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Spend today culture

Research of 5,000 adults by the Money Advice Service discovered a “spend today” culture in the UK and a lack of financial skills.

Some of the findings were surprising:

  • 20% were unable to read a bank statement
  • 33% could not calculate the effect that a 2% annual interest rate will have on their savings
  • 40% admitted to having less than £500 in savings

 

The Money Advice Service is going to be working with the UK Financial Capability Board to improve people’s ability to manage money. They will focus on developing their skills and knowledge to manage their personal finances.

At Sackmans we start the Improving the Numbers programme by looking at personal finance and money management. We even touch on the physcology of money.

By using E-Life Planner software we are able to help businesses owners create a personal financial plan. The service starts at just £250 plus VAT.

The software is great but we know that what really makes a difference is the mindset shifts this encourages. As well as doing the plan we introduce you to powerful concepts like “Pay Yourself First” as a way to achieve financial freedom.

 

A better 2016

As we approach the end of the year, it’s time to reflect and plan for the next year. One way of doing this is to create a budget.

There are different approaches to budgeting – here’s one that you can use based on Profit First principle. Normally, you start with sales take off costs and you’re left with profit.

When you put profit first and add costs you know what sales you need to hit. Once you know this you can create a sales plan to do this using:

  • Number of customers
  • Price
  • Quantity
  • Frequency of purchase

 

For example, if you are a hairdresser you could look at ways of:

  • Winning new customers
  • Charging higher prices
  • Encouraging customers to buy more
  • Getting people to come back earlier

 

Each strategy can be broken down an analysed. For example, winning new customers could be done by encouraging referrals. Charging higher prices can be done by creating premium experiences. Sales training can help sell more and rebook quicker.

Start with profit and give yourself some sales and marketing targets and you may find your 2016 results will be better than 2015.

Giving to save tax

Inheritance Tax (IHT) is something that affects more people than ever and is expected to double by 2020. In 2015/15 the tax office collected over £3.4 billion.

One way to defeat IHT is to make gifts before you die. Here are some ideas how to gift effectively.

Make use of the annual transfer’s allowance of £3,000 which can be carried forward one year. Small gifts of £250 per person a year is also exempt. You can also make gifts up to £5,000 if you are the parent of a child getting married. Grandparents and the other person getting married can give £2,500 – everyone else can give £1,000.

Make sure you give away your money before it is too late. If you survive seven years the gift is outside your estate. Bear in mind that you can insurance against IHT on an early death – just make sure the insurance proceeds go into trust, not your estate otherwise there will be tax on that.

One way around the seven year rule is to claim the gift is normal expenditure out of income. For the tax office to agree, you need to be able to show a pattern of expenditure. So, it can be better to do regular (perhaps monthly or quarterly) gifts rather than one large one.

Xero security update

The Website hack of Talk Talk made national news so it was interesting to see Xero recommend users change their password.

There is an increase volume of attacks so it makes sense to consider your position. With Xero it seems to be around phishing emails.

The first thing you can do now is to login and check your history and look at the time, location and IP address. If you have any concerns email Xero at phishing@xero.com.

You can do the same with any other Websites/online applications you use.

Xero are working on a twostep authentication where you enter a password generated by an authenticator App on your phone or smart device.

A reminder of key points for passwords:

  • Never share passwords
  • Use complex passwords
  • Change your passwords regularly
  • Don’t use the same password for multiple Websites

 

Keep an eye out for Phishing emails – if in doubt about clicking a link check with Xero first. And, use reputable anti-malware software.

Stay safe online

The Xero Website had a good article about being safe online to protect yourself, your customers and employees.

The three things we can all do are:

  • Have a good password strategy
  • Be aware of phishing emails
  • Keep anti-malware up-to-date
  • Keep your operating system and application software patched and up-to-date

 

A good password strategy means:

  • Not sharing a password (even with friends)
  • Always using complex passwords
  • Changing passwords at least once a month
  • Use different passwords for different applications
  • A complex password is a long password made up of numbers, letters and special characters ($,#,%,&, etc). The longer your password the better because it is harder to guess.

 

A phishing email looks like it comes from a trusted source and tries to trick you into providing passwords and other important data. Look out for:

  • Incorrect spelling or grammar
  • Different URLs
  • Requests for personal information
  • The email calls for urgent action.
  • The email says sounds too good to be true
  • The email doesn’t use your name

We hope this helps you stay safe online.

Do one in three business need to change strategy?

All businesses should take time to think about the big picture – this is called Strategic Planning.

At Sackmans we recommend you do a full strategic plan every five years because things change so quickly. If you have not done one for a while, now could be a good time.

According to a study by researchers at Oxford University and Deloitte, just over a third of current jobs in the UK are at high risk of computerisation over the following 20 years.

The researchers based the work on nine key skills required to perform it; social perceptiveness, negotiation, persuasion, assisting and caring for others, originality, fine arts, finger dexterity, manual dexterity and the need to work in a cramped work space.

This is bad news for employees, but especially for business owners.

If you are under 45 years old and you plan on earning money for 20+ years (or want to sell up as part of your retirement) you may need to radically change your business strategy and diversify.

