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Tag: Pension Contributions

Pension Contributions

  • 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. 

  • GE2024 – Actions To Take Before 4 July 2024

    Capital Gains Tax – Rate Increases

    Current rates of 10%/18%/20%/24% might increase closer to, but not as high as, income tax rates of 20%/40%/45%.

    For example, if you’re in the process of selling a buy-to-let residential property expecting to pay a 24% capital gains tax rate, you may want to ensure you exchange before 4 July to save an increase to say 30%. The effective date for capital gains tax is exchange, not completion, so if you can only exchange before 4 July this should be sufficient.

    Action: If you agree this is likely to happen you may want to ensure you exchange on sales of chargeable assets, such as second residential properties, before 4 July.

    Pension Contributions – Threshold Decreases

    The current recently introduced more generous thresholds of up to £60k per tax year of total contributions enjoying income tax relief and no maximum on your pension fund pot value, will probably be dialled down by a Labour government.

    We’d expect any contributions paid and pension pot values already enjoying these rules to continue to benefit from them, with conditions. For example, when a pension pot maximum was initially introduced existing pots over the maximum remained tax free as long as no further contributions were made.

    It’s also possible the 40% and 45% tax relief is reduced to 20%, often mentioned, but so far not adopted by any government even during the financial crash.

    Action: Subject to Independent Financial Adviser advice, make further pension payments before 4 July. For example, if so far this tax year you’ve paid say £10k into your pension scheme, you might want to try making a further maximum £50k, whatever is affordable/advisable, before 4 July to obtain maximum tax relief for this tax year.

    Tax Avoidance Clamp Down

    The truth about public bodies trying to demonstrate results is that they end up going for ‘low hanging fruit’. For HMRC this often translates in going to the taxpayers they already know about and digging deep hoping they’ll give in.

    A classic example is the recent campaign against weak research and development – R&D – tax relief claims. HMRC has attacked many genuine claims as part of their sweep up picking on certain easily identifiable claim types, hoping the less financially robust who can’t afford the professional fees or who simply don’t have the time, will give up. The real culprits not necessarily caught within the rigid simple crtieria managing to avoid scrutiny.  

    Action: At the minimum, ensure you retain evidence of tax claims and that your bookkeeping is simple and clear, so when asked it’s easier to respond to queries and you don’t have to give in because it’s hard to reply.

    Preparing a good tax return is a skill. All tax returns should be prepared with possible queries in mind, so provide explanations where needed enabling HMRC to see what is happening; it may make the difference to encourage HMRC not to write to you for clarifications.

    NB The current government has now matched Labour’s anti-avoidance pledge, so there’s more reason to act.

    VAT On School Fees

    This is a definite promise from Labour. The exact increase in cost of school fees is unlikely to be simply 20% because the school will recover VAT on many of its costs and may also decide to absorb some of the potential price increase.

    Action: Much has been said about you can do to reduce your exposure to any increase, the simplest and most robust is to pay school fees in advance before 4 July. However, do consider the possibility of the school failing and therefore losing your fees completely!

    After 4 July 2024

    It’s worth noting that the above actions may turn out not to be needed immediately, but are still worth considering over the next few months. [EDIT: For a later Budget now expected in the Autumn].

    In addition, despite recent assurances that taxes won’t increase, the public finances are fragile which Labour might later declare worse than expected, paving the way for certain other popular increases. 

    Action: Keep in touch with your On The Spot Accountant to ensure you’re kept up to date. 

  • 2024 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 and many will have to repay child benefit when they didn’t before.

    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 income 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 and 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. 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 2024 than in the year to 31 March 2025, 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 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 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 also receives 20% direct from the government, boosting its value in the background.

    3. State Pension Top Up

    The original deadline to top up your state pension, if needed, has been extended to 6 April 2025, but as time flies, it’s worth a reminder!

