Tax Guide 2020/21 Professional Dedicated Trustworthy
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Professional • Dedicated • Trustworthy
Tax Guide 2020/21
Taxes made easy Contents
clear and concise tax guide A few essentials
Introduction
2 Employer obligations
Companies
2020/21 The personal allowance
Tax rates and allowances
Self assessment (SA) timetable
Income shifting
Value Added Tax (VAT)
Making Tax Digital (MTD)
Practical tax tips to guide you through the tax system and Family matters 5 Tax and your
help you plan to minimise your liability. Married couples investments 17
Children Pensions
Please use this guide High Income Child Benefit Tax free savings
to identify areas Charge Other tax efficient investments
where you could take Tax-Free Childcare
What about unmarried Property matters 19
action, then contact partners? Buy to let
us for advice and to A word of warning Main residence
discuss the most
Working for others 8 Disposals and capital
appropriate way
The tax code gains tax 21
forward. 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
1
A few essentials
allowances. They might have income from their
Introduction own business or receive rent from a property.
The personal allowance
In the UK most income tax which flows into the Alternatively, it may be that their savings or In principle, all individuals are entitled to a basic
Exchequer does so by deduction at source. dividend income is significant enough to result personal allowance before any income tax
The tax is taken from income before it is paid in tax being payable at the basic, higher or whatsoever is paid. However, some individuals
to the taxpayer and most of this happens by additional rates of tax. These taxpayers may on high incomes may receive a reduced or
way of Pay as You Earn (PAYE). This collection be asked to complete a self assessment return even no personal allowance. This is explained
system will no doubt be familiar to almost each year and have direct contact with HMRC. further below.
everyone who is in employment and also to
The 2020/21 personal allowance is £12,500
those who receive pensions. Practical Tip and each individual may have taxable income
Many of us, including children, the retired and If you are not asked to complete a tax return, up to £50,000 before they start to pay higher
working people will have interest from savings it remains your responsibility to advise HMRC rate tax. See the devolved rates and bands for
accounts of one sort or another and many also if there is a new source of untaxed income, a Scottish taxpayers set out later in this section.
have shares from which income arises in the capital profit that could lead to a tax liability
Losing the personal allowance
form of dividends. The savings allowance and or you are subject to the high income child
dividend allowance may cover this for most benefit charge. Please contact us for further Where an individual’s total income exceeds
people so that this income is taxable at 0%. advice if this affects you. £100,000 the personal allowance is reduced
by £1 for every £2 of income in excess of
As the circumstances described above that limit. This means that an individual with
cover the overwhelming majority of an income of £125,000 or
individuals, more than 80% of the more will not be
population will have little or no regular entitled to
contact with HM Revenue and any personal
Customs (HMRC), the organisation allowance.
that administers and regulates all
taxes in the UK.
Over 11 million taxpayers have
something more than just a
regular income taxed under
PAYE or income covered by
the savings and dividend
2 A few essentials
Rates and bands for Scottish and Welsh is entitled to an SA of £500. Additional rate
Tax Tip taxpayers receive no SA.
taxpayers
If your income is in the £100,000 - £125,000
For 2020/21 the tax rates and bands applicable The dividend allowance (DA), available to all
range the restriction in your personal
to Scottish taxpayers on non-savings and non- taxpayers regardless of their marginal tax rate,
allowance is the equivalent of a tax cost of
dividend income are as follows: charges the first £2,000 of dividends to tax at
60%. You may want to consider making or
increasing certain payments which are tax 0%. Dividends received above this allowance
Scottish are taxed at the rates shown in the table.
deductible to minimise this tax cost.
income tax Band name Rate %
Dividends within the DA still count towards an
Examples include pension contributions band £
individual’s basic or higher rate band and so
(which may be subject to restrictions) and
0 - 2,085 Starter 19 may affect the rate of tax payable on dividends
charitable donations.
above the £2,000 allowance.
2,086 -
Basic 20
Tax rates and allowances 12,658 Dividends are treated as the top slice of
income. So the basic rate tax band is first
12,659 -
The income tax bands and rates for 2020/21 Intermediate 21 allocated against other income.
30,930
are determined by where you live in the UK and
Income tax is not the only means by which
the type of income you have. 30,931 -
Higher 41 the government relieves us of our hard-earned
For most UK residents the following tax rates 150,000
cash. You may own assets such as a precious
and bands apply: Over 150,000 Top 46 antique, a second home or shares. If such
an asset is sold, the chances are that a profit
Income tax Dividend For 2020/21 the Welsh rate of income tax is will arise and this may give rise to a liability to
Rate %
band £ rate % set at 10% and this is added to the UK rates, capital gains tax (CGT).
0 - 37,500 20 7.5 which are each reduced by 10%. For 2020/21,
Details of any capital gains may have to be
37,501 - the overall tax payable by Welsh taxpayers
included on the self assessment return.
40 32.5 continues to be the same as English and
150,000
Northern Irish taxpayers. Inheritance tax may be payable on the assets
Over 150,000 45 38.1 that you give to others in your lifetime or leave
Scottish and Welsh taxpayers continue to pay
behind when you die. At one time very few
In addition, some taxpayers may be entitled tax on their savings and dividend income using
individuals had to worry about this tax. House
to the starting rate for savings which taxes the UK rates and bands.
price increases have changed this and many
£5,000 of interest income at 0%. However,
Other allowances more estates have now become liable, so
this rate is not available if non-savings income
Individuals may be entitled to savings you may need to consider some planning to
(broadly earnings, pensions, trading profits
allowance (SA), with savings income within the minimise this tax.
and property income) exceeds the starting rate
limit. SA taxed at 0%. The amount of SA depends Many of those in business have to understand
on an individual’s marginal rate of tax. An the principles of Value Added Tax (VAT)
individual taxed at the basic rate of tax has an because they will have to act as an unpaid
SA of £1,000, whereas a higher rate taxpayer collector of this tax. In addition, those who
A few essentials 3
run their business through a limited company •• 31 January following - final date for
need to know about corporation tax which submission of the return and all outstanding
Practical Tip
taxes a company’s profits. Employing others tax to be paid. The full £100 penalty will always be due if
in your business brings further obligations •• There is an automatic penalty of £100 for late your return is filed late even if there is no tax
with Real Time Information reporting for PAYE filing of the return. outstanding. It is therefore essential to submit
and auto enrolment pension contributions •• Further penalties may be due if the filing of the return on time either by 31 October
responsibilities. We consider these issues later the return is significantly delayed. These may (non-electronic) or otherwise by 31 January
in this guide. run into hundreds of pounds. following the end of the tax year.
