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Capital Allowances

  • Tax Changes From April 2026

    1. Dividend Tax Increases – 8.75% to 10.75%, 33.75% to 35.75%, no change to 39.35%

    Another reason for owner-managers to consider higher salaries instead of dividends from April 2026.

    Always check your figures as there are many variables to consider: income tax rates, NI thresholds, NI employer allowance availability, corporation tax rates, other income.

    2. Making Tax Digital – Income Tax Self Assessment (MTD ITSA) – Quarterly reporting 

    Get yourself geared up if your sole trader turnover and landlord gross rents together were over £50k in your 2024/25 tax return.

    The minimum is to have income and costs on a spreadsheet and have filing-only software ready for the first deadline of 7 August There’s no need to spend a lot and beware of free software which rarely remains free and will use up your time.

    Your life will be a lot easier if all income and costs go through one bank account for each sole trader business and your landlord business. 

    3. No Tax Relief For Unremibursed Home Working Costs

    If your employer doesn’t reimburse you for your home working costs, you can no longer claim tax relief against your employment income.

    Check your Tax Codes for the 2026/27 tax year to ensure any historical deductions aren’t included, otherwsie you’ll need to repay this tax relief in your tax return or by an adjusted Tax Code or P800 issued to you in due course. This includes the £6 per week commonly claimed by staff.

    4. Benefit In Kind For Electric Cars – Increase from 3% to 4%

    For a £50,000 electric car, the benefit in kind will increase from £1,500 to £2,000, increasing the tax paid for a higher rate taxpayer from £600 to £800.

    Electric cars remain generally tax efficient particularly when purchased through your company enjoying 100% corporation tax relief.

    5. Non-Residents Voluntary Class 2 National Insurance Payments – No longer available

    Where the full 35 qualifying years hasn’t been achieved, or may not be, sole trader or partnership taxpayers have often topped up their missing years by paying voluntary Class 2 national insurance. This option will no longer be available to non-residents.

    Similarly, the more expensive, but potentially still cost effective, route of making Class 3 contributions, will require qualifying residencies to be for much longer at 10 years rather than 3 years.

    6. Capital Allowances – Reduction in write down rate from 18% to 14%

    Not a main issue for most owner-managed businesses, but where there are some historical pool tax written down values brought forward, the already very slow write down rate of 18% is now an even slower rate of 14%. This increases the number of years for a full write down from over 23 years to over 30 years! 

    The main thing is to ensure you get 100% reliefs wherever they are avaialable such as using the annual £1m AIA allowance.

    7. EMI Share Option Company Thresholds – Large Increases

    EMI share options really should help growth by enabling small-medium companies to attract talent without paying the highest salaries or bonuses, however they aren’t adopted as much as they could be.

    Perhaps increasing the thresholds will help by opening up EMI to larger companies such as those with gross assets of £120 million, but it’s the smaller companies that need help with simplification of the rules to keep their costs down. Thresholds for employees remain unchanged at a maximum of £250,000.

    The increase from 10 to 15 years in which an option can be exercised will be very helpful for options granted on or after 6 April 2026 and perhaps help make these more attractive to some owner-managed businesses.

    8. EIS Company Thresholds – Large Increases

    A lot of thresholds already in the millions are being doubled and should help larger companies obtain more investment, however the smaller SEIS thresholds stay the same again favouring the larger end of the SME market.

    We see the investor side of this too, so we may see more investments being made by higher net worth clients or those with some funds they are keen to use to help a growth company. 

    9. BADR – Entrepreneurs Relief – Tax increase – 14% to 18%

    This compares with 18% or 24% for other assets.

    As 18% applies only if you remain a basic rate taxpayer, you’ll often find yourself paying 24% and therefore the BADR rate of 18% is favourable. As the maximum capital gain covered is a ‘lifetime’ limit of £1m, the maximum tax saved by BADR is £60,000.

    Although it’s called a ‘lifetime’ limit, this in practice really means gains from 2008 when Entrepreneurs Relief first came into existence.

    10. Inheritance Tax – Business and Agricultural Property Reliefs – Reduced from unlimited to £2.5m and 20% above £2.5m

    As widely included in the press, mostly due to farmer protests who suffer from being asset rich-cash poor, eligible trading businesses and farms will start to pay IHT on their estates instead of an unlimited relief.

    With £2.5m per spouse, a total of £5m covers many businesses and farms, but for those exceeding this, you may want to look at family gifting either to individuals or trusts.

    Always take appropriate advice as there are numerous factors to consider. 

    11. Inheritance Tax – Relief for charitable legacies limitations

    To help ensure legacies are directed towards UK charities (or eligible sports bodies), gifts must be made direct to the charity, rather than via trustees who may make some payments outside of the UK.

    These are the main ones affecting owner-manager businesses, but always look out for others such as EIS threshold increases which may help more investment in the growth sectors generally.

    12. Penalties For Late Filing – Corporation Tax Returns – Doubled

    This is probably a good idea as these are very out-of-date.

    As soon as a corporation tax return misses the 12 month deadline, the penalty for late filing will increase from £100 to £200. If the return still isn’t filed within the next 3 months, a further penalty is due, currently £200, which will increase to £400.

    Often, directors forget about dormant companies, which are also subject to these penalties, unless HMRC has agreed in advance and hasn’t sent the company a notice to file a return.

    There are many more changes coming in later years, so continue to look out for these.

  • 2026 Tax Year End Planning

    1. Review Your Optimum Dividend-Salary Mix

    Shareholder-directors review your mix of dividends-salary to ensure they are optimised. If it is different to payments you’ve made so far, ensure your February and March salary and dividends are adjusted accordingly.

