Taxes Made Easy

TAXES MADE EASY

Clear and concise tax guide 2024/25

Contents

A Few Essentials

Practical tax tips to guide you through the tax system and help you plan to minimise your liability. This guide is designed to provide you with an overview of the key tax rules from seven perspectives - that of the family; the employee; the person running their own business; the taxation of investments; disposals and CGT; property matters; and, finally, the potential liability on your estate at death. Please use the guide to help you identify planning opportunities, pitfalls to avoid and areas where you may need to take action and then contact us for further advice.

Family Matters

Working For Others

Running a Business

Tax and Your Investments

Disposals and Capital Gains Tax

Property Matters

Preserving The Inheritance

The rules, rates and allowances in this guide relate to the 2024/25 tax year and these may be different for other tax years. The general effect of the Civil Partnership Act is to treat registered civil partners on a consistent basis with married couples. For the purposes of this guide we have on occasions referred only to spouses.

A FEW ESSENTIALS Introduction Taxation in the UK is administered and regulated by HMRC. Many individuals will have little or no regular contact with HMRC. For employees, income tax is typically deducted at source from earnings before they are paid out by way of Pay as You Earn (PAYE). Often other sources of income, such as savings and dividends, are covered by allowances such that no tax needs to be paid. Without additional income tax payable to HMRC, these individuals do not need to complete income tax returns.

Tax rates and allowances The income tax bands and rates for 2024/25 are determined by where you live in the UK and the type of income you have. For most UK residents the following tax rates and bands apply:

Practical Tip If you are not asked to complete a tax return, it remains your responsibility to advise HMRC by 5 October following the tax year if there is untaxed income, a capital profit that could lead to a tax liability or high levels of employment expenses or savings income. For the 2024/25 tax year, the high income child benefit charge is taxable through PAYE for employees, although the need to register for self-assessment currently remains. Please contact us for further advice if this affects you. The personal allowance In principle, all individuals are entitled to a basic personal allowance before any income tax is paid. This means that many individuals do not pay income tax on the first £12,570 (for 2024/25) of income they receive, and individuals who have lower levels of income may not need to pay any income tax at all. The personal

Non-savings and savings income rate %

Taxable income £

Dividend rate %

0 - 37,700

20 40 45

8.75

However, over 12 million taxpayers have something more than just a regular income taxed under PAYE or income covered by the savings and dividend allowances. They might have income from their own business or receive rent from a property. Alternatively, it may be that their savings or dividend income is significant enough to result in tax being payable. These taxpayers may be asked to complete a self assessment return each year and have direct contact with HMRC. Other taxpayers may need to complete periodic returns; for example, where they have made a disposal of an asset which is subject to Capital Gains Tax (CGT) or be responsible for collecting and paying the tax on behalf of others such as employers or businesses charging VAT.

37,701 - 125,140

33.75 39.35

Over 125,140

Taxable income is income in excess of the personal allowance. Non-savings income is broadly earnings, pensions, trading profits and property income. Savings and dividends allowances Individuals may be entitled to the savings allowance (SA), with savings income within the SA taxed at 0%. The amount of SA depends on an individual’s marginal rate of tax (the highest rate of tax to which they are subject). An individual taxed at the basic rate of tax has an SA of £1,000, whereas a higher rate taxpayer is entitled to an SA of £500. Additional rate taxpayers receive no SA.

allowance is now fixed until April 2028. Losing the personal allowance

However, the personal allowance is reduced for individuals with higher levels of income. Where an individual’s adjusted net income exceeds £100,000 the personal allowance is reduced by £1 for every £2 of income in excess of that limit. This means that an individual with an income of £125,140 or more will not be entitled to any personal allowance.

A Few Essentials

For 2024/25 the Welsh rate of income tax on non-savings income is set at 10% and this is added to the UK rates, which are each reduced by 10%. For 2024/25, the overall tax payable by Welsh taxpayers continues to be the same as English and Northern Irish taxpayers. Scottish and Welsh taxpayers continue to pay tax on their savings and dividend income using the UK rates and bands and the personal allowance is set for the UK as a whole. Income tax reliefs In order to encourage charitable giving and saving for the future, income tax relief is available for donations made to charity under gift aid and pension contributions to personal pension schemes. Basic rate relief is deemed to be given at source. Effectively what this means is that basic rate tax is reclaimed by the charity or pension fund, so you only need to pay £100 for the charity/fund to receive £125. Relief for higher and additional rate taxpayers is given by extending the bands set out above by the gross amount of the donation (the total receipt by the charity/fund). For example, a higher rate taxpayer making a donation of £100 would pay tax at 20% on the first £37,825 of taxable income rather than £37,700.