This guide is designed to provide you with
Practical Tip an overview of all of these taxes from seven
Remember to keep all tax related documents perspectives - that of the family; the employee;
such as interest statements, dividend the person running their own business; the
vouchers, pay certificate form P60 etc. Place taxation of investments; property matters;
everything in a folder through the year as it disposals and CGT and, finally, knowing
is received. Then you can simply hand this that nothing is certain except death
to us when we need to prepare your self and taxes, the potential liability
assessment return. on your estate at death.
HMRC is increasingly emphasising the Please use the guide
importance of good records. Failure to to help you identify
maintain adequate records may lead to planning opportunities,
inaccurate tax returns, which could result pitfalls to avoid and
in penalties. areas where you
may need to take
Self assessment (SA) action and then
contact us for
timetable further advice.
•• Income tax and capital gains tax are
both assessed for a tax year which runs
from 6 April to the following 5 April.
•• Shortly after 5 April - a notice to complete
a return is issued by HMRC.
•• 31 October following - non-electronic
returns (where you have requested a paper
return from HMRC or downloaded a blank
return) need to be submitted to HMRC by
this date.
4 A few essentials
Family matters
Jointly owned assets
Married couples Tax Tip
Married couples will often own assets in some
Spouses are taxed as independent persons, If you are feeling charitable, remember that a form of joint ownership. If they do not then it
each of whom is responsible for their own tax donation to charity under the Gift Aid scheme may be advantageous, for tax purposes, for
affairs. The phrase ‘spouse’ whenever used in benefits from tax relief. It makes sense for a transfers to be made to ensure joint ownership.
this guide includes a registered civil partner. higher rate/additional rate taxpayer spouse to
make such donations so that they can benefit This can have benefits for income tax, CGT
For spouses, there is no aggregation of income, and even inheritance tax.
from the extra tax relief.
no sharing of the tax bands and except in
limited circumstances detailed later in this guide, Alternatively, in some circumstances,
donations can be carried back to attract tax
Tax Planning
the personal allowance may not be transferred
from one spouse to the other. relief in the previous tax year. If you and your spouse are both involved
in running a business, income can be
Minimising the tax bill Tax breaks for spouses equalised if you are equal partners or equal
However tax can be minimised if spouses Married couples and civil partners may be shareholders. Alternatively, if only one of you
equalise, as far as possible, their income so eligible for a Marriage Allowance (MA). is involved, the other could be employed in
that personal allowances, savings allowance a small capacity, drawing a salary to use up
(SA) and dividend allowance (DA) are fully The MA enables spouses to transfer a fixed their personal allowance.
utilised and higher/additional rates of tax are amount of their personal allowance to their
minimised. spouse. The option to transfer is not available Where assets are owned in joint names,
to unmarried couples. any income is deemed to be shared equally
between the spouses. If the actual ownership
Example The option to transfer is available to couples
shares are unequal, income is still deemed to
In 2020/21 Ian and Angela have savings where neither pays tax at the higher or
be split equally unless an election is made to
income of £50,000, dividend income of additional rate. If eligible, one partner will be
split the income in the same proportion as the
£50,000 and no other income. If this is split able to transfer 10% of their personal allowance
ownership of the asset.
equally between them, the total tax bill for to their partner which means £1,250 for the
the couple is £6,050. If only one spouse has 2020/21 tax year. This does not apply to shares in close
an income of £100,000 and the other has companies (almost all small, private, family
For those couples where one person does not
nothing, the total tax bill leaps to £22,000 - owned companies will be close companies)
use all of their personal allowance, the benefit
an additional £15,950! where income is always split in the same
will be up to £250 (20% of £1,250).
proportion as the shares are owned.
Family matters 5
Transferring income to children friends and family are able to contribute up
Example to the annual limit of £9,000. It is possible to
Children have their own personal allowances
A buy to let property is owned three quarters transfer the investment to a Junior Individual
and tax bands. Where their only income is, at
by Helen and one quarter by her husband Savings Account (ISA).
best, a few pounds from a paper round or a
Mark. If no election is made the net rental
Saturday job, there may be some scope for CTFs will start to mature from September 2020
income on which tax is payable will be split
transferring income producing assets to the when the first eligible children begin to turn
50:50.
children to use up their personal allowance. 18. On maturity funds can be either withdrawn
If an election is made the income will be split or left in the tax advantaged CTF account
However, such assets should not be provided
75:25. A choice can be made according pending instructions from the account holder.
by a parent, otherwise the income remains
to which is the most desirable when other Alternatively the savings can be transferred
taxable on the parent, unless it does not exceed
income of the spouses is taken into account. to an ISA and the amount transferred will be
£100 (gross) each tax year.
disregarded for the annual ISA subscription limit.