    Currently many people can make catch up Class 3 NI payments all the way back to 6 April 2006 to fill any gaps in state pension qualifying years. From 6 April 2025 this is being reduced to 6 years, which is still valuable and will be sufficient for many people.

    You should 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 £824 to add on a missing year, which although expensive is often still worth it – but do check!

    4. 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.

    From 6 April 2024, the £1k 0% dividend tax is again halved to £500 so the advantage of paying tax free dividends to a spouse is less than it used to be and spreading family tax costs across lower tax bands has become more advantageous.

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

    For all businesses, sole traders and limited companies. the Annual Investment Allowance is now permanently at £1m meaning that you can spend up to £1m on plant and equipment or on eligible commercial property refurbishment costs and receive 100% tax relief. Similarly, new electric cars purchased before 6 April 2025 benefit from 100% tax relief with no limit.

    If you plan to incur these costs near to your year end, such as 31 March 2024, ensure you meet the conditions for a claim in the earlier 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.

    6. Research & Development

    The new merged R&D scheme – for SMEs and large companies – takes effect for accounting periods beginning on or after 1 April 2024, but with the existing SME intensive scheme remaining for now.

    As you’d expect the new merged scheme isn’t as generous and R&D expenditure and claims should be made in earlier accounting periods wherever possible.

    If a major part of your claim is overseas contractors, from 1 April 2024 these will no longer be eligible and you may also wish to bring some of those forward.

    7. Director Small Wins

    Remember to maximise your director treats for the tax year ended 5 April 2024; trivial benefits totalling £300 each, annual parties expenditure up to £300 each with guest or having a private health care check.

    8. Capital Gains Tax

    If you’re about to exchange on an asset, you may want to ensure this definitely happens before 5 April 2024, after which your tax free annual exemption of £6,000 is reduced by a further half to £3,000. For a couple selling a buy-to-let property this might cost tax of up to £1,680 for the sake of a few days.

    Each taxpayer is different and you should only act after being advised about all the financial impacts of your actions. Also, the Budget on 6 March 2024, may affect your optimum position.

  • Dear HMRC…Why We Need To Talk

    Dear HMRC

    Why we need to talk to you…..

    As an unrepresented taxpayer with apparently very simple tax affairs, I find myself needing to call you. I really don’t want to. I have better things to do, but I like to know I’m not going to upset you.

    Over the last few years, I’ve needed to talk to you about:

    Incorrect PAYE code – In common with the mightiest Finance Directors, I don’t like surprises. If this code is wrong and you send me a demand after the end of the tax year, it’s a worry. I don’t have spare resources to conjure up extra cash.

    No matter how hard I try, I don’t understand my code. If you change it, I won’t know why and I need to ask you. I need someone to say it’s OK, no need to worry.

    High Income Child Benefit Charge – A couple of times, I’ve earnt over £50,000, and you came back to me a few years later and asked me to repay some child benefit. This is a confusing rule. You saw my income, but child benefit continued to be paid. You told me this is on the website for me to see clearly.

    Sorry, but I don’t hang out on HMRC’s website just in case something applies to me. You know the jargon because you see and hear it every day. I don’t, so occasionally I need a human to explain things to me.

    Pensions – Full Tax Relief – When I earn over £50,270 (different to the £50,000 for child benefit) I’m told I can claim an additional 20% income tax on some of the gross pension payment made to my employer’s pension scheme. I have only the vaguest idea what this means and suspect there are a lot of us missing out on full tax relief.

    I’d quite like you to explain this to me. HMRC’s site assumes a certain level of starter knowledge eg what ‘relief at source’ means.

    Self Employed Class 2 NICs – My side hustle self employed income is sometimes very low and you refunded me the Class 2 NICs I’d asked to pay voluntarily. On enquiry a person explained that voluntary contributions aren’t accepted unless a certain form has been completed.

    For years, I’ve reported a small self employed business on the side. This isn’t enough to earn me a state pension credit should I ever need to pay Class 2 NICs voluntarily. How confusing is that? I couldn’t have worked this out on my own.