    For example, if your company suffers the 26.5% marginal corporation tax rate and some or all of the £10,500 national insurance employer annual allowance is available to you, you’re likely to find that a salary higher than £12,570 is more tax efficient for you.

    With continued frozen tax allowances and thresholds, you’re more likely to get caught by 33.75%, 39.35%, 40%, 50.63%, 60% or 45% tax rates so also check you’ll be within the tax band you’re expecting staying under £50k, £60k to avoid child benefit repayments or £100k to keep your tax free personal allowance.

    You may ask your spouse to take on some shareholder responsibilities and receive some dividends to use their basic rate tax bands or to keep your income under £100k.

    2. Beat The Increased Dividend Tax Before 6 April 2026

    With an additional 2% tax added onto existing already high rates, if your optimum mix of dividends-salary includes some dividends ensure you take your optimum dividend on or before 5 April 2026. Or if you have discretion on the timing of any other dividend, try to receive it on or before 5 April 2026. For example, some share buybacks are subject to dividend tax. It will therefore be tax efficient to ensure this occurs on or before 5 April 2026.

    The new rates will be 10.75% within the £50k tax band, 35.75% over £50k to £100k, 53.63% over £100k to £125k due to the withdrawal of the tax free personal allowance. The top 39.35% from £125k stays the same.

    3. Estimate Your 2026 Taxable Profits

    Sole traders, partners and shareholder-directors should all review your taxable profits.

    Sole traders and partners, if it looks as though you’ll be taken you into the 40% higher rate band of £50k, or over the threshold you’re aiming for, consider what action you might take before 5 April 2026. Shareholder-directors with 31 March 2026 year ends consider your actions if you want to get your corporation tax bill as low as possible such as under £50k for the 19% rate. 

    You might invest in equipment eg office equipment, PC, van, other equipment, 100% electric car or make pension contributions. See further below.

    4. Making Tax Digital – Sole Traders and Landlords – April 2026

    Whilst reviewing your profits to April, also check your total gross sales and rents showing in your 2025 tax return. If these total over £50k, regardless of your profit, you’ll be into the new MTD ITSA regime where quarterly income and costs need to be submitted to HMRC. There’s no need to change anything with your accountant as they will prepare your income tax return as usual and no need for fully blown software unless this has other value for you.

    The minimum is to extract your income and costs from your business bank account and tick certain figures to be transferred through simple software to HMRC electronically four times a year. 

    5. Pensions, Pensions, Pensions

    Despite the upcoming inheritance tax (IHT) charges from April 2027, corporation tax of 25%/26.5% is often a good saving for many company owners, particularly where under current rules 25% of your pension pot may be taken tax free from age 55/57. 

    With a company March year end if your profits might be higher in the year to 31 March 2026 than in the year to 31 March 2027, you may save up to 7.5% more tax from making pension contributions in 2026, subject to the £60k annual allowance.

    If as a sole trader or employee your income is over £100k, you’ll save an extra 40% from gross pension contributions made to get income down under £100k to save an extra 20%. For income over £125k, you save an extra 25%. Your pension pot receives 20% direct from the government, boosting its value in the background.

    Before making a decision, please take appropriate advice about your entire estate including the overall mix of your pensions and other assets and investments.

    6. Annual Investment Allowance and Electric Car First Year Allowance – 100%

    For all businesses, sole traders and limited companies, the Annual Investment Allowance rewards investment of up to £1m on plant and equipment or eligible commercial property refurbishment with 100% tax relief. Similarly, new electric cars purchased benefit from 100% tax relief with no limit.

    If you plan to incur these costs near to your year end, such as 31 March 2026, ensure you meet the conditions for a claim in this year, so you don’t have to wait a year to get the cashflow tax saving.

    For example, investing £100k might save £25k of corporation tax (25%), or £45k of income tax (45%) which is better in your pocket one year earlier than with HMRC.

    Remember hire purchase contracts work, so you don’t need to have bought the assets outright to get full tax relief, assuming the hire purchase contract is good value overall.

    7. Corporation Tax Returns Due From April 2026 – Double Late Filing Penalties

    If you send in your corporation tax return late after April 2026, your late filing penalties will double, starting with an increase from £100 to £200. For ongoing companies with ‘normal’ year ends, the first year end caught will be 30 April 2025, so there’s even more reason to send in your return on time.

    8. Entrepreneurs Relief (BADR) Tax Increase – 14% To 18%

    If you’re in the middle of a sale or liquidation of your business eligible for 14% BADR ensure you exchange or receive your liquidation distribution by 5 April 2026 so you don’t pay the higher 18% coming in from 6 April 2026.

    9. Director Small Wins 

    Remember to maximise your director treats for the tax year ended 5 April 2026; trivial benefits under £50 each, totalling an annual £300 each, annual parties expenditure up to £300 each including guest or have a private health care check.

    10. PAYE Tax Codes – Check!

    These are often wrong and HMRC is using them more, so expect even more errors! For example, as tax relief for home office costs isn’t available from April 2026, tax codes being issued now for the 2026/27 tax year need careful scrutiny. Make sure you understand yours and if it’s wrong, call HMRC to get it corrected.

    11. Cash ISA Limits – April 2027

    Although the reduction from £20k to £12k for cash ISAs if you’re under 65 doesn’t come until April 2027, if you prefer a cash ISA, make sure you use the £20k’s available for 2025/26 and 2026/27 while you can.