Capital gains tax
Independent taxation also applies to CGT. Each
Tax Planning Junior ISA
spouse is entitled to take advantage of the There is nothing to stop you employing your A Junior ISA is available for UK resident children
annual exemption of £12,300 before any CGT children in the family business so as to take under the age of 18 who do not have a CTF
has to be paid. advantage of their personal allowance. There account. Junior ISAs are tax advantaged and
are age restrictions (with some exceptions have many features in common with existing
This is advantageous where assets are held the minimum age is generally 13 years old) ISAs.
jointly and then sold as each spouse can use and legal limitations as to the type and
their annual exemption to save tax. They are available as cash or stocks and shares
duration of the work. It is also essential that
based products but a child can only have one
The transfer of assets between spouses is payment is only made for actual work carried
cash Junior ISA and one stocks and shares
neutral for CGT. This is sometimes done shortly out for the business and at a reasonable
Junior ISA. The annual investment is limited to
before assets are sold, to minimise tax. Advice commercial rate.
£9,000.
should be sought before undertaking such
transactions to ensure that all tax aspects have Children and capital gains
been considered. Please contact us for CGT Children also have their own annual exemption
Tax Planning
advice. for CGT, so assets transferred to them which There are some other limited ways income
have a bias towards capital growth rather than can be transferred to children tax efficiently
Children income may prove to be more advantageous. such as:
It is often assumed that children are not Child Trust Funds (CTFs) •• National Savings Children’s Bonds which
taxpayers. In fact HMRC will tax a child just as are tax free.
The availability of new CTFs ceased from
readily as anyone else if the child has sufficient January 2011, as did government contributions •• Friendly Societies offer 10 year minimum,
income to make them liable. to the accounts. Existing CTFs however tax exempt savings plans for children for up
continue to benefit from tax free investment to £25 per month.
growth. No withdrawals are possible until the
child reaches age 18. However, the child’s
6 Family matters
High Income Child Benefit Tax-Free Childcare However, transfers of assets may be liable to
CGT and, if substantial, could also lead to an
Charge The scheme is available to families where all inheritance tax liability. It is vital for unmarried
parents are working (on an employed or self- couples to each make a Will if they wish to
A charge arises on a taxpayer who has adjusted
employed basis) 16 hours a week and meet a benefit from each other’s estate at death.
net income over £50,000 in a tax year where
minimum income level (generally £139 a week)
either they or their partner are in receipt of Child Remember all the special rules for married
with each earning less than £100,000 a year.
Benefit for the year. Where both partners have couples, both those dealt with in this section
Parents who are receiving support through Tax
adjusted net income in excess of £50,000 the and those covered in other sections of this
Credits or Universal Credit are
charge applies to the partner with the higher guide, apply equally to same-sex couples who
not eligible.
income. have entered into a registered civil partnership
Parents need to register or marriage.
The income tax charge applies at a rate
with the government and
of 1% of the full Child Benefit award
for each £100 of income between
open an online account. A word of warning
The government ‘top
£50,000 and £60,000. The charge Transferring assets or interests in a business
up’ payments into this
on taxpayers with income above between husband and wife may attract the
account at a rate of 20p
£60,000 will be equal to the amount interest of HMRC especially where it is obvious
for every 80p that families
of Child Benefit paid. that it has been done primarily for tax saving
pay in. The scheme is
Child Benefit claimants are able to elect generally limited to £10,000 purposes. Transfer of ownership of an asset
not to receive Child Benefit if they or per child per year. The must be real and complete, with no right of
their partner do not wish to pay the charge. government’s contribution is return and no right to the income on the asset
therefore a maximum of £2,000 per given up.
Equalising income can help to reduce the
charge for some families. child. If a non-working spouse is given shares in an
Employer Supported Childcare (see the Working otherwise one-person, private company, HMRC
may, in some circumstances, seek to tax the
Example for Others section) closed to new entrants
working spouse on all of the dividends under
on 4 October 2018. Parents who qualify for
Phil and Jane have two children and receive what is known as the ‘settlements legislation’.
both schemes are able to choose which
£1,820 Child Benefit. Jane has little income. You may want to consider obtaining advice from
scheme they wish to use but families cannot
Phil expects his adjusted net income to be us before entering into this type of arrangement.
benefit from both schemes at the same time.
£55,000. On this basis the tax charge will be
To find out about all childcare options visit
£910. This is calculated as £1,820 x 50% Checklist for Couples
www.childcarechoices.gov.uk
(£55,000 - £50,000 = £5,000/£100 x 1%).
✔✔ Try to equalise your income.
If Phil can reduce his income by £5,000 to What about unmarried
£50,000 no charge would arise. This could be ✔✔ Consider placing assets in joint names.
achieved by transferring investments to Jane
partners?
✔✔ If you have children consider making use of
or by making additional pension or Gift Aid It still pays to equalise income as much as their personal allowances.
payments. possible, as income tax will be minimised.
Family matters 7
Working for others
Few avoid working for others at some time income tax rates apply to an employee’s pay, obtained by the individual can often outweigh
in their life and most will have encountered rather than the rates and bands which apply the tax cost arising. In addition, for the individual
the PAYE system operated by employers to across the rest of the United Kingdom (see the (but not the employer) benefits generally do not
collect the income tax and national insurance ‘A few essentials’ section of this guide for details attract NICs.
contributions (NICs) due on wages and salaries. of rates and bands).
