Residential Letting – What is the Finance Cost Allowance and how are Unused Finance Costs used up?

This is often referred to clause 24 or section 24 relating to Finance Act 2015 (No 2) [Section 26 Finance Act 2016] that introduced the change which started from 6th April 2017. It took full force for the tax year 2020/21. The rules restrict interest relief to the basic rate of tax (20%).

The legislation was inserted into Income Tax (Trading and Other Income) Act 2005: Sections 272A, 272B and 274A-274C and Income Tax Act 2007: Sections 399A and 399B.

The legislation does not apply to Furnished Holiday Lets or Limited Companies.

Finance Costs include all finance costs, even those to buy furnishings and the incidental cost of arranging the finance.

The Relief

Its calculated as 20% of the lower of

  1. Finance costs not deducted from income, or
  2. The profits of the property business, or
  3. The adjusted total income

What is adjusted Total Income?

Net income is defined in the Income Tax Act 2007 Section 23

23 The calculation of income tax liability

To find the liability of a person (“the taxpayer”) to income tax for a tax year, take the following steps. Step 1

Identify the amounts of income on which the taxpayer is charged to income tax for the tax year.

The sum of those amounts is “total income”.

Each of those amounts is a “component” of total income.

Step 2

Deduct from the components the amount of any relief under a provision listed in relation to the taxpayer in section 24 to which the taxpayer is entitled for the tax year.

See [F1sections 24A and 25] for further provision about the deduction of those reliefs.

The sum of the amounts of the components left after this step is “net income”.

It excludes Saving and Dividend Income (ITA07/S18 (3) & (4)).

It excludes the personal allowance and blind persons allowance (ITA07/S23).

The end results is adjusted total income (ATI) – S274AA.

A tax reduction can not be used to create a tax refund but it can be carried forward.

Example 2020-21 onwards

Fred has

  • Employment Income £45,000
  • Residential Property Income £25,000
  • Mortgage Interest £10,000
  • Allowable expenses £5,000
  • Property Losses Carried Forward £15,500
  • Unused Finance Costs carried forward from 2019-20 £2,000

Calculation as follows

Employment Income£45,000
Property Income Calculation
Rental Income£25,000
Finance Costs – you can’t deduct Mortgage Interest£0
Allowable Expenses-£5,000
Property Business Profits£20,000
Less Property Losses Carried Forward-£15,500
Taxable Property Business Profits£4,500
Net Income – Employment and Property£49,500
Income Tax Calculation
Personal Allowance £12,500 at 0%
Basic Rate £37,000 at 20%£7,400
Higher Rate £0 at 40%
Income Tax Liability before Residential allowance£7,400

The Basic Rate Tax 20% reduction for Residential Property is the lower of

  1. Finance Costs not deducted in this case that’s £10,000 Mortgage and £2,000 Unused Finance Costs carried forward from 2019-20 which totals £12,000
  2. Property business profits which are £4,500
  3. Adjusted total income (exceeding personal allowance) £37,000 (£49,500 – £12,500)

The lowest amount is the

  • Property business profits which are £4,500
  • So the basic rate tax reduction is 20% x £4,500 = £900

    We can now deduct that from the £7,400, leaving £6,500 as the final income tax liability.

    Unused Finance Costs
    Residential Finance Costs£12,000
    Used in the Basic Rate Reduction-£4,500
    Unused Residential Finance Costs£7,500

    The Unused Residential Finance Cost is carried forward to the next tax year, in this example 2021-22.

    We repeat the calculations above in 2021-22, following all the same steps.

    Let’s assume in 2021-22 his net income from Employment and Property is £60,000

    The tax would be 0% x £12,570 plus 20% x £37,700 plus 40% x £9,730 = £11,432

    The Basic Rate Tax 20% reduction for Residential Property is the lower of

  • Finance Costs not deducted £10,000 Mortgage as in the previous year and £7,500
  • Unused Finance Costs = £17,500

  • Property business profits which are £20,000 (assuming its the same as the previous year – losses having been used up in the previous year)
  • Adjusted total income (exceeding personal allowance) £47,430 (£60,000 – £12,570)
  • The lowest is £17,500.