Rates and bands for Scottish and Welsh taxpayers For 2024/25 the tax rates and bands applicable to Scottish taxpayers on non-savings and non-dividend income are as follows: Taxable income £ Band name Rate % 0 - 2,306 Starter 19 2,307 - 13,991 Basic 20 13,992 - 31,092 Intermediate 21 31,093 - 62,430 Higher 42 62,431 - 125,140 Advanced 45 Over 125,140 Top 48

The dividend allowance (DA) is available to all taxpayers regardless of their marginal tax rate. The DA charges the first £500 of dividends to tax at 0%. Savings and dividends received above these allowances are taxed at the rates shown in the table. Savings and dividends within the SA or DA still count towards an individual’s basic or higher rate band and so may affect the rate of tax payable on income in excess of the allowances. In addition, some taxpayers may be entitled to the starting rate for savings which taxes up to £5,000 of interest income at 0%. However, this rate is not available if non-savings income exceeds £5,000. Tax Tip The DA reduced to £500 for 2024/25. It may be worth revisiting any dividend planning to ensure it is still tax-efficient in light of the reduced allowance.

As above, taxable income is income in excess of the personal allowance.

A Few Essentials

These deadlines may be extended in certain circumstances where the notice to submit a return is issued later than expected. There is an automatic penalty of £100 for late filing of the return. Further penalties may be due if the filing of the return is significantly delayed. These may run into hundreds of pounds. HMRC is increasingly emphasising the importance of good records. Failure to maintain adequate records may lead to inaccurate tax returns, which could result in penalties. Practical Tip Remember to keep all tax related documents such as interest statements, dividend vouchers, form P60 etc. Place everything in a folder through the year as it is received. Then you can simply hand this to us when we need to prepare your self assessment return.

business through a limited company need to know about corporation tax which taxes a company’s profits. Employing others in your business brings further obligations with Real Time Information reporting for PAYE and auto enrolment pension contributions responsibilities. We consider these issues later in this guide. Self assessment (SA) timetable Income tax and CGT are both assessed for a tax year which runs from 6 April to the following 5 April. The tax year 2024/25 runs from 6 April 2024 to 5 April 2025. Shortly after 5 April a notice to complete a return is usually issued by HMRC. Typically the return then needs to be submitted by: 31 October following - non-electronic returns (where you have requested a paper return from HMRC or downloaded a blank return). 31 January following - returns filed online.

Tax Tip Gift aid donations and personal pension contributions are also deducted from your income to arrive at adjusted net income for the purposes of calculating any reduction in your personal allowance. If your adjusted net income is between £100,000 and £125,140, you may want to consider making or increasing charitable donations or pension contributions in order to minimise the reduction in the personal allowance. There are specific rules which determine how much tax relief can be obtained for pension contributions which are discussed further in ‘tax and your investments’, which also contains details of relief for contributions to occupational pension schemes. Other taxes Individuals are not only taxable on the income they receive. You may own assets such as a precious antique, a second home or shares. If such an asset is sold at a profit this may give rise to a liability to CGT. Details of any capital gains may have to be included on the self assessment return if you receive one; alternatively you can complete a ‘real time’ return. Inheritance Tax (IHT) may be payable on the assets that you give to others in your lifetime or leave behind when you die. With rising house prices, this has become a concern for many more individuals. Many of those in business have to understand the principles of VAT because they will have to act as a collector of this tax. In addition, those who run their

A Few Essentials

FAMILY MATTERS Married couples Spouses are taxed as independent persons, each of whom is responsible for their own tax affairs. The phrase ‘spouse’ whenever used in this guide includes a registered civil partner. For spouses, there is no aggregation of income, no sharing of the tax bands and, except in limited circumstances detailed later in this guide, the personal allowance may not be transferred from one spouse to the other. Minimising the tax bill However, tax can be minimised if spouses equalise their income so that personal allowances, savings allowances and dividend allowances are fully utilised and higher/ additional rates of tax are minimised. Example In 2024/25 Ian and Angela have savings income of £50,000, dividend income of £50,000 and no other income. If this is split equally between them, the total tax bill for the couple is £6,860. If only one spouse has an income of £100,000 and the other has nothing, the total tax bill leaps to £23,092 - an additional £16,232!

Where assets are owned in joint names, any income is deemed to be shared equally between the spouses unless an election is made to split the income in the same proportion as the ownership of the asset. This does not apply to shares in close companies (almost all small, private, family owned companies will be close companies) where income is always split in the same proportion as the shares are owned. Example A buy to let property is owned three quarters by Helen and one quarter by her husband Mark. If no election is made the net rental income on which tax is payable will be split 50:50. If an election is made the income will be split 75:25. A choice can be made according to which is the most desirable when other income of the spouse is taken into account. Capital gains tax Independent taxation also applies to CGT. Each spouse is entitled to take advantage of the annual exemption of £3,000 before any CGT has to be paid. This is advantageous where assets are held jointly and then sold as each spouse can use their annual exemption to save tax. The transfer of assets between spouses is neutral for CGT. This is sometimes done shortly before assets are