    12. Inheritance Tax  – Increases From April 2026

    The reduction in 100% relief from IHT known as Business Property Relief from April 2026 to a lesser extent then originally, still requires consideration by many large estates with farms and businesses. Exact advice will be dependent on values, family dynamics, cashflow… Ensure you get good advice from the right expert.

    Each taxpayer is different and you should only act after being advised about all the financial impacts of your actions. 

  • Spring Into The New Tax Year

    1. Frozen Income Tax Allowances

    Frozen allowances mean that more people are getting caught by a 40%, 60% or 45% tax rates and the dividend tax equivalents. As a business owner, you have more options than a regular employee.

    Some sole traders work less to keep their profits under the 40% higher rate band of £50k. Shareholder-directors should review their mix of dividends-salary to ensure they are optimised.

    A sole trader could add another person such as a spouse and set up a general partnership to even out the use of their income tax bands. A shareholder-director may ask a spouse to take on some shareholder responsibilities and receive some dividends to use their basic rate tax bands or to keep your income under £100k.

    2. Employer’s National Insurance 

    As a director-shareholder, in the light of the increase in rate from 13.8% to 15% and lower starting point from £9,100 to £5,000, alongside an increase in the annual allowance from £5,000 to £10,500, consider whether you need to change your dividends-salary mix from this month.

    For example, if your company suffers the 26.5%/25% tax rate and some or all of the increased £10,500 national insurance employer annual allowance is available to you, you’re likely to find that a director salary higher than £12,570 is more tax efficient for you.

    If you’re a sole shareholder-director without staff but with a budget for some services, consider a part time employee who can be a family member so the £10,500 annual allowance available to you. This might even save you money overall.

    As an employer facing increased national insurance costs, consider approaching employee remuneration differently. For example, bonus schemes might be replaced by a more tax efficient share option scheme or introduce a salary sacrifice scheme to replace salary or bonuses with employer pension contributions. 

    3. Pensions

    Plan, plan, plan.

    With corporation tax at 25%/26.5% for many company owners, you may wish to re-visit your company pension contributions paid into your own pension to save corporation tax. Contributions must be paid before your company year end so make sure you don’t miss that.

    4. Annual Investment Allowance and Electric Cars Allowance – 100%

    The Annual Investment Allowance rewards investment of up to £1m on plant and equipment or eligible commercial property refurbishment with 100% tax relief. Similarly, new electric cars purchased benefit from 100% tax relief with no limit.

    If you plan to incur these costs near to your year end, such as 30 June 2025, ensure you meet the conditions for a claim in this year, so you don’t have to wait a year to get the cashflow tax saving.

    Remember hire purchase contracts work, so you don’t need to have bought the assets outright to get full tax relief, assuming the hire purchase contract is good value overall.

    5. Entrepreneurs Relief (BADR)

    If you’re thinking of selling your business or liquidating and your business is eligible for BADR, ensure you exchange or receive your liquidation distribution by next 5 April 2026 so you don’t pay the higher 18% (currently 14%) applying in the next tax year.

    6. Director Small Wins

    With too many tax increases around at the moment, remember use what is still available to you. Maximise your director treats for the tax year ended 5 April 2026; trivial benefits under £50 each, totalling an annual £300 each, annual parties expenditure up to £300 each including guest or have a private health care check.

    7. Furnished Holiday Lets (FHLs) Cessation

    FHLs now have the same tax treatment as assured longer term lettings.

    Tax losses from your FHLs can be brought forward and offset against future property profits. However, tax reliefs such as capital allowances are more restricted and the split of profits between joint spouse owners require a formalised approach.

    Review your property ownerships, who should own what percentage and your repair and refurbishment plans,  ensuring you implement your requirements correctly and in good time. For example, HMRC needs to be notified promptly if you want rental profits to be allocated between you and your spouse in certain way, otherwise your will each be taxed 50:50 which may not be optimal.

    8. Non-Domiciled Tax Changes

    The changes are the biggest for many years. If you are UK tax resident but not a UK domicile, known as a ‘Non-Dom’, take specialist advice on the implications for you. Your income tax, capital gains and inheritance tax may all be affected.

    9. Tax Returns Additional Information

    Sole traders will be required to include the date you started or ceased your business. Understand the implications of the dates you use, because these dates affect your registration date with HMRC and your loss reliefs or capital allowances claims, but the date can be debateable. For example, when did you really start your business? During a marketing phase, when you contacted potential clients or when you raised your first invoice? It depends on the whole picture.

    Shareholder-directors now need to provide details of your shareholding in your company such as percentage shareholding, company name and registered number. Make sure your dividends always agree with the amount in your company accounts.

    10. Interest Charged By HMRC Increased To 8.5%

    Be careful about underpaying your tax bills. The interest rate HMRC will charge you on underpaying your tax such as self assessment payments on account or your corporation tax is now 8.5%, which is pretty expensive. If you overpay tax, HMRC will pay you 3.5% which is better than most business accounts, but a 5% difference against the 8.5% charged on underpaid tax.

    Therefore, where there is some doubt about your final tax bill, you may wish to err on the side of overpaying rather than underpaying your tax.

     

    Each taxpayer is different and you should only act after being advised about all the financial impacts of your actions. 

  • 2025 Tax Year End Planning

    1. Frozen Allowances

    With continued frozen tax allowances, more people are getting caught by a 40%, 60% or 45% tax rate. 

    As a business owner, you have more options than a regular employee, but it’s worth everyone checking in with what is available and affordable. Some sole traders work less to keep their profits under the 40% higher rate band of £50k or an employee may decide to go part time.

