Archive for the ‘Tax Planning’ Category
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.
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.
There is no doubt that the tax office are more active with tax investigations; there has been a lot of announcements about targeting specific industries.
You can not stop the tax office investigating you but you can take steps to protect yourself. The two things I recommend are taking out insurance which will pay for professional representation and making sure your bookkeeping is 100%.
The reason I recommend insurance is because you may take a considerable amount of time and energy to close an enquiry. And, if you are unable to defend yourself you may need to accept a higher tax bill.
100% bookkeeping is not difficult with modern systems and we offer training, coaching and support. The reason it is so important is that the tax inspector will try and “break the records”. This means finding a mistake and when they do this they can say the records can not be relied on. You then need to prove yourself innocent!
I recommend completing a Financial Systems Audit and looking at the new online systems that are available because they can cut down on the time you need to spend and enable us to work more effectively together.
Goodwill is an accounting concept which recognises the value of a business over its physical assets. For example, my accounting business could be sold for 1.25 times the annual turnover even though I only have £5,000 worth of assets such as computers.
When you transfer your business from a sole-trader or partnership to a company you actually sell the Goodwill to the company. But, the chances are your company doesn’t have any cash to pay for it so you create a loan between the company and you.
The company owes you this money and can repay you without you paying tax. The good news is that the company can claim a tax deduction against its profits for the cost of the Goodwill. You and the company save tax and this is another reason to consider our Going Limited service.
Some businesses will not be able to take advantage because the goodwill will be viewed as “personal” goodwill by the tax office. Like all tax planning, the issue needs to be research and professional advice taken.
The cost of something is not just what you pay but what you miss out on, this is called the opportunity cost. Often the opportunity cost is many times the actual cost.
In a previous post I mentioned how a sole trader business making £40,000 could save £3,000 tax by trading as a limited company. Over 20 years this would be worth £60,000 but what is the opportunity cost for a business owner?
Well, the highest rate of return you could get would be developing your business. So, the question is what could you achieve if you used that saving to invest in business development how much could you make?
Perhaps this money could go into Search Engine Optimisation and increase your online enquiries and sales. Maybe you could put it into PR and build your brand and win better and bigger work.
I know that if I put £3,000 into telemarketing I’d win £5,000 of new business. This new business would be with me for at least seven years and I’d get referrals, so for me £3,000 a year saving over 20 years is worth £5,000 x 7 x 2 x 20 = £1,400,000.
What about investing that money taking on new knowledge and skills? It could be that you could build your business and sell it for £5 or even £20m.
If you are not a client of mine you may be thinking it worth having tax planning review? Call me a to book a meeting.
National Insurance is charged on profits of a sole-trader or partnership. At the moment, the charge is 0% below £7,225, 9% between £7,225 and £42,475 and 2% over £42,475.
But, if you trade your business as a Limited Company you can take your profit as dividends which do not attract a National insurance Charge. If you make £40,000 profit, the saving is £2,949.75 a year and if you are in business for 20 years this could be worth £58,995.
Tax is payable on profits of a sole trader or partner, regardless if you take the profit out of the business or not. With a Limited Company you can leave the profit inside the company and only pay 20% tax. This can be useful if you have fluctuating profits in your business.
If your profits go up and down year by year then if you are a sole-trader or partner you could be taxed at higher rates of tax one year and lower rates of tax another year. It could be that you do not use your entire lower rate tax band so over the years you could end up paying more tax.
Using a Limited Company to trade allows you to avoid being caught in this trap because you are taxed on what you actually take from the company, not what profit the company makes. This means you can even out your personal taxable income and basically legally hide profits from the taxman.