Valuation
For Welsh taxpayers a letter 'C' is included in
The tax code the tax code. For 2020/21 Welsh taxpayers
Rules were introduced from April 2017 which
may affect the value of a benefit. Where a
Ensuring the right amount of tax is taken pay the same overall rates of income tax as benefit is taken rather than an alternative cash
relies on a PAYE code, issued by HMRC and taxpayers in England and Northern Ireland. option, the taxable value of the benefit is the
based on information given in a previous self With so many complications and some higher of the cash foregone or the taxable value
assessment return or supplied by the employer. guesswork involved, getting the code exactly under the normal benefits rules. Transitional
The employee, not the employer, is responsible right can be difficult and the right amount of tax provisions apply for arrangements entered into
for the accuracy of the code. will not always be deducted. before 6 April 2017. Contact us for the correct
Code numbers try to reflect both an individual’s valuation of benefits.
tax allowances and reliefs and also any tax Tax Tip Company cars
they may owe on employment benefits and
If you are unsure about your code and are Employer provided
in some cases other types of income. For
anxious not to end the tax year under or cars, commonly
many employees things are simple. They will
overpaid, then you should have it checked. known as company
have a set salary or wage and only a basic
HMRC may update an individual’s tax code cars, remain a popular benefit and for some a
personal allowance. Their code number will be
during the tax year to reflect changes to real status symbol, despite continued increases
1250L and the right amount of tax should be
benefits and to collect tax underpayments. in the tax charge they give rise to.
paid under PAYE. However, for those who are
Please talk to us about getting your tax code
provided with employment benefits the code The charge on cars is generally calculated
checked.
number is generally adjusted to collect the tax by multiplying the list price of the car by
due so that there are no nasty underpayment a percentage which depends on the CO2
surprises. HMRC may also try to collect tax Benefits emissions (recorded on the Vehicle Registration
on untaxed income, tax on dividends and tax Document) of the car. You then pay tax at 20%,
The range of benefits available will vary
owing for an earlier year. 40% or 45% on this charge depending on your
significantly depending on the type of
overall tax position. The tax rates applicable to
For Scottish taxpayers a letter ‘S’ is included employment. Some attract no tax but even
Scottish taxpayers range from 19% to 46%.
in the tax code and denotes that the Scottish taxable benefits can be efficient as the benefit
8 Working for others
The table on the next page shows the Fuel for private use
Cars Cars
percentages for 2020/21. The table is divided A separate charge applies where private fuel
2020/21 registered registered
into two columns for cars registered up to 5 is provided by the employer for a company
after 5.4.20 before 6.4.20
April 2020 and those registered after that date. car. The charge is calculated by applying the
The table reflects the differences between the CO2 emissions % of list % of list price same percentage figure used to calculate the
new Worldwide harmonised Light vehicle Test (g/km) price taxed taxed company car benefit to a fixed figure which
Procedure (WLTP) and the New European for 2020/21 is set at £24,500. No fuel benefit
1 – 50 (split by
Driving Cycle (NEDC) test it is replacing. applies to an electric car.
zero-emission 0 0
For most company cars registered after 5 April miles)
2020 car benefit rates will be reduced by two
>130 0 2 Tax Planning
percentage points for 2020/21 from the rates
previously announced for that year. Additionally, 70-129 3 5 The fuel benefit charge can be expensive.
to accelerate the shift to zero-emission cars, all It may be cheaper for the employee to
zero-emission models, regardless of when they 40-69 6 8 pay for all the fuel and to reclaim from the
were registered, will be subject to a 0% rate. employer the cost of business miles driven
30-39 10 12 in a company car based on a specific log of
Thus drivers of these cars will pay no company
car tax in 2020/21. Both these rates will riseCheap or interest free loans choose which scheme they wish to use but which are 45p for the first 10,000 miles in a tax
If loans made by the employer to an employee families cannot benefit from both schemes at year and 25p thereafter.
exceed £10,000 at any point in a tax year, tax the same time.
If the employee is paid for business miles at less
is chargeable on the difference between the Pension contributions than the statutory rates, tax relief is available
interest paid and the interest due at an official on the difference. If, however, the employee is
Contributions by an employer to a registered
rate - currently set at 2.25% per annum. An paid at more than these rates then the excess
pension scheme are generally tax and NICs free
exception applies for certain qualifying loans - is taxable.
for most employees. This may be far better than
please contact us for information.
any other perk. If you are paid less than the statutory rates
to use your own car for business purposes
Tax Tip Tax Tip remember to claim a deduction on your return
The £10,000 limit on tax free loans is an or write to HMRC to make your claim.
You may want to sacrifice some of your
attractive perk for many employees.
‘normal’ salary to do this. Please talk to us
to make sure your salary sacrifice scheme is Example
Childcare costs
effective. In 2020/21 Michael travels 14,100 business
Childcare costs paid for by an employer may miles in his own car and is paid 32p per mile
be exempt from both income tax and NICs.
This applies to a place in an employer operated Expense payments by his employer.
nursery and to Employer Supported Childcare An employee can claim tax relief for expenses Michael can claim tax relief on an additional
as long as the claimant entered the Scheme which are incurred wholly, exclusively and amount of £1,013 ((10,000 x 45p) + (4,100 x
before 4 October 2018. In the latter case, necessarily for business purposes. The main 25p)) - (14,100 x 32p).
the exemption is limited and types of expense are travelling to places for
excess amounts are subject work (but not the normal place of work) and Vans
to tax and NICs. Employer overnight accommodation. Where employees are provided with a van and
Supported Childcare is now the only private use of this is to travel to and
closed to new claimants Reimbursed expenses
from work (including any incidental private use),
and has been replaced by An employer would normally reimburse an then no taxable benefit should arise. If there
Tax-Free Childcare (see the employee for business expenses. Employers is private use beyond this, there is a benefit of
Family Matters section of are no longer required to report reimbursed tax £3,490 for 2020/21 and an additional £666 if
this guide). deductible business expenses and therefore fuel is provided for private as well as business
Employees who qualify for employees do not need to claim tax relief on journeys. In order to avoid this charge, it is
both schemes are able to these expenses. advisable to have a formal written policy,
Mileage claims detailed mileage logs and make use of vehicle
tracker records. These will support the limited
Many employers pay a standard rate of private use of the van and may avoid problems
mileage to all employees who use their with HMRC in the future.
own cars for business journeys. HMRC
set statutory rates for business mileage
10 Working for othersRunning a business
Starting up a business of your own is a big step partnership. Again, the business and personal choose which structure is right for you based
and not one to take lightly. The taxation of your affairs of the partners are not legally separate. on more than just the tax issues alone.
business is only one of many commercial and
Sole traders and partnerships are often
legal aspects of starting a business that you
referred to as unincorporated businesses and
The tax regime
will need to consider.
the individual owners as self-employed. Unincorporated businesses
Preparation is the key and a proper business
Limited company A new business should register with HMRC on
plan is one of the first things you should do.
