Ford&Co TAXES MADE EASY 2017/2018 - Jonathan Ford & Co
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Ford&Co
Chartered Accountants
TAXES
MADE EASY
2017/2018
Taxes made easy Contents
clear and concise tax guide A few essentials
Introduction
2 Companies
Income shifting
Value Added Tax (VAT)
2017/18
Self assessment (SA) timetable
and your business
Family matters 4
Married couples
Tax and your
investments 17
Tax rates and allowances
Practical tax tips to guide you through the tax system Children
Pensions
and help you plan to minimise your liability. Tax free savings
High Income Child Benefit
Charge
Please use this guide to identify areas where you could What about unmarried Property matters 19
take action, then contact us for advice and to discuss partners? Buy to let
the most appropriate way forward. A word of warning Main residence
Working for others 8 Disposals and
The tax code capital gains tax 21
Benefits Entrepreneurs’ Relief
Expense payments Investors’ Relief
Running a business 11 Preserving the
Choosing a business structure inheritance 22
The tax regime Key features:
Capital allowances So what’s the problem?
Paying the tax Mitigating the liability
Employer obligations
1
A few essentials
more than 80% of the population will have an asset is sold, the chances are that a profit
Introduction little or no regular contact with HM Revenue will arise and this may give rise to a liability to
In the UK most income tax which flows into the and Customs (HMRC), the organisation that capital gains tax (CGT).
Exchequer does so by deduction at source. administers and regulates all taxes in the UK.
Details of any capital gains may have to be
The tax is taken from income before it is paid Over 10 million taxpayers have something included on the self assessment return.
to the taxpayer and most of this happens by more than just a regular income taxed under
way of Pay-As-You-Earn (PAYE). This collection Inheritance tax may be payable on the assets
PAYE or income covered by the Savings and
system will no doubt be familiar to almost that you give to others in your lifetime or leave
Dividend Allowances. They might have income
everyone who is in employment and also to behind when you die. At one time very few
from their own business or receive rent from
those who receive pensions. individuals had to worry about this tax.
a property. Alternatively, it may be that their
From April 2016 radical changes to the way savings or dividend income is significant House price increases over the last two to
in which interest is paid to savers by banks enough to result in tax being payable at the three decades have changed this and many
and building societies mean that this interest basic, higher or additional rates of tax. These more estates have now become liable so
is no longer paid with tax deducted at source. taxpayers may be asked to complete a self you may need to consider some planning to
Instead for many their savings income is assessment return each year and then they will minimise this tax.
covered by the Savings Allowance. Make sure have direct contact with HMRC. Many of those in business have to understand
you read the guidance on this issue covered the principles of Value Added Tax (VAT)
in the ‘tax rates and allowances’ section on Practical Tip because they will have to act as an unpaid
page 4. collector of this tax. In addition, those who
If you are not asked to complete a tax return,
Many of us, including children, the retired and run their business through a limited company
it remains your responsibility to advise HMRC
working people, will have savings accounts need to know about corporation tax which
if there is a new source of untaxed income, a
of one sort or another and many might also taxes a company’s profits. Employing others
capital profit that could lead to a tax liability
have shares from which income arises in the in your business brings further obligations with
or you are subject to the high income child
form of dividends. The way in which dividends Real Time Information reporting for PAYE and
benefit charge. Please contact us for further
are taxed has also changed, with individuals the roll out of Pensions Auto Enrolment. We
advice if this affects you.
benefitting from a Dividend Allowance. consider these issues later in this guide.
Strategies may need reviewing to maximise Income tax is not the only means by which
income and minimise income tax. the government relieves us of our hard earned
As the circumstances described above cover cash. You may own assets such as a precious
the overwhelming majority of individuals, antique, a second home or shares. If such
2 A few essentials
Practical Tip Self assessment (SA) timetable
Remember to keep all tax related documents • Income tax and capital gains tax are both
such as interest statements, dividend assessed for a tax year which runs from
vouchers, pay certificate form P60 etc. Place 6 April to the following 5 April.
everything in a folder through the year as it • Shortly after 5 April - SA returns or a notice
is received. Then you can simply hand this to complete a return are issued by HMRC.
to us when we need to prepare your self
assessment return. • 31 October following - non-electronic
returns need to be submitted to HMRC by
HMRC are increasingly emphasising the this date.
importance of good records. Failure to • 31 January following - final date for
maintain adequate records may lead to submission of the return and all outstanding
inaccurate tax returns, which could result in tax to be paid.
penalties.
• There is an automatic penalty for late filing of
This guide is designed to provide you with the return of £100.
an overview of all of these taxes from seven
perspectives - that of the family; the employee; • Further penalties may be due if the filing of
the person running their own business; the the return is significantly delayed. These may
taxation of investments; property matters; run into hundreds of pounds.
disposals and CGT and, finally, knowing that
nothing is certain except death and taxes, the Practical Tip
potential liability on your estate at death.
The full £100 penalty will always be due if
Please use the guide to help you identify your return is filed late even if there is no tax
planning opportunities, pitfalls to avoid and outstanding. It is therefore essential to submit
areas where you may need to take action and the return on time either by 31 October
then contact us for further advice. (non-electronic) or otherwise by 31 January
following the end of the tax year.
A few essentials 3
Family matters
taxable income of £123,000 or more will not be * Only applicable to savings income. The 0%
Married couples entitled to any personal allowance. rate is not available if taxable non-savings
The phrase ‘spouse’ whenever used in this income exceeds £5,000
guide includes a registered civil partner. Tax Tip ** Scottish resident taxpayers are liable
Spouses are taxed as independent persons, If your income is in the range £100,000 - on non-savings income and non-dividend
each of whom is responsible for their own tax £123,000 the restriction in your personal income at 20% income tax up to £31,500,
affairs. In principle all individuals are entitled allowance is the equivalent of a tax cost of 40% between £31,501 to £150,000 and then
to a basic personal allowance before any 60%. You may want to consider making or 45%.
income tax whatsoever is paid. However, some increasing certain payments which are tax Other income taxed first, then savings
individuals on high incomes may receive a deductible to minimise this tax cost. income and finally dividends.
reduced or even no personal allowance. This is
explained further below. Examples include pension contributions
(which may be subject to restrictions) and Tax rates and allowances
The 2017/18 personal allowance is £11,500. charitable donations.