    Shareholder-directors should review their mix of dividends-salary to ensure they are optimised. For example, if your company suffers the 26.5% marginal tax rate and some or all of the £5k national insurance employer annual allowance is available to you, you’re likely to find that a salary higher than £12,570 is more tax efficient for you.

    A sole trader could add another person such as a spouse and set up a general partnership to even out the use of their income tax bands, or an employee might make more payments into a pension scheme, as described next.

    2. Employer’s National Insurance Increase

    In the light of the increase in rate from 13.8% to 15% and lower starting point from £9,100 to £5,000 consider whether you need to change your shareholder-director dividends-salary mix from 6 April 2025. 

    Perhaps in the next tax year, you also need to approach employee remuneration differently. For example, bonus schemes might be replaced by a more tax efficient share option scheme or introduce a salary sacrifice scheme to be replace salary or bonuses with employer pension contributions. 

    3. Pensions

    With higher corporation tax of 25%/26.5% for many company owners, you may wish to re-visit your company pension contributions to ensure you optimise your corporation tax relief.

    With a March year end if your profits might be higher in the year to 31 March 2025 than in the year to 31 March 2026, you may find you’re likely to save more tax from making pension contributions in this earlier year, subject to the £60k annual allowance.

    High sole trader or employee earners should always check they’re keeping taxable earnings under £100k wherever possible which might be achieved by paying more into your pension scheme from personal funds before 5 April 2025.

    If your income is over £100k, you’ll save an extra 40% from gross pension contributions made to get income down in the range between £100k and £125k. Under £100k, you save an extra 20%, whereas for income over £125k, you save an extra 25%. Your pension pot receiving 20% direct from the government, boosting its value in the background.

    4. State Pension Top Up

    The deadline to top up your state pension for years from 6 April 2006 is 5 April 2025. From 6 April 2025 this is being reduced to 6 years.

    Therefore check your Personal Tax Account, which despite its name also shows your state pension years. You can identify any missing years, any errors and check whether it’s worth making the payments.

    State pension credit years can arise from a variety of sources, but if you need to make the most expensive Class 3 national insurance payment, it costs £907 to add on a missing year, but it might be less if you were self employed.

    5. Spouse Dividends

    Dividend tax is at its highest level and as dividends also form part of your gross income trapped within the frozen allowances mentioned above, you may ask your spouse to take on some shareholder responsibilities and receive some dividends to use their basic rate tax bands or to keep your income under £100k.

    6. Annual Investment Allowance and Electric Car First Year Allowance – 100%

    For all businesses, sole traders and limited companies, the Annual Investment Allowance rewards investment of up to £1m on plant and equipment or eligible commercial property refurbishment with 100% tax relief. Similarly, new electric cars purchased benefit from 100% tax relief with no limit.

    If you plan to incur these costs near to your year end, such as 31 March 2025, ensure you meet the conditions for a claim in this year, so you don’t have to wait a year to get the cashflow tax saving.

    For example, investing £100k might save £25k of corporation tax (25%), or £45k of income tax (45%) which is better in your pocket one year earlier than with HMRC.

    Remember hire purchase contracts work, so you don’t need to have bought the assets outright to get full tax relief, assuming the hire purchase contract is good value overall.

    7. Double Cab Pick Ups

    Before the IHT changes in April 2026, the earliest tax change upsetting farmers and others is the expensive tax changes to double cab pick ups taxing them like ‘normal’ cars from 6 April 2025. This means that capital allowances and taxable benefits in kind will be based on CO2 emissions.

    Purchase, lease, order your new or 2nd hand DCPU by 5 April 2025 to continue to enjoy the current rules or replace your current one after 5 April 2025 with a single cab pick up or other commercial vehicle. 

    8. Entrepreneurs Relief (BADR)

    If you’re in the middle of a sale or liquidation of your business eligible for 10% BADR ensure you exchange or receive your liquidation distribution by 5 April 2025 so you don’t pay the higher 14% coming in from 6 April 2025.

    9. Director Small Wins

    Remember to maximise your director treats for the tax year ended 5 April 2025; trivial benefits under £50 each, totalling an annual £300 each, annual parties expenditure up to £300 each including guest or have a private health care check.

    Each taxpayer is different and you should only act after being advised about all the financial impacts of your actions. 

  • FHLs – What Should You Do Before 6 April 2025

    These are the questions to ask yourself before going any further:

    • Is your FHL business profitable or loss-making?
    • Are you planning any significant refurbishments?
    • How much is your interest cost? 
    • Do you have other income from employment, self employment or a limited company?
    • Do you rent out other non-FHL rental properties?
    • Are you thinking of retiring or semi-retiring?
    • Do you make pension contributions based on FHL income?
    • Do you have family members already as part owners or potential part owners?
    • Did you start your FHL business recently or several years ago?
    • Has the property value increased since purchase?
    • Do you carry out a trade beyond simple property letting or might you want to start one?

    Your optimum tax efficient answer, will depend on your answers to these questions and probably a few more! Here are a few suggestions based on certain scenarios that we often see:

    1. Recent purchase of one FHL property

    We’ve seen an increase in FHL property purchases by employees and business owners since Covid, often funded by borrowings, which could have fed into the previous government’s reasoning to change these rules.

    Large amounts have often been spent making the property FHL-ready such as buying furniture, crockery, white goods and linen, decorating, safety improvements and adding cupboards. There are therefore carried forward tax losses.

    If you’ve not yet incurred these costs for your FHL, you may wish to do so to benefit from FHL rules which allow tax relief for more costs such as your initial purchases of furniture, crockery, white goods and linen.

    The property is expected to be profitable in the future after deducting buy-to-let interest. 