A company is a legal entity in its own right, commencing to trade. Income tax is paid on
However, tax matters are our main concern
separate from the personal affairs of the the profits of the business. The amount that the
here.
owners and the directors. proprietor, or a partner in a partnership, draws
out of the business (referred to as ‘drawings’)
Choosing a business structure A company provides protection from liability, is irrelevant.
The alternative business structures are: which means that the creditors of the company
cannot make a claim against the owners or Profits are taxed on a current year basis
Sole trader the directors except in limited circumstances. as shown by the example, although a new
Often this advantage is somewhat eroded business will be subject to special rules, which
This is the simplest form of business structure
because a bank, for example, may seek we will be pleased to explain to you.
since it can be established without legal
formality. personal guarantees from the directors.
These potential advantages carry the downside
Example
The business of a sole trader is not
distinguished from the proprietor’s personal of greater legal requirements and regulations If the accounting period (or ‘year’) end is 31
affairs. If the business incurs debts which are that must be complied with. March then, in the tax year 2020/21, the
unpaid, the creditors can seek repayment from profits for the year ended 31 March 2021 will
Limited Liability Partnerships (LLPs)
the sole trader personally. be taxed.
LLPs are a halfway house between
Partnership partnerships and companies. If the year end was 31 August then, in the tax
A partnership is similar in nature to a sole year 2020/21, the profits for the year ended
They are taxed in the same way as a 31 August 2020 will be taxed.
trader but involves two or more people working partnership but are legally a corporate body.
together. This again gives some protection to the owners
A written agreement is essential so that from the partnership’s creditors.
all partners are aware of the terms of the In this guide we consider the differing tax
treatments of the alternatives but you should
Running a business 11Trading and property income allowances customer has not paid what is owed by the
Tax Tip year end, the amount due is not taxable until
Trading and property income allowances of
The choice of accounting date on a business £1,000 per annum are available. Individuals next year.
start up can affect: with trading or property income below £1,000 •• Allowable payments include paid expenses
do not need to declare or but these still need to meet the existing tax
•• how profits are taxed
pay tax on that income. rule of being wholly and exclusively incurred
•• when tax is payable for the purposes of the trade.
Those with income above
•• when losses are relieved. the allowance are able to •• Payments include most purchases of plant
calculate their taxable profit and machinery, when paid, rather than
So do contact us to discuss the options either by deducting their claiming capital allowances. The bad news is
available for your circumstances. expenses in the normal way that if a supplier is not paid by the year end,
or by simply deducting the the amount is not relievable until next year.
Working out profits
relevant allowance. •• Interest payments are only allowed up to a
Profits are calculated using accepted limit of £500.
accounting practices and crucially this means Cash basis for smaller
unincorporated •• Business losses may be carried forward to
that profit is not necessarily simply receipts
businesses set against the profits of future years but not
less payments. Instead it is income earned less
carried back or set off ‘sideways’ against
expenses incurred. However, see details of the An optional basis for other sources of income.
optional cash basis for smaller unincorporated calculating taxable
businesses. profits is available to Do get in touch if you would like us to consider
Not all of the expenses that a business incurs small unincorporated if this optional scheme is appropriate for you
are allowed to be deducted from income for businesses. If an owner of a business decides and your business.
tax purposes but most are. It is important that to use the cash basis, the business profits
you keep proper and comprehensive business would be taxed on cash receipts less cash Capital allowances
records so that relief may be claimed. payments of allowable expenses subject to a
number of tax adjustments. When assets are purchased for the business,
such as machinery, office equipment or motor
Tax Tip The optional scheme requires an election by vehicles, capital allowances are available.
the business owner and is only available where As with expenses, these are deducted from
Try to incur expenditure just before rather than the business receipts are less than £150,000.
just after the year end, as this will accelerate income to calculate taxable profit.
Businesses can stay in the scheme up to a
the tax relief. total business turnover of £300,000 per year. Plant and machinery - Annual
Examples of the type of expenditure to Investment Allowance (AIA)
Further details about the scheme:
consider bringing forward include building The AIA from 1 January 2019 gives
•• Cash receipts include all amounts received a 100% write off on most types
repairs and redecorating, advertising,
in connection with the business including of plant and machinery costs, but
marketing campaigns and expenditure on
those from the disposal of plant and not cars, of up to £1,000,000 per
plant and machinery.
machinery. The good news is that if a annum (reducing to £200,000
12 Running a businessfrom 1 January 2021). Special rules apply Paying the tax also details the income tax, national insurance
to accounting periods which straddle these contributions (NICs) due together with other
dates. Any costs incurred in excess of the AIA The self-employed may have to pay tax and deductions such as student loan repayments.
will attract an annual ongoing allowance of 6% NICs three times a year, namely:
The PAYE and NICs on salaries is payable
or 18% depending upon the type of asset. •• 31 January in the tax year monthly (or quarterly where the amount due is
Other allowances include a 100% allowance •• 31 July following the tax year less than £1,500 per month).
on certain energy efficient plant and machinery •• 31 January following the tax year. Penalties apply to employers who fail to make
within designated areas in Enterprise Zones
returns on time. These penalties range from
and zero-emission cars, goods vehicles and In certain circumstances, the first two payments
£100 to £400 per month depending on the size
equipment for gas refueling stations. can be waived. Because of the COVID-19
of the employer. Interest and penalties also
outbreak, the second payment on account due
Motor cars apply for failing to pay on time.
for the 2019/20 tax year on 31 July 2020 can
The tax allowance on a car purchase depends be deferred until January 2021. The employer must also report details of
on CO2 emissions. Currently purchases of new expenses and benefits provided to employees.
unused cars with emissions of up to 50g/km Employer obligations More information on the valuation of benefits is
attract a 100% first year allowance, while cars contained in the Working for Others section of
with emissions of up to 110g/km attract an 18% As an employer you will have many this guide.
allowance and those in excess of 110g/km are responsibilities. These will include employment
only eligible for an 6% allowance. law requirements which are not covered in this Pensions Auto Enrolment (AE)
guide and HMRC requirements to report pay AE obliges employers to automatically enrol
Structures and Buildings Allowance (SBA) and benefits. Two other requirements place a ‘workers’ into a work based pension scheme.