Tax bands and rates are applied to each For 2017/18 the basic, higher and additional
spouse separately, so that each may generally rates of tax applicable remain unchanged.
have taxable income up to £45,000 before 2017/18 Income Tax Rates For 2017/18 some individuals qualify for a
they start to pay higher rate tax. See the 0% starting rate of tax on savings income up
£
income tax rates table for the different bands to £5,000. However this rate is not available
which apply to Scottish residents. 0 - 5,000 0%* if non-savings income (broadly earnings,
For spouses there is no aggregation of 20% pensions, trading profits and property income)
income, no sharing of the tax bands and 0 - 33,500** exceeds the starting rate limit.
(7.5% on dividends)
except in limited circumstances detailed later Individuals may be entitled to Savings
in this section the personal allowance may not 40%
33,501- 150,000 Allowance (SA) with savings income within the
be transferred from one spouse to the other. (32.5% on dividends)
SA taxed at 0%. The amount of SA depends
45% on an individual’s marginal rate of tax. An
Losing the personal allowance Over 150,000
(38.1% on dividends) individual taxed at the basic rate of tax has an
Where an individual’s total income exceeds
SA of £1,000 whereas a higher rate taxpayer
£100,000 the personal allowance is reduced
is entitled to an SA of £500. Additional rate
by £1 for every £2 of income in excess of that
taxpayers receive no SA.
limit. This means that an individual with total
4 Family matters
The Dividend Allowance (DA), available to all The option to transfer is available to couples
taxpayers regardless of their marginal tax rate, Tax Tip where neither pays tax at the higher or
charges the first £5,000 of dividends to tax at If you are feeling charitable, remember that a additional rate. If eligible, one partner will
0%. Dividends received above this allowance donation to charity under the Gift Aid scheme be able to transfer 10% of their personal
are taxed at the rates shown in the table on benefits from tax relief. It makes sense for a allowance to their partner which means £1,150
the previous page. higher rate/additional rate taxpayer spouse to for the 2017/18 tax year.
Dividends within the DA still count towards an make such donations so that they can benefit For those couples where one person does not
individual’s basic or higher rate band and so from the extra tax relief. use all of their personal allowance the benefit
may affect the rate of tax payable on dividends Alternatively, in some circumstances, will be up to £230 (20% of £1,150).
above the £5,000 allowance. donations can be carried back to attract tax Jointly owned assets
Dividends are treated as the top slice of relief in the previous tax year.
Married couples will often own assets in some
income. So the basic rate tax band is first
Tax breaks for spouses form of joint ownership. If they do not, then
allocated against other income.
it may be advantageous for tax purposes
Married couples and civil partners may be for transfers to be made to ensure joint
Minimising the tax bill
eligible for a Marriage Allowance (MA). ownership.
It follows from the basic rules set out above
that tax is minimised if spouses equalise, as The MA enables spouses to This can have benefits for income tax, CGT
far as possible, their income so that personal transfer a fixed amount of their and even inheritance tax.
allowances, SA and DA are fully utilised and personal allowance to their
higher/additional rates of tax are minimised. spouse. The option to
transfer is not available
to unmarried
Example couples.
In 2017/18 Ian and Angela have savings
income of £50,000 and dividend income
of £50,000 and no other income. If this is
split equally between them, the total tax bill
for the couple is £8,700. If only one spouse
has income of £100,000 and the other has
nothing, the total tax bill leaps to £22,225 -
an additional £13,525!
Family matters 5
Capital gains tax
Tax Planning Tax Planning
Independent taxation also applies to CGT.
If you and your spouse are both involved Each spouse is entitled to take advantage of There is nothing to stop you employing your
in running a business, income can be the annual exemption of £11,300 before any children in the family business so as to take
equalised if you are equal partners or equal CGT has to be paid. advantage of their personal allowance. There
shareholders. Alternatively, if only one of you are age restrictions (with some exceptions
is involved, the other could be employed even This is advantageous where assets are held the minimum age is generally 13 years old)
if only to use up their personal allowance. jointly and then sold as each spouse can use and legal limitations as to the type and
their annual exemption to save tax. duration of the work. It is also essential that
Where assets are owned in joint names any The transfer of assets between spouses payment is only made for actual work carried
income is deemed to be shared equally is neutral for CGT. This is sometimes done out for the business and at a reasonable
between the spouses. If the actual ownership shortly before assets are sold, to minimise tax. commercial rate.
shares are unequal, income is still deemed to Advice should be sought before undertaking
be split equally unless an election is made to such transactions to ensure that all tax Children and capital gains
split the income in the same proportion as the aspects have been considered. Children also have their own annual exemption
ownership of the asset.
Further detail on the operation of this tax is for CGT so that assets transferred to them
This does not apply to shares in close included in the disposals and CGT section of which have a bias towards capital growth
companies (almost all small, private, family this guide. rather than income may prove to be more
owned companies will be close companies) advantageous.
where income is always split in the same Children Child Trust Funds (CTFs)
proportion as the shares are owned.
It is often assumed that children are not The availability of new
taxpayers until they achieve some particular CTFs ceased from
Example age. In fact HMRC will tax a child just as January 2011, as did
A buy to let property is owned three quarters readily as anyone else if the child has sufficient government contributions
by Helen and one quarter by her husband income to make them liable. to the accounts. Existing
Mark. If no election is made the net rental CTFs however continue
Transferring income to children
income on which tax is payable will be split to benefit from tax free
50:50. Children have their own personal allowances investment
and tax bands. Where their only income is, at growth.
If an election is made the income will be split best, a few pounds from a paper round or a
75:25. A choice can be made according Saturday job, there may be some scope for
to which is the most desirable when other transferring income producing assets to the
income of the spouses is taken into account. children to use up their personal allowance.