Tax Tip A donation to charity under the Gift Aid scheme benefits from tax relief. It makes sense for a higher rate/additional rate taxpayer spouse to make such donations so that they can benefit from the extra tax relief. Tax breaks for spouses Married couples and civil partners may be eligible for a Marriage Allowance (MA). The MA enables spouses to transfer a fixed amount of their personal allowance to their spouse. The option to transfer is not available to unmarried couples. The option to transfer is available to couples where one party has not used all of their personal allowance and the other does not pay tax at the higher or additional rate. If eligible, one partner will be able to transfer 10% of their personal allowance to their partner which means £1,260 for the 2024/25 tax year. Relief is given as a basic rate tax reducer with a benefit of up to £252 (20% of £1,260). It is also possible to backdate your claim for previous years - please contact us if you think this might apply to you. Jointly owned assets Married couples will often own assets in some form of joint ownership. This can have benefits for income tax, CGT and even IHT.

Family Matters

sold to minimise tax. Advice should be sought before undertaking such transactions to ensure that all tax aspects have been considered. Please contact us for CGT advice. Note that CGT neutral transfers do not apply to unmarried couples. Children Transferring income to children If a child has sufficient income to make them liable, they will be taxed in exactly the same way as an adult. However they also benefit from their own personal allowances and tax bands. Where their only income is low, there may be some scope for transferring income producing assets to the children to use up their personal allowance. Note that if assets are provided by a parent then the income remains taxable on the parent, unless it does not exceed £100 (gross) each tax year. However, this option could be considered where grandparents or other relatives wish to pass on wealth. Be mindful of capital and inheritance tax implications of the transfers of assets. Tax Planning Children may be employed in the family business so as to take advantage of their personal allowance (subject to legal restrictions). It is essential that payment is only made for actual work carried out for the business and at a reasonable commercial rate.

Children and capital gains Children also have their own annual exemption for CGT, so assets transferred to them which are expected to grow in value may prove to be advantageous. Child Trust Funds (CTFs) The availability of new CTFs ceased from January 2011, as did government contributions to the accounts. Existing CTFs, however, continue to benefit from tax free investment growth. No withdrawals are possible until the child reaches age 18. However, the child’s friends and family are able to contribute up to the annual limit of £9,000. It is possible to transfer the investment to a Junior Individual Savings Account. Junior ISA (JISA) A JISA is available for UK resident children under the age of 18 who do not have a CTF account. JISAs are tax advantaged and have many features in common with existing ISAs.

They are available as cash or stocks and shares based products but a child can only have one cash JISA and one stocks and shares JISA. The annual investment is limited to £9,000. Other children’s savings options are available which may be tax efficient such as National Savings Children’s Bonds and Friendly Societies’ savings plans. High Income Child Benefit Charge A charge arises on a taxpayer who has adjusted net income over £60,000 in a tax year where either they or their partner are in receipt of Child Benefit for the year. Where both partners have adjusted net income in excess of £60,000 the charge applies to the partner with the higher income. Note in this case ‘partners’ does not just include spouses and civil partners but also couples living together as if they were married or in a civil partnership.

Family Matters

From 2024/25, the income tax charge applies at a rate of 1% of the full Child Benefit award for each £200 of income between £60,000 and £80,000. The charge on taxpayers with income of £80,000 or above will be equal to the amount of Child Benefit paid. Child Benefit claimants are able to elect not to receive Child Benefit if they or their partner do not wish to pay the charge. Equalising income can help to reduce the charge for some families. Example Phil and Jane have two children and receive £2,213 Child Benefit. Jane has little income. Phil expects his adjusted net income to be £70,000. On this basis the tax charge will be £1,107. This is calculated as £2,213 x 50% (£70,000 - £60,000 = £10,000/£200 x 1%). If Phil can reduce his income by £10,000 to £60,000 no charge would arise. This could be achieved by transferring investments to Jane or by making additional pension or Gift Aid payments. Tax-Free Childcare The scheme is available to families where all parents are working (on an employed or self-employed basis) 16 hours a week and meet a minimum income level (generally £183 a week for over 21 year olds) with each earning less than £100,000 a year. Parents who are receiving support through Tax Credits or Universal Credit are not eligible. Parents need to register with the government and open an online account. The government ‘top up’

payments into this account at a rate of 20p for every 80p that families pay in. The scheme is generally limited to £10,000 per child per year. The government’s contribution is therefore a maximum of £2,000 per child. Employer Supported Childcare closed to new entrants on 4 October 2018. Parents who qualify for both schemes are able to choose which scheme they wish to use but families cannot benefit from both schemes at the same time. 15/30 hours childcare In addition, qualifying families will be entitled to free childcare. Families can receive up to 30 hours of free childcare for three and four year olds. From April 2024, there is an additional 15 hours of free childcare for two year olds. In September 2024, this 15 hours will be available for children aged nine months or over. The free childcare is available over 38 weeks and can be used flexibly with one or more childcare providers. To find out about all childcare options click here . What about unmarried partners? It still pays to equalise income as much as possible, as income tax will be minimised. However, transfers of assets may be liable to CGT and, if substantial, could also lead to an IHT liability. It is vital for unmarried couples to each make a Will if they wish to benefit from each other’s estate at death. A word of warning Transferring assets or interests in a business between spouses may attract the interest of HMRC especially where it is obvious that it has been done primarily for tax

