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Tag: Pensions

Pensions

  • Top 10 Client Queries During 2021

        1. What claim can I make for home office costs?

          Depending on whether you’re an employee, self employed or an owner-director, your claim can usually be at least £6 per week up to a market rent charged to your company which is included in your income tax return. 

        2. Should I incorporate my sole trader business? How do I incorporate my sole trader business?

          With the increase in dividend tax in 2022 and corporation tax increases in 2023 for many companies, this needs to be revisited. At about £100k to £150k profits you may be better to remain a sole trader, but only if you need to take all the profit out from your company. If not, the tax advantage of spreading your taxable income over several years, is very valuable, particularly if you want to keep your child benefit or tax free personal allowance.

          Often a good way is for you to set up a new company which buys goodwill and other assets from you. At low levels, the goodwill may be taxfree on you. Your company will owe you for these assets which it can repay you tax free when it has the funds. 

        3. How does one of us exit our company?

          If your company has accumulated profits and cash and several other criteria are met, your company may be able to buy your fellow shareholder-director’s shares and cancel the shares. This means you don’t need to find the cash from your personal funds.

        4. What tax efficient choices are there to reward my staff? 

          Many and varied from an annual Christmas Party for everyone, annual health care checks, cycle to work arrangements and small gifts under £50, through to granting share options to senior staff. 

        5. How do I liquidate my company?

          For some small solvent companies, a simple DIY striking off might be approrpriate, but your company can be resurrected in certain situations. Liquidator fees have become more competitive and may enable you to take more accumulated profits out of your company at a 10% capital gains tax rate, which is better than a 32.5% dividend tax rate but more than the 7.5% dividend tax rate where your total income is under £50k.

        6. I don’t understand my company’s accounts. Would you please take over?

          Recent government grants and loans have focussed minds on the advantage of understanding your accounts at some level. We’re seeing quite a few accounts that don’t agree to software or make little sense, which when rectified helps business owners see what’s going on.

        7. What VAT applies to imports and exports? 

          This depends on whether these are goods or services and whether it’s B2B or B2C. With more businesses providing online services which reach consumers outside of the UK, it’s important to understand that local EU VAT is due and how to register and pay EU VAT.

        8. What capital gains tax do I pay on my property sale? 

          This depends on a few factors, mostly whether you’ve ever lived in the property as your home. If it’s never been your home, the entire profit over £12k per owner, after costs of purchase, sale and any capital improvements will be taxed at 18% or 28% or a combination, determined by whether you’re a basic rate or higher rate taxpayer when the property gain is added to your income. If it’s partly been your home, partly rented, a proportional calculation is required.

        9. What pension contributions can I make? Am I claiming enough income tax relief? 

          Broadly, pension contributions are restricted to £40k per year to include all contributions to all schemes by employer and employee. Some unused maximums can be brought forward from previous years but the annual lifetime allowance of £1m must also be considered.

          On the other hand, we often see employee higher rate taxpayers not claiming enough tax relief due to a misunderstanding about how thier pension contributions are paid. Pensions have never been more complicated and many people should take advice from an IFA.

        10. What income tax is due when I work abroad for a UK employer?

          If you are resident and working in another country, you’re usually required to pay tax in that country. We’re seeing some senior staff moving permanently abroad but retaining their UK employment. Their employers are often unclear as to how to deal with local tax systems, instead continuing to pay UK PAYE tax. If this becomes more common it might get more attention from local tax authorities.

    As always take advice specific to your situation as different answers are likely to be appropriate to different people and companies. 

  • 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. 

  • Top Five Most Common Tax Queries – 2016/17

    1. Dividend Tax – How much tax will I have to pay?

    Unfortunately, most companies are affected by this. Broadly dividends you pay over £5k within the basic rate tax band have now suffered a 7.5% tax charge. If this is over £1k, which is likely, you’ll also find yourself in the payments on account system meaning that you have to pay 50% of next year’s tax bill before the end of the tax year in January. Plus a further 50% in July. The first year this applies is this tax year just ended and therefore your cashflow requirements will be even higher next January 2018, and July 2018.

    2. Salary – What salary should I take from my limited company?

    If you’re a sole director, you can’t claim the Employer Annual Allowance of £3k, so the most tax efficient monthly salary was set at the national insurance threshold of £671. For next tax year, this increases to £680. If there’s more than one director who was paid at least £485pcm or you employed staff, even briefly during the tax year, you could claim the Employer Annual Allowance using part of the £3k. This means if you paid yourself the full tax free personal allowance of £11k or £916pcm, when all the taxes are taken into account, this saved £472 per couple of directors. This year the savings are very similar, despite the increased tax free personal allowance to £11,500 as the reduced rate of corporation tax to 19% reduces the saving from paying a higher salary. Before paying a second director, you should always review their other income such as property rental.