However, such assets should not be provided
by a parent, otherwise the income remains
taxable on the parent, unless it does not
exceed £100 (gross) each tax year.
6 Family matters
No withdrawals are possible until the child of £50,000 the charge applies to the partner What about unmarried
reaches age 18. However, the child’s friends with the higher income.
and family are able to contribute up to the
The income tax charge applies at a rate of 1%
partners?
annual limit of £4,128. It is possible to transfer
of the full Child Benefit award for each £100 It still pays to equalise income as much as
the investment to a Junior Individual Savings
of income between £50,000 and £60,000. possible, as income tax will be minimised.
Account.
The charge on taxpayers with income above However, transfers of assets may be liable to
Junior ISA (JISA) £60,000 will be equal to the amount of Child CGT and, if substantial, could also lead to an
Benefit paid. inheritance tax liability. It is vital for unmarried
A JISA is available for UK resident children
couples to each make a Will if they wish to
under the age of 18 who do not have a CTF Child Benefit claimants are able to elect not to
benefit from each other’s estate at death.
account. JISAs are tax advantaged and have receive Child Benefit if they or their partner do
many features in common with existing ISAs. not wish to pay the charge. Remember all the special rules for married
couples, both those dealt with in this section
They are available as cash or stocks and share Equalising income can help to reduce the
and those covered in other sections of this
based products but a child can only have one charge for some families.
guide apply equally to same-sex couples who
cash JISA and one stocks and shares JISA.
have entered into a registered civil partnership
The annual investment is limited to £4,128. Example or marriage.
Phil and Jane have two children and receive
Tax Planning £1,789 Child Benefit for 2016/17. Jane has A word of warning
There are some other limited ways income little income. Phil’s income is over £60,000 Transferring assets or interests in a business
can be transferred to children tax efficiently for the 2016/17 tax year. So the tax charge between husband and wife may attract the
such as: on Phil is £1,789. interest of HMRC especially where it is obvious
National Savings Children’s Bonds which are For 2017/18 the Child Benefit for two that it has been done primarily for tax saving
tax free. children remains at the same amount of purposes. Transfer of ownership of an asset
£1,789 per annum. Phil expects his adjusted must be real and complete, with no right of
Friendly Societies offer 10 year minimum, tax net income to be £55,000. On this basis the return and no right to the income on the asset
exempt savings plans for children for up to tax charge will be £895. This is calculated given up.
£25 per month. as £1,789 x 50% (£55,000 - £50,000 = If a non-working spouse is given shares in
£5,000/£100 x 1%). an otherwise one-person, private company,
High Income Child Benefit If Phil can reduce his income by a further
HMRC may, in some circumstances, seek to
Charge tax the working spouse on all of the dividends
£5,000 no charge would arise. This could be
under what is known as the ‘settlements
achieved by transferring investments to Jane
A charge arises on a taxpayer who has legislation’. So you may want to consider
or by making additional pension or Gift Aid
adjusted net income over £50,000 in a tax year obtaining advice from us before entering into
payments.
where either they or their partner are in receipt this type of arrangement.
of Child Benefit for the year. Where both
partners have adjusted net income in excess
Family matters 7
Working for others
Few avoid working for others at some time Scottish higher rate point of £31,500 applies some a real status symbol, despite continued
in their life and most will have encountered to an employee’s pay, rather than the £33,500 increases in the tax charge they give rise to.
the PAYE system operated by employers to which applies across the rest of the United
The charge on cars is calculated by multiplying
collect the income tax and national insurance Kingdom.
the list price of the car by a percentage which
contributions (NICs) due on wages and salaries.
With so many complications and some depends on the CO2 emissions (recorded on
guesswork involved, getting the code exactly the Vehicle Registration Document) of the car.
The tax code right can be difficult and the right amount of tax You then pay tax at 20, 40 or 45% on this
Ensuring the right amount of tax is taken will not always be deducted. charge depending on your overall tax position.
relies on a PAYE code, issued by HMRC and The table shows on the next page the
based on information given in a previous self Tax Tip percentages for 2017/18. For the majority of
assessment return or supplied by the employer. company car drivers the taxable benefit is 2%
The employee, not the employer, is responsible If you are unsure about your code and are
anxious not to end the tax year under or higher compared to 2016/17.
for the accuracy of the code.
overpaid, then you should have it checked. If the car has a diesel engine the charge is
Code numbers try to reflect both an individual’s Please talk to us about getting your tax code increased by a further 3% supplement (except
tax allowances and reliefs and also any tax right. that it cannot exceed 37%).
they may owe on employment benefits and
in some cases other types of income. For
many employees things are simple. They will Benefits Example
have a set salary or wage and only a basic The range of benefits available will vary Mark has an Audi A3 TDI (diesel) registered
personal allowance. Their code number will be significantly depending on the type of on 1 February 2017. It has an original list
1150L and the right amount of tax should be employment. Some attract no tax but even price of £20,155 and CO2 emissions of 99g/
paid under PAYE. However, for those who are taxable benefits can be efficient as the benefit km. Mark had extras fitted to the car costing
provided with employment benefits the code obtained by the individual can often outweigh £1,000 (VAT inclusive). In 2017/18 the taxable
number is generally adjusted to collect the tax the tax cost arising. In addition, for the individual benefit will be £4,443 ([20,155 + 1,000] x
due so that there are no nasty underpayment (but not the employer) benefits generally do not 21%*). If Mark is a higher rate taxpayer the
surprises. HMRC may also try to collect tax attract NICs. tax due on this will be £1,777.
on untaxed income, tax on dividends and tax
owing for an earlier year. Company cars * 18% from the table plus 3% diesel
Employer provided cars, commonly known as supplement.
For Scottish resident taxpayers the suffix ‘S’ is
included in the tax code and denotes that the company cars, remain a popular benefit and for
8 Working for others
Fuel for private use Medical insurance
2017/18
A separate charge applies where private fuel is The employee is taxed on the amount of the premium
CO2
% of car’s provided by the employer for a company car. The paid by the employer.
emissions
price taxed charge is calculated by applying the same percentage
(g/km) Home and mobile phones
figure used to calculate the company car benefit to a
0 to 50* 9 fixed figure which for 2017/18 is set at £22,600. No There is no benefit on the provision of a company
51 to 75* 13 fuel benefit applies to an electric car. mobile phone even where it is used privately. However,
76 to 94* 17 this is limited to one phone per employee.