The SBA gives an annual rate of capital further burden on employers. Duties include:
allowances to qualifying investments incurred Real Time Information •• assessing the types of workers in the
on or after 29 October 2018 to
Real Time Information (RTI) reporting is business
construct new, or renovate old,
non-residential structures mandatory for broadly all employers. •• providing a qualifying automatic enrolment
and buildings. The pension scheme
Under RTI, employers or their agents are
initial rate of 2% was required to make regular payroll submissions •• automatically enrolling all ‘eligible jobholders’
increased to 3% for each pay period during the year. The into the scheme and
from 1 April 2020 submissions detail payments made to and •• paying employer contributions.
for corporation tax deductions made from employees. These
and 6 April 2020 for submissions must generally be made on or All employers generally need to contribute
income tax. before the date the amounts are paid to the at least 3% of the ‘qualifying pensionable
employees. earnings’ for eligible jobholders.
The RTI submission details payments made If the employer only pays the employer’s
which include salary, overtime and statutory minimum contribution, employees’
payments such as statutory maternity pay. It contributions are generally 5% to meet the
overall minimum 8% contribution rate. There
Running a business 13are different ways of calculating minimum Tax on ‘drawings’ Further rules prevent the avoidance of the
contributions and the employee contributions Directors of a company will normally be paid charge by repaying the loan before the nine
may be paid net of basic rate tax depending on a salary and this is taxed under PAYE as for month date and then effectively withdrawing the
the type of pension scheme. all employees. The cost of this, including the same money shortly afterwards.
employer’s NICs, is generally an allowable A ‘30 day rule’ applies if at least £5,000 is
Practical Tip expense of the company. Shareholders of the repaid to the company and within 30 days new
company in contrast may be rewarded by the loans or advances of at least £5,000 are made
All employers have to comply with Auto
payment of dividends on their shares. to the shareholder. The old loan is effectively
Enrolment from when they first take on an
employee. We can help you to deal with Auto treated as if it has not been repaid. A further rule
Enrolment. Tax Tip stops the tax charge being avoided by waiting
31 days before the company advances further
In most small companies the directors and funds to the shareholder. This is a complex area
Companies shareholders are one and the same and so so please do get in touch if this is an issue for
they can choose the most tax efficient way to you and your company.
Unlike sole traders and partnerships who pay pay themselves. Using dividends can result
tax on profits only (and drawings are ignored), in savings in NICs. This requires planning
companies have two layers of tax. The first is and needs to take account of the Dividend Planning Tip
tax payable by directors and shareholders on Allowance, which taxes dividends within the Ensure that sufficient salary and dividends
money they take out of the company and the allowance at 0%, and dividend rates of tax. are drawn from the business to prevent these
second is corporation tax which is due on the
charges arising unnecessarily on an overdrawn
company’s profits The Dividend Allowance is currently £2,000
director’s current account. We can also ensure
so careful planning is required. Please talk to
that overdrawn accounts are cleared properly.
us to decide what is appropriate for you.
Practical Tip Please contact us if you would like to discuss
If you operate as a limited company, there Warning - close company loans to the right options for you and your business.
is a legal separation between you as the participators
owner and the company itself. This means A close company (which generally includes
you cannot use the company bank account owner managed companies) is taxed in certain
as if it were your own! This requires a certain circumstances when it has made a loan or
amount of discipline without which all kinds of advance to individuals or their family members
legal and tax related difficulties can occur. who have an interest or shares in the company
(known as participators). The tax charge is
Corporation Tax currently 32.5% of the loan if it is outstanding
Companies currently pay corporation tax at nine months after the end of the accounting
19%. period. The tax charge is repaid to the
company nine months after the end of the
accounting period in which the loan is
repaid.
14 Running a businessTax on profits Tax relief for expenditure on Research and are currently three rates of VAT which can
The profits of a limited company are calculated Development (R&D) be payable on what are known as taxable
in a similar way as for unincorporated Companies with expenditure in qualifying R&D supplies. These are the standard rate of 20%,
businesses and the same rules with regard activities can receive tax relief - the rates of the the reduced rate of 5% and the zero rate.
to expenses and capital allowances generally relief depend on the type of company: The zero rate applies where the supply is
apply. Remember though that the salaries deemed to be subject to VAT but the output
•• for small and medium-sized companies
paid to directors, but not the dividends paid to VAT is charged at 0%, meaning that no VAT is
(SMEs) paying corporation tax at 19%, the
shareholders, are deductible from the profits actually payable.
effective rate of tax relief is 43.7% (that is a
before they are taxed.
tax deduction of 230% on the expenditure). However, a business also pays VAT on the
For SMEs not yet in profit, the relief can goods and services it buys. This is known as
Tax Planning be converted into a tax credit payment, input tax.