    3. VAT – Should I deregister from the VAT Flat Rate scheme?

    HMRC recently introduced the concept of a limited cost trader, meaning mostly consultants, who they deemed to be abusing the tax system by profiting from the Flat Rate scheme. As the scheme was introduced by the government and taxpayers were encouraged to use it, this was a strange statement to hear. The upshot is that consultants have moved to standard VAT accounting meaning they make neither a gain or a loss but HMRC may now need to spend more time reviewing their tax returns because they will be more complicated. Unfortunately, the new rules, as is often the case, has caught other people. For example, if you run a ballet school but sell a few ballet clothes to students, selling goods isn’t your main business activity, so you can no longer operate the Flat Rate scheme. 

    4. Pensions – How much tax relief do I receive and should my company pay the contributions?

    If you’re a company director-shareholder taking a small salary (see above) and larger dividends (see above) you are limited when looking at personal pension contributions. This is because pensions can’t be paid against dividends even though we now pay tax on dividends. Therefore, it’s usually a good idea for your company to pay company pension contributions. They are an expense in your profit and loss account and therefore saved 20% corporation tax (or 19% during this new tax year).

    For people who don’t run their own business who are in their employer’s pension scheme please triple check that you understand whether you’re receiving full or partial tax relief in your payslips. We see many people only receivng 20% who aren’t aware they need to make a further 20% claim in their tax return.

    5. Sporting events or memberships – Can I claim tax relief?

    Despite being a place where business is discussed with customers and suppliers, HMRC view this as not being tax deductible. The main reason to go to a sporting event with customers and suppliers is to entertain and entertaining is not tax deductible. On the other hand, if there’s a conference with a business agenda for staff to attend away from their office, this is likely to be tax deductible. If the cost is less than £50 incl VAT per person, you may be able to use the new trivial benefits rules and treat staff to a sporting event, as many times as you like. So, it’s not all bad. 

     

  • Budget 2017 – So will the Chancellor be sacked?

    The thing about national insurance

    It’s complicated.

    The Chancellor referred to the lack of payment for public services but the national insurance of £6,170 due on a salary of £32,000 includes £3,297 paid by the employer, not the individual. Plus the employer receives corporation tax relief reducing the net amount paid to the Treasury by £659 to £2,638 from the employer.

    If you look at what the individual pays, the correct comparison is £2,873 from the employee versus £2,300 from the self-employed, a reduced differential of £573. On a salary or profit of £32,000, this gap will drop to about £240 from April 2019. 

    This £240 is effectively the price of no holiday pay, sick pay, maternity pay, having to pay all your own pension contributions etc. 

    Hopefully, the announced review of benefits available to all will improve these comparisons. 

    15 MARCH 2017 UPDATE – THIS CLASS 4 NATIONAL INSURANCE INCREASE HAS BEEN SCRAPPED. 

    Making tax digital

    On top of this a 1 year delay to ‘making tax digital’ quarterly reporting where your turnover is less than £83k won’t reduce this new self-employed burden by much and the self-employed may start to feel a bit hard done by today.

    Dividend tax 

    The 0% tax rate on £5,000 of dividends will from April 2018 be available on only £2,000 of dividends. This will adversely affect small owner-managed businesses but it’s still likely to be beneficial to run many businesses through a limited company, if only to be able to control the timing of your personal taxable income.

    Perhaps when HMRC was told that its example of the interaction of the £5,000 and the tax free personal allowance was wrong, the Treasury had to re-run its numbers and discovered that £5,000 would cost more than they realised!

    Research & Development 

    As part of the Chancellor’s determination to tackle our poor productivity, he seems willing to be more lenient about the details required when making an R&D claim. This needs to be an instruction to HMRC, as the most lengthy information requests are made by inspectors after submission, sometimes for relatively small claims. 

    Conclusion

    The Chancellor’s error in the national insurance comparison and HMRC’s error in calculating the effect of the £5,000 tax free dividend, show how complicated the tax system has become. Even those legislating and running it don’t always understand the interactions across different parts of the system. There has to be more inroads into simplifying the tax system so taxpayers have more certainty over the tax they’ll have to pay.

    On the basis the Chancellor is waiting for the Autumn to deliver a more comprehensive budget, and will check with practitioners before making comparisons, perhaps he won’t be sacked this time. And perhaps we’d like to hear a few more jokes yet. 

  • Tax Checklist – Use It or Lose It – March 2016

    1. Pensions – up to £80k tax relief

    There is a one off opportunity to get tax relief for up to £80k pension contributions (usually £40k) for this tax year only. Check whether you might be eligible. 

    2. Pensions – earnings over £150k reduced tax relief

    A tapered annual allowance is being introduced so that tax relievable pension contributions will start to fall for people earning £150k from £40k to £10k when earnings are at £210k.