saving purposes. Transfer of ownership of an asset must be real and complete, with no right of return and no right to the income on the asset given up. If a non-working spouse is given shares in an otherwise one-person, private company, HMRC may, in some circumstances, seek to tax the working spouse on all of the dividends under what is known as the ‘settlements legislation’. You may want to consider obtaining advice from us before entering into this type of arrangement.

Family Matters

WORKING FOR OTHERS Few avoid working for others at some time in their life and most will have encountered the PAYE system operated by employers to collect the income tax and National Insurance contributions (NICs) due on wages and salaries. The tax code

Company cars Employer-provided cars, commonly known as company cars, remain a popular benefit, despite the tax charge they give rise to. The charge on cars is generally calculated by multiplying the list price of the car by a percentage which depends on the CO 2 emissions (recorded on the Vehicle Registration Document) of the car. For hybrid cars with emissions not exceeding 50g/km, the percentage is determined by the electric mileage. The percentage applicable may be obtained from HMRC here. Example David has a company car, a Hyundai Ioniq, which had a list price of £28,395 when it was provided new on 6 April 2024. The CO 2 emissions are 26g/km and its electric range is 39 miles. David's benefit in kind for 2024/25 is £3,407, being £28,395 x 12%. Fuel for private use A separate charge applies where private fuel is provided by the employer for a company car. The charge is calculated by applying the same percentage figure used to calculate the company car benefit to a fixed figure which for 2024/25 is set at £27,800. No fuel benefit applies to an electric car.

For Welsh taxpayers a letter 'C' is included in the tax code. With so many complications and some guesswork involved, getting the code exactly right can be difficult and the right amount of tax will not always be deducted. Tax Tip If you are unsure about your code and are anxious not to end the tax year under or overpaid, then you should have it checked. HMRC may update an individual’s tax code during the tax year to reflect changes to benefits and to collect tax underpayments. Please talk to us about getting your tax code checked. Benefits The range of benefits available will vary significantly depending on the type of employment but can be a key part of a remuneration package. Some are completely exempt from income tax. Benefits can also give an NIC saving for the individual. Valuation The general rule is that the value of the benefit is the cost to the company although there are special rules in respect of some benefits. Where a benefit is taken rather than an alternative cash option, the taxable value of the benefit is the higher of the cash foregone or the taxable value under the normal benefits rules. Contact us for the correct valuation of benefits.

Ensuring the right amount of tax is taken relies on a PAYE code issued by HMRC and based on information given in a previous self assessment return or supplied by the employer. The employee, not the employer, is responsible for the accuracy of the code. Code numbers try to reflect both an individual’s tax allowances and reliefs and also any tax they may owe on employment benefits and in some cases other types of income. For many employees things are simple. They will have a set salary or wage and only a basic personal allowance. Their code number will be 1257L and the right amount of tax should be paid under PAYE. However, for those who are provided with employment benefits, the code number is generally adjusted to collect the tax due so that there are no nasty underpayment surprises. HMRC may also use the code to collect tax on untaxed income, tax on dividends, the High Income Child Benefit Charge and tax owing for an earlier year. For Scottish taxpayers a letter ‘S’ is included in the tax code and denotes that the Scottish income tax rates apply to an employee’s pay, rather than the rates and bands which apply across the rest of the United Kingdom.

Working For Others

Tax Planning The fuel benefit charge can be expensive. It may be cheaper for the employee to pay for all the fuel and to reclaim from the employer the cost of business miles driven in a company car based on a specific log of business journeys undertaken. HMRC publishes advisory fuel rates for company cars which are updated on a quarterly basis. Click here for the latest rates or contact us. Vans Where employees are provided with a van and the only private use of this is to travel to and from work (including any incidental private use), then no taxable benefit should arise. If there is private use beyond this, there is a benefit of £3,960 for 2024/25 and an additional £757 if fuel is provided for private as well as business journeys. In order to avoid this charge, it is advisable to have a formal written policy, detailed mileage logs and make use of vehicle tracker records. These will support the limited private use of the van and may avoid problems with HMRC in the future. Medical insurance The employee is taxed on the amount of the premium paid by the employer. Home and mobile phones There is no benefit on the provision of a company mobile phone even where it is used privately. However, this is limited to one phone per employee. Where home telephone bills are paid by the employer, the amount paid will be taxable. The employee may