95 18 Tax Planning Where home telephone bills are paid by the employer,
the amount paid will be taxable. The employee may
100 19 The fuel benefit charge can be expensive. It may
make a tax deduction claim for the cost of business
105 20 be cheaper for the employee to pay for all the
calls only but not the line rental.
fuel and to reclaim from the employer the cost of
110 21
business miles driven in a company car based on Cheap or interest free loans
115 22 a specific log of business journeys undertaken. If loans made by the employer to an employee exceed
120 23 £10,000 at any point in a tax year, tax is chargeable
HMRC publish advisory fuel rates for company
125 24 cars which are updated on a quarterly basis. See on the difference between the interest paid and the
130 25 goo.gl/4XVe9h for the latest position or contact interest due at an official rate - set at 2.5% per annum
135 26 us. from 6 April 2017. An exception applies for certain
qualifying loans - please contact us for information.
140 27
Planning to change your car?
145 28 Tax Tip
Significant changes to the car benefit rules are taking
150 29
place. The appropriate percentages of the list price The £10,000 limit on tax free loans is an attractive
155 30 subject to tax are now, in general, increasing by 2% perk for many employees.
160 31 per annum up to a maximum of 37% up to 2018/19.
165 32 In 2019/20 the percentages will increase by 3% (but Childcare costs
retaining the 37% maximum).
170 33 Childcare costs paid for by an employer are exempt
175 34 The government had from both income tax and NICs. This applies to a
planned to abolish the place in an employer operated nursery or where the
180 35 existing 3% diesel employer pays for registered or approved childcare
185 36 supplement but as long as the scheme meets certain requirements. In
190 and this will now be the latter case the exemption is limited to a maximum
37 retained until of up to £55 per week depending on when the
above
2021. employee first receives employer supported childcare
round down except * and their tax position. Any excess amounts are subject
to tax and NICs. Employer supported childcare is
available to new claimants until April 2018 when the
Working for others 9Tax-Free Childcare scheme will be fully up Expense payments
and running. Employees who qualify for both Example
schemes are able to choose which scheme An employee can claim tax relief for expenses In 2017/18 Michael travels 14,100 business
they wish to use but families cannot benefit which are incurred wholly, exclusively and miles in his own car and is paid 32p per mile
from both schemes at the same time. necessarily for business purposes. The main by his employer.
types of expense are travelling to places for
New Tax-Free Childcare scheme work (but not the normal place of work) and Michael can claim tax relief on an additional
The scheme for employer supported childcare overnight accommodation. amount of £1,013 ((10,000 x 45p) + (4,100 x
is being replaced by Tax-Free Childcare. The 25p)) - (14,100 x 32p).
scheme will be available to families where all Reimbursed expenses
parents are working 16 hours a week and meet An employer would normally reimburse an Vans
a minimum income level (generally £120 a employee for business expenses. Employers Where employees are provided with a van and
week) with each earning less than £100,000 a are no longer required to report reimbursed tax the only private use of this is to travel to and
year. Parents who are receiving support through deductible business expenses and therefore from work (including any incidental private use),
Tax Credits or the Universal Credit are not employees do not need to claim tax relief on then no taxable benefit should arise. If there
eligible. these expenses. is private use beyond this, there is a benefit of
Parents will need to register with the Mileage claims £3,230 for 2017/18 and an additional £610 if
government and open an online account fuel is provided for private as well as business
Many employers pay a standard rate of mileage journeys. In order to avoid this charge, it is
with National Savings and Investments. The to all employees who use their own cars for
government will then ‘top up’ payments into advisable to have a formal written policy,
business journeys. HMRC set statutory rates detailed mileage logs and make use of vehicle
this account at a rate of 20p for every 80p for business mileage which are 45p for the first
that families pay in. The scheme is limited to tracker records. These will support the limited
10,000 miles in a tax year and 25p thereafter. private use of the van and may avoid problems
£10,000 per child per year. The government’s
contribution will therefore be a maximum of If the employee is paid for business miles at less with HMRC in the future.
£2,000 per child. than the statutory rates, tax relief is available
on the difference. If, however, the employee is
Pension Contributions paid at more than these rates then the excess
Contributions by an employer to a registered is taxable.
pension scheme are generally tax and NICs free If you are paid less than the statutory
for most employees. This may be far better than rates to use your own car for
any other perk. business purposes remember
to claim a deduction on your
Tax Tip return or write to HMRC to
make your claim.
You may want to sacrifice some of your
‘normal’ salary to do this. Please talk to us
to make sure your salary sacrifice scheme is
effective.
10 Working for othersRunning a business
Starting up a business of your own is a big step partnership. Again, the business and personal a corporate body. This again gives some
and not one to take lightly. The taxation of your affairs of the partners are not legally separate. protection to the owners from the partnership’s
business is only one of many commercial and creditors.
Sole traders and partnerships are often referred
legal aspects of starting a business that you will
to as unincorporated businesses and the In this section we consider the differing tax
need to consider.
individual owners as self-employed. treatments of the alternatives but you should
Preparation is the key and a proper business choose which structure is right for you based
plan is one of the first things you should do. Limited Company on more than just the tax issues alone.
However, tax matters are our main concern A company is a legal entity in its own right,
here. separate from the personal affairs of the owners
and the directors.
Choosing a business structure A company provides protection from liability,
The alternative business structures are: which means that the creditors of the
company cannot make a claim against the
Sole Trader owners or the directors except in limited
This is the simplest form of business structure circumstances. Often this advantage is
since it can be established without legal somewhat eroded because a bank, for
formality. example, may seek personal guarantees from
the directors.
The business of a sole trader is not
distinguished from the proprietor’s personal These potential
affairs. If the business incurs debts which are advantages carry the
unpaid, the creditors can seek repayment from downside of greater legal
the sole trader personally. requirements and regulations
that must be complied with.