The BBC has created an online application to help you see if you are likely to be affected. To use it click here.

No gain mean no pain

Married couples and civil partners can reduce Capital Gains Tax (CGT) by making use of a special rule which allows them to transfer assets between them at a value that means there is no gain or loss for tax purposes.

This rule can be used with assets help in one person’s name or for assets held in joint names.

An example would be Simon and Jane who are married. Simon bought a painting for £1,000 which is now worth £10,000 that he wants to sell. But, he is a higher rate tax payer and has already used is CGT allowance so would pay 28% tax on £9,000.

But, if he transfers the painting to Jane (who is a lower rate tax payer), she can sell it and not pay any tax because the gain is below her CGT allowance. She will be treated as buying the painting on the same date and at the same price that Simon did.

If in the following year, Simon wanted to sell a house he owned with a gain of £33,000, he could transfer 33% and use Jane’s CGT allowance. Or, he could transfer 66% and use both their allowance and her lower rates of tax.

Make sure you use the no gain rule if want to sell assets which have a CGT liability.

Common VAT Traps

Here are some VAT traps to be aware of:

Avoiding VAT registration by business splitting
There are rules to prevent people avoiding VAT registration by splitting sales between different people.

It’s important to keep in mind that a “business” is not registered for VAT -a person is. The person can be an individual, partnership or company. The classic example is a pub where the pub with accommodation – the husband’s name and the accommodation is in the wife’s name.

If you have more than one business that you treat separately fro VAT be careful.

Not applying to use VAT flat rate scheme
Unlike other VAT schemes like Cash Accounting, you need to get the permission of the tax office to use the Flat VAT Rate Scheme.

It’s important you get their agreement to use the scheme because applications cannot be back-dated. This could cost you thousands of pounds.

Reclaiming VAT on parking meters
You need a valid VAT invoice to reclaim VAT and on-street parking meters are not subject to VAT so there will not be a VAT number on the receipt.

This maybe a very small thing but if the tax office spots this it could encourage them to look closer at your business and assume there are other errors, like not declaring all your income.

Note – all parking tickets should be checked carefully as council parking generally does not have VAT.

Claiming VAT on business entertaining
VAT is not recoverable on any entertaining – that includes lunches with clients unless they are overseas customers.

However, you can claim the VAT on your annual party if it is below £150 per head. And, you can have two parties at £75 a head.

Failing to repay VAT on unpaid invoices
If a business has not paid a supplier bill for over six months (and they originally reclaimed the VAT under the accruals basis) they need to repay the VAT to the tax office.

Saving for children

If a parent saves money in the child’s name in a standard savings account then if the interest is over £100 it will be taxed in the parent’s name.

So, you can only save a few thousand for a child before the interest is taxed. However, grandparents can save for grandchildren without the same problem. And, a child has a tax free allowance of £10,600. So, a child could have a couple of hundred thousands of pounds of savings from grandparents and not pay tax.

This is why it can be worth families discussing arrangements and possibly gifts skipping generations.

But, parents can save for their children in a tax free environment called Trust Funds (CTFs) and Junior Savings Accounts (JSAs).

From April 2015 parents can transfer savings held in a Child Trust Fund (CTF) to a Junior Savings Account (JSA), which can pay better rates and may have lower charges.

Money held in a CTF or JSA is locked away until the child reaches 18.  But, the income is tax free. A JSA operates in the same way as an Individual Savings Account (ISA). The maximum investment is £4,800 so there is scope to make tax free investments for children.

 

Avoiding 60% tax

You effectively pay tax at 60% on income over £100,000 because you pay tax at 40%, plus you start to lose your personal allowance, which also increases your tax.

Your personal allowance is £10,600 for the current tax year. The rule is that you lose £1 of allowance for every £2 of income over £100,000. So, if your income is £101,000 then the tax of the £1,000 over £100,000 is 40% of £1000 (£400) plus £200 (40% of £500 being the reduction in the personal allowance). This is a tax rate of £600 on £1,000 = 60%.

This tax rate applies between £100,000 and £121,200 because at this level there is no personal allowance left. So, it can be useful to look to reduce your income below £100,000.

Here are three ways to reduce your income below £100,000 and save tax at 60%.

Pension
Contributing to a pension scheme will reduce your taxable income. So, for example, if you had income of £121,200 and contributed £21,200 you would save tax of £12,720. This would make the cost of the pension contribution £8,480.

Keep in mind that you can get 25% out tax free which is £5,300 which would leave £15,900 in your pension at a cost of £3,180.

Transfer income
It is possible to transfer assets that generate income to your spouse or civil partner. This can reduce your personal income for tax.

Your spouse or partner may have to pay tax at 40% but you won’t lose your personal allowance, so you save tax of 20% on the income.

Timing
If you have a company you can delay or bring forward income by paying dividends at different times. It is possible to let profit roll-up in a limited company and pay out dividends over many years when you wind down or retire. In effect, you use your company as a pension fund.

Another option is to let profit roll up in a limited company and pay out profits as a capital distribution when you close the company.