21 Tax Saving Tips Tax & Accounts

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1 21 Tax Saving Tips Tax & Accounts

2 Everyone wants to save tax and, although there are complex tax savings schemes available, some tax savings are simple. You just need to take some care in working through the possibilities. The worst you could then find is that your financial affairs are in order. In which case, give yourself a large pat on the back. But you might discover that you are missing out on cash that at present is being kept by HMRC on your behalf. Either way, you are a winner. So please read this through and let us know if we can help. Ian Marlow Managing Director HFM Tax & Accounts 2

3 1 Check your tax code Look at the tax code on your latest pay slip and see if you are on the correct tax code. Most people will be on a 747L code which means you will have a tax free allowance of 7,470 before your income is taxed. But tax codes can vary for many reasons; you may have tax to pay for an earlier year, or an additional allowance for pension contributions or gift aid payments. If you are on a BR code it means all your income is taxed at the basic rate and you have no personal allowance. That usually occurs when you already have income elsewhere, say from self employment or a pension, and that is using your personal allowance. Check the HMRC guide basics.htm. 2 Use your annual ISA allowance This year you can put 10,200 in an Individual Savings Account (ISA) and the income from the savings is entirely shielded from tax. There are two types of ISA Cash ISAs and Stocks and Shares ISAs and the same tax exemption applies to both. You do though have to be resident and ordinarily in the UK in order to open an ISA. Choose your ISA carefully though to maximize the return from your investment as saving tax on no income is rather a waste of time. But regular saving through ISAs is a good idea. 3 Plan your giving If you make a gift to charity by Gift Aid then the amount of income that attracts tax at the basic rate is increased by the amount of the gift aid payment. So, if you are a higher rate taxpayer, you will pay less tax at the higher rate. That way both you and the charity get to benefit from your generosity. If the charitable gift comes from a company not an individual then the tax relief is obtained by treating the gift as an expense, thus reducing the amount of Corporation Tax due. 3

4 4 Claim for professional membership costs If you belong to an approved professional body then you can claim the cost of your annual membership against either employed or self employed income. This may be only a small amount (though every little helps) but if you are, say, a doctor then the amounts of tax saved can be significant. The claim can be made either on a Self Assessment Tax Return or by writing to HMRC with details of the subscription. This may then be included in your tax code in future. 5 Incorporate your business Because self employed income is always taxed in the year it is earned it can be more tax efficient to incorporate your self employed business. Then you can draw money from the business as a mixture of salary and dividends and have more flexibility to retain profit in the company to avoid paying higher rate tax unnecessarily in one year. However, tax savings are rarely the only reason for incorporating and tax rules do change. It is always a good idea to obtain professional advice before doing this. But delay could cost you significant amounts. 6 Contribute to a pension scheme Contributing to a pension scheme makes sense in itself as we all need to make provision for retirement and it is also tax efficient to make pension contributions. If you are employed you can make additional contributions to your employer s scheme. If self employed you can set up a personal pension. If you trade through a limited company you can set up a company pension scheme and pay into your pension fund that way. These all attract tax relief in slightly different ways. Even if you wish you had started earlier, the best time to start a pension is always now. 4

5 7 Take dividends below the higher rate threshold Trading through a limited company gives you the flexibility to retain money in the company and avoid taking income that is unnecessarily taxed at 40% when you might be a basic rate taxpayer in the following year. It takes careful planning though to ensure you take income only up to the higher rate limit in any tax year. You will also need to make sure you complete all the necessary paperwork board resolutions and issue of dividend certificates to ensure HMRC are not able to challenge the dividend award and argue that the drawings should be treated as salary. 8 buy a low emission vehicle Generally speaking company cars are taxed punitively and it is often better to keep the vehicle out of the company and claim a mileage allowance. But the government has made it attractive for a company to provide a low emission vehicle and the taxable benefit can be as low as zero for an electric vehicle. And if the vehicle has CO2 emissions of less than 110g then you can claim a 100% first year capital allowance in order to obtain tax relief in the year it was purchased. So check the tax situation before you buy or lease in order to avoid an expensive mistake. 9 Transfer savings or investments to your partner Where you are a higher rate taxpayer and your partner is a basic rate taxpayer or is not in receipt of any income, you can take steps to minimize your total tax payments. Savings should be put in the name of the person with the lowest tax rate and any gift aid payments made by the higher rate taxpayer. And, if you are married or in a civil partnership, any shares can be transferred without a capital gains tax charge in order to minimize tax on dividends or before they are sold. It is a simple piece of tax planning, but very effective. 5