    So the basic rate deduction is £17,500 x 20% = £3,500

    £11,432 less £3,500 gives a final income tax liability of £7,932

    Unused Finance Costs
    Residential Finance Costs and carried forward amount£17,500
    Used in Basic Rate Reduction-£17,500
    Unused Residential Finance Costs to be Carried Forward£0

    Is it a Repair, Replacement (RDI) or Improvement?

    This is probably one of the most difficult cost types to define and is extremely confusing for property investors.

    The guidance never seems to quite fit with the work undertaken.

    Its an issue for accountants too, often the investor lists all the costs rather than the projects so you end up with lots of entries like B&Q and have to try to reshuffle them into projects like a new kitchen.

    HMRC has a tool kit Capital v Revenue which gives some guidance.

    In general investors want costs to be repairs (which can be deducted from profit and save tax now) where as HMRC would probably prefer improvements (which are held back and used the Capital Gains Computation when the property is sold).

    In this blog I will try to give some further help aimed at owners of Buy to Let properties, the rules apply both to individual investors and those who invest via a company.

    Pre-Letting Costs

    The general rule is that if you buy a run down property that needs work doing on it before it can be let then that work is an improvement (capital cost).

    However, if you had a letter from an letting agent saying it was lettable in its purchase condition then the works could be a repair (revenue).

    If substantial work is needed, its best to discuss this with your accountant before the work is done to determine its status as an Improvement or Repair.

    The important point is the property needs to in fit state to let before the alterations, refurbishment, repairs are carried out if you want the costs to be repairs.

    Here is HMRC’s Guidance from PIM2030

    Repairs after a property is acquired

    Repairs to reinstate a worn or dilapidated asset are usually deductible as revenue expenditure. The mere fact that the customer bought the asset not long before the repairs are made does not in itself make the repair a capital expense. But a change of ownership combined with one or more additional factors may mean the expenditure is capital. Examples of such factors are:

    • A property acquired that wasn’t in a fit state for use in the business until the repairs had been carried out or that couldn’t continue to be let without repairs being made shortly after acquisition.
    • The price paid for the property was substantially reduced because of its dilapidated state. A deduction isn’t denied where the purchase price merely reflects the reduced value of the asset due to normal wear and tear (for example, between normal exterior painting cycles). This is so even if the customer makes the repairs just after they acquire the asset.
    • The customer makes an agreement that commits them to reinstate the property to a good state of repair.


    HMRC have agreed “A replacement of a part of the “entirety” with the nearest modern equivalent is allowable as a repair for tax purposes.” (Tax Bulletin 59)


    • Replacing single glazed windows with double glazed windows
    • Replacing guttering with a new modern guttering
    • Replacing lead pipes with copper or plastic pipes
    • Replacing wooden beams with steel girders

    What about Kitchens?

    The following refurbishment works would be repairs

    • Stripping out
    • Replacing Base Units
    • Replacing Wall Units
    • Replacing Work Tops
    • Re-tiling
    • Floor repairs
    • Plastering
    • Wiring

    Provided you are replacing with a similar standard kitchen

    But if you add storage or equipment these items would be capital improvements.

    There are also special rules relating to expenditure on specified parts of buildings called
    ‘integral features’. The following are integral features:

    • an electrical system (including a lighting system)
    • a cold water system
    • a space or water heating system, a powered system of ventilation, air cooling or air
    purification, and any floor or ceiling comprised in such a system
    • a lift, an escalator or a moving walkway
    • external solar shading.

    Under these rules if expenditure on an integral feature represents the whole, or more than 50%,
    of the cost of replacing the integral feature, then the whole of the expenditure is to be treated as
    capital expenditure

    Replacement of Domestic Items (RDI)

    Since 2016 Replacement of Domestic Items Relief has replaced the Wear and Tear Allowance. The rules are in PIM3210.