    Example ignoring brought forward losses:

    • Salary £40,000
    • Expected Rental Profit Before Interest £12,000 
    • Interest Paid £4,800
    • Currently, your income tax bill is: 20% of (£40,000 + £12,000 – £4,800) – £12,570 = £6,926
    • From 6 April 2025 your tax bill will become: 20%/40% of (£40,000 + £12,000) = £8,232 less 20% of £4,800 = £7,272
    • An increase of £346 every year without an increase in income.
    • Another impact from entering the higher rate band is halving your 0% tax band for interest income from £1,000 to £500, potentially adding a further £100 tax cost.
    • If your income is nearer to £60,000 before interest and you have children, your child benefit will start to be withdrawn. 
    • If your income is nearer to £100,000 before interest, you start to lose your tax free personal allowance!

    Your actions might be:

    1. Increase pension contributions against your salary to keep your income in the basic rate band, however, this clearly reduces your day-to-day cash to live on.
    2. If you’re an employee you can’t do too much about your salary unless you’re thinking of retiring or doing less work.
    3. If you’re a limited company owner, you may consider reducing the salary-dividends you take out of your company and if the £40,000 is mostly dividend income which won’t support personal pension contributions, you’d need to consider replacing some of this with company pension contributions.
    4. Increase the rent you charge to compensate for your increased tax cost. You’ll no longer be obliged to rent out the property for a certain number of days, so your model can become fewer renters at a higher rent.
    5. Shop around for a better buy-to-let mortgage to reduce your interest cost, although we often see this is pretty much under control.
    6. Transfer a proportion of your property to your spouse or adult children to spread your income across the family, however capital gains tax will be due on non-spouse transfers at 18%/24% unless you claim ‘holdover relief’ to delay the tax due until the recipient sells it.
    7. If you’ve owned the property for two years, sell your property before 6 April 2025 to benefit from 10% BADR (Business Asset Disposal Relief) assuming it’s not withdrawn on Budget Day.
    8. Sit it out, receive a reduced net of tax income and wait for future capital growth.
    9. Provide other services and argue that you’re carrying out a normal trade, similar to say a B&B or hotel.

    Losses – Your brought forward tax losses will be used up more quickly than before, being offset against £12,000 rather than £7,200 (£12,000 – £4,800), but may still offer some delay in the impact illustrated above.

    2. Professional landlord with a mix of FHLs and ASTs making an overall profit

    Landlords with several properties often without any other significant income may be known as professional landlords. Some properties may be funded by borrowings, and some are more profitable than others, with often a property needing a significant amount spent on it each year. Properties may be owned by both spouses, often also by adult children.

    Where a few FHLs are refurbished in the same year, this might cause an overall net FHL tax loss. Currently, losses from FHLs can only be offset against profits from FHLs, ditto ASTs. Moreover, the 

    Example after deducting any losses:

    • Expected FHL Rental Profit Before Interest £60,000 
    • Interest Paid on FHLs £10,000
    • Expected AST Rental Profit Before Interest £50,000
    • Interest Paid on ASTs £15,000
    • Currently, your income tax bill is: 20%/40% of (£60,000 – £10,000+£50,000) – £12,570 = £27,432 less 20% of £15,000 = £24,432
    • From 6 April 2025 your tax bill will become: 20%/40% of (£60,000 + £50,000) – £7,570 reduced personal allowance = £33,432 less 20% of £25,000 = £28,432
    • An increase of £4,000 every year without an increase in income.

    Your actions might be:

    1. Increase the rent you charge to compensate for your increased tax cost. You’ll no longer be obliged to rent out FHL properties for a certain number of days, so your model can become fewer renters at a higher rent or they might become AST renters.
    2. Shop around for a better buy-to-let mortgage to reduce your interest cost, although we often see this is pretty much under control.
    3. Transfer more of your properties to your spouse or adult children to spread your income further across the family, however capital gains tax will be due on non-spouse transfers, at 24%. 
    4. FHLs allow flexible allocation of profits and losses which will no longer be available. In particular HMRC regards joint spouse ownership to be a deemed 50% share unless they receive a declaration of trust and Form 17 in good time and which can’t be done retrospectively. It will be advisable to review this before 6 April 2025. 
    5. Transfer FHL properties to non-spouse family members, but claim ‘holdover relief’ to delay the gains for the recipients to pay 18%/24% on the entire gain when they sell them.
    6. Incorporate your property portfolio using capital gains tax incorporation relief to defer capital gains tax otherwise due. However Stamp Duty Land Tax will be a cost which might be a price worth paying for long run control over your income tax position and full tax relief for interest.
    7. Sell some FHL properties before 6 April 2025 to benefit from 10% BADR (Business Asset Disposal Relief) assuming it’s not withdrawn on Budget Day. You may choose the properties with the highest gain for the maximum benefit. Possibly reinvesting in new properties.
    8. If your FHL rents are currently chargeable to VAT, consider whether you may no longer need to be VAT registered.

    Losses – If you’re planning to refurbish a few FHLs, the new rules allow any FHL tax loss to be offset against both types of rents from 6 April 2025. As the FHL rules allow more costs to be tax deductible, you might bring forward some work to before 6 April 2025 using these rules while you can. You’ll still get tax relief either in 2024/25 if you still have enough FHL profits or in 2025/26 agaisnt all properties. Going forward, combining tax losses across FHLs and ASTs is likely to be helpful.

    3. Long term owner of a couple of FHL properties, nearing retirement age

    You have made fairly steady profits each year and seen a large increase in market value earmarked to enjoy in your retirement. 

