The question of  how much should be taken as salary and how much as dividend to minismise the tax bill  is raised very often.  I will response this question based on the normal small business situation. My response is not intended to apply people with very high earnings or where the company is making more than £300k profits per year.

The balance:

- Pay yourself a salary of £5,715

- Any further sums you need take it as dividends

Pay Dividends Correctly – Or Pay The Consequences
This is an area of tax planning that HMRC may want to attack in future years. You don’t want the Taxman wanting to treat the payments as a loan to you or even as salary.  If the dividends are treated as a loan, which is the Taxman’s most likely approach if you do things wrong, the company must pay 25% of the loan over to HMRC, and you are personally assessed to a benefit for having an interest free loan from your company. So this is what you need to do…

• You need to know you have enough retained profits to be able to pay the dividends by law. Retained profits are all profits since the company started that haven’t already been paid out as dividends.

• Check your company’s Articles of Association as to who can recommend and authorise a dividend. The directors of the company will normally recommend the dividend, and the shareholders will approve that recommendation.

• Pass a company resolution authorising the dividend. A simple standard word-processed document can be used, which we can provide to you if you sign up for our newsletter http://www.southsideaccountants.co.uk/diary/sign-up-to-our-monthly-tax-saving-tips-newsletter/

If your tax affiars are straightforward and you pay tax through PAYE (Pay as You Earn)  you will not need to complete a tax return. However if your tax affairs are complicated and/or you receive income from many sources, then you will need to complete a tax return.

These are the most common groups who are asked by HMRC to complete a tax return:

• Self-employed

• Company directors

• Income from savings and investments that are £10,000 or above

• Income from rental (after expenses) of £2,500 or above

• Income is over£100,000 in a tax year

• You need to pay capital gains tax (CGT).  This following link explains CGT . It talks about CGT on the sale of shares. The principles are the same whether you are selling shares or any other assets http://www.southsideaccountants.co.uk/diary/2010/01/17/what-is-the-tax-position-if-listed-company-shares-sold-at-a-loss/

• You want to claim certain expenses. For example as an employee you want to claim professional subscriptions of £2,500 or more.

• You live or work abroad

The onus is on you to complete your tax return. If you are not sure whether you need to complete a tax return please contact HMRC or ask your accountant.

Do I need an Accountant to complete a tax return?

You do not need an accountant to complete a tax return. However, to ensure that you pay the minimum amount of tax within the law, it would be best to employ an accountant. http://www.southsideaccountants.co.uk/diary/2009/11/17/check-your-accountant-is-qualified/

What is the deadline  for completing tax returns?

• There is a deadline of  31/10 if you complete a paper tax return.

• If you complete a tax return online the deadline is 31/1.

What if I don’t complete a tax return, when I am required?

You will get an automatic penalty of £100. After several reminders from HMRC, you will get a big fine as high as twice your tax bill plus  interest.

http://www.southsideaccountants.co.uk/taxation-services.html#perstax

As an employee you will only be taxed on a company van if you use it for private (non business) journeys. Private use other than commuting (work to home and vice versa) means using the van for your social activities or your supermarket shopping.

If your employer  allowed you unlimited use of the van, this will be assessed under PAYE as benefit in kind of £3000. If your employer also pays for the private fuel, there will be additional £500 benefit in kind on you. If you are basic rate tax payer (20%)  for the tax year 2009/10, your tax bill for private use of the van will be £700.

Where your only private use of the van is for home to work  travel (and vice versa) this is not treated as private use so you will not be taxed under these circumstances if all other private use is not allowed by your employer. Your employer should ask you to sign an agreement stating that you will only be allowed to use the van for private purpose to travel from your home to work and vice versa. Any other private use would not be allowed. You also need to keep mileage logs recording your mileage for each business journey and the reason for the journey.

To ensure you do not end up with an unwarranted tax bill, please make sure you that you sign the only business use agreement before the new tax year starts – 6th April.

http://www.southsideaccountants.co.uk/free-consultation.html

Donating under Gift Aid means that the charity you are donating to will be able to recover 28p for every £1 you donate from the Taxman.  This is available until 5th April 2011.

For your charity to recover this cash you must give a Gift Aid declaration. Where you make a donation over the phone instead of  using a website, your charity will write to you to confirm this Gift Aid declaration.

Another requirement is that you must be a taxpayer who has paid tax that is at least the amount  that you charity will claim under Gift Aid.  If you are not a taxpayer you cannot make a Gift Aid declaration.

If you are a higher rate tax payer you can also claim the difference the 40% high rate of tax and 20% basic rate of tax on your personal tax return. You need to keep your accountant informed of donations you have made under gift aid so he/she can claim the difference.

This is a plain English Guide to Income tax.

What is income tax?

This is tax paid on money you earn, It includes your salary, some state benefits, savings and pensions. If you are an employee benefits such as company cars are also taxed.

Please note the rates below are for the tax year 2009/10.

How much tax do you pay?

This depends on how much you earn.

All of us are entitled to earn up the the level of our personal allowance of £6,475 (for the tax year 2009/10) without being taxed. This is your tax free income that the taxman cannot touch.

