Tag: Pension

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 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.

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: 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.

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.

 

steve@bicknells.net

Contact Us

Is this the End of National Insurance?

Pay Packet And Banknotes

You pay National Insurance contributions to qualify for certain benefits including the State Pension.

You pay National Insurance if you’re:

  • 16 or over
  • an employee earning above £155 a week
  • self-employed and making a profit of £5,965 or more a year

The Office of Tax Simplification is currently beginning a process of looking at merging National Insurance with Income Tax.

OTS NI TOR

ACCA’s head of tax Chas Roy-Chowdhury warned that an alignment of NI and income tax rates would be crucial prior to a merger taking place.

Whilst This is Money reported…

Middle and high earners could see their tax bills jump under radical plans to merge income tax and National Insurance, a tax expert has warned.

People taking home £50,000 a year could be £230 worse off, but low earners on £20,000 would save more than £530, and those on £30,000 would come out around £380 ahead, according to snap research by Tilney Bestinvest on the potential tax shake-up.

Chancellor George Osborne wants to reduce ‘complexity’ in the tax system to make it clearer exactly how much people have to cough up, and has ordered the Office of Tax Simplification to see if there is a case for change.

This change is also likely to lead to changes to Pension tax relief reform, Your Money reported…
The government has already announced a consultation on the pension tax relief system, and I believe that a merger of income tax and NI would likely result in the floated idea of a pension with ISA-like tax treatment. This is because at present, a basic rate taxpayer gets 20% tax relief on pension payments but surely this would increase to 32% under a combined system. It seems illogical to increase tax relief at a time when they are actually trying to reduce the cost to the Exchequer. An equal tax treatment of ISAs and pensions could be a prelude to merging the two, potentially drawing ISAs into some form of limetime allowance.
steve@bicknells.net

Have you been over taxed on your pension withdrawal?

This is exactly how I pictured the partners lounge

You should be able to withdraw 25% of your pension tax free, but your pension provider will tax you on payments above this level.

If they don’t hold a current P45, the pension provider will apply an emergency tax code on a month 1/week 1 basis, which could mean you pay too much tax.

You will need these forms to reclaim the tax

Form P50Z – if the client has chosen to empty all their pension pot in one go and they have no other PAYE or pension income (other than the state pension);

Form P53Z – if the client has chosen to empty all their pension pot in one go and they do have other PAYE or pension income other than the state pension;

Form P55 – where the client has taken a lump sum payment which doesn’t use up all of their pension pot, they have only taken a single payment and don’t intend to take further payments in that tax year.

steve@bicknells.net

Will you be taxed if you inherit a Pension Fund?

Signing Last Will and Testament

IHT only applies if the pension company has to pay the value of your scheme to your estate, in which case it becomes like any other asset, but generally the pension pot is held in a discretionary trust, which means it isn’t taxed on death.

You can now nominate anyone not just dependents to be the beneficiary.

Since 6th April 2015 anyone who inherits a pension fund from a person who dies before the age of 75 is entitled to receive it tax free and the you can take the money as a lump sum or income. Once over 75 a special tax of 45% applies (previously 55%), you could reduce this by taking a regular income.

From 6th April 2016 the 45% tax is likely to be scrapped and income tax rates will be applied.

The BBC website has a useful post which explains the changes in 10 questions, click here to read it

steve@bicknells.net

 

 

Will cashing in your annuity lead to a better pension?

This is exactly how I pictured the partners lounge

The chancellor George Osborn has announce that he plans to allow pensioners to cash in their annuities.

Before the pension reforms….

Individuals saved into a pension during their working life and so built up a pension pot.

At some point during the first years of retirement, they used the money to buy an annuity from an insurance company.

This is a transaction that occurs once, and only once.

An annuity is an annual retirement income that is paid to them for the rest of their life.

BBC

From April 2016 the proposal is to allow pensioners to swap an annuity for a fixed lump sum.

But will pensioners be able to find investments which are better than the annuity they currently have?

steve@bicknells.net

Auto Enrolment – Free Webinars

BrightPay_&_AE

With the introduction of automatic enrolment, thousands of employers need to automatically enrol their eligible employees into a workplace pension scheme. Many small and micro employers will look to their bookkeeper, accountant or payroll advisor for help and advice. BrightPay is hosting a series of free Auto Enrolment Webinars specifically designed for bookkeepers, accountants and payroll advisors to make it easier to help payroll clients with their new obligations.

These webinars will include a number of guest speakers from the accounting and payroll industry. The topics covered will highlight various methods to streamline your auto enrolment processes and save you time handling these employer duties for payroll clients. Below is a list of each webinar with the guest speakers and topics that will be discussed. These are completely free webinars. Book your place today.

Webinars Dates

18th March
● Paul Byrne: Payroll Bureaus Guide to Profit from Auto Enrolment
● Mark Lee: How to STAND OUT from your competition
Register here https://www.brightpay.co.uk/events/9/

24th March
● Paul Byrne: Embrace Auto Enrolment to increase profits
● Patrick McLoughlin: Using Auto Enrolment to attract your Ideal Clients
Register here https://www.brightpay.co.uk/events/10/

25th March
● Paul Byrne: Essential Questions to ask you Payroll Software Provider
● Darren Critten: Auto Enrolment – Collaboration is the key to Success!
Register here https://www.brightpay.co.uk/events/7/

Written by Karen Bennett for BrightPay Payroll Software

Will you pay Class 3A NI to top up your Pension?