    These tax changes will cost you 24% capital gains tax instead of 10% and even more income tax than illustrated above once your state pension starts to be paid. You may therefore decide to bring forward your plans. You may even decide to move into one of the properties.

    Example:

    • Market value £600,000
    • Original cost including stamp duty and solicitors £300,000 
    • Capital improvements not claimed for income tax £50,000
    • Selling costs £10,000
    • Tax free annual exemption £3,000
    • Capital gain £237,000
    • Capital gains tax of 10% is due on £237,000 = £23,700, assuming sufficient lifetime BADR of up to £1m remains available. 
    • From 6 April 2025, the capital gains tax due is 24% of £237,000 = £56,880, an increase of £33,180.

    Your actions might be:

    1. If affordable, maximise pension contributions during this tax year using your FHL rental profits as pensionable income while you can.
    2. Cease your FHL property business before 6 April 2025, locking in the favourable 10% BADR rate, ensuring you sell all properties within 3 years of cessation.

    Property tax is complicated. It’s therefore essential to obtain appropriate tax advice before taking any action suggested above, including Inheritance Tax implications. It’s likely some of the tax rates referred to above will increase in the Budget on 30th October, some of which may be immediately effective, so please check those changes at the time. 

  • Autumn Statement 2023 – More Drip Than Waterfall

    This was very much about ‘making work pay’ and aiming to improve productivity. Important though national insurance tax reductions are to help sole traders and partnerships, they do nothing to help those caught by frozen thresholds or running small limited companies.

    Sole traders and partners

    With Class 2 national insurance abolished and Class 4 national insurance reduced by 1% from April 2024 but dividend tax unchanged, more businesses may decide to remain as sole traders rather than incorporate or even prefer to disincorporate.

    When you add in that the cash basis will become the default way to measure tax profits from April 2024 (for any size sole trader) together with the previously known companies house reforms requiring more company information to be made public, the government clearly wants small businesses to stay as sole traders unless they’re large enough to embrace being a limited company in full.

    To back this up, the cash basis for measuring tax profits from April 2024 will allow losses to be offset in the same way they are for the accruals basis (the one that accountants with use) and there won’t be an interest deduction cap of £500 with all trading interest becoming tax deductible.

    The cash basis may have been improved to also ease the introduction of Making Tax Digital – MTD – which will benefit from some simplifications from April 2026 (with over £50k turnover or rents) and from April 2027 (over £30k) where the quarterly submissions will now be cumulative and there won’t be an end of period statement (EOPS). MTD won’t yet be required for partnerships or jointly owned property. 

    NB For sole traders and partners with profits under £6,725, or tax losses, who want or need a state pension credit year, can still voluntarily pay Class 2 £3.45 a week, so Class 2 will still exist for many. 

    Owner-Directors

    With dividend tax at 8.75% between £12,570 and £50,270 but employee national insurance at 10% from January 2024, this differential is narrowed further, making it more likely than before that an owner-director should take a salary instead of a dividend. If you continue to take dividends, your income tax return will need to show your own company dividends separately from any others and your percentage share ownership, presumably to help HMRC track these back to your company.

    If you continue to embrace being a limited company, investing to save the higher corporation tax, but need funding to do so, you might benefit from an external EIS investor who will continue to benefit from tax breaks until 2035, which should encourage more investors to enter the small business scene.

    If, despite it being harder, you remain eligible for research and development tax credits, the R&D work you’ll need to do if you’re loss-making to maximise your cashback at 14.5% will fall from 40% to 30% from April 2024, meaning that you’re not expected to spend as much on R&D. Perhaps the 40% threshold was probably too high for many!

    Limited companies – 100% tax relief on new assets – ‘Full expensing’

    Much is said about full expensing but it has no value for most small limited companies who already benefit from 100% tax relief, called AIA, on most fixed asset spend of up to £1m per year. Full expensing only applies to new assets purchased by limited companies whereas AIA applies to sole traders and partners and second hand assets. 

    And don’t forget the same Chancellor increased corporation tax from 19% to 25%/26.5% meaning many companies won’t be better off overall. 

    After all the media interviews I was expecting a waterfall of tax improvements for small businesses, but we’ve  ended up with a dripping tap.

  • 2023 Tax Year End Planning

    Pensions

    With corporation tax increasing from 19% to 25%/26.5% many company owners may wish to delay some pension contributions to after April 2023, subject to using the £40k annual allowance effectively.

    High earners should always check they’re keeping taxable earnings under £100k wherever possible which might be achieved by paying more into your pension scheme before the end of the relevant tax year.

    If you’re likely to become an additional 45% taxpayer from April 2023 for the first time because your income is between £125k and £150k, you’ll save an extra 25% instead of 20% by making pension contributions after April 2023.

    Spouse Dividends

    Since 6 April 2022, dividend tax has been at its highest level. If you can take more dividends from your company you might consider asking your spouse to take on some shareholder responsibilities and  receive some dividends, particularly before 5 April 2023 while the £2k 0% tax band remains available.

    From 6 April 2023, the £2k is halved to £1k so this advantage reduces, however, spreading the tax costs across lower tax bands is likely to remain advantageous.

    National Insurance – State Pension Top Up

    From 6 April 2023 the ability to make top up payments for earlier years is significantly reduced.

    Currently many people can make catch up Class 3 NI payments all the way back to 6 April 2006 to fill any gaps in your state pension qualifying years. From this April this is being reduced to 6 years, which is still valuable and will be sufficient for many people.

    If you’re not sure, you need to check your Personal Tax Account, which despite its name also shows your state pension.

