My Blog

Category: Income Tax

  • Focussed on Brexit? What About The Tax Year End Only 1 Week Later?

    Income Tax Thresholds – £50k and £100k 

    A relatively new phenomenon, these are crucially important to understand if you want to make sure you don’t pay more tax than you need to.

    As a company business owner, you can choose the salary and dividends you take out of your company; profits and cash permitting! You are in control and you don’t need to cross these thresholds unless you do so with knowledge of the consequences.

    For £50k up to £60k, your child benefit starts to get taken away for you or your partner. If your child benefit is an annual £1,752 and your income is £60k, you have to repay (or not claim) £1,752. This amounts to a further tax of 17.52% on top of your dividend tax in that bracket of 32.5%, just over 50% in total. This is expensive!

    Similarly, if you need to take more than £60k and are closer to the £100k threshold, you may want to stay under the £100k threshold. After this, you start to lose your tax free personal allowance. For every £1 of dividend taken between £100k and £123,700, the effective dividend tax due is 48.75%, rather than 32.5%. For high earning employees the effective tax rate is 60%!

    The Importance of Pension Contributions and Charitable Donations 

    The introduction of the above £50k and £100k thresholds has shown how important pension contributions and donations are to your financial health. Admittedly, you are parting with money so it does cost you, but perhaps not as much as you thought.

    If you were thinking of paying more pension contributions or some donations, you might want to make sure you pay them at the optimal time to maximise your tax reliefs.

    As a company owner, your pension contributions will probably need to be made as company contributions, so you’d need to focus on charitable donations or simply timing payments and dividends correctly.

    As a high earning employee, say, on a salary of £110k, paying £8k into a pension scheme will save you £6k of income tax! This is 60% of £10k which is the £8k you paid, grossed up by the 20%, or £2k, paid direct by the government into your pension pot. Therefore, paying £8k into a pension, which you should benefit from one day, only really costs you £4k.

    Take IFA advice before deciding when and where to invest, or you might want to use your employer’s scheme.

    Property Landlord? 

    If you’re due to carry out any repairs soon, make sure they’re done before the 5 April 2019 so you can claim tax relief in this tax year.

    Tax relief restrictions on loan interest continue to cause problems. It may be worth considering selling the property, particularly with further capital gains tax adverse changes coming in from April 2020, only just over a year away. As the property market is not as vibrant as it was, it may easily take a year to sell, so perhaps you should list it sooner rather than later. Subject to what you think might happen to house prices over this period, naturally!                           

    Start Up Sole Trader? 

    If you were an employee in the tax year you started your business, or in any of the previous 3 tax years, you should be able to reclaim a PAYE refund, if you make a tax loss.

    Many start ups make a tax loss in the first few years. If you have some costs to incur or equipment to buy in the next few months, you might want to incur these costs before 5 April 2019. This could increase your tax loss and therefore your tax refund. The meaning of ‘incur’ isn’t necessarily paying out cash before 5 April 2019, so check the rules if your cashflow is tight.

    Remember to take appropriate professional advice before taking or refraining from any action. 

  • (Residential) Property Is Dead! Long Live (Commercial) Property!

    If you are a basic rate taxpayer, be prepared to be taken into a higher rate tax bracket or child benefit to be taken away, effectively another tax charge.

    If we assume you’re an employee, with two children, earning a £47k salary and property profits of £3k, your gross income is £50k. Assuming your spouse isn’t earning more than £50k, you get to keep all your child benefit.

    Your £3k property rent is calculated as follows:

    Rental income  £7,000

    Interest            (£3,000)

    Agent fees          (£400)

    Insurance           (£100)

    Other eg repairs (£500)

    Profit                  £3,000

    On which you’re paying 40% tax of £1,200. If your property is worth £120k, you’re receiving a modest after-tax return of 1.5%. 

    However, this picture changes when the new rules, starting next April 2017, are fully in place in 2020. The interest of £3k above is no longer deductible and your taxable property profit doubles to £6,000.

    Your gross taxable income is now £53k. So what?

    1. More of your income is now taxed at 40%, rather than 20%.

    2. Your child benefit now starts to be withdrawn.

    On these figures the additional tax due on top of the £1,200 is:

    Child benefit withdrawn           £536

    Additional higher rate tax      £1,200

    Less 20% interest tax relief    (£600)

    Additional tax                         £1,136

    Your modest after-tax return is now reduced to £664 (£3,000 profit – £1,136 new tax – £1,200 current tax) of £120k which is 0.5%!

    Similar considerations apply for taxpayers near to the £100k gross income level as you’ll start to see your tax free personal allowance allowance withdrawn at income above £100k. 

    If you rent out a furnished property you’re currently enjoying an additional tax deduction of 10% of £7,000 saving you £280 of tax. This will be withdrawn from this April 2016, reducing your net of tax returns even further.