Partnership
A partnership is similar in nature to a sole Limited Liability Partnerships
trader but involves two or more people working (LLPs)
together. LLPs are a halfway house between
A written agreement is essential so that partnerships and companies.
all partners are aware of the terms of the They are taxed in the same way
as a partnership but are legally
Running a business 11The tax regime Working out profits Cash basis for smaller unincorporated
Profits are calculated using accepted businesses
Unincorporated businesses accounting practices and crucially this means An optional basis for calculating taxable profits
A new business should register with HMRC on that profit is not necessarily simply receipts is available to small unincorporated businesses.
commencing to trade. Income tax is paid on less payments. Instead it is income earned less If an owner of a business decides to use the
the profits of the business. The amount that the expenses incurred. However see details of the cash basis, the business profits would be
proprietor, or a partner in a partnership, draws optional cash basis for smaller unincorporated taxed on cash receipts less cash payments of
out of the business (referred to as ‘drawings’) is businesses. allowable expenses subject to a number of tax
irrelevant. Not all of the expenses that a business incurs adjustments.
Profits are taxed on a current year basis are allowed to be deducted from income for The optional scheme requires an election by
as shown by the example, although a new tax purposes but most are. It is important that the business owner and is only available where
business will be subject to special rules, which you keep proper and comprehensive business the business receipts are less than £150,000.
we will be pleased to explain to you. records so that relief may be claimed. Businesses can stay in the scheme up to a total
business turnover of £300,000 per year.
Example Tax Tip A bit more detail of the scheme:
If the accounting period (or ‘year’) end is 31 Try to incur expenditure just before rather • Cash receipts include all amounts received in
March then, in the tax year 2017/18, the than just after the year end, as this will connection with the business including those
profits for the year ended 31 March 2018 will accelerate the tax relief. from the disposal of plant and machinery. The
be taxed. good news is that if a customer has not paid
Examples of the type of expenditure to
consider bringing forward include building what is owed by the year end, the amount
If the year end was 31 August then, in the tax
repairs and redecorating, advertising and due is not taxable until next year.
year 2017/18, the profits for the year ended
31 August 2017 will be taxed. marketing campaigns and expenditure on • Allowable payments include paid expenses
plant and machinery. but these still need to meet the existing tax
rule of being wholly and exclusively incurred
Tax Tip Trading and property income allowances for the purposes of the trade.
The choice of accounting date on a business Proposals have been announced to introduce • Payments include most purchases of plant
start up can affect: new £1,000 allowances for trading and property and machinery, when paid, rather than
income from April 2017. Individuals with trading claiming capital allowances. The bad news is
• how profits are taxed or property income below £1,000 will no longer that if a supplier is not paid by the year end,
• when tax is payable need to declare or pay tax on that income. the amount is not relievable until next year.
Those with income above the allowance will be
• when losses are relieved. able to calculate their taxable profit either by • Interest payments are only allowed up to a
deducting their expenses in the normal way or limit of £500.
So do contact us to discuss the options
available for your circumstances. by simply deducting the relevant allowance. • Business losses may be carried forward to
set against the profits of future years but not
12 Running a businesscarried back or set off ‘sideways’ against Paying the tax The PAYE and NICs on salaries is
other sources of income. payable monthly (or quarterly where
The self-employed may have to pay tax and the amount due is less than £1,500
Do get in touch if you would like us to consider
NICs three times a year, namely: per month).
if this optional scheme is appropriate for you
and your business. • 31 January in the tax year Penalties apply to
• 31 July following the tax year employers who fail
Capital allowances to make returns
• 31 January following the tax year. on time. These
When assets are purchased for the business,
In certain circumstances, the first two payments penalties
such as machinery, office equipment or motor
can be waived. range from
vehicles, capital allowances are available.
£100 to
As with expenses, these are deducted from
income to calculate taxable profit. Employer obligations £400 per
month
Plant and machinery - Annual Investment As an employer you will have many depending
responsibilities. These will include employment on the size
Allowance (AIA)
law requirements which are not covered in this of the employer.
The AIA gives a 100% write off on most types guide and HMRC requirements to report pay Interest and
of plant and machinery costs, but not cars, of and benefits. Two other requirements place a penalties also apply
up to £200,000 per annum. further burden on employers. for failing to pay on time.
Any costs incurred in excess of the AIA will Real Time Information The employer must also report details of
attract an annual ongoing allowance of 8% or expenses and benefits provided to employees.
18% depending upon the type of asset. Real Time Information (RTI) reporting is
mandatory for broadly all employers. More information on the valuation of benefits is
Businesses are eligible for a 100% allowance, contained in the Working for Others section of
on certain energy efficient plant and low Under RTI employers, or their agents, are this guide.
emission cars. required to make regular payroll submissions
for each pay period during the year. The Pensions Auto Enrolment
Motor cars submissions detail payments made to and Pensions Auto Enrolment places obligations
The tax allowance on a car purchase depends deductions made from employees. These on employers to automatically enrol ‘workers’
on CO2 emissions. Currently purchases of cars submissions must generally be made on or into a work based pension scheme. Employers
with emissions of up to 130g/km attract an before the date the amounts are paid to the have to comply with their obligations from a
18% allowance and those in excess of 130g/ employees. designated staging date (which vary by size of
km are only eligible for an 8% allowance. The RTI submission details payments made employer and when the PAYE reference was
which include salary, overtime and statutory set up).
