Tag: tax planning


Ready for the end of the tax year?

The tax year will end on April 5th. Are you confident that you have made appropriate preparations and maximised your tax allowances?

Here are some of the allowances that you should consider: 

The Marriage Allowance

You can transfer £1,250 of your Personal Allowance to your spouse or civil partner if they earn more than you and pay tax at the basic rate. This could yield a potential tax saving of £250. You need to make sure that you have income within your Personal Allowance of £12,500. An application to HMRC needs to be made for this allowance. It’s also worth noting that you can backdate your claim to include any tax year since April 5th 2015. 

Enterprise Investment Scheme, SEIS and VCT

Investments made with the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) during the current tax year can be carried back for relief for the 2018/2019 tax year, potentially providing both income tax relief and capital gains tax deferral relief. However, rules differ between the two so be sure to check with each provider. 

For the EIS, you can obtain 30% income tax relief on the amount allocated for shares in EIS qualifying companies, from a minimum of £500 up to a maximum of £2,000,000. For Venture Capital Trusts (VCT), you receive 30% of tax relief on investments up to £200,000. For SEIS qualifying companies, you can receive 50% income tax relief on up to £100,000 per year.  

The Tapered Annual Allowance

For higher income earners, the tapered annual allowance will apply. For every £2 of adjusted income, including employer pension contributions, as well as income over £150,000, your annual allowance is reduced by £1. The Government has a comprehensive guide for working out whether your income will have the allowance applied. You may only be able to assess this accurately as you get closer to April 5th. If you can assess the figures accurately in time to make a pension contribution, then ensure you do so. If not, as soon as the most accurate figures become available, you can take steps to make up any shortfall by carrying it forward to the next year.

The Money Purchase Annual Allowance

You can get tax relief on pension contributions of up to £40,000 per year or 100% of your taxable salary. However, if you have already started drawing income from a defined contribution pension scheme, the amount you can pay into a pension without suffering a tax charge reduces. 

The allowance for the 2019/2020 tax year remains unchanged from last year at £4,000 and applies if you have taken any taxed income from a money purchase or defined contribution pension. This extends to personal pensions, SIPPs and workplace pensions.


If you’re an employee, you may be able to claim for expenses not reimbursed by your employer, such as travel mileage (not including home to work), the cost of buying small essential items or equipment needed to do your job, such as tools or professional subscriptions. 

If your employer reimburses you at a rate lower than the current standard mileage rate of 45p per mile for the first 10,000 miles and 25p per mile thereafter, you can claim the difference back in your tax return. 

Taking the time now to make sure you’re maximising your allowances can yield notable tax savings at the end of the tax year on April 5th.





Sole trader vs limited company?

When people are setting up a business, one of the first questions they have to grapple with is what legal structure they are going to trade under – sole trader, limited company or partnership.

If you’re one of our clients, you will already have made this decision but we thought it would be useful to give a quick outline of the differences.  

Sole trader

Being a sole trader is the most popular legal structure. Approximately 3.4 million sole proprietorships were created in 2017 and they accounted for 60% of small businesses in the UK. 

On the plus side, there are no set up costs and it’s very simple to get up and running. The only requirement is to inform HMRC by 5th Oct of your business’ second tax year. There is very little paperwork and you don’t have to have any dealings with Companies House. None of your information is held on the public record.    

As a sole trader, however, you are completely responsible for your business and its finances. You need to be aware that if your business goes bust or you have any business debts, your personal finances and assets could be in danger. Legally, your liability is unlimited.

It’s advisable, therefore, to take out small business insurance policies. This way you can avoid getting sued personally should there be any legal disputes. Remember, the buck stops with you! 

You and your business are treated as a single entity, which is also significant for tax purposes. You will have to pay tax on the profits that are above your personal tax allowance (£12,500 for the 2019/20 tax year). This is calculated through the self-assessment system and you will also pay Class 2 and Class 4 NICs.

