead of their period end will need to consider this in order to avoid creating additional tax liabilities.

Trivial benefits - Trivial benefits are a tax-efficient way for companies to reward their employees and for owners to extract value from the company. Trivial benefits are taxdeductible for the company and tax-exempt for the employee.

The conditions to be satisfied to meet the exemption are:

 • the benefit is not cash or a cash voucher;

 • the cost of the benefit does not exceed a VAT inclusive value of £50;

 • the employee is not entitled to the benefit as part of any contractual obligation; and

 • the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties.

An employee can receive an unlimited number of trivial benefits each year. Examples that can be given include vouchers, hampers and birthday gifts. Where the company providing the benefit is a close company, whilst directors and members of their family or household can receive tax-exempt trivial benefits, the maximum amount that can be received is £300 over the tax year, subject to the usual conditions being satisfied. Where a member of the director’s family or household is also an employee of the company, they are each entitled to their own £300 allowance.

Bonuses - A company may consider paying its directors and employees a bonus based on its year end results. Where the necessary conditions are met, a company can include a tax-deductible provision for the bonus payments in its accounts (under CTA 2009, s 1288). Where a bonus is properly evidenced and documented, this allows a company to accelerate the corporation tax relief it receives on the bonuses ahead of when they are paid for PAYE purposes. In normal circumstances, corporation tax relief would be given in the period that the remuneration is paid.

For this treatment to be available, the company must have a constructive obligation to pay the bonus at its year end. This can be evidenced by a board minute prior to the year end, which is then ratified at the AGM, or if a company has a history of paying bonuses, by past practice. In addition to having a constructive obligation, the company must also actually pay the bonus within nine months of the period end, or if earlier, the date of filing of the corporation tax return. At the time the bonus is paid, PAYE will need to be operated, with the associated tax and National Insurance contributions liabilities paid.

It is important to be cautious that discussions and provision of bonus payments prior to the period end do not trigger an immediate PAYE liability (under ITEPA 2003, s 18). These rules determine when remuneration is treated as paid and when PAYE should be applied. These rules are stricter for directors than employees. If a bonus is determined before the end of a period of account, this becomes the trigger date for PAYE to be operated. However, this can be avoided if the bonuses are allocated to a ‘pool’ for a later distribution by shareholders at the AGM, but this is an area where caution should be exercised.

Don’t forget…

 • Working from home allowance – Where directors and employees are required to work from home, they can be paid a tax-free flat rate expense of £6 per week which is tax deductible for the company.

 • Dividend allowance – For the 2024/25 tax year, individuals can receive total tax-free dividends of £500 per year. Dividends can only be paid to shareholders and only if the company has sufficient distributable reserves.

 • Check time limits – Ensure that any claims for reliefs are submitted in time. For example, for companies making a rollover relief claim, the time limit is four years from the end of the accounting period to which the claim relates.

 • Check director salaries – Where directors take a low salary, ensure that the amount declared through the payroll is at least equivalent to the lower earnings level to receive a qualifying year’s credit for state pension entitlement. For 2024/25, the lower earnings limit is £6,396 per year.

Practical tip - Do not wait until after the year end and when the corporation tax payment date is almost due to start considering tax planning. Business owners need to be proactive to ensure their business is as tax-efficient as possible and all available expenses and reliefs have been claimed.

Most individuals are entitled to receive a personal allowance. This is the amount that they are able to earn before they pay tax. For 2024/25, the personal allowance is set at £12,570. The allowance is for the tax year only – if you do not use it in the tax year, you lose the benefit of it; you cannot carry any unused amount forward to the next tax year.

As the end of the tax year approaches, if you have yet to use your 2024/25 personal allowance, you may want to consider whether there is scope to do so.

1. Pay a salary or a bonus

If you operate a personal or family company, you may wish to consider withdrawing further profits in the form of a salary or bonus before 6 April 2025. For 2024/25, the optimal salary is one equal to the personal allowance of £12,570 where the allowance is not used elsewhere. If you have yet to pay a salary of this level, there is still time to do so before the end of the tax year.

2. Advance income or defer expenses

For 2024/25 onwards, the cash basis is the default basis of assessment for unincorporated businesses. Under the cash basis, income is assessed when received and expenses recognised when paid. If your taxable profit for 2024/25 is less than your personal allowance and you have no other income, consider whether you can bring profit into 2024/25 rather than 2025/26 by accelerating income (for example, by invoicing early) or by delaying paying expenses.

3. Consider pension payments

If you have reached the age of 55 and have already flexibly accessed your pension, for example, by withdrawing your 25% tax-free lump sum, consider taking further payments from your pension to use up any remaining personal allowance as this will enable you to withdraw further amounts from your pension tax-free.

4. Preserve the allowance if you are a high earner

The personal allowance is reduced once adjusted net income reaches £100,000. For every £2 by which adjusted net income exceeds £100,000, the personal allowance is reduced by £1 until fully abated once income reaches £125,140. Individuals whose adjusted net income is £125,140 or more in 2024/25 do not receive a personal allowance. However, to prevent the loss of the personal allowance, consideration could be given to delaying income, for example, deferring bonus or dividend payments from a personal or family company, or reducing adjusted net income by making pension contributions or charitable donations.

5. Consider the marriage allowance

If you are married or in a civil partnership and are unable to use your 2024/25 personal allowance in full, consider whether you can make use of the marriage allowance to save tax. If your spouse or civil partner is a basic rate taxpayer, you can transfer £1,260 of your personal allowance to them by making a marriage allowance claim. This will reduce their tax bill by £252.