    Note – RDI is not given for the purchase of new items that are not replacements

    In order for relief to be given, 4 conditions must be met:

    Condition A – the individual or company looking to claim the relief must carry on a property business that includes the letting of a dwelling-house(s).

    Condition B – an old domestic item that has been provided for use in the dwelling-house is replaced with the purchase of a new domestic item. The new item must be provided for the exclusive use of the lessee in that dwelling-house and the old item must no longer be available for use by the lessee.

    Condition C – The expenditure on the new item must not prohibited by the wholly and exclusive rule (see BIM37000) but would otherwise be prohibited by the capital expenditure rule (see BIM35000).

    Condition D – Capital Allowances must not have been claimed in respect of the expenditure on the new domestic item.

    If the 4 conditions are met, then a deduction for the expenditure on the new item can be claimed.

    However, a deduction is not allowed if:

    • The dwelling-house in question is, in full or part, a furnished holiday letting (special rules apply to FHL’s)
    • Rent-a-Room receipts have been received in respect of the dwelling-house in question and Rent-a-Room relief has been claimed in relation to those receipts.

    If the new item is of broadly the same quality/standard as the old item and doesn’t represent an improvement then the deduction is the cost of the new item. Note that for these purposes, just because an item is brand new does not make it an improvement over an item which has been in use for several years and suffered general wear and tear. For example, a brand new budget washing machine costing circa £200 is not an improvement over a 5 year old washing machine that cost around £200 at the time of purchase (or slightly less, taking into account inflation).

    RDI will be given for ‘domestic items’ such as:

    • Moveable furniture such as beds and free-standing wardrobes.
    • Furnishings such as carpets, curtains and linen.
    • Household appliances such as televisions, fridges and freezers.
    • Kitchenware such as crockery and cutlery


    If an alteration increases the market value of the building, changes its function, or extends the life of the whole building then its an improvement.

    We also noted under pre-letting that work to make a property lettable could be an improvement.

    PIM2030 states

    But there is usually no improvement if trivial increases in performance or capacity arise solely from the replacement of old materials with newer but broadly equivalent materials. For example, the replacement of pipes or storage tanks of imperial measure with the closest metric equivalent may result in slightly increased diameter or capacity but the cost is still revenue expenditure.

    Where a significant improvement arises from the change of materials, the whole of the cost is capital expenditure. This includes things like redecoration after the main work has been done (redecoration would ordinarily be a revenue expense). The entire cost is capital expenditure, including the expense of making good any damage to decorations.

    Alterations to a building may be so extensive as to amount to the reconstruction of the property. This will be capital expenditure and it can’t be deducted as an ordinary revenue business expense.

    Working at Home – How can claim tax relief?

    Working from Home Tax Relief

    Tax Savings for Employees and business covering VAT, Home Costs and Equipment

    Further information on the items discussed in the video

    VAT Notice 700 – 32. Apportionment of tax between business and non-business activities

    This section explains how to treat tax incurred on goods or services that are used only partly for business purposes


    Claim tax relief for your job expenses

    From 6 April 2020 your employer can pay you up to £6 a week (£26 a month) to cover your additional costs if you have to work from home. For previous tax years the rate is £4 a week (£18 a month).

    You will not need to keep any records.

    If you work at home voluntarily

    If you’ve agreed with your employer to work at home voluntarily, or you choose to work at home, you cannot claim tax relief on the bills you have to pay.



    Simplified expenses if you’re self-employed


    You can only use simplified expenses if you work for 25 hours or more a month from home.