6 10 Claim pre trading expenses There are usually a number of costs to setting up a new business that are incurred long before the business starts. You can take steps to minimize your tax liability in the first year of trading by recording all these expenses and keeping all of the receipts. Even the small amounts can add up to a significant sum so get into good habits right from the moment you start to do anything towards the start of the business. And if you plan to register for VAT make sure you keep the VAT invoices in order to reclaim VAT on your expenses. 11 Use your CGT allowance wisely Each year every taxpayer has an allowance in excess of 10,000 that is exempt from capital gains tax (CGT). That leaves scope for tax planning to reduce your CGT bill. Firstly, by spreading the sale of assets such as shares over two tax years e.g. selling half the shares on 4 th April and half on 6 th April. Secondly, as transfers between spouses (or civil partners) are exempt from CGT so transferring some of the shares to be sold by your partner can use their allowance and possibly ensure a lower CGT rate on their sale too. 12 Claim interest relief on funding a new business If you have to make personal borrowings to start your new company then you are able to claim tax relief on the interest from your borrowing on your personal self assessment return. You will need to be careful though to ensure there is a clear trail for the cash from the receipt of the loan to the income in the company account. HMRC will not allow the tax relief if the interest is not clearly shown to be for business purposes, and they are unlikely to allow relief on credit card borrowing. 6

7 13 Make use of your AIA for capital expenditure When a business purchases capital assets, such as equipment, it is allowed to claim capital allowances each year to offset the use of the equipment against its useful life. The rules for doing so can be complex and they tend to vary from year to year, but currently it is possible to claim 100% of the cost of purchasing the asset in the year it was purchased, up to a specified limit. If you are thinking of purchasing equipment it is worth checking if it is advisable to spend the money before the end of the tax year. 14 Convert your mobile phone to a company scheme For some years now owning a company mobile has not been a taxable benefit and the company is able to claim the cost of rental and all calls as a business expense. However, if you use your personal mobile for company use, HMRC will only allow you to claim the marginal cost of using the phone for business use i.e. the additional calls and none of the rental. So change your phone contract to a company one as soon as you can. It is not difficult but could save you money. 15 Learn to understand your business numbers I thought of apologizing for this one as it s not strictly a tax saving idea. But it just might be the idea that saves or makes you most money. The point is that you must understand the business numbers if you are going to increase sales and reduce costs. And making money comes before saving tax (though doing both is preferable). Too often we become focused on saving tax from the profit we currently enjoy when it would leave us with more disposable income if we spent the same effort focusing on increasing our profitability. And you can t do that without understanding where your business is at present. 7

8 16 Plan your exit from your business Why are you in business? Hopefully you enjoy what you do (or why do it?) but it makes a lot of sense to think hard about where you want to end up as soon as possible into a venture. Is this a lifestyle business? Do you want to involve other investors? Have you thought about when you will sell and to whom? Having a plan makes it more likely that you will end up where you want to be. And it makes it more likely that you can plan your exit in a taxefficient manner. 17 Make plans for inheritance tax And presumably you don t want to leave more than necessary of your hard earned money to the government. You would rather leave it for your children right? Then you need to make sure you organize your affairs in such a way as to do that: drawing up a will; making lifetime transfers to children and possibly setting up a trust may help you to get close to your goal. Whatever you do, make sure you plan carefully and review your plans as your circumstances change. 18 Register capital losses Sometimes an investment goes wrong and, instead or making money, you lose it. No one plans to do that but if it does happen you will need to take action to register the capital loss so that it can be offset against future gains. If you don t make the claim on your tax return by the deadline then you lose the benefit, but once you claim you can carry the loss forward indefinitely. In some circumstances it can offset against other income but you should take professional advice about this as the rules are complex. 8

9 19 Make sure you claim all allowable expenses Whether it is income tax or corporation tax, it is levied on business profits not turnover, so maximizing expenses is important to keeping your tax bill down. Keep every receipt you can and make sure you claim every expense that is wholly and completely incurred in the course of your business. Otherwise you are throwing money away in tax. They have to be allowable expenses though for example, entertaining clients will not usually be a tax deductible expense so make sure you understand the rules carefully. This is one area where professional advice at the start of a business should pay for itself. 20 Claim mileage allowances for business use of car Do you use your car for work? Then make sure you claim mileage expenses. If your employer pays mileage expenses that are lower than the HMRC approved rate, then you can claim the difference when you complete your tax return. By the way, you can do the same if you have a bike although the rate per mile is lower. And if you own a business you should think about whether to claim all the cost of running the vehicle. 21 Find a good accountant An accountant doesn t have a magic wand to reduce your tax bill but we do know the rules and how to apply them to your advantage. We can advise you on the expenses you can claim and how to ensure you use all your tax allowances to full advantage, in addition to saving you time in dealing with HMRC and offering business and financial advice when you need it. It just might be the most tax efficient decision you make. 9

10 TAKE ACTION Most people are wasting money without ever realizing it! Ignorance may be bliss but it doesn t help you to know where you may be able to save money. For that you need someone who can take a knowledgeable look at your affairs and advise you of the action you can take. So why not be smart and get in touch today? Call us for an informal, no obligation chat on DISCLAIMER The information contained in this document is of a general nature and is not a substitute for professional advice. You are recommended to obtain specific professional advice before you take any action. 10

11 Material provided is only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the author or the firm. 11

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