    Research & Development

    One major change from this April is the reduced cash credit for tax loss-making SMEs. The effective value is currently 33.35% but this is being reduced by nearly a half to 18.6%. (The government is punishing SMEs for the poor practices of non-qualified companies set up to claim cash backs.) You may therefore wish to check whether some costs can be brought forward to access the current higher cashback rate.

    On the other hand, if you’re profitable with over £50k profits your marginal tax rate will be increasing by at least an absolute 6%. The combination of this rate increase and the reduced credit from 230% to 186% is a net value increase from 43.7% to 46.5% for R&D spend from April 2023.

    The increase in the value of a tax credit under the alternative RDEC scheme is a net tax credit of 15%, still lower than the percentages above, meaning it may remain less appropriate for many SMEs. 

    If a major part of your claim is overseas contractors, these will no longer be eligible and you may wish to bring some of those forward if possible. However, if you’re looking forward to claiming data and cloud hosting as an R&D cost, these become eligible from April and a delay might work out depending on the project plans.

    The requirement to provide more details is already fulfilled when On The Spot Accountants make claims. If the advance notice of a claim ends up in the final legislation we’ll be keeping in touch with you to ensure a notification is submitted even if it’s a protective one. Happily, most client tax returns are easily submitted within the 6 month required timeframe which may supersede the need for any advance notification at all!

    Super Deduction 130%

    As this ends on 31 March 2023, bringing forward a large capital spend might be worthwhile saving an effective 24.7% of corporation tax. However, as this was only a way to mimic the 25% increased corporation tax rate from 1 April 2023 and has certain restrictions, if you have profits over £50k, capital spend is likely to save you more, 25%/26.5%, corporation tax by waiting until 1 April 2023.

    Capital Gains Tax

    If you’re about to exchange on an asset, you may want to ensure this definitely happens before 5 April 2023, after which your tax free annual exemption of £12,300 is reduced by more than half to £6,000. For a couple selling a buy-to-let property this might cost tax of up to £3,528 for the sake of a few days.

    Likely, more valuable, is the increase in corporation tax for companies who might save 6% on the whole gain by exchanging before 1 April 2023 and if your year end isn’t 31 March, it might be worth changing it!

    You’ll see there are some twists and turns with these changes, sometimes bringing forward plans is the better answer, sometimes delaying plans is better. Each taxpayer is different and you should only act after being advised about all the financial impacts of your actions. In particular, some changes have slightly different effects if your year end is not 31 March.

  • 2022 – Top 8 Tax Queries

    1. Extraction of profits from your limited company 💪

    We had fun with changing national insurance thresholds and rates but got there in the end! Optimum director salaries might be £12,570 or £11,908 with dividends. Other ways to take money from your company include home office rent, pension contributions and interest on loans made to your company. Dividends were difficult for some where sufficient after-tax profits weren’t achieved and these should be repaid to avoid other tax issues. 

    2. Using tax losses to generate a cash refund 👍

    Limited companies, sole trader and partnerships enjoy different rules with some surprisingly helpful results. By definition, when you have tax losses you’re likely to need a cash injection and the tax system can help you. We’ve made many claims, but also found HMRC needed to be chased more than usual to part with your cash! We’re known for never giving up 🙂

    3. Research and development cash refunds 💰

    Along similar lines, if your company also carried out R&D, we made many claims to get you a cash payment from HMRC to encourage you to do more for the good of the economy. We’re not sure the new restrictions will help you much more from April, however!

    4. Capital allowances – 130% super-deduction and electric vehicles 🚘

    We’ve made many 130% capital allowances claims for limited companies for new equipment and 100% tax relief for new electric cars. If cash has been tight, hire purchase was used to further help with cashflow.

    5. Capital gains tax – residential property 🏠

    Taxpayers selling a rented or second home needed advice and real time tax returns prepared. With many also benefitting from principal private residence relief, or for overseas residents, pre and post April 2015 gains, the calculations got a bit interesting! We’ve used the rules to the optimum to help keep these bills down.

    6. VAT – Overseas business to business services 👥

    It’s very easy to get this area wrong. When you provide services to another business and invoice that overseas company, it’s ‘outside the scope’ for VAT. This is a sweet spot where no VAT is charged by your business and your business is still able to reclaim VAT on all costs as normal. This means you may want to voluntarily register for VAT to recover this VAT if it’s worth the administration of preparing VAT returns.

    7. Rewarding staff 🎉

    We’ve advised on ensuring all taxes are considered: corporation tax, VAT, income tax and national insurance. Annual parties up to £150 for each person and gifts up to £50 cost each are the most tax efficient as long as they’re not in recognition of doing a particular piece of work or meeting a target. Pub or restaurant visits are more problematic. EMI share options are more tax efficient but don’t always suit the company culture.

    8. Off-payroll working and IR35 🙄 

    Again, we had a brief time thinking off-payroll working was behind us, but it ended up staying. We’re seeing more customers of our clients happy to confirm they understand a piece of work is outside these rules and therefore more consultants coming back setting up limited companies. It’s essential to get your Status Determiniation Statement or SDS, otherwise you’re at risk of a very high tax bill.

    Here’s to 2023 and making the most of the system we’re presented with! Happy New Year! 🥂 

  • Autumn Budget – Cheers From Your Town?

    Investment – Capital allowances of 100% or 130%

    If you invest in your business you’ll receive 100% tax relief on purchases up to £1m! This was due to be reduced, but today it has been extended to continue until April 2023. So invest in any machinery, van, computer, for your business and you get a full tax write off in that year, even if you borrow to buy it. 