    Hours of business use per month Flat rate per month
    25 to 50 £10
    51 to 100 £18
    101 and more £26


    You worked 40 hours from home for 10 months, but worked 60 hours during 2 particular months:

    10 months x £10 = £100
    2 months x £18 = £36

    Total you can claim = £136

    Specific deductions: use of home: apportioning the expenditure

    The factors to be taken into account when apportioning an expense include:

    • Area: what proportion in terms of area of the home is used for trade purposes?
    • Usage: how much is consumed? This is appropriate where there is a metered or measurable supply such as electricity, gas or water.
    • Time: how long is it used for trade purposes, as compared to any other use?

    The method of apportioning an expense depends on the relative importance of each of these factors. There are examples at BIM47825.


    Claim capital allowances


    You can claim capital allowances when you buy assets that you keep to use in your business, for example:

    • equipment
    • machinery

    Other Points to Consider

    • Capital Gains Tax
    • Planning Consent
    • Insurance
    • Business Rates
    • Benefit in Kind


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    When is Mortgage Interest a tax allowable expense?


    There are ways that you can claim tax relief for your mortgage interest.

    Qualifying Loan Interest Relief

    Often when you start a business you will need to borrow money personally to lend to your new company or buy shares.

    You might borrow by increasing your mortgage.

    You may be entitled to claim tax relief for interest paid on a loan or alternative finance arrangement used to buy:

    • shares in, or to fund, a ‘close’ company (contact your HM Revenue & Customs (HMRC) office if you are not sure if the company is ‘close’)
    • an interest in, or to fund, a partnership
    • plant or machinery for your work (but make sure you do not claim this interest twice, you will do if you have already deducted it as a business expense)

    If you receive a low-interest or interest free loan from your employer for one of the above purposes you may be able to claim relief for any benefit taxable on you.

    This is called ‘Qualifying loan interest relief’, HMRC have a helpsheet which gives further details HS340

    Property Investors/Buy to Let

    At the moment property investors can also offset mortgage relief against their profits but the rules are changing.

    2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%

    2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%

    2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%

    2020/21 100% will get only 20% relief

    For a 20% tax payer that’s fine but for higher rate taxpayer its a disaster that will lead to them paying a lot more tax

    These rules will not apply to Companies, Companies will continue to claim full relief.

    How much can you borrow?

    In summary if you re-mortgage above the original market value and you own the property personally and take out the cash you will not be able to claim relief from interest on the part above the original market value

    If however you borrow to invest in another property that is ok.

    Have your employees got a S336 tax claim?

    Pay Packet And Banknotes


    Basically, if an employer makes a declaration on the P11D, which the employee and HMRC agree can be counted as tax deductible, this is referred to as a S336 Claim. In order to claim the employee would need to show the expense was wholly and exclusively for business.


    Here are some suggestions of expenses employees may claim….

    1. Flat Rate Expenses by Occupation – HMRC have a list EIM32712 for example Healthcare staff in the National Health Service, private hospitals and nursing homesUniformed ancillary staff: maintenance workers, grounds staff, drivers, parking attendants and security guards, receptionists and other uniformed staff – get a flat rate of £60 per year – this link explains how it works – Money Saving Expert
    2. Mileage in your own vehicle on business – the approved rates are list below if your employer pays you mileage already deduct the rate from the amounts below and claim the difference

    Tax: rates per business mile

    Type of vehicle First 10,000 miles Above 10,000 miles
    Cars and vans 45p (40p before 2011 to 2012) 25p
    Motorcycles 24p 24p
    Bikes 20p 20p

         3. Professional Subscriptions – if you personally pay for a professional subscription that you need for your work you can claim the cost against tax – here is a list of HMRC approved  professional organisations

    4. Traveling Costs – you may have business travel costs for hotels and meals that haven’t been reimbursed and these costs can be reclaimed against your tax

    5. Working from Homemaximum of £4 per week

    6. Uniform not covered by a Flat Rate – read this blog

    7. Trainingwhere training was an intrinsic contractual duty of the employment (see also EIM32535 & EIM32546) and where any personal benefit, unlike most CPE/CPD courses, would be incidental and not therefore give rise to a dual purpose of the expenditure.