    3. Stamp Duty Land Tax – increases of 3% for second residential properties

    If you exchanged after 25 November 2015, remember to complete before 1 April 2016 to pay the current lower SDLT rates.

    4. Rented Furnished Property – wear and tear allowance abolished

    If you’re planning to replace furnishings, you can save tax by claiming the last wear and tear allowance in this tax year and claiming for actual spend in the next tax year after 6 April 2016.

    5. New Dividend Tax – owner managed companies increased income tax charge 

     You may find it makes sense to bring forward some dividends so they are paid by 5 April 2016 to save the higher 7.5% charges applying after that.

    Many people are affected by at least one of the above, so looking into the details before the end of the month will be time well spent.

     

     

     

     

     

  • #Budget2015 – Game, Set and Match

    Aces

    There were a few aces served up on behalf of small businesses during the ‘game’. These include:

    • The reduction in corporation tax to 18% always welcome by all businesses.
    • Permanency of 100% capital allowances for spend of up to £200k each year provides certainty in investment decisions and supports the recurring poor UK productivity conversations taking place recently.
    • The widely touted IHT (inheritance tax) saving when passing on the family home to direct descendants helps business owners who invest their profits into their family home.

    Double Fault

    However, small businesses may not be impressed with the double fault:

    • Increasing dividend tax from 0% to 7.5% on dividends over £5k within the 20% basic rate income tax band is a classic example of extending the reach without increasing the rate.
    • Add on the 32.5% rate on dividends within the higher rate band which looks the same as it is today, but is an increase from a net 25%, and you have a disincentive to incorporate, at least until the lower corporation tax rate kicks in.
    • This looks like a way to recover more tax from consultancy/freelance companies who are genuinely self employed and can arrange their remuneration tax efficiently in the same way as any other owner-director.

    Deuces

    A further disadvantage for consultancy/freelance companies but bringing some advantage to small businesses with staff:

    • Increasing the Employment Allowance from £2k to £3k saving more employer’s national insurance could encourage a small business to employ a person on a £30k salary or 3 people on a £15k salary. With part timers, under the £8k threshold, it’s not unusual for small business to have quite a few employees but no employer NI bill.
    • On the other hand the Employment Allowance will not be available at all to 100% owner-director companies who have been able to save about £200 by increasing their salary slightly. This simply revises their salary back to pre Employment Allowance levels, currently about £8k.
    • With the dividend rate changes, owner-directors will use their remaining tax free personal allowance, currently about £2k, to save some of the new 7.5% or 32.5% income tax rate on dividends above £5k.
    • They may also tip the balance to taking more dividends out this year, perhaps with employer pension contributions while you can.

    Five Setter

    It was a long game going to five sets covering other important areas such as:

    • Buy-2-let property owners by their sheer numbers are a relatively easy target to help raise more tax by restricting interest relief on buy-2-let loans to to basic rate tax and taking away the 10% wear and tear allowance.
    • Encouraging more rent-a room use of your own property by increasing the tax free income from £4,250 to £7,500, a 76% increase! Coupled with the IHT improvement is telling us to live in bigger homes and rent a room out rather than invest in a buy-to-let!
    • Bringing in non-Doms to the ‘normal’ tax net when they have either been borne to UK parents or have lived in the UK for 15 out of 20 years. Another example of extending the reach without increasing the rate.
    • Withdrawal of corporation tax relief on goodwill on acquisition of a business but allowing a lesser, non trading loss, relief on ultimate sale. An interesting way to provide a net relief, and will keep tax advisers and commercial lawyers very busy in future business sales.
    • Ensuring that when stock is sold it’s sold at market value and not a more tax efficient value agreed between both parties has clearly been identified as an area with some tax leakage.

    Winners and Losers

    Losers continue to be higher and additional rate taxpayers including consultants/freelancers. This means any future increase in the higher rate income tax threshold is very welcome providing a whole host of knock-on effects such as for dividend tax, capital gains tax, and pension reliefs. Winners continue to be trading businesses employing staff, low paid earners and many basic rate taxpayers. 

    Whether the Chancellor can continue to serve at this pace into the next Budget in March 2016, we will soon find out.

     

     

     

     

     

     

     

     

  • #Budget2014 (Small) Makers. Doers. Savers. + Investors?

    The Chancellor chose this headline, but I think Investors also get a look in.

    (SMALL) MAKERS

    I take this to be businesses. In fact, it’s largely small to medium companies that benefit from today’s announcements being the changes to AIA, SEIS and R&D.

    What are AIA, SEIS and R&D?

    AIA – Enables all businesses to spend up to £500k on plant & machinery and to receive a 100% tax allowance on all that expenditure. The effective date is this April 2014, but take care with the unnecessarily complex transitional rules.