Being a sole trader is thought to be less tax efficient than being a limited company as there is less opportunity for tax planning via the self-assessment system. 

Limited company

The second most popular legal structure is a limited company of which there were 1.9 million in 2017. There is a certain amount of paperwork required and you need to deal with Companies House but it is relatively straightforward. Note that your company details will be on public record.   

The main advantage of having a limited company is that you have limited personal liability should something go wrong. The business is treated as a separate entity from its owners so your own assets are protected.    

Despite the higher dividend taxes that were introduced in 2016, a limited company is still  considered to be more tax efficient. The company will pay corporation tax and dividend tax and employer’s Class 1 NICs on salaries, while staff pay employees’ Class 1 NICs on salaries. Under the limited company structure, there are more possibilities for tax planning by delaying dividends, for example, until a future tax year to minimise the tax liability. 

One of the disadvantages, though, is that you are obliged to prepare annual accounts which need to be filed with Companies House. You also need to file a full set of corporate tax accounts for HMRC. As a limited company, it’s advisable to use an accountant to make sure the accounts are done thoroughly.


Inheritance Tax – Could there be a better alternative?

Inheritance tax is enormously unpopular to say the least. A YouGov poll found that 59% of the public deemed it unfair, making it the least popular of Britain’s 11 major taxes. What’s more, the tax has a limited revenue raising ability, with the ‘well advised’ often using gifts, trusts, business property relief and agricultural relief to avoid paying so much.

As it stands, the tax affects just 4% of British estates and contributes only 77p of every £100 of total taxation. This puts the tax in the awkward position of being both highly unpopular and raising very little revenue. At the moment, the inheritance tax threshold stands at £325,000 per person. If you own your own home and are leaving it to a direct descendant in your will, this lifts the threshold by an additional £125,000 in the 2018-19 tax year (the nil-rate band), to £450,000. Anything above this is subject to a 40% tax.

Inheritance tax is seen as unfair because it is a tax on giving (while normal taxes apply to earnings) and it is a ‘double tax’ on people who have already earned – and been taxed on – their wealth.

However, the Resolution Foundation, a prominent independent think tank, has suggested an alternative.

They propose abolishing inheritance tax and replacing it with a lifetime receipts tax.

This would see individuals given a lump sum they could inherit tax free through their lifetime and would then have to pay tax on any inheritance they receive that exceeds this threshold. The thinktank suggests that by setting a lifetime limit of £125,000 and then applying inheritance tax at 20% up to £500,000 and 30% after that would be both fairer and harder to avoid.

They predict that a lifetime receipts tax would raise an extra £5 billion by 2021, bringing in £11 billion rather than the £6 billion inheritance tax currently raises. In a time of mounting pressure on public services like the NHS, this additional revenue would be welcomed by many.

Moving away from inheritance tax would reduce many of the current ways to manage the amount of assets an individual is taxed on upon death. For instance, people would not be able to reduce the size of their taxable estate by giving away liquid assets seven years prior to their death.

The Resolution Foundation also suggests restricting business property and agricultural relief to small family businesses.

The lifetime receipts tax is, at the moment, just a think tank recommendation and is not being considered by the government.

However, the government are trying to introduce changes to probate fees that would see estates worth £2 million or more pay £6,000 in probate fees, up from the current rate of £215. This proposal has seen little support in the House of Lords and the government may consider scrapping the tax.


Business Motoring – Tax Considerations

Fuel duty is down a penny at the pumps – but will it help businesses with transport costs?

The Chancellor’s surprise fuel duty reduction in the March Budget looks like good news, particularly alongside his cancellation of the fuel duty escalator. Yet with high oil prices and the January VAT increase, there’s plenty to consider when it comes to the cost of business transport.

Tax implications
Most commercial vehicles can be included in the Annual Investment Allowance (AIA), providing 100% first-year relief on up to £100,000 spent on plant and machinery.