    8. Other costs – where the cost is wholly and exclusively for business

    Form P87

    If you are an employee use this form to tell HMRC about employment expenses you have had to pay during the year for which tax relief is due.
    Only fill in this form if your allowable expenses are less than £2,500 for the year.
    If your claim is more than £2,500 you will need to fill in a Self Assessment tax return. Please contact the Self Assessment Helpline on 0300 200 3310 or register at
    You must fill in a separate P87 for each employment for which you are claiming.
    If you have not paid any tax during the year no refund will be due.


    What expenses can the self employed claim?

    Business people group.

    The UK has seen the fastest growth in self-employment in Western Europe over the past year, according to the Institute for Public Policy Research (IPPR).

    There are many types of expense that you can claim and HMRC have just created a new guide…

    HMRC expenses

    Pre Trading expenses

    Many business owners incur in costs before they actually start in business. You can go back up to 7 years can claim costs as pre-trading expenses.

    Let’s says you want to start a home based business, you need to create an office at home or build an office in the garden. This means that you have building costs as well as equipment costs before you start trading. These costs are submitted to the new business as an expense claim by the owner on the first day the business starts.

    Also you might have legal cost for contracts or renting offices or equipment, you could have costs for product development, stock, samples, or even a motor vehicle.

    You can check more about pre-trading expenses or at HMRC.

    However, what happens when you have paid VAT prior being VAT registered? You can reclaim any VAT you are charged on goods or services that you use to set up your business.

    Normally, this will include:

    • VAT on goods you bought for your business within the last 4 years and which you have not yet sold
    • VAT on services, which you received not more than 6 months before your date of registration

    You should include this VAT on your first VAT return. If you have doubts as to whether you should be VAT registered or not, take a look at VAT Notice 700/1: should I be registered for VAT.

    Simplified or Actual Expenses

    Simplified expenses are a way of calculating some of your business expenses using flat rates instead of working out your actual business costs. You don’t have to use simplified expenses. You can just decide if it suits your business or not.

    Simplified expenses can be used by:

    • sole traders
    • business partnerships that have no companies as partners

    You can use flat rates for:

    • business costs for vehicles
    • working from home
    • living in your business premises

    You must calculate all other expenses by working out the actual costs.

    In order to find out which method works best for you, you can use the Government expense checker

    Don’t forget Capital Allowances and the Annual Investment Allowance

    Buying equipment, even if it’s on finance, is a great way to reduce your tax bill, the 100% AIA can be used on the date you buy the asset.

    Currently, the Annual Investment Allowance is £500,000 and this has been reduced to £200,000 in January 2016.

    It is not necessary to claim the maximum capital allowances available or even claim them at all, crazy as it might sound there are situations when not claiming capital allowances can reduce your tax bill!

    Sole Trader Example

    The personal tax allowance is currently £10,600 (2015/16)

    Let’s assume profits are £15,000 and Capital Allowances available are £5,000, so that would reduce taxable profits to £10,000 which would waste £600 of the personal tax allowance.

    It would therefore be better to only claim £4,400 in capital allowances and claim the remaining £600 in the following year.

    Employers are saving £6k by opting for Self Employed Freelancers…

    A survey by PeoplePerHour has shown that the self-employed segment of the labour market in both the UK and USA is growing at a rate of 3.5% per year – faster than any other sector. Should this growth continue for the next five years, researchers predict that half of the working population could be self-employed freelancers by 2020.

    The survey also suggests that small businesses that hire freelancers instead of full-time employees could save £6,297.17 per annum. The survey shows that the average waste or spare capacity for each employee in a SMEs is 1.9 hours per day.

    The research identifies a number of key drivers behind the shift from employment to self-employment, including “the availability of ubiquitous and inexpensive computing power, sophisticated applications and cloud-based services“. [Lawdonut]

    Contact Us

    Are you ready for the changes to employee expenses?

    Pay for woman.

    From April 2016 all employee expense Dispensations agreed with HMRC will cease to apply!