The qualifying emissions are to reduce from 130
to 110g/km from April 2018. payments such as statutory maternity pay. It The employer’s duties include:
also details the income tax, national insurance
contributions (NICs) due together with other • assessing the types of workers in the
deductions such as student loan repayments. business
Running a business 13• providing a qualifying automatic enrolment Warning - close company loans to
pension scheme Practical Tip
participators
• automatically enrolling all ‘eligible jobholders’ If you operate as a limited company, there A close company (which generally includes
into the scheme is a legal separation between you as the owner managed companies) is taxed in certain
owner and the company itself. This means circumstances when it has made a loan or
• and paying employer contributions. you cannot use the company bank account advance to individuals or their family members
All employers will need to contribute at least as if it were your own! This requires a certain who have an interest or shares in the company
3% of the ‘qualifying pensionable earnings’ for amount of discipline without which all kinds of (known as participators). The tax charge is
eligible jobholders. However, to help employers legal and tax related difficulties can occur. 32.5% of the loan if it is outstanding nine
adjust, compulsory contributions will be phased months after the end of the accounting period.
in, starting at 1% before eventually rising to 3%. Corporation Tax The tax charge has been increased from 25%
If the employer only pays the employer’s Companies currently pay corporation tax at for loans made prior to 6 April 2016. The tax
minimum contribution, employees’ contributions 19%. charge is repaid to the company nine months
is currently 1% of their salary, before eventually after the end of the accounting period in which
Tax on ‘drawings’ the loan is repaid.
rising to 5% as there is an overall minimum 8%
Directors of a company will normally be paid
contribution rate. The employee contributions Further rules prevent the avoidance of the
a salary and this is taxed under PAYE as for
may be paid net of basic rate tax depending on charge by repaying the loan before the nine
the type of pension scheme, if so the employee all employees. The cost of this, including the
month date and then effectively withdrawing the
pays a 0.8% contribution eventually increasing employer’s NICs, is generally an allowable
same money shortly afterwards.
to 4% before basic rate tax relief is added. expense of the company. Shareholders of the
company in contrast may be rewarded by the A ‘30 day rule’ applies if at least £5,000 is
payment of dividends on their shares. repaid to the company and within 30 days new
Practical Tip loans or advances of at least £5,000 are made
All employers have to implement Auto Tax Tip to the shareholder. The old loan is effectively
Enrolment. Contribution levels are due to treated as if it has not been repaid. A further
In most small companies the directors and rule stops the tax charge being avoided by
increase from April 2018. We can help you to
shareholders are one and the same and so waiting 31 days before the company advances
deal with Auto Enrolment.
they can choose the most tax efficient way to further funds to the shareholder. This is a
pay themselves. Using dividends can result complex area so please do get in
Companies in savings in NICs. This requires planning touch if this is an issue
and needs to take account of the Dividend for you and your
Unlike sole traders and partnerships who pay
Allowance and dividend rates of tax. company.
tax on profits only (and drawings are ignored),
companies have two layers of tax. The first is The government has announced plans to
tax payable by directors and shareholders on reduce the Dividend Allowance from £5,000
money they take out of the company and the to £2,000 from 6 April 2018 so careful
second is corporation tax which is due on the planning is required. Please talk to us to
company’s profits. decide what is appropriate for you.
14 Running a businessPayment of tax What does VAT apply to?
Planning Tip
Corporation tax is usually payable nine months VAT is chargeable on the supply of goods and
Ensure that sufficient salary and dividends and one day after the year end, so the choice of services in the UK when made by a business
are drawn from the business to prevent these accounting date has no tax consequence. that is required to register for VAT.
charges arising unnecessarily on an overdrawn
director’s current account. We can also ensure A registered business must charge VAT on its
that overdrawn accounts are cleared properly.
Practical Tip sales which is known as output VAT. There
Please contact us if you would like to discuss HMRC issue toolkits on various tax topics are currently three rates of VAT which can be
the right options for you and your business. to help taxpayers and their agents comply payable on what are known as taxable supplies.
with tax law. One of the main areas of non These are the standard rate of 20%, the
compliance identified by HMRC is poor reduced rate of 5% and the zero rate.
Tax on profits
The profits of a limited company are calculated record keeping and this applies to all types of The zero rate applies where the supply is
in a similar way as for unincorporated business. If you would like guidance on what deemed to be subject to VAT but the output
businesses and the same rules with regard records to keep please get in touch. VAT is charged at 0%, meaning that no VAT is
to expenses and capital allowances generally actually payable.
apply. Remember though that the salaries Income shifting However, a business also pays VAT on the
paid to directors, but not the dividends paid to goods and services it buys. This is known as
shareholders, are deductible from the profits Over recent years, many families have been
input tax.
before they are taxed. attracted by the savings that can be made by
combining small salaries and large dividends. It If the output tax exceeds the input tax, then
was possible to increase the savings available a payment of the difference has to be made
Tax Planning by introducing a non-working family member to HMRC. This calculation is normally done
Companies are a popular business structure into the business as a shareholder or co-owner, quarterly. If input tax exceeds output tax a
as they generally result in less tax being paid to use up their personal allowance and lower repayment of VAT will be made.
overall. However the changes to tax rates rates of tax. This calculation is also done quarterly except
on dividends and the proposal to reduce the Care needs to be taken as rules aimed that if repayments occur regularly this can
Dividend Allowance from April 2018 reduce at counteracting this in the ‘settlements be done monthly. Regular repayments would
the savings that are available by incorporating legislation’ could be used to challenge certain perhaps apply where a business generally
and trading as a limited company. arrangements. If you have any questions or makes zero rated supplies.
We would be happy to discuss the concerns, please do not hesitate to contact us.
Supplies
implications of incorporation with you before
you decide whether or not to incorporate Value Added Tax (VAT) and your Certain supplies of goods and services are not
subject to VAT at all and are known as exempt
your business. business supplies. A business that makes only exempt
VAT is a tax ultimately paid by the final supplies cannot register for VAT and will be
consumer and businesses act as the collectors unable to reclaim any input tax.
of the tax. There are heavy fines for failing to
operate the system properly.
Running a business 15customer will be able to recover the VAT that is
Tax Tip charged.
When you first register for VAT you can Indeed, in general, a business that always sells
reclaim input tax on goods purchased up to to other VAT registered businesses will normally
four years prior to registration provided they register, even if below the annual limit, because
are still held when registration takes place. then it can reclaim VAT on purchases and
VAT on services supplied in the six months expenses.
prior to registration may also be reclaimed.