    If you’re a company, however, you’re more likely to want to claim the super-deduction of 130% which saves even more tax and without a £1m cap so nothing changes for you today. Although it’s worth noting this is only avaialable for new assets and more restricted types of plant. 

    Company Research and Development Tax Relief – Restriction and Extension

    Good to know the UK spends quite a lot on R&D but I understand the OECD thinks it’s not all ‘proper’ R&D.

    One difference in comparison to other countries allowing spend outside the UK will, from April 2023, be restricted to UK spend only. By contrast, as widely requested, qualifying spend will from April 2023 be extended to include data and cloud costs which can form a large part of necessary R&D costs.

    Further details will be issued.

    Pension Scheme Withdrawal Age Increase – From 55 to 57 Years

    Confirming a previous announcement, however, many people will have made plans to take out at least their 25% tax free lump sum at age 55, perhaps to pay off their mortgage. If you don’t act before 6 April 2028, you’ll have to wait until you’re 57. 

    In the meantime do see if you can benefit from tax relief by making contributions into a scheme.

    Landlords, Sole Traders and Partnerships – Tax Year End

    Coming in from April 2023 and 2024, look out for this and whether you should change your year end to align with the tax year. Most of you will already use 31 March or 6 April, but if you don’t you may find you get a better result making the alignment before 2023.  

    Personal Capital Gains Tax – Sales of Residential Properties

    Where tax is due, UK residents now have 60 days after completion to report and pay the capital gains tax due. The online portal has had some problems so this gives HMRC and the taxpayer time to clear them soon after the transaction.

    Underpaid or Failure To Repay Child Benefit, Gift Aid, Pension Charges 

    As a result of losing a tax case, which they’re appealing, it’s been made clear today that HMRC can go back at least 4 years and recover any overpaid child benefit, gift aid relief or underpaid pension charges.

    The figures can be very large when paid back in one lump sum with costs, so ensure you understand the rules and pay the correct amount on time.

    Let us know if you need to know more about these or any other changes announced today. 

  • Don’t Be Dwarfed By The Tax System – Seven Ways To Make Tax Less Taxing

     

    Dear Sajid Javid

    Following your ambition to simplify the tax system and as we approach your 1st Budget, may I pass on a few things that will make a difference to business’ actual experience of the tax system.

    Many good people looking at simplification tend to make changes from a macro viewpoint. Here, we’re looking at the micro level. The things that make people scratch their heads every day of the week.

    1. How many tax references do you need?

    A VAT registered owner-managed limited company with even only one shareholder-director has to obtain SIX different tax references, which arrive in different formats from different departments: 

    1. Government gateway
    2. Corporation tax
    3. VAT
    4. PAYE
    5. PAYE accounts office
    6. Income tax

    Not forgetting if there’s overseas trading, they’ll need a further VAT reference and in the construction trade, another reference. In the confusion they often end up setting up numerous government gateways. 

    There are attempts to make the system look combined but it soon breaks down into the same old silos once you scratch under the service. Please do not believe this is getting better.

    1. Names given to tax reliefs

    Please revisit the names of the following reliefs: 

    Substantial Shareholdings Relief – Part of the government’s business friendly agenda, to qualify and save capital gains tax, a company needs to own only 10% of shares in another company, hardly ‘Substantial’. Companies and many accountants miss out on this relief. 

    Adjusted Net Income – Affecting high earners and the amount of pension they can pay with tax relief, this is NOT net of tax. This is GROSS income and easily misunderstood so that unexpected tax bills arise. 

    Reinvestment Relief – This applies to SEIS capital gains tax savings when a gain is reinvested into SEIS shares. EIS also offers capital gains tax relief when a gain is reinvested into EIS shares. It’s not the same outcome (delay instead of reduction) but with both requiring a reinvestment into new shares, it’s endlessly confusing.

    1. Van tax

    What is a van? 3 different things according to the tax system depending on whether it’s:

    1. VAT
    2. Benefit in kind
    3. Capital allowances 

    Get this wrong and even taxpayers who run a simple van-based business, might get caught out and suffer financial hardship later.

    1. Change of company address

    With over 70% of limited companies registered at a home address, it’s quite common for the address to be changed. However, you can’t do this direct with HMRC. You change it with companies house and wait forever for that simple bit of information to be sent and/or dealt with by HMRC.

    If there needs to be the link, please ensure the information is acted upon. With electronic communication surely this should be almost immediate?

    There’s no point even trying to get the year end changed with HMRC via companies house. An accountant just has to do a workaround. If clients haven’t used an accountant before, they tend to appear at this point.

    1. CT61s

    Often needed when paying interest on a loan, perhaps to a shareholder-director for lending money to his/her company to help get it off the ground or expand.

    These forms record the income tax which still needs to be deducted despite the new £1k ‘simplification’. If tax still has to be deducted, surely the form should be available online? It’s about the only one that isn’t.

    Why the added administration for a busy start up who is responsibly lending money to ensure his/her company can pay its creditors. What’s so bad about that?

    1. IR35 and off-payroll working

    This gets more and more confusing. Recent Tribunal cases turn on a single judge’s casting vote, so how is anyone else supposed to decide?

    Surely the definition needs to either be very simple, such as after 2 years working for the same single client, you’re deemed an employee. Or people weigh up the pros and cons of being an employee and decide for themselves. With the new dividend tax, the government is now receiving some NI ‘replacement’.

    1. Agent Authorisation

    Due to the above, businesses need to use qualified accountants, who have to navigate HMRC’s agent gateway. To become an agent for a company the only box that works is the postcode and don’t forget to put the space in the right part of the postcode! No other website is so sensitive in this and other areas.