10 ways to pay less income tax

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…

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

Top 10 facts and rules…

Its only available to ‘First Time Buyers’
‘First Time Buyers’ can only have one Help to Buy ISA with one provider
You can pay in £1,000 when you open the account and then save a maximum of £200 per month
The maximum government bonus is £3,000 (but you can lower amounts of bonus if you have less than £12,000)
The scheme will run for 4 years from the date it opens (Autumn 2015)
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
Unlike ISA’s where you open one per year, the Help to Buy ISA will continue for 4 years
You can withdraw funds but if its not to buy a home then you won’t get the bonus
More than 100,000 homes have now been bought with government backed schemes
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 http://www.hmrc.gov.uk/forms/p87.pdf 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.

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…

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
Childcare – Up to £55 per week but check the rules to makesure your childcare complies (HMRC Leaflet IR115) – these rules are changing soon.
Mobile Phone – One per employee
Lunch – Tax Free Lunch Blog
Cycle Schemes – Cycle to Work Blog
Fitness – Fitness Blog
Parties and Gifts – Christmas Blog
Parking – Parking Blog
Business Mileage Allowance – 45p for the first 10,000 miles then 25p
Long Service Award – A bit restrictive as you need 20 years service, the tax free amount is £50 x the number of years
Eye Tests and Spectacles – The Eye Test must be needed under the Health & Safety at Work Act
Suggestion Schemes – Suggestion Scheme Blog
Insurance such and Death in Service and Income Protection – Medical Insurance Blog
Travel Expenses – Travel Blog
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: http://www.hmrc.gov.uk/calcs/cars.htm and rates are shown in the table below for zero emission vehicles and some of the lower CO2 vehicles.

10. Check your P800

The P800’s are likely to contain errors because:

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

So check the following carefully:

P60 – you get this at the end of each tax year
P45 – you get this when you leave a job
PAYE Coding Notice
P11D Expenses and benefits
P9D Expenses payments and income from which tax cannot be deducted
Bank and Building society statements
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.

steve@bicknells.net

What are tax implications if a company pays a Directors personal 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

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
Childcare – Up to £55 per week but check the rules to makesure your childcare complies (HMRC Leaflet IR115) – new rules coming soon
Mobile Phone – One per employee
Lunch – Tax Free Lunch Blog
Cycle Schemes – Cycle to Work Blog
Fitness – Fitness Blog
Parties and Gifts – Christmas Blog
Parking – Parking Blog
Business Mileage Allowance – 45p for the first 10,000 miles then 25p
Long Service Award – A bit restrictive as you need 20 years service, the tax free amount is £50 x the number of years
Eye Tests and Spectacles – The Eye Test must be needed under the Health & Safety at Work Act
Suggestion Schemes – Suggestion Scheme Blog
Insurance such and Death in Service and Income Protection – Medical Insurance Blog
Travel Expenses – Travel Blog
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

steve@bicknells.net

It’s a Pool Car isn’t it?

Yet again, we have another case on Pool Cars which could have been prevented had the right procedures been put in place.

The Case was decided in May 2015 and involved Mark and Trudie Holmes and their company KMS Logistics (UK) Ltd. The company owned 7 prestige cars which were used assist in maintaining and attracting clients.

There was no prohibition (not even a verbal one) on the private use of the vehicles, mileage logs showed that the cars were mainly used by Mr & Mrs Holmes. Until 2003/4 they had been declared as a benefit in kind but then the stopped being declared! There even seemed to be confusion over who owned the cars.

So not surprising Mr & Mrs Holmes lost the case.

Read the full details by clicking here

So what should you do to prove there is no private use:

Keep the car on the company’s business premises
Keep the keys at the company’s business premises
Prepare a Board Minute
Make sure your contract of employment bans private use
Keep a mileage log
Insure the car principally for business use

HMRC have specific rules on keeping vehicles at home in EIM23465

Even if you do meet the 60% rule you still have to prove ‘no private use’

steve@bicknells.net

Would you give your staff a company motorbike?

Motorbikes have a clear tax advantage over company cars because they are classified as plant and machinery. This is better for both employers and employees.

Capital Allowances are restricted on cars based on CO2 emissions and employees also get taxed on the benefit in kind based on CO2.

Motorbikes being plant and machinery aren’t restricted and you could use the Annual Investment Allowance to offset the cost.

The Benefit In Kind is assessed as 20% of the cost of the motorbike but there will also be a benefit in kind on fuel, repairs and insurance.

The company will also have to pay 13.8% Class 1A NI on the benefit in kind but that applies to most benefits including cars and motorbikes.

Would motorbikes be a viable option for your employees?

steve@bicknells.net

What are Dispensations and Scale Rate Allowances?

Its nearly time to prepare your P11D’s, here is a link to the 2014-15 P11D

You’ll need to submit an end-of-year form to HM Revenue and Customs (HMRC) for each employee you’ve provided with expenses or benefits.

The form will either be a P9D or a P11D, depending on the expense or benefit.

You may need to submit form P11D(b) to report the amount of Class 1A National Insurance due on all the expenses and benefits you’ve provided. You should do this if:

you’ve submitted any P11D forms
you’ve been sent a P11D(b) form by HMRC

If you don’t submit any P11D forms, you can tell HMRC that you don’t owe Class 1A National Insurance by completing a declaration.

Due by 6th July 2015.

As an employer, you can apply for a dispensation on some expenses and benefits you provide for your employees. This means you won’t need to report them to HM Revenue and Customs or pay tax or National Insurance on them. Here is a link to apply for Dispensations.

There are also Benchmark Scale Rates which can be paid tax free, alternative you can claim the actual costs

Description	Amount (up to)
Breakfast rate	£5
One meal (5 hour) rate	£5
Two meal (10 hour) rate	£10
Late evening meal rate	£15

steve@bicknells.net

Did you have fun on your corporate day out? you could be in for a tax bill

Small businesses across the UK will soon see HM Revenue & Customs (HMRC) clampdown on corporate away days.

That is according to law firm Pinsent Masons, which said that the department will now ask for tax and National Insurance on the cost of such events.

Joe Quinn, the company’s Director, explained: “If tax inspectors think that there is too much of a fun or social element to a company’s offsite event then they should be treated as though they are a taxable treat for employees.”

http://www.taxassist.co.uk/francksidon//?pg=news.php&article=12790

Staff Parties and Annual Functions costing less than £150 per head are exempt if open to staff generally but Corporate Hospitality is another minefield

Her Majesty’s Revenue and Customs (HMRC) make it quite clear that members of staff, such as sales representatives, who would be expected to attend corporate hospitality events in order to entertain clients as part of their role within the company, would be exempt from any potential charge on benefits in kind. Other members of staff, who were present purely as a perk of the job, would be deemed as being in receipt of a benefit and therefore would be liable for a charge. Visitors, not employed by the hosting company would be exempt. The company paying for the corporate hospitality would also be able to treat the expenditure as entertaining clients, for which they could claim tax relief.

http://ukmoneymarket.co.uk/other/corporate-hospitality

steve@bicknells.net