    Self Employed Tax Payments Due – In my busier years, no matter how hard I try I don’t understand any statement I see. I pay the figure at the bottom and hope for the best. You tell me the payment on account system is explained online.

    You’re the only organisation I deal with that has a twice a year payment system with half of it in advance and the other half after the end of a period. Unless someone takes me through how that works, I’m not going to understand it.

    It seems the people sitting in rooms talking familiar language make rules that suit their ends. The rest of us get on board as best we can.

    Or are you saying we now all need to pay an accountant?

    Yours confused

    Unrepresented Customer (who can’t choose another ‘supplier’)

  • 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. 

  • 2023 Corporation Tax Increase – 7 Ways To Keep It Low

    What action can you take to help you pay less of this increase? Here are some ideas for your consideration:

    1. Director salary

    A tax deductible expense against profits, ensure this is optimised. Perhaps it’s time to have a paid spouse director? This makes paying a higher salary to both of you, tax efficient. For example as a sole director-employee you’re probably taking £736pcm. With a second director, this could be increased to £1,047pcm to save corporation tax but also to remain efficient for income tax and national insurance. 

    1. Home office rent

    If you’ve not revisited this recently, perhaps the costs have increased? Or your business use of your home office increased? Ensure you have a licence agreement and record the rental income in your income tax return, with a deduction for the costs, such as utilities, council tax, insurance, against the rent.

    You can set the net rent for income tax purposes to be £NIL, but it might be better to have a profit in your self assessment income tax return, to save more corporation tax, depending on the details of your other income from the company and elsewhere. 

    1. Company pension contributions and relevant life policies

    In general, you can benefit from up to £40k pension contributions per tax year. Therefore, if no other pension contributions are made by you or on your behalf, your company might be able to pay the full £40k into your personal pension saving up to £10,600 of corporation tax.

    A death in service policy where neither the premiums paid by the company or the benefits paid out are taxed on you or your beneficiaries.

    Of course, take IFA advice before going ahead.

    1. Electric vehicles

    New electric vehicles are receiving some of the most generous tax benefits for the next few years. Your company saves corporation tax on the purchase price even if you don’t pay out all the cash up front eg hire purchase. Plus there are minimal income tax and national insurance costs. You therefore get the personal use and enjoyment of a car for a large net tax saving. For petrol, diesel or hybrid cars, there are often large net costs!

    If your electric vehicle costs £50k, the potential corporation tax saving if you’re aiming to reduce your £100k profits to £50k, is £13,250 in the year of purchase.

    1. Investment in plant & equipment

    Perhaps it’s time to make that expansion and invest in new plant & equipment needed to do that. Of course, you have the 130% super-deduction before 2023, but going forward after that you can invest up to £200k every year in new eligible assets and receive 100% corporation tax relief. The maximum you can save annually at the 26.5% maximum marginal rate is therefore £53k.

    1. Trivial benefits and annual parties

    As long as each benefit costs less than £50 incl VAT, you can provide a voucher or buy a gift for yourself and your employees which aren’t taxable on them but saves corporation tax at the same time. Director-shareholders are limited to a maximum of £300 per tax year, but your employees aren’t, as long as the gifts are made on an ad-hoc basis.

    One of our old favourites, the annual party can be a Summer party as well as a Christmas party. Everyone has to be invited and it’s £150 incl VAT per person plus £150 incl VAT for a guest.

    With two shareholder-directors and two employees, each receiving £300 trivial benefits and attending an annual party with a guest, over £600 of corporation tax might be saved each year.

    1. Healthier options – cycle to work scheme, private health checks, eye tests

    To offset the annual party and driving around in your new car, you might visit these healthier tax deductible items, where you don’t suffer any income tax or national insurance.

    A cycle to work scheme has to be offered to everyone and the bike used more than 50% of the time for commuting or business journeys. The bike is lent to you and you then buy it from the company at a second hand value a few years later.