    You may ask yourself whether it’s worth the hassle! 

    If you do still benefit from capital growth, remember that when you sell the property HMRC will require the capital gains tax within 30 days of exchange, so make sure the gap between exchange and completion isn’t longer than 30 days so you have the funds available. Please remember to include your accountant before exchange!

    You may want to look at transferring or putting new purchases into a limited company which doesn’t suffer all these changes. However, currently, banks seem reluctant to lend to these companies. 

    Commerical Property

    Comparatively speaking, commercial property is now looking very attractive. It isn’t going to suffer from any changes and also enjoys lower stamp duty rates. It can be held within a pension wrapper and benefit from those tax advantages. This may be enough to entice you to look at something different and compare the returns. After taking appropriate advice of course.

     

     

     

     

     

     

     

     

  • How does George affect his parents’ after-tax income?

    Meaning the baby, not the Chancellor!

    If his father’s only income was his RAF’s officer income, with a salary under £50k, and with a non-earning mother, they would receive the full child benefit of £20.30 per week, or £1,055.60 per year until as late as 31 August 2033 if he is in qualifying education or in the armed forces by then.

    If his father receives a pay rise in the next 16 to 20 years, taking his income over £50k, child benefit is reduced or if it reaches £60k, becomes £NIL. This assumes the thresholds aren’t increased with wage inflation which is probably the intention.

    If his mother works for her parents’ company for a modest salary below the tax free personal allowance of £9,440 and the company runs a childcare voucher scheme for all its employees paying up to £243 pcm or £2,916 per annum until 1 September 2028, corporation tax of £2,471 (£1,888 + £583) per year is saved with no tax charge on George’s mother. And no loss or reduction in child benefit.

    This childcare can be paid despite a private education if it’s an out-of-hours school club such as rugby practice.

    Before starting school, his father may take George to a workplace nursery paid for by the RAF with no tax cost to him, and with no income limits, this can be very valuable. It could be paid at the same time as George’s mother’s childcare vouchers with no effect on the level of childcare vouchers paid to her.

    In addition, if his mother had shares in her parent’s company and received dividends, they wouldn’t affect the level of childcare vouchers paid, but might affect child benefit if the gross dividends plus salary totalled £50k or more.

    Potentially, child tax credits are available if their combined income, including gross dividends, dropped to £25,798 or less before 1 September 2029. Or if they need to spend spend £175 per week on childcare and their combined income is under £40k, they might receive the childcare element of working tax credits, but only if both of them worked 16 hours per week somewhere.

    Simple enough? Not really. With all the different dates, different income definitions and different thresholds, it’s certainly not child’s play!

  • Why it might pay to furnish your buy-to-let property

    When you spend money on your buy-to-let property, you expect to get a tax deduction against the rents received to help keep your tax bill down.

    For those with children, this is even more important if your rented property might take you into the ‘no-go’ £50,000 – £60,000 income level where child benefit might be reduced or taken away completely.

    With residential properties, costs like agent’s fees and gas certificates are easily deductible. But what about the costs of white goods and furniture?

    The usual (now very valuable) capital allowances for trades, aren’t available for residential properties. Therefore, instead, before April 2013, there was a useful ‘non-statutory’ relief that allowed you to claim the cost of say replacing a cooker (the original cost can’t be claimed). This relief has now been taken away.

    What remains is, instead, claiming a 10% Wear & Tear allowance based on 10% of the rent due on your property. However, this only applies to furnished properties. Furnished means the sort of things you’d expect to see in a home such as a bed, sofa, dining table and chairs.

    With the availability of cheap furniture, you might find this is an investment worth making. You’d get tax relief for replacing white goods in the future. Of course, if the furniture itself gets damaged, you’d need to include its replacement cost within the 10% claim.

    As the Wear & Tear allowance is based on rent due, you can see that this is more of a possibility in higher rent areas.

  • #Tax Myth 7 – The Highest Income Tax Rate Is 50%

    You may be aware that income of £150,000 and above suffers a tax rate of 50%.

    What is less well known is that at a lower level of income the tax rate is in fact higher than 50%.

    For income of between £100,000 and £116,210, the income tax rate is 60%.

    Why is this?

    From £100,000 the personal allowance available to all taxpayers is gradually taken away at a rate of £1 for every £2 of income. The change from completely tax free income to that income being taxed at 40% causes that income to pay a marginal tax rate of 60%.

    As the tax free personal allowance increases, the band of income which pays a rate higher than 50% (or 45%) will increase. If the tax free personal allowance becomes £10,000, the income level affected will be between £100,000 and £120,000.

    For those who can spread income across different tax years, such as owner-directors, this is a valuable tax saving.