This will improve profit and can be especially
As there are three rates which can be relevant for new businesses because there are
applicable to taxable supplies, standard, often high initial set up costs that carry VAT.
reduced or zero rated, it is important to identify On the other hand, registration comes at the
the type of supplies correctly and apply the cost of having to meet onerous record keeping
correct percentage of VAT. requirements, a need to submit online VAT
Some input VAT is not reclaimable by a VAT returns and pay online and on time. As well as a
registered business. Two common examples fundamental need to get it right!
are VAT incurred on entertaining UK business Failure on any of these points exposes the
customers and VAT on the purchase of a car. business to penalties which, in some cases,
Do I need to register? can be substantial.
A business must register if its taxable supplies
exceed an annual figure, currently £85,000. If Tax Planning
taxable supplies are less than this a business You should consider carefully whether
may still register voluntarily. So, for example, if to register voluntarily. If the VAT at stake
the business makes only zero rated sales, it can is relatively small the responsibilities of
still register and reclaim the input tax suffered. registering may outweigh the benefit.
VAT can affect competition. A plumber, for
example, who sells only to the general public,
will be at a disadvantage if he has to register
Practical Tip
for VAT. There are various VAT schemes designed to
He may have to charge up to 20% more than a reduce administration and/or improve cash
plumber who is not registered to earn the same flow for the smaller business so do contact
profit. us for further information.
On the other hand, if the same plumber only
works for other VAT registered businesses,
such as building companies, then it will not
matter whether he is registered because the
16 Running a businessTax and your investments
Setting aside income in the form of savings exceed £40,000 or if the value of the fund
is important for us all, to provide for the when benefits are taken is greater than a
unexpected or to build up a nest egg that we lifetime allowance which, for 2017/18, is
can enjoy in retirement. £1 million. Generally where a taxpayer has
adjusted income in excess of £150,000
Pensions the annual contribution possible will be
restricted from £40,000 by £1 for every
Pensions are one of the most tax efficient
£2 for income in excess of the £150,000.
forms of saving. Most higher rate taxpayers can
The minimum annual allowance available
contribute £100 to a registered pension fund
after this restriction is £10,000. When an allocation of funds into a flexi-access
at a cost of only £60 and investment income
account is made the member typically will take
and capital gains will accrue within the scheme Pensions freedom the opportunity of taking a tax free lump sum
largely tax free. Taxpayers have choice and flexibility when it from the fund.
An individual is entitled to tax relief on personal comes to accessing their personal pension
The person will then decide how much or how
contributions in any given tax year up to the fund. Options include taking a tax free lump
little to take from the flexi-access account. Any
higher of 100% of earned income or £3,600 sum of 25% of fund value and purchasing an
amounts that are taken will count as taxable
(gross). annuity with the remaining fund or opting for a
income in the year of receipt.
more flexible drawdown.
The contributions are paid net of basic rate
Access to some or all of a pension fund without
tax and the pension provider will then recover The flexible drawdown rules allow for total
first allocating to a flexi-access account can
that basic rate tax from HMRC. Higher and freedom to access a pension fund from the age
be achieved by taking an uncrystallised funds
additional rate relief, if appropriate, can be of 55. Access to the fund may be achieved in
pension lump sum.
claimed from HMRC. Contributions in excess of one of two ways:
the individual’s limit can be made into a scheme The tax effect will be:
• allocation of a pension fund (or part of a
but the excess will not attract tax relief. pension fund) into a 'flexi-access drawdown • 25% is tax free
An employer may make contributions to a account' from which any amount can be
• the remainder is taxable as income.
scheme and a deduction from profits may be taken over whatever period the person
available to the employer. decides Getting the right advice at the point of
retirement is therefore important.
As these reliefs are generous, there are controls • taking a single or series of lump sums from
which serve to limit high levels of contribution. a pension fund (known as an 'uncrystallised
These are complex but, put simply, they may funds pension lump sum').
give rise to a tax charge if annual contributions
Tax and your investments 17Tax free savings Other tax efficient investments investment (in qualifying unquoted trading
The following investments work in varying ways. companies) of up to £1 million. A CGT
You should consider your needs in detail before exemption may be given on sales of EIS shares
Tip held for at least three years. If the gain on the
entering into any commitments.
Don’t forget to use the Dividend and Savings sale of any chargeable asset (eg quoted shares,
Allowances. These allowances tax £5,000 National Savings and Investment (NS&I) second homes, etc) is reinvested in EIS shares,
of dividends and up to £1,000 of savings Premium bonds the gain on the disposal can be deferred.
income at 0%. See the section ‘tax rates and Premium bonds are tax free and you could win Seed Enterprise Investment Scheme (SEIS)
allowances’ on page 4. £1 million!
A more recent addition to the available
Individual Savings Accounts (ISAs) However, the annual rate of return is not schemes is SEIS. The tax breaks for the
predictable. The current Premium bonds investor are:
ISAs are free of income tax and CGT. There investment limit is £50,000. The more you
are maximum investment limits which apply • income tax relief at 50% in respect of
invest the more frequently you are likely to win,
for each tax year but, over several years, large qualifying SEIS shares up to an annual
the smaller prizes at least. However, there is no
investments can be built up. From 6 April 2017 maximum investment (in all SEIS companies)
guarantee of a steady rate of return.
the overall annual ISA savings limit is £20,000. of £100,000
Investors can choose to invest in a cash Single premium insurance bonds • a CGT exemption where SEIS shares are
ISA, stocks and shares ISA or an Innovative These provide a means of deferring income into sold more than three years after they are
Finance ISA as long as they do not exceed the a subsequent period when it may be taxed at a issued (as for EIS)
investment limit. lower rate.