Childcare costs Childcare costs paid for by an employer may be exempt from both income tax and NICs. This applies to a place in an employer operated nursery and to Employer Supported Childcare as long as the claimant entered the Scheme before 4 October 2018. In the latter case, the exemption is limited and excess amounts are subject to tax and NICs. Employer Supported Childcare is now closed to new claimants and has been replaced by Tax- Free Childcare. Employees who qualify for both schemes are able to choose which scheme they wish to use but families cannot benefit from both schemes at the same time.

make a tax deduction claim for the cost of business calls only but not the line rental. Cheap or interest free loans If loans made by the employer to an employee exceed £10,000 at any point in a tax year, tax is chargeable on the difference between the interest paid and the interest due at an official rate - currently set at 2.25% per annum. An exception applies for certain qualifying loans - please contact us for information. Tax Tip The £10,000 limit on tax free loans is an attractive perk for many employees. Even for tax-free loans over £10,000, the tax charge may still be more attractive than taking out a loan at current interest rates.

Working For Others

Pension contributions Contributions by an employer to a registered pension scheme are generally tax and NICs free for most employees. Expense payments An employee can claim tax relief for expenses which are incurred wholly, exclusively and necessarily for business purposes. The main types of expenses are travelling to places for work (but not the normal place of work) and

HMRC sets statutory rates for business mileage which are 45p for the first 10,000 miles in a tax year and 25p thereafter. If the employee is paid for business miles at less than the statutory rates, tax relief is available on the difference. If, however, the employee is paid at more than these rates then the excess is taxable. If you are paid less than the statutory rates to use your own car for business purposes remember to claim a deduction on your return or write to HMRC to make your claim. Example In 2024/25 Michael travels 14,100 business miles in his own car and is paid 32p per mile by his employer. Michael can claim tax relief on an additional amount of £1,013 ((10,000 x 45p) + (4,100 x 25p)) - (14,100 x 32p).

overnight accommodation. Reimbursed expenses

An employer would normally reimburse an employee for business expenses. Employers are no longer required to report reimbursed tax deductible business expenses and therefore employees do not need to claim tax relief on these expenses. Mileage claims Many employers pay a standard rate of mileage to all employees who use their own cars for business journeys.

Working For Others

RUNNING A BUSINESS Starting up a business of your own is a big step and not one to take lightly. The taxation of your business is only one of many commercial and legal aspects of starting a business that you will need to consider. Choosing a business structure The alternative business structures are: Sole trader This is the simplest form of business structure since it can be established without legal formality.

Taxation of unincorporated businesses A new business should register with HMRC on commencing to trade. Income tax is paid on the profits of the business. The amount that the proprietor, or a partner in a partnership, draws out of the business is irrelevant. From 2024/25, profits will be taxed on an actual basis; an individual will be taxed on any profits arising from the 6 April in one year to the 5 April in the next. Previously an individual would broadly have been taxed on the profits of the period of account ending in the tax year. This may add significant complexity to calculating the income tax payable for a trader who does not have a 31 March or 5 April year end as the profits will need to be apportioned into the tax year itself. We would be happy to assist you with these calculations. Cash basis for smaller unincorporated businesses The cash basis is an optional basis for calculating taxable profits. Previously, this was available to small unincorporated businesses upon election. If no election was made, the accruals basis applied. From 2024/25, most unincorporated businesses will have to calculate taxable profits using the cash basis as the default. The historic restrictions on who can use the cash basis have been removed. A business can elect to apply the accruals basis instead.

from the personal affairs of the owners and the directors.

A company provides protection from liability, which means that the creditors of the company cannot make a claim against the owners or the directors except in limited circumstances. Companies are subject to corporation tax and individuals are only subject to income tax on any funds withdrawn from the company by way of salary or dividend, for example. In the past, this has been an advantage of incorporation as corporation tax rates have been lower than income tax rates. The recent increase in corporation tax has eroded that tax advantage for companies with larger profits. These potential advantages carry the downside of greater legal requirements and regulations that must be complied with. Limited Liability Partnerships (LLPs) LLPs are a halfway house between partnerships and companies. They are taxed in the same way as a partnership but are legally a corporate body. This again gives some protection to the owners from the partnership’s creditors. In this guide we consider the differing tax treatments of the alternatives but you should choose which structure is right for you based on more than just the tax issues alone.

The business of a sole trader is not distinguished from the proprietor’s personal affairs. If the business incurs debts which are unpaid, the creditors can seek repayment from the sole trader personally. Partnership A partnership is similar in nature to a sole trader but involves two or more people working together. A written agreement is essential so that all partners are aware of the terms of the partnership. Again, the business and personal affairs of the partners are not legally separate. Sole traders and partnerships are often referred to as unincorporated businesses and the individual owners as self-employed. The trading profits of both sole traders and partnerships are subject to income tax. Limited company A company is a legal entity in its own right, separate

Running a Business

trading profits. Instead a tax-standardised version of depreciation, known as capital allowances, may be claimed (see later). Trading and property income allowances Trading and property income allowances of £1,000 per annum are available. Individuals with trading or property income of £1,000 or less do not need to declare or pay tax on that income. Those with income above the allowance are able to calculate their taxable profit either by deducting their expenses in the normal way or by simply deducting the relevant allowance. Paying the tax The self-employed may have to pay tax and class 4 NICs

three times a year, namely: • 31 January in the tax year • 31 July following the tax year • 31 January following the tax year.