    Annual private health checks, as opposed to private health insurance, and eye tests where you use a screen for work, also save corporation tax without any tax charge on you or your employees.

    If any of these appeal to you, please discuss with your On The Spot Accountant. 

  • 2021 Tax Year End Planning – Top Tips

    Easter Monday is not only the end of a long bank holiday, it’s also the end of the tax year. Make sure you plan accordingly, so you can improve your nest egg before Easter 🐤 Please see our top tips below:

    1. Income Tax Thresholds – £50k and £100k

    These are crucially important to understand, to ensure you don’t pay more tax than you need to. Even if you benefit from a 0% tax rate on certain allowances, say the £2k dividend allowance, the £2k still counts towards these £50k and £100k thresholds.

    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.

    Between £50k and £60k, your child benefit starts to get taken away for you or your partner. If your child benefit is an annual £1,820 and your income is £60k, you have to repay (or not claim) £1,820. This amounts to a further tax of 18.2% on top of your dividend tax of 32.5%, just over 50% in total. This is expensive!

    Similarly, if you need to take more than £60k and are close to the £100k threshold, you may want to stay under the £100k threshold where you start to lose your tax free personal allowance. For every £1 of dividend taken between £100k and £125k, the effective dividend tax due is 48.75%, rather than 32.5%. For high earning employees the effective income tax rate is 60%!

    2. The Importance of Pension Contributions and Charitable Gift Aid Donations

    The introduction of the £50k and £100k thresholds has shown how important pension contributions and gift aid 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’re thinking of paying pension contributions or gift aid donations, pay them at the optimal time to maximise your tax reliefs. Remember they need to be paid on or before 5 April 2021 to save income tax.

    As a company owner, your pension contributions will probably be made as company contributions and to save corporation tax these must be paid before your accounting year end. If your company year end is 31 March 2021, pay them on or before 31 March 2021.

    As a high earning employee, say, on a salary of £110k, paying £8k into a pension scheme saves you £6k of income tax! This is 60% of £10k being the £8k you paid, grossed up by 20%, or £2k, paid direct by the government into your pension pot. The net effect on your income tax return is £4k to allow for this £2k paid in the background.

    As a sole trader or partner, if you have a good year, you’re not able to defer income as easily into another tax year so pensions and gift aid donations may be even more important. Similar considerations apply as above.

    Take IFA advice before deciding if, when and where to invest.

    3. Planning To Expand?

    As a sole trader or partner, if you have some larger costs to incur or equipment to buy, you might want to incur these costs before 5 April 2021 so you can claim tax relief in this tax year.

    If you’ve just started up so you’re making losses and paid tax elsewhere in this tax year or any of the previous three tax years, you should be able to claim an income tax refund. Therefore, if you have some costs to incur or equipment to buy, incur them before 5 April 2021 to increase your tax loss and therefore your tax refund.

    The meaning of ‘incur’ isn’t necessarily paying out cash before 5 April 2021, so check the rules if your cashflow is tight.

    Similarly, as a company owner with a 31 March 2021 accounting year end, bringing forward significant costs will save you corporation tax. However, for plant & equipment, you may save more tax by making the investment in your next accounting period from 1 April 2021 to benefit from the recently announced super-deduction of 130%.

    4. Planning To Invest?

    If you’re planning to support unrelated growing limited companies by investing in shares, remember to consider whether S/EIS income tax reliefs are available to you. Each £10k invested might save you £3k or £5k of income tax. Investing on or before 5 April 2021 should bring forward your tax saved by a year.

    5. Marriage Allowance, Trivial Benefits, Annual Parties

    Ensure you’ve not missed out on these during the tax year. They can add up! For example, marriage allowance can save up to £250. Perhaps even treat your employees to a virtual Easter party, assuming the £150 per person wasn’t used up at Christmas!

    As ever, remember to take appropriate professional advice before taking or refraining from any action so that your tax and business situation may be assessed in full.