Companies are a popular business structure effectively worth 33.35% of the expenditure
If the output tax exceeds the input tax, then
as they generally result in less tax being paid •• an ‘above the line’ credit exists for a payment of the difference has to be made
overall. companies not qualifying under the SME to HMRC. If input tax exceeds output tax a
scheme.. This is known as the R&D repayment of VAT will be made. This calculation
We would be happy to discuss the Expenditure Credit (RDEC) scheme and
implications of incorporation with you before is generally done on a quarterly basis. However
allows a claim to a taxable credit of 13% where repayments occur regularly it is possible
you decide whether or not to incorporate your (12% prior to 1 April 2020). The credit is fully
business. to opt for monthly VAT returns. Regular
payable, net of tax, to companies with no repayments would perhaps apply where a
corporation tax liability. business generally makes zero rated supplies.
Payment of tax
Corporation tax is usually payable nine months This is a complex area. Please get in touch if Supplies
and one day after the year end, so the choice you would like to know more. Certain supplies of goods and services are not
of accounting date has no tax consequence. subject to VAT at all and are known as exempt
Value Added Tax (VAT) supplies. A business that makes only exempt
Practical Tip 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.
HMRC issues toolkits on various tax topics
to help taxpayers and their agents comply of the tax. There are heavy fines for failing to
with tax law. One of the main areas of non operate the system properly. Tax Tip
compliance identified by HMRC is poor What does VAT apply to? When you first register for VAT you can
record keeping and this applies to all types of VAT is chargeable on the supply of goods and reclaim input tax on goods purchased up to
business. If you would like guidance on what services in the UK when made by a business four years prior to registration provided they
records to keep please get in touch. that is required to register for VAT. are still held when registration takes place.
VAT on services supplied in the six months
A registered business must charge VAT on its prior to registration may also be reclaimed.
sales which is known as output VAT. There
Running a business 15As there are three rates which can be This will improve profit and can be especially
applicable to taxable supplies, standard, relevant for new businesses because there are
reduced or zero rated, it is important to identify often high initial set up costs that carry VAT.
the type of supplies correctly and apply the On the other hand, registration comes at the
correct percentage of VAT. cost of having to meet onerous record keeping
requirements, a need to submit online VAT
Some input VAT is not reclaimable by a VAT
returns and pay online and on time.
registered business. Two common examples
are VAT incurred on entertaining UK business
customers and VAT on the purchase of a car.
Making Tax Digital (MTD)
Do I need to register? MTD for VAT is part of a government strategy
which will ultimately require taxpayers to move
A business must register if its taxable supplies to a fully digital tax system.
exceed an annual figure, currently £85,000. If
taxable supplies are less than this a business Under the MTD for VAT rules, businesses with
may still register voluntarily. So, for example, a turnover above the VAT threshold must keep
if the business makes only zero rated sales, digital records for VAT purposes and provide
it can still register and reclaim the input tax their VAT return information to HMRC using
suffered. MTD functional compatible software.
VAT can affect competition. A plumber, for Businesses below the VAT threshold which
example, who sells only to the general public, have voluntarily registered for VAT can opt to
will be at a disadvantage if he has to register join the scheme.
for VAT. There are some exemptions from MTD for
He may have to charge up to 20% more than a VAT. However, the exemption categories are
plumber who is not registered to earn the same tightly-drawn and are unlikely to be applicable
profit. to most VAT registered businesses.
On the other hand, if the same plumber only We can help you to meet your MTD for VAT
works for other VAT registered businesses, obligations.
such as building companies, then it will not
matter whether he is registered because the
customer will 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
16 Running a businessTax and your investments
Setting aside income in the form of savings An employer may make contributions to a account' from which any amount can be
is important for us all, to provide for the scheme and a deduction from profits may be taken over whatever period the person
unexpected or to build up a nest egg that we available to the employer. decides
can enjoy in retirement. •• taking a single or series of lump sums from
There are controls which serve to limit the
availability of tax relief on high levels of a pension fund (known as an 'uncrystallised
Pensions contribution. These are complex but, put simply, funds pension lump sum').
Pensions are one of the most tax efficient they may give rise to a tax charge if annual
contributions exceed £40,000 or if the value When an allocation of funds into a flexi-access
forms of saving. Most higher rate taxpayers can
of the fund when benefits are taken is greater account is made the member typically will take
contribute £100 to a registered pension fund
than a lifetime allowance which, for 2020/21, the opportunity of taking a tax free lump sum
at a cost of only £60 and investment income
is £1,073,100. Generally where a taxpayer has from the fund.
and capital gains will accrue within the scheme
largely tax free. Contributions are paid net of adjusted income in excess of £240,000 the The person will then decide how much or how
basic rate tax and the pension provider will then annual contribution possible will be restricted little to take from the flexi-access account. Any
recover that basic rate tax from HMRC. Higher from £40,000 by £1 for every £2 for the excess amounts that are taken will count as taxable
and additional rate relief, if appropriate, can be income. The minimum annual allowance income in the year of receipt.
claimed from HMRC. available after this restriction is £4,000.
Access to some or all of a pension fund without
An individual is entitled to tax relief on personal Pensions freedom first allocating to a flexi-access account can
contributions in any given tax year up to the Taxpayers have choice and flexibility when it be achieved by taking an uncrystallised funds
higher of 100% of earned income or £3,600 comes to accessing their personal pension pension lump sum.