This is exactly how I pictured the partners lounge

From 12 October 2015 to 5 April 2017 you’ll be able to make a ‘Class 3A voluntary contribution’ to top up your State Pension by up to £25 per week.

You can choose to top up your State Pension by between £1 and £25 per week. How much you’ll need to contribute depends on:

  • how much extra pension you want to get each week
  • how old you are when you make the contribution

Example You are 68 years old in October 2015. You decide that you want to get an extra £5 per week (£260 a year) on top of your pension.

The cost of an extra £1 per week for a 68 year old is £827, so you multiply £827 by 5.

You’ll make a lump sum payment of £4,135.

You can use this calculator to see how it works…

https://www.gov.uk/state-pension-topup

Here is a link to the legislation…

http://www.legislation.gov.uk/ukdsi/2014/9780111121689/contents

steve@bicknells.net

Common Auto Enrolment mistakes..

14975526361_d496e12032_m

The Pensions Regulator (TPR) has recently highlight the following problem areas:

  1. Employer forgeting to do the declaration of compliance within 5 months of staging, many employers wrongly assumed that registering on the Government Gateway was enough.
  2. Confusion caused by running multiple payrolls for the same employer for example weekly and monthly
  3. Completing the declaration of compliance but without choosing a pension provider
  4. Omitting self employed workers who have a contract to provide work personally

steve@bicknells.net

5 Key Tests the employer must pass to borrow from a Pension Scheme

Pension concept
There are five key tests that a loan from a Pension Scheme must satisfy to qualify as an authorised employer loan. If a loan fails to meet one or more of these tests an unauthorised payment charge will apply.

The five key tests are

  • security
  • interest rates
  • term of loan
  • maximum amount of loan and
  • repayment terms.

Security [S179, Sch 30]

If a registered pension scheme makes a loan to an employer the amount of the loan must be secured throughout the full term as a first charge on any asset either owned by the sponsoring employer, or some other person, which is of at least equal value to the face value of the loan including interest.

If the asset used as security is taxable property then there may be additional tax charges under the taxable property provisions if the registered pension scheme is an investment regulated pension scheme.

Taxable property consists of residential property and most tangible moveable assets. Residential property can be in the UK or elsewhere and is a building or structure, including associated land, that is used or suitable for use as a dwelling. Tangible moveable property are things that you can touch and move. It includes assets such as art, antiques, jewellery, fine wine, classic cars and yachts.

Interest Rates [S179, Sch 30]

All loans made by registered pension schemes to employers must charge interest at least equivalent to the rate specified in The Registered Pension Schemes (Prescribed Interest Rates for Authorised Employer Loans) Regulations 2005 (SI 2005/3449). This is to ensure that a commercial rate of interest is applied to the loan.

The minimum interest rate a scheme may charge is calculated by reference to 1% above the average of the base lending rates of the following 6 leading high street banks:

  • The Bank of Scotland
  • Barclays Bank plc
  • HSBC plc
  • Lloyds TSB plc
  • National Westminster plc and
  • The Royal Bank of Scotland plc.

The average rate calculated should be rounded up as necessary to the nearest multiple of ¼%.

Term of Loan [S179, Sch 30]

The repayment period of the loan must not be longer than 5 years from the date the loan was advanced. The total amount owing (including interest) must be repaid by the loan repayment date.

Maximum Amount of Loan [S179, Sch 30]

Section 179 (1)(a) of Finance Act 2004 restricts the amount of a loan which can be made to a sponsoring employer to 50% of the aggregate of the amount of the cash sums held and the net market value of the assets of the registered pension scheme valued immediately before the loan is made. These restrictions are necessary because although such loans provide a useful source of business funding, there may be liquidity problems for the scheme if there is a sudden requirement to provide scheme benefits. It may also not be prudent to lend scheme funds to one company.

Repayment Terms [S179, Sch 30]

All loans to employers must be repaid in equal instalments of capital and interest for each complete year of the loan, beginning on the date that the loan is made and ending on the last day of the following 12 month period – known as a loan year.

Often Land and Commercial Property are used as the security for Pension Scheme loans but the problem is having first charge over the asset!

steve@bicknells.net

Is your pension going Dutch?

Amsterdam, canals and bikes

I love Holland but are their Collective pensions better than ours?

Collective funds pool all contributions into one big fund, so the administration costs are lower and pensions are paid from the fund rather than having to buy annuities.

By running funds collectively rather than individually (the British model) costs are reduced.

Some experts suggest that savers will increase their investment returns by 30%.

An article in the Telegraph 3rd June 2014 commented…

What is certain is that the schemes are a long way from the final salary “gold standard”. There are no guarantees, not even the certainty of a fixed income that you get with an annuity. You may get inflation-linked increases, you may not.

Assuming that these schemes do become available in the coming years, the best course for most workers would probably be to use them for some, not all, of their pension savings, with the rest in traditional schemes, self-invested pensions or Isas.

But will they ever see the light of day? There is little incentive for companies to back them – finance directors remember what happened with final salary schemes, which drove many firms to the brink of bankruptcy thanks to endless “gold-plating”.

So will your pension be going Dutch?

steve@bicknells.net