    Companies should also take care about the effect on deferred tax which will restrict the ability of your company to pay tax efficient dividends.

    SEIS – This has now become a permanent feature. Your start up company can continue to attract tax efficient investment in your company shares.

    R&D – The Research & Development repayable tax credits for small companies have been increased from 11% to 14.5%. This is very welcome for small companies desperate for cash at the beginning of the investment cycle. It’s now time to bring this into the main stream tax consideration, and ensure you aren’t eligible, rather than think this is for other companies. And make sure you are a company as this doesn’t apply to sole traders/partnerships.

    Please note this applies from 1 April 2014, so you might want to delay some expenditure if this is possible at this late stage.

    DOERS

    I presume these are employees. Acknowledging that there are too many 40% taxpayers by getting the tax thresholds closer to April 2012 levels wef from April 2015, helps the hard hit middle income earners.

    The childcare costs announced several times helps employees but doesn’t help owner-managed businesses, where the current voucher scheme is more valuable. Make sure you set up a voucher scheme now, so you can continue to use it after the new scheme comes in.

    SAVERS

    A big nod to savers that the government is On Your Side.

    From 1 July 2014, the ISA threshold is £15,000 whether it’s cash, shares or a mixture. This will save higher rate taxpayers a lot of tax over several years. As interest rates increase, this becomes more valuable.

    From April 2015, allowing £5,000 of interest income to be taxed at 0% is worth up to £2,250 per year if it applies to a 45% taxpayer. This might encourage small business owners to charge their companies interest on a director loan in credit. The company saves 20% corporation tax, but the owners may not be taxed on the interest income.

    With the higher personal allowance and basic rate band effective from April 2015, small business owners might benefit from delaying a few dividends this year to benefit from a 0% net tax rate, which might otherwise have been taxed at a net rate of 25%.

    INVESTORS?

    Perhaps this includes pensions, as these are more like investment vehicles than any other. A massive improvement to the flexibility of defined contribution schemes fits in with a modern working pattern where many people no longer retire fully at a certain age.

    SEIS – This is very valuable for high net worth individuals looking for a better return than bank deposits and quoted shares. It’s good to see it’s a permanent part of the investor’s options.

    As many of today’s favourable announcements apply from April 2015, we can only speculate what will be announced in the March 2015 Budget, a few months before a general election.

  • #Tax Myth 13 – Your Income Is The Same For All #HMRC Purposes

    #Tax law is set up by different politicians at different times to achieve different aims, so we often end up with a strange mix of outcomes.

    You may know what your Income is for income tax & national insurance purposes, but what about pension purposes? Child benefit high income charge? Childcare vouchers?

    Here’s a list of the main sources of income and when they’re applicable when dealing with #HMRC:

    Salary, Bonuses & Benefits

    • Income tax
    • National insurance – Class 1
    • Employee pension contributions
    • Childcare vouchers
    • High income child benefit charge
    • Working tax credits

    Sole Trader/Self Employed Profits

    • Income tax
    • National insurance – Class 2
    • National insurance – Class 4
    • High income child benefit charge
    • Pension contributions
    • Working tax credits

    Dividends – Gross

    • Income tax
    • High income child benefit charge
    • Working tax credits (over £300)

    Interest Income – Gross

    • Income tax
    • High income child benefit charge
    • Working tax credits (over £300)

    Property Profits

    • Income tax
    • High income child benefit charge
    • Working tax credits (over £300)

    Pensions Received, Including State Pensions

    • Income tax
    • High income child benefit charge
    • Working tax credits

    Points To Note

    1. The gross dividend is the amount you received plus the tax credit of 1/9. So for a £100 dividend, you use the higher non-cash figure of £111.11.
    2. The £300 is deducted only once from this income added together.
    3. The tax free personal allowance is not deducted when considering thresholds such as the £50k-£60k adjusted net income for the high income child benefit charge.

    Strange Mix Of Outcomes

    1. When calculating your/your partner’s adjusted net income for the high income child benefit charge, or your working tax credit income, remember to deduct self employed losses, gross gift aid and gross pension contributions (a net £100 gift or contribution becomes £125 gross), but not most property losses! And not in the same way as for income tax purposes!
    2. The childcare voucher thresholds ignore dividends, so you may be able to pay more tax free childcare vouchers from your own company than you thought.
    3. Pension contributions paid by employees are restricted according to salary, bonuses and benefits, but employer contributions don’t have the same limitations (there are others). Your own company may therefore prefer to pay employer pension contributions (after seeing an IFA).
    4. With the new simplified cash accounting for unrepresented self employed sole traders effective from April 2013, these cash based profits are presumably the ones to use for working tax credits and other #HMRC purposes? They will probably be the same for the new universal credit system as we already know that requires monthly reporting of cash based profits.
    #taxisfun