What impact does earning over £100k have on my tax code and pension allowance?

Many people don’t realise the impact of earning over £100,000.

Here are a couple things you need to know

Personal Allowance – Tax Code

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 £125,000 or above.

You’ll also need to do a Self Assessment tax return.

Pension Allowance Reduction

To work out if you have a reduced (tapered) annual allowance for a tax year, you’ll need to work out your:
# net income in that tax year
# pension savings in that tax year
# threshold income in that tax year
# adjusted income in that tax year

If your adjusted income is over £150,000 your annual allowance in the same tax year will be reduced.

It will not be reduced if your threshold income for that year is £110,000 or less, no matter what your adjusted income is.

For every £2 your adjusted income goes over £150,000, your annual allowance for that year reduces by £1. The minimum reduced annual allowance you can have is £10,000.

Whichever type of pension scheme you’re in (for example, a career average scheme), you’ll need to know your pension savings so you can work out both your:

# threshold income
# adjusted income

If the pension savings made in the tax year are more than your available annual allowance, you should include the excess amount on your Self Assessment return. Your available annual allowance is your reduced annual allowance plus any unused allowance from the previous 3 tax years.

This amount is added to your taxable income and you will pay Income Tax on it, at the tax rate that applies to you.

The adjusted income includes your pension contributions and for final salary or career schemes pension contributions are the increase in scheme value

steve@bicknells.net

Take your £5,000 Dividend Allowance while you still can!

The Dividend Allowance was introduced in April 2016 and it allows you to take £5,000 in dividends tax free.

As announced at Spring Budget 2017, the government will legislate in Finance Bill 2017 to reduce the tax-free allowance for dividend income from £5,000 to £2,000.

So in 2016/17 and 2017/18 you need to take the £5,000 because in 2018/19 its dropping to £2,000 and most people expect it to disappear in 2019/20.

Dividends above the allowance are taxed as follows:

7.5% on dividend income within the basic rate band
32.5% on dividend income within the higher rate band
38.1% on dividend income within the additional rate band

What are the requirements for a legal dividend?

Companies Act 2006 Section 830 – Distributions to be made only out of profits available for the purpose

(1)A company may only make a distribution out of profits available for the purpose.

(2)A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

(3)Subsection (2) has effect subject to sections 832 and 835 (investment companies etc: distributions out of accumulated revenue profits).

A distribution must be justified by

The Company’s last published accounts
Interim Accounts
Initial Accounts

In small businesses having the right paperwork is vital should HMRC raise any questions, you will need:

Board Minutes
Dividend Vouchers

steve@bicknells.net

How much can landlords claim for wear and tear?

Landlords have been used to claim 10% of rental income as a tax deductible wear and tear allowance, but that will change in April 2016.

The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

https://www.gov.uk/government/publications/reform-of-the-wear-and-tear-allowance/reform-of-the-wear-and-tear-allowance

As the old rules apply until the 5th April 2016 it would be worth postponing any renewal purchase until after 6th April 2016, so you can claim a tax deduction in 2016/17.

It also worth noting that the old rules only applied to fully furnished property where as the new rules can be applied by any landlord who includes any items of furniture or equipment in their property.

The cost of the renewal is reduced by any sale proceeds for the item it replaces.

Detailed guidance is expected in April 2016.

steve@bicknells.net

New Tax Break for Couples – Register Now

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.

Applying online is straightforward. Couples can register their interest to receive the Allowance now at gov.uk/marriageallowance.

The maximum saving is 20% x £1,060 = £212

However, the partner giving up the allowance must not be earning and the partner getting the allowance must not be a higher rate tax payer.

steve@bicknells.net

10 ways to pay less tax

You are entitled to plan your tax affairs in a way that makes sure you do not pay more tax than you have to. There are many legitimate ways in which you can save tax, or example by saving in a tax-free ISA (Individual Savings Account), making donations to charity through Gift Aid, claiming capital allowances on assets used in your business or paying into a pension scheme.

Here are 10 ways to pay less tax:

Choose the right business structure for your business – most businesses start out as sole traders but once they start making profits convert to limited companies, this is because sole traders pay income tax starting at 20% and national insurance class 2, £2.70 per week and class 4, 9% on profits between £7,755 and £41,450, whereas, in a company a you could pay the tax and NI free salary of £7,748 and then pay dividends from profits after corporation tax of 20%
Employ your family – Children can legally work from the age of 13 which means they can perform activities which are relevant and justifiable in your business. Each member of your family has a tax free allowance of £9,440 (2013/14).
Avoid earning more than £100,000 – Once you earn over £100,000 you start to lose your personal allowance, when earnings are above £118,880 all of your allowance of £9,440 will have been lost
Pay into your Pension – Currently you can pay £50,000 per year into to your pension
Pay Dividends – Generally directors will take a low directors fee and the rest of their income in Dividends
Claim Expenses – You may well have an office at home and use your car for business
Use Company Assets – Sometime the Benefit in Kind Tax works in your favour, so you could get the business to buy the assets for you to use for example a commercial vehicle or computer equipment
Buy Assets – You should be able to buy assets with a loan or on credit but you will get the tax relief as soon as you take ownership
Check for Building Assets – do have integral building assets
R&D – Could you claim R&D tax credits