    You will need new systems for checking expenses, HMRC will be supply examples.

    Expenses which are not covered by benchmark scale rates are likely to paid and taxed via the payroll with the employee claiming relief through P87 and Self Assessment SA100.


    Are you ready for the new regime?

    Contact Us

    Beware of letting your accounts become a shambles

    Unhappy office worker on the phone, isolated on white

    It’s not uncommon for Directors and Senior Employees to get behind with their expense claims and paperwork, they are busy people trying to build their businesses and sometimes the paperwork gets put to one side.

    But lets consider the recent HMRC case against the Directors of RSL (NorthEast) Ltd. Mr White was Director of RSL and he had a company credit card which he used for business and personal expenses, he travelled extensively on company business. Unfortunately RSL became insolvent, so HMRC assessed Mr White on credit card expenses as a benefit in kind.

    Mr White appealed on the basis that he had lent the company large amounts of his own money and any credit card expenses were just a reimbursement.

    HMRC argued…

    • Section 203(2) ITEPA does not grant any right to retrospectively make good a benefit. Income tax is an annual tax, and the value of the benefit depends upon what is made good in that tax year.”
    • “Any “rewriting” [to reflect the money reimbursed to RSL] would have a retrospective effect on the Company accounts.” HMRC implied that this would not be allowed.

    HMRC won the case, but mainly because the accounts were in a terrible shambles!

    What can we learn from this?

    1. Keep good records, don’t put off doing your accounts!
    2. If you do get behind you do a have a ‘reasonable time to make good’ as noted in HMRC’s manuals

    Contact Us

    10 ways to pay less income tax

    Pay Packet And Banknotes

    Income Tax is a tax you pay on your income. You don’t have to pay tax on all types of income.

    You pay tax on things like:

    • money you earn from employment
    • profits you make if you’re self-employed – including from services you sell through websites or apps
    • some state benefits
    • most pensions, including state pensions, company and personal pensions and retirement annuities
    • interest on savings and pensioner bonds
    • rental income (unless you’re a live-in landlord and get £4,250 (£7,500 from April 2016) or less)
    • benefits you get from your job
    • income from a trust
    • dividends from company shares

    So how can you pay less income tax?

    Here are 10 suggestions…

    1. Pension

    When you pay into a pension you get income tax relief on your contributions .

    Lets say you invest £10,000 per year of earned gross income, increasing each year by 3% for inflation and see the effect of tax relief at 40% and 20%, assuming a return on the investment of 7% (which you should get with Commercial Property Investment)

    40% Tax Rate 20% Tax Rate
    Year Pension No Pension % Diff Year Pension No Pension % Diff
    1 £10,700 £6,252 71% 1 £10,700 £8,336 28%
    2 £22,470 £12,954 73% 2 £22,470 £17,272 30%
    3 £35,395 £20,131 76% 3 £35,395 £26,841 32%
    4 £49,564 £27,808 78% 4 £49,564 £37,078 34%
    5 £65,077 £36,013 81% 5 £65,077 £48,017 36%
    6 £82,036 £44,773 83% 6 £82,036 £59,698 37%
    7 £100,555 £54,119 86% 7 £100,555 £72,158 39%
    8 £120,754 £64,081 88% 8 £120,754 £85,441 41%
    9 £142,761 £74,692 91% 9 £142,761 £99,590 43%
    10 £166,715 £85,987 94% 10 £166,715 £114,649 45%
    11 £192,765 £98,000 97% 11 £192,765 £130,667 48%
    12 £221,070 £110,771 100% 12 £221,070 £147,694 50%
    13 £251,801 £124,337 103% 13 £251,801 £165,782 52%
    14 £285,140 £138,740 106% 14 £285,140 £184,987 54%
    15 £321,285 £154,024 109% 15 £321,285 £205,365 56%
    16 £360,445 £170,233 112% 16 £360,445 £226,978 59%
    17 £402,846 £187,416 115% 17 £402,846 £249,888 61%
    18 £448,731 £205,621 118% 18 £448,731 £274,161 64%
    19 £498,358 £224,901 122% 19 £498,358 £299,868 66%
    20 £552,006 £245,309 125% 20 £552,006 £327,079 69%

    Even when you consider:

    • Your money is locked up till you are 55
    • You pay tax when you take money out of the pension
    • You can get 25% out of the pension tax free

    The difference in growth is massive

    If you do salary sacrifice you can increase the tax effect by saving national insurance too.