(gross). fund. Options include taking a tax free lump The tax effect will be:
For employees, if the contributions are sum of 25% of fund value and purchasing an
annuity with the remaining fund or opting for a •• 25% is tax free
deducted from salary payments, tax relief is
more flexible drawdown. •• the remainder is taxable as income.
given in the same way as for an individual
paying personal pension contributions. In some The flexible drawdown rules allow for total Getting the right advice at the point of retirement
cases, the pension contribution is paid gross freedom to access a pension fund from the age is therefore important.
to the pension provider and the contribution of 55. Access to the fund may be achieved in
is deducted from salary before an employee’s one of two ways: Money Purchase Annual Allowance
tax is calculated. Tax relief is therefore given The government is alive to the possibility of
automatically. •• allocation of a pension fund (or part of a
people taking advantage of the flexibilities by
pension fund) into a 'flexi-access drawdown
'recycling' their earned income into pensions
Tax and your investments 17and then immediately taking out amounts Other tax efficient Venture Capital Trusts (VCT)
from their pension funds. The MPAA sets the These bodies mainly invest in the shares
maximum amount of tax-efficient contributions investments of unquoted trading companies. VCT
an individual can make at £4,000 per annum in are however quoted investments. An
The following investments
certain scenarios. investor in the shares of a VCT will be
work in varying ways. You
should consider your needs exempt from tax on dividends and on
Tax free savings in detail before entering into any capital gain arising from disposal
any commitments. of the shares in the VCT. Income tax
Tip National Savings and
relief currently at 30% is available on
subscriptions for VCT shares, up to
Don’t forget to use the dividend and savings Investment (NS&I) £200,000 per tax year, so long as the
allowances. These allowances tax £2,000 Premium bonds shares are held for at least five years.
of dividends and up to £1,000 of savings Premium bonds are tax free and you
income at 0%. See ‘other allowances’ in the The Enterprise Investment Scheme (EIS)
could win £1 million!
‘A few essentials’ section. Income tax relief at 30% is available on new
However, the annual rate of return is not equity investment (in qualifying unquoted
Individual Savings Accounts (ISAs) predictable. The current Premium bonds trading companies) of up to £1 million. A higher
ISAs are free of income tax and CGT. There investment limit is £50,000. The more you limit of £2 million may apply to investments
are maximum investment limits which apply invest the more frequently you are likely to win, in ‘knowledge intensive companies’. A CGT
for each tax year but, over several years, large the smaller prizes at least. However, there is no exemption may be given on sales of EIS shares
investments can be built up. The overall annual guarantee of a steady rate of return. held for at least three years. If the gain on the
ISA savings limit is £20,000. Investors can Single premium insurance bonds sale of any chargeable asset (eg quoted shares,
choose to invest in a cash ISA, stocks and second homes, etc) is reinvested in EIS shares,
The growth on insurance bonds is taxed
shares ISA or an Innovative Finance ISA as long the gain on the disposal can be deferred.
at 20% and paid directly out of the bond.
as they do not exceed the investment limit. For a higher rate taxpayer bonds provide a Seed Enterprise Investment Scheme (SEIS)
Lifetime ISA means of deferring income into a subsequent The tax breaks for SEIS investors are:
The Lifetime ISA for adults is available to those period when it may be taxed at a lower
rate. Withdrawals of up to 5% of the original •• income tax relief at 50% in respect of
under the age of 40. Individuals are able to qualifying SEIS shares up to an annual
contribute up to £4,000 per year and receive investment can be made each year without
incurring an immediate tax charge. maximum investment (in all SEIS companies)
a 25% bonus from the government. If £4,000 of £100,000
is invested, the investment limit for the other Complex tax reliefs can be available on
•• a CGT exemption where SEIS shares are sold
types of ISAs falls to £16,000. Funds, including withdrawal or on maturity of the bonds. Please
more than three years after they are issued
the government bonus, can be used to buy a consider taking advice on the implications prior
(as for EIS)
first home up to £450,000 at any time from 12 to making withdrawals in excess of the annual
months after the first subscription or can be 5% limit and on maturity. •• a further CGT exemption of 50% where an
withdrawn from age 60 completely tax-free. individual makes a capital gain and reinvests
the gain in qualifying SEIS shares.
18 Tax and your investmentsProperty matters
Direct investment in residential property has Which property? rates potentially apply if, at the end of the
always been a popular form of investment. Investing in a buy to let property is not the same purchase transaction, the individual owns two or
as buying your own home. You may wish to get more residential properties.
Buy to let an agent to advise you of the local market for There are some exemptions from the rules.
The UK property market, whilst cyclical, has rented property. An agent will also be able to One of these covers the replacement of a main
proved over the long-term to be a successful advise you of the standard of decoration and residence within certain time limits. Please
investment. This has resulted in a massive furnishings which are expected to get a quick contact us for further advice on this area.
expansion in the buy to let sector. let.
Tax on rental income
Traditionally, buy to let involves investing Letting property can be very time consuming
Income tax will be payable on the rents received
in property with the expectation of capital and inconvenient. Tenants will expect a quick
after deducting allowable expenses. Allowable
growth with the rental income from tenants solution if the central heating breaks down over
expenses include mortgage interest, which is
covering the mortgage costs and any the bank holiday weekend! Do not cut corners
restricted in the case of residential property,
outgoings. However the gross return from buy - a correctly drawn up tenancy agreement will
repairs, agent’s letting fees and the cost of
to let properties, the rent less expenses, can ensure the legal position is clear.
replacing furnishings.
change. Investors also need to take a view on Devolution of Property Taxes
the likelihood of capital appreciation exceeding Restriction of relief for finance costs on
inflation. Investors should take a long-term view Stamp Duty Land Tax (SDLT) applies in England residential lettings
and choose properties with care. and Northern Ireland, Land and Buildings
The amount of income tax relief landlords can
Transaction Tax (LBTT) in Scotland and Land
get on residential property finance costs is being
Transaction Tax (LTT) in Wales.
Practical Tip restricted to the basic rate of income tax. Relief
Higher rates of SDLT, is given by way of a basic rate reduction
When choosing between investments always LBTT and LTT apply rather than the costs being deductible
consider the differing levels of risk and your on purchases of in full from the rental income. This
requirements for income and capital in both additional residential restriction to a basic rate reduction
the short and long term. An investment properties. has been phased in over four
strategy based purely on saving tax is not years from April 2017. This
appropriate. The rates are 3%
above the SDLT reduction may be subject
and LTT rates and to further restrictions
4% above the LBTT
rates. The higher
Property matters 19You can also read