• a further CGT exemption of 50% where an
Lifetime ISA Venture Capital Trusts (VCT) individual makes a capital gain in 2017/18
The government has introduced a new Lifetime These bodies mainly invest in the shares of and reinvests the gain in
ISA for adults under the age of 40. Individuals unquoted trading companies. VCT are however qualifying SEIS shares before
will be able to contribute up to £4,000 per year quoted investments. An investor in the 6 April 2018.
and receive a 25% bonus from the government. shares of a VCT will be exempt from tax
If £4,000 is invested, the investment limit for on dividends and on any capital gain
the other types of ISAs falls to £16,000. Funds, arising from disposal of the shares in
including the government bonus, can be used the VCT. Income tax relief currently at
to buy a first home up to £450,000 at any time 30% is available on subscriptions for
from 12 months after the first subscription, VCT shares, up to £200,000 per tax
or can be withdrawn from age 60 completely year, so long as the shares are held
tax-free. for at least five years.
There is also the Help to Buy ISA. Details are in The Enterprise Investment
the Property Matters section of the guide.
Scheme (EIS)
Income tax relief at 30%
is available on new equity
18 Tax and your investmentsProperty matters
Direct investment in residential property has Which property? residence within certain time limits. Please
always been a popular form of investment. contact us for further advice on this area.
Investing in a buy to let property is not the same
as buying your own home. You may wish to get Tax on rental income
Buy to let an agent to advise you of the local market for
Income tax will be payable on the rents received
The UK property market, whilst cyclical, has rented property. An agent will also be able to
after deducting allowable expenses. Allowable
proved over the long-term to be a successful advise you of the standard of decoration and
expenses include mortgage interest, which is
investment. This has resulted in a massive furnishings which are expected to get a quick
restricted in the case of residential property,
expansion in the buy to let sector. let.
repairs, agent’s letting fees and the cost of
Traditionally, buy to let involves investing in Letting property can be very time consuming replacing furnishings.
property with the expectation of capital growth and inconvenient. Tenants will expect a quick
solution if the central heating breaks down over Restriction of relief for finance costs on
with the rental income from tenants covering
the mortgage costs and any outgoings. the bank holiday weekend! Do not cut corners residential lettings
However, the gross return from buy to let - a correctly drawn up tenancy agreement will The amount of income tax relief landlords can
properties, the rent less expenses, can change. ensure the legal position is clear. get on residential property finance costs is
Investors also need to take a view on the being restricted to the basic rate of income
Stamp Duty Land Tax (SDLT) and Land and
likelihood of capital appreciation exceeding tax. This restriction will be phased in over four
inflation. Investors should take a long-term view Buildings Transaction Tax (LBTT) years from April 2017. For 2017/18 75% of
and choose properties with care. Higher rates of SDLT and LBTT, which relates the finance costs are deductible in full from the
to Scotland, apply on purchases of additional rental income. The remaining 25% is given as
Practical Tip residential properties. a basic rate reduction. This reduction may be
subject to further restrictions where property or
The rates are 3% above the SDLT and LBTT
When choosing between investments always other non-savings income is insufficient.
rates. The higher rates potentially apply if, at the
consider the differing levels of risk and your
end of the purchase transaction, the individual Disposal
requirements for income and capital in both
owns two or more residential properties.
the short and long term. An investment Where property is disposed of CGT will
strategy based purely on saving tax is not Welsh Land Transaction Tax will be introduced generally be payable. This is payable on the
appropriate. from April 2018. difference between the sale proceeds and
the original cost. Where property has been
There are some exemptions from the rules.
improved then these capital costs may be
One of these covers the replacement of a main
available to reduce the value of the gain. The
Property matters 19CGT annual exemption results in the first Provided a particular residence has been the largest asset could
£11,300 of gains, for 2017/18, being tax free. main home at some time, then the last 18 result in an IHT
months of ownership will always be exempt. liability of up
CGT rates are generally 10% to the extent that
This applies even if another residence has now to 40%. At the
any income tax basic rate band is available and
become the main home during this time. same time, finding
18% thereafter.
a way to deal with
However these rates increase to 18% and 28% it efficiently for IHT
Example
for chargeable gains on residential properties is difficult because
that do not qualify for private residence relief Joe has a house in Luton which is his individuals need
and some other situations. principal private residence and which he a place to live. The
has owned for eight years. Fed up with government has introduced
Main residence commuting he buys a flat in central London measures to reduce the
and elects for this to be his main residence. problem for many families. See the
An individual’s or married couple’s only or main Exactly five years later he sells his home in Preserving the Inheritance section of this guide
residence is generally exempt from CGT. The Luton. for details.
exemption extends to grounds of up to half a
hectare provided this is not used for any other The Luton home is exempt for the first eight Help to Buy ISA
purpose. There must also be clear evidence of years whilst he was living in it and for the last
The Help to Buy ISA, provides a tax free
occupation as a main residence and not just 18 months because, even though he had
savings account for first time buyers wishing to
ownership. another home which was his main residence
save for a home.
during this time, the last 18 months is always
exempt provided the home in question The scheme provides a government bonus to
Tax Planning
qualified as the main residence at some each person who has saved into a Help to Buy
Larger grounds may also be exempt, as can point. ISA at the point the purchase of their first home
the sale of part of the garden or grounds for is completed. For every £200 a first time buyer
development. However, professional advice is 9.5/13 of the gain on the Luton home will be saves, the government will provide a £50 bonus
recommended to plan for the best outcome. exempt from CGT. Upon the eventual sale up to a maximum bonus of £3,000 on £12,000
of the flat the whole of that gain will also be of savings.
Subject to exceptions, periods of absence are exempt.
chargeable but, if the main residence was let Tip
during absences, as a result of which a charge The main residence exemption can be
complex and often causes a good deal of Those saving for their first home should first
arises, a ‘letting relief’ may apply to reduce the
misunderstanding. Please contact us for further consider the Lifetime ISA. The Lifetime ISA
chargeable gain.
advice before making transactions in property. allows more to be saved and the bonus is
More than one residence added to the account at the end of each tax
Inheritance tax (IHT) year. You can have both a Help to Buy and
Where an individual (or married couple) have
two or more residences, only one residence at The general growth in house prices has caused Lifetime ISA at the same time but you will
any one time can be treated as the main home real IHT worries. This is because retaining the only be able to use the bonus from one of the
for exemption. This is done by an election. family home in the estate when it is often the accounts to purchase your first home.
20 Property mattersYou can also read