    2. ISA

    Individual Savings Accounts have been around for a few years and very soon the Help to Buy ISA will be launched

    Help to Buy ISA

    Top 10 facts and rules…

    1. Its only available to ‘First Time Buyers’
    2. ‘First Time Buyers’ can only have one Help to Buy ISA with one provider
    3. You can pay in £1,000 when you open the account and then save a maximum of £200 per month
    4. The maximum government bonus is £3,000 (but you can lower amounts of bonus if you have less than £12,000)
    5. The scheme will run for 4 years from the date it opens (Autumn 2015)
    6. Couples can have a Help to Buy ISA each which means if they don’t want to wait 4 years could save £12,000 in 25 months where as a single saver would need 55 months
    7. Unlike ISA’s where you open one per year, the Help to Buy ISA will continue for 4 years
    8. You can withdraw funds but if its not to buy a home then you won’t get the bonus
    9. More than 100,000 homes have now been bought with government backed schemes
    10. You will be able to get them at banks and building societies

    3. Salary Sacrifice

    Salary Sacrifice is a very tax efficient way to give your employees benefits and the most popular benefits are Pensions and Childcare. I wrote a blog back in 2011 which explained how it can save 45.8% in tax and NI

    HMRC decided on 9th April 2013 that it was time to “clarify”  in their Manuals what are successful and unsuccessful salary sacrifice schemes and have added some further guidance. Their Staff are instructed not to approve schemes (Employment Income Manual EIM42772)….

    You (HMRC) may get requests for advice:

    • on how to set up a salary sacrifice arrangement, or
    • on whether draft documentation will achieve a successful salary sacrifice.

    You (HMRC) should not comment on either of these areas. Salary sacrifice is a matter of employment law, not tax law. The nature of an employee’s contract of employment is a matter for the employer and employee.

    The specific updates are:

    EIM42750 – Salary Sacrifice – updated – this contains the examples of schemes

    EIM42777 – Contractual arrangements – this has interesting comments on childcare and pensions

    4. Employment Expenses

    As an employee you can claim tax relief for expenses incurred in doing your job, for example business mileage, cycling on business, hotels, meals, business phone calls, in fact anything as long as its business related

    If your claim is less than £2500 you can make your claim using Form P87 if its more than £2500 you will need to complete a Self Assessment Return (you need to phone HMRC to request a Self Assessment Return – contact details below), if you know your UTR number you can register and file your Self Assessment Return on line.

    5. Dividends

    When you take dividends has never been more critical due to changes in the Summer Budget 2015, so if you have distributable reserves you might want to take more dividends this tax year, try the Dividend Calculator above to see how much difference it could make.

    Dividend Calculator 2

    6. Tax break for Couples

    A new tax break as launched this week from 6 April 2015, which will be eligible to more than 4 million married couples and 15,000 civil partnerships.

    The Allowance means a spouse or civil partner who doesn’t pay tax – therefore is not earning at all or is earning below the basic rate threshold (£10,600) – can transfer up to £1,060 of their personal tax-free allowance to a spouse or civil partner – as long as the recipient of the transfer doesn’t pay more than the basic rate of income tax.