Under the cash basis, business profits are taxed on cash receipts less cash payments of allowable expenses. This may be more simple for the business owner to calculate. In addition, as the individual is only taxed on income actually received, they will not be subject to income tax on amounts paid late until those amounts are actually paid. Further details about the scheme: • Cash receipts include all amounts received in connection with the business including those from the disposal of plant and machinery. • Allowable payments include paid expenses but these still need to meet the existing tax rule of being wholly and exclusively incurred for the purposes of the trade. • Payments include most purchases of plant and machinery, when paid, rather than claiming capital allowances. • The interest payments restriction of £500 has been removed for 2024/25 onwards and any amount of interest can be deducted if incurred wholly and exclusively for the trade.

• Cash basis losses will be available to use in the same way as accruals losses, including sideways relief. The optional accruals basis requires an election by the business owner for the year in which it is to apply. The election will stay in place until revoked by the business. Do get in touch if you would like us to consider which scheme is appropriate for you and your business. Working out profits Not all of the expenses that a business incurs are allowed to be deducted from income for tax purposes but most are. It is important that you keep proper and comprehensive business records so that relief may be claimed. Non-deductible expenses include those which are not wholly and exclusively for the purposes of the trade - client entertaining and private expenses of the sole trader are common examples of this. Depreciation is another type of expense which is not deductible from

The first two payments are based on the income tax and class 4 NIC liability for the previous tax year (less any amounts deducted at source like PAYE) and the final

payment is the balancing amount. Capital allowances

When assets are purchased for the business, such as machinery, office equipment or motor vehicles, capital allowances are available. As with expenses, these are deducted from income to calculate taxable profit. The below allowances are available to both unincorporated businesses (using the accruals basis) and companies.

Running a Business

Plant and machinery - Writing Down Allowances (WDA)

Unlike income tax bands, the corporation tax rate is applied to the total taxable profits of the company. Therefore a company with profits of £400,000 would have a corporation tax liability of £100,000 (being 25% of £400,000). The operation of marginal relief acts to gradually increase the rate of corporation tax from 19% to 25% - broadly this results in an effective tax rate of 26.5% on profits which fall between £50,000 and £250,000. Companies are taxed on the basis of their accounting period which usually aligns to the period for which the company prepares accounts.

companies are subject to corporation tax on profits. In addition, individuals may be subject to income tax on the extraction of profits from the company; thus profits may be taxed on both the company and the individual. However, there may be cash savings to operating as a company as the corporation tax rate will be lower in some circumstances than the applicable income tax rate on the profits. Corporation Tax The rate of corporation tax payable is dependent on the level of taxable profits in the company (plus certain dividends received by the company).

Plant and machinery purchased by a business is eligible for annual WDA of 18% per annum for most plant and machinery and 6% per annum for certain expenditure which is ‘integral’ to a building such as air conditioning or water systems and other long life assets. These allowances are calculated on a reducing balance basis rather than straight line on cost. Plant and machinery - Annual Investment Allowance (AIA) The AIA gives a 100% write off on most types of plant and machinery costs, but not cars, of up to £1,000,000 per annum. Any costs incurred in excess of the AIA will attract an annual ongoing allowance of 6% or 18% depending upon the type of asset. Motor cars The tax allowance on a car purchase depends on CO 2 emissions. From April 2021 purchases of cars with emissions not exceeding 50g/km attract an 18% allowance and those in excess of 50g/km are only eligible for a 6% allowance. A first year allowance (FYA) of 100% is available on new zero emission cars (for cars purchased before 1 April 2025). Structures and Buildings Allowance (SBA) The SBA gives allowances of 3% per annum to qualifying expenditure on the construction of new or the renovation of non-residential structures and buildings. Companies Unlike sole traders and partnerships who are subject to income tax on the trading profits of the business,

Taxable profits £

Corporation tax rate %

0 - 50,000

19%

50,000 - 250,000

25% less marginal relief

Over 250,000

25%

Running a Business

investing in qualifying new plant and machinery can claim: • full expensing providing allowances of 100% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances • a first year allowance of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances. This relief is not available for unincorporated businesses and will typically be most useful where companies or groups invest over the AIA of £1,000,000 in new plant and machinery. Tax relief for expenditure on Research and Development (R&D) Companies with expenditure in qualifying R&D activities can receive tax relief. For accounting periods starting on or after 1 April 2024, the previous SME scheme and the R&D expenditure credit (RDEC) scheme will merge. The new scheme will broadly follow the rules of the RDEC:

• There will be a 20% above the line credit. • Loss-making companies will benefit from a notional tax rate of 19% (small profits rate) and not 25% (main rate), increasing the benefit. • Where R&D activity is sub-contracted out, the company who bears the risk will be the one to make the claim. • Claims will be restricted to UK-based activities and workers, subject to specific exemptions. R&D intensive companies will operate under a separate scheme, with enhanced relief where R&D expenditure accounts for 30% or more of total expenditure. This is a complex area. Please get in touch if you would

Tax Tip Marginal relief has the impact that any profits falling between £50,000 and £250,000 are effectively taxed at 26.5%. Therefore, maximising deductions available will be particularly important for those companies whose profits fall between these thresholds. We can assist you with identifying any claims for deductions for your business. Tax on profits The profits of a limited company are calculated in a similar way as for unincorporated businesses and the same rules with regard to expenses and capital allowances generally apply. Remember though that the salaries paid to directors (but not the dividends paid to shareholders) are deductible from the profits before they are taxed. Tax Planning Companies are a popular business structure as they may result in less tax being paid overall. However, the saving is dependent on profits and withdrawals. We would be happy to discuss the implications of incorporation with you before you decide whether or not to incorporate your business. Capital allowances for companies - full expensing In addition to the AIA and general writing down allowances which are available to companies as well as unincorporated businesses, from 1 April 2023 companies

like to know more. Payment of tax

Corporation tax is usually payable nine months and one day after the year end but payments may be accelerated for large companies.

Running a Business

Tax on ‘drawings’ Directors of a company will normally be paid a salary and this is taxed under PAYE as for all employees. The cost of this, including the employer’s NICs, is generally an allowable expense of the company. Shareholders of the company in contrast may be rewarded by the payment of dividends on their shares. Dividends are paid out of profits after taxation. Tax Tip In most small companies the directors and shareholders are one and the same and so they can choose the most tax efficient way to pay themselves. Using dividends can result in savings in NICs. However, this requires careful planning, especially given the increase in corporation tax rates. Please talk to us to decide what is appropriate for you.

Warning - close company loans to participators A close company (which generally includes owner managed companies) may be taxed where it has made a loan or advance to individuals or their family members who have an interest or shares in the company (known as participators). The tax charge is currently 33.75% of the loan if it is outstanding over nine months after the end of the accounting period. The tax charge is repaid to the company nine months and one day after the end of the accounting period in which the loan is repaid. Further rules prevent the avoidance of the charge by repaying the loan before the payment date and then effectively withdrawing the same money shortly afterwards. This is a complex area so please do get in touch if this is an issue for you and your company.

Tax Planning Ensure that sufficient salary and dividends are drawn from the business to prevent these charges arising unnecessarily on an overdrawn director’s current account. We can also ensure that overdrawn accounts are cleared properly. Please contact us if you would like to discuss the right options for you and your business. Employer obligations As an employer you will have many responsibilities. These will include employment law requirements and the need to enrol workers into a work based pension scheme (Pensions Auto Enrolment) which are not covered in this guide. Real Time Information Real Time Information (RTI) reporting is mandatory for almost all employers. Under RTI, employers or their agents are required to make regular payroll submissions for each pay period during the year. The submissions detail salary and other employment payments made to and deductions such as income tax and NICs made from employees. These submissions must generally be made on or before the date the amounts are paid to the employees. Penalties apply to employers who fail to make returns on time. These penalties range from £100 to £400 per month depending on the size of the employer. Interest and penalties also apply for failing to pay on time. The employer must also report details of expenses and benefits provided to employees.

Running a Business

Value Added Tax (VAT) VAT is a tax ultimately paid by the final consumer and businesses act as the collectors of the tax. What does VAT apply to? VAT is chargeable on the supply of certain goods and services in the UK when made by a business that is registered for VAT (see later). A registered business must charge VAT on its taxable supplies (broadly the sales made) which is known as output VAT. There are currently three rates of VAT which can be payable. These are the standard rate of 20%, the reduced rate of 5% and the zero rate. The zero rate applies where the supply is deemed to be subject to VAT but the output VAT is charged at 0%, meaning that no VAT is actually payable. A business also pays VAT on the goods and services it buys. This is known as input tax and may be reclaimed by a VAT-registered business. If the output tax exceeds the input tax, then a payment of the difference has to be made to HMRC. If input tax exceeds output tax a repayment of VAT will be made. This calculation is generally done on a quarterly basis. However, where repayments occur regularly, it is possible to opt for monthly VAT returns. Some input VAT is not reclaimable by a VAT-registered business. Two common examples are VAT incurred on entertaining UK business customers and VAT on the purchase of a car. Certain supplies of goods and services are not subject to VAT at all and are known as exempt supplies. A business