Significantly, cars don’t qualify but, along with other vehicle purchases over the AIA, benefit instead from the Write Down Allowance (WDA), currently at 20% (capped at 10% for cars which emit over 160 grams of CO2 per kilometre).

Vehicles used exclusively for business aren’t liable for tax. If used privately, the employer must pay VAT on the purchase price while the employee pays for the private portion of running the vehicle, although VAT on repairs and maintenance can be reclaimed. Employers must also pay Class 1A National Insurance on motor vehicle and fuel benefits provided to employees.

There are tax concessions on maintenance and running costs, interest on bank loans used to buy a vehicle and rental payments for leased vehicles, while 15% is taxed for cars which emit over 160g/km of CO2. Purchasing low-emission cars (under 110g/km) offers a 100% write-off against tax.

Vehicle excise duty is also a consideration – there is a different rate for the first year after purchase (higher for cars over 130g/km, zero under this), aligning with standard rates from the second year on.

Greener is leaner
So fuel costs are far from the only consideration for business. While a penny less duty is welcome, the overall message from the government is that greener vehicles save tax

If tax avoidance is legal, why is it such a hot topic?

The traditional British view of tax evasion and tax avoidance is black and white: tax evasion is illegal, while tax avoidance is legal. In this time-honoured view, there was even a sense that, while tax evasion was clearly wrong, there was something laudable about tax avoidance: because, after all, “no one wants to pay more tax than he needs to”.

However, this traditional view has been taking quite a battering in recent years. Increasingly it seems, tax avoidance is coming to be regarded – by some, but by no means all – as morally reprehensible or even repugnant. This has helped popularise a third term, tax compliance. A tax avoider seeks to pay less than the tax due as required by the spirit of the law: a tax compliant tax payer seeks to pay the tax due but no more.

There are still plenty of defenders of the old view. Toby Young, writing in the Daily Telegraph in February 2011, said that “Tax avoidance isn’t morally wrong. It’s perfectly sensible behaviour.” He and those who share his views often talk about tax allowances such as are available through ISAs and pension plans, and even duty-free items on offer at airports. Who in his right mind would not take advantage of these perfectly legal opportunities? And if so, are they not avoiding tax?

It seems, though, that what has awoken the public ire is the sense of scale. Particularly when people are facing public spending cuts, tax increases and austerity, it sticks in the craw to find that the rich can apparently flout tax liabilities.

Two cases came to the fore in 2010, amongst other highly publicised examples: Vodafone and Sir Philip Green. Protesters said that Vodafone was let off a £6 billion tax bill by HMRC. Although both organisations denied this, Vodafone stores were shut by demonstrations by protesters.

If true, these allegations suggest that a large corporation is able to avail itself of treatment simply not available to most individuals – or most companies, for that matter. This question of scale goes far beyond the mention of ISAs and duty-free cigarettes, and seems to fly in the face of the spirit of the law.
Sir Philip Green is the owner of the Arcadia Group which comprises Topshop, BHS, Dorothy Perkins, Miss Selfridge and other stores. Green, the ninth-richest man in Britain, has also been the subject of protests against his alleged activities.

A representative of UK Uncut, an anti-tax avoidance organisation, wrote in the Guardian: “While Green lives and works in the UK, the Arcadia Group is registered in the name of his wife, Tina, who is resident in Monaco and so enjoys a 0% income-tax rate. In 2005 this arrangement allowed the Greens to bank £1.2 billion, the biggest paycheck in British corporate history, without paying a penny in tax. This completely legal dodge cost the British taxpayer £285m, enough to pay the salaries of 9,000 NHS nurses or the £9,000 fees of close to 32,000 students. In an age of austerity, the link between tax avoidance and public sector cuts becomes crystal clear.”

These allegations, whether true or not, became more inflammatory when Green was appointed to advise the government on how best to slash public services.

It seems obvious that this sense of indignation is not going to disappear: indeed, it is likely to grow. That being the case, high-profile figures may want to consider moving more towards tax compliance than tax avoidance when arranging tax planning.