    7. Tax Free Benefits

    Getting tax free benefits will save you lots of tax, here some ideas…

    1. Pensions – Up to £40k can be paid in to you pension scheme by your employer (2015/16)  and you can use carry forward to pay in even more
    2. Childcare – Up to £55 per week but check the rules to makesure your childcare complies (HMRC Leaflet IR115) – these rules are changing soon.
    3. Mobile Phone – One per employee
    4. Lunch – Tax Free Lunch Blog
    5. Cycle Schemes – Cycle to Work Blog
    6. Fitness – Fitness Blog
    7. Parties and Gifts – Christmas Blog
    8. Parking – Parking Blog
    9. Business Mileage Allowance – 45p for the first 10,000 miles then 25p
    10. Long Service Award – A bit restrictive as you need 20 years service, the tax free amount is £50 x the number of years
    11. Eye Tests and Spectacles – The Eye Test must be needed under the Health & Safety at Work Act
    12. Suggestion Schemes – Suggestion Scheme Blog
    13. Insurance such and Death in Service and Income Protection – Medical Insurance Blog
    14. Travel Expenses – Travel Blog
    15. Working From Home – Working from Home Blog

    8. Earn less than £100k

    Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £121,200 or above.

    9. Green Company Car

    A calculator is available here: and rates are shown in the table below for zero emission vehicles and some of the lower CO2 vehicles.

    BIK CO2

    10. Check your P800

    The P800’s are likely to contain errors because:

    1. Large amounts of data are manually input
    2. Estimates especially for Bank Interest and Investment Income

    So check the following carefully:

    1. P60 – you get this at the end of each tax year
    2. P45 – you get this when you leave a job
    3. PAYE Coding Notice
    4. P11D Expenses and benefits
    5. P9D Expenses payments and income from which tax cannot be deducted
    6. Bank and Building society statements
    7. Pension Tax Deductions

    Its expected that around 3 million people will be asked to pay more tax and around 2 million people will have overpaid.


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    What are tax implications if a company pays a Directors personal expenses?

    Businessman struggling with large Expenses

    It’s not uncommon for Directors personal expenses to get mixed up with business expenses, for example the director is out buying things for the company and picks up some items for themselves at the same time and it goes on the same bill.

    In a perfect world the Director would just repay the cost of personal purchases to the company, but we don’t live in  perfect world, so what are the options?

    Directors Loan Account

    You could post the cost to the Directors Loan Account. These accounts are normally repaid when the Director is paid either salary or dividends.

    If the loan is not cleared by year end then the company will have to pay a temporary corporation tax charge of 25% and reclaim the tax when the loan is repaid using form L2P

    There may also be a notional amount of interest (4%) charged as a benefit in kind on the loan.

    Benefit In Kind

    You could have the expenses as a benefit in kind, some benefits may even be tax free, here is a list of my favourite tax free benefits

    1. Pensions – Up to £40k can be paid in to you pension scheme by your employer (2015/16)  and you can use carry forward to pay in even more
    2. Childcare – Up to £55 per week but check the rules to makesure your childcare complies (HMRC Leaflet IR115) – new rules coming soon
    3. Mobile Phone – One per employee
    4. Lunch – Tax Free Lunch Blog
    5. Cycle Schemes – Cycle to Work Blog
    6. Fitness – Fitness Blog
    7. Parties and Gifts – Christmas Blog
    8. Parking – Parking Blog
    9. Business Mileage Allowance – 45p for the first 10,000 miles then 25p
    10. Long Service Award – A bit restrictive as you need 20 years service, the tax free amount is £50 x the number of years
    11. Eye Tests and Spectacles – The Eye Test must be needed under the Health & Safety at Work Act
    12. Suggestion Schemes – Suggestion Scheme Blog
    13. Insurance such and Death in Service and Income Protection – Medical Insurance Blog
    14. Travel Expenses – Travel Blog
    15. Working From Home – Working from Home Blog

    Private Use of Company Assets

    It may also be worth considering private use of company assets.

    • The cost of the asset is allowed against Corporation Tax and you can claim Capital Allowances and the Annual Investment Allowance.
    • The Assets could be purchased from the Director but they must be transferred at Market Value.
    • The Benefit In Kind is generally 20% of the market value

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