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 they are registered because the customer will generally be able to recover the VAT that is charged. Indeed, in general, a business that always sells to other VAT-registered businesses will normally register, even if below the annual limit, because then it can reclaim VAT on purchases and expenses. This will improve profit and can be especially relevant for new businesses because there are often high initial set up costs that carry VAT. On the other hand, registration comes at the cost of having to meet record keeping requirements, a need to submit online VAT returns and pay online and on time.

that makes only exempt supplies cannot register for VAT and will be unable to reclaim any input tax. Do I need to register? A business must register if its taxable supplies exceed an annual figure of £90,000 (from 1 April 2024). If taxable supplies are less than this a business may still register voluntarily. So, for example, if the business makes only zero-rated sales, it can still register and reclaim the input tax suffered. VAT can affect competition. A plumber, for example, who sells only to the general public will be at a disadvantage if they have to register for VAT. They may have to charge up to 20% more than a plumber who is not registered to earn the same profit.

Running a Business

There are some exemptions from MTD for VAT. However, the exemption categories are tightly drawn and are unlikely to be applicable to most VAT-registered businesses. We can help you to meet your MTD for VAT obligations. MTD for income tax MTD for income tax was expected to be introduced from April 2024. This has now been delayed; self-employed individuals and landlords with income over £50,000 will be mandated to apply MTD from April 2026. Those with income over £30,000 will be mandated from April 2027 and the government will review the application of MTD for smaller businesses. We can help you assess when MTD will be required for your business and to meet your obligations.

Tax Tip When you first register for VAT you can reclaim input tax on goods purchased up to four years prior to registration provided they are still held when registration takes place. VAT on services supplied in the six months prior to registration may also be reclaimed.

Making Tax Digital (MTD) MTD for VAT

MTD for VAT is part of a government strategy which will ultimately require taxpayers to move to a fully digital tax system. Under the MTD for VAT rules, all VAT-registered businesses must keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD functional compatible software.

Running a Business

TAX AND YOUR INVESTMENTS Setting aside income in the form of savings is important for everyone, to provide for the unexpected or to build up a nest egg to enjoy in retirement. Pensions Making pension contributions

• taking a single or series of lump sums from a pension fund (known as an 'uncrystallised funds pension lump sum'). A taxpayer will typically take their tax-free lump sum from the fund at the same time as making an allocation into a flexi-access account. Where uncrystallised lump sums are withdrawn, 25% of each payment is tax free. The total amount which can be withdrawn as a tax free lump sum (under whichever option chosen) is generally limited to a total of £268,275, except in certain circumstances where previous protections apply. Other income withdrawn from a fund is taxable as income. The rules on pensions drawdown are complex and there are a number of options for taking a pension. Getting the right advice at the point of retirement is therefore crucial. Money Purchase Annual Allowance (MPAA) The government is aware of the possibility of people taking advantage of the flexibilities by 'recycling' their earned income into pensions and then immediately taking out amounts from their pension funds. The MPAA sets the maximum amount of tax-efficient contributions an individual can make at £10,000 per annum in certain scenarios.

complex but, put simply, they may give rise to a tax charge if annual contributions exceed £60,000. This threshold is reduced for high income individuals; generally where a taxpayer has adjusted income in excess of £260,000 the maximum annual contribution possible will be restricted by £1 for every £2 for the excess income. The minimum annual allowance available after this restriction is £10,000. Tax Tip Making pension contributions may limit the reduction of your personal allowance where you have income in excess of £100,000. We can assist you with planning your pension contributions. Pensions freedom Taxpayers have choice and flexibility when it comes to accessing their personal pension fund. Options include taking a tax free lump sum of 25% of fund value and purchasing an annuity with the remaining fund or opting for a more flexible drawdown. The flexible drawdown rules allow for total freedom to access a pension fund from the age of 55. Access to the fund may be achieved in one of two ways: • allocation of a pension fund (or part of a pension fund) into a 'flexi-access drawdown account' from which any amount can be taken over whatever period the person decides

Pensions are one of the most tax efficient forms of saving. Taxpayers benefit from tax relief on contributions at their marginal rate and investment income and capital gains will accrue within the scheme largely tax free. An individual is entitled to tax relief on personal contributions in any given tax year up to the higher of

100% of earned income or £3,600 (gross). Where employee contributions are made to

occupational pension schemes these are usually deducted from salary before an employee’s tax is calculated. Tax relief is therefore given automatically. Contributions to personal pension schemes are paid net of basic rate tax and the pension provider will then recover that basic rate tax from HMRC. Higher and additional rate relief, if appropriate, can be claimed from HMRC. Employer pension contributions are an exempt benefit for the employee and a deduction from profits may be available to the employer. There are controls which serve to limit the availability of tax relief on high levels of contribution. These are

Tax and Your Investments

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