Those of us who fall in the higher age bracket get a higher level of personal allowance:

• Aged between 65 to 74 the personal allowance is £9,490

• For people  aged 75 and over it is £9,640

There is also a blind person’s allowance, and married couple’s allowances based on age

After using your personal allowance, any income that you earn after £37,400 you will be taxed at 20% . Any income above £37,400 after using your personal allowance will be taxed at 40%.

Any interest paid on your savings, the first £2,440 above your personal allowance will be taxed at 10%.  However, if your other income (non savings) exceeds £2,440 after deducting your personal allowance, then any interest from savings will be taxed at the basic rate of 20%.

How is income tax paid?

If you are:

Employed: Tax will be collected through PAYE (Pay As Your Earn). If you receive a pension, your pension provider will collect the tax in the same way.

Self Employed: Tax will be paid through self assessment. You or your accountant will complete a self-assessment form to determine your tax bill.

Savings Income : Your bank will deduct tax from the interest you receive it.

Newsletter

http://www.southsideaccountants.co.uk/diary/sign-up-to-our-monthly-tax-saving-tips-newsletter/

If you are selling some stuff  that is lying around in the attic then the answer is unlikely. To pay tax on what you sell you either need to be trading or make a capital gain.

HMRC are likely to consider you as trading  where you are buying or making goods to sell them on to make a profit. This also applies where you sell these goods for a third party and you are paid a commission on your sales.

If  you just sell  odd items on Internet auctions, classified adverts or car boot sales it is unlikely HMRC will regard you as self-employed. This is because in most situations the amount you receive for goods sold is less than the amount you originally paid for the second hand goods you have put up for sale.  Tax is only to be paid where you make a profit.  You have have not made a profit here.

The same applies to capital gains tax. You only need to pay this tax on gains you made on selling certain assets. You will only make a gain where you sell the asset for more than what you paid for it or where the value of the asset has increased over the period your ownership and price you sell it for is above this increased value. The items you sell are more than likely to personal effects or goods – these are known as chattels, they are separately worth than £6k when you sell them. They are exempt from capital gains tax so it is unlikely that you will make a gain that is chargeable to tax.

If you would like us to help just get in touch.

http://www.southsideaccountants.co.uk/taxation-services.html#perstax

You as an empolyer can recover VAT on expenses incurred on staff team building where this event is wholly for the business purpose.  The same also applies to staff parties, staff outgoings and other similar events.

However, you will not be able to cover VAT where:

• The event is exclusively for the directors of the business. For you to recover all staff should be invited to the event.

• Where your employees merely acts as hosts to non-employees and the only purpose of the event  is entertaining non- employees.

http://www.southsideaccountants.co.uk/tax-centre.html

On a buy to let mortgage you get tax relief on the interest on this mortgage and not on the capital repayment part.

With a repayment mortgage, the interest element decreases over the period of the loan as more of the mortgage is repaid. This means the amount of interest you can offset against your rental income decreases and your tax bill rises.

The solution  may be to take out an interest only mortgage…

• Repayments would be less each month and the mortgage would not reduce so the interest would  remain high.

• The saving on the lower mortgage payments can be  added to the repayments on say your normal home mortgage and so repay this off quicker instead.

By organising  your mortgage in this way, you ensure your tax on the rental income is minimised. What you are doing is paying less interest on your residential mortgage which is not tax deducible and more interest on your buy to let mortgage which is!

http://www.southsideaccountants.co.uk/promises.html

What is it?

Inheritance Tax is usually paid on your estate when you die. Most estates don’t have to pay Inheritance Tax because they are valued at less than the threshold (£325,000 in 2009-10).

Give It Away And Live For 7 Years

No inheritance tax (IHT) is payable on most gifts in your lifetime so long as you live 7 years after the gift. These gifts are known as a Potentially Exempt Transfers (PET)

If a gift is made but there is some reservation on it, such as gifting your house with the understanding you can still live there until you die, this will not count as a PET and will still form part of your estate that is subject to IHT on at death. However, the gift will be effective for capital gains tax, which can create a double tax charge for the person that inherits the house.

If you give away cash that is used to purchase your house, you can be liable to income tax on the benefit of living in the house. This is called the pre-owned asset charge.

There is a sliding for scale for the amount of IHT payable for death within the 7 years. Of course if your estate is worth less than £325,000, no IHT is ever payable.

Other Gifts That Are Always Free Of Inheritance Tax

The following will always be free on IHT, whenever they are made…

• Small gifts to the same person of not more than £250 in a year.

• Gifts in consideration of marriage of £5,000 from parents, £2,500 from grandparents and £1,000 from anyone else.

• Normal expenditure out of income where the amounts given are part of your normal expenditure taking one year with another.

• Amounts up to £3,000, with any unused amount being allowed to be carried forward to the following tax year.

• Capital transfers for family maintenance – often connected with divorce.

• Any gifts between spouses/civil partners, where the person who receives the gift is domiciled in the UK.

• Any gifts to charities or political parties.

Husband and Wife (or civil partners)

No inheritance tax is payable on gifts between spouses or civil partners as long as both parties are domiciled in the UK. This is often used as a basic method of IHT avoidance. If the gift is a transfer to a foreign domiciled spouse it is only exempt up to £55,000.

With effect from 9th October 2007 spouses and civil partners will now be able to make full use of the nil rate band belonging to each spouse. This is retrospective and applies to anyone with a spouse or civil partner previously deceased. That gives a total inheritance tax exemption for a married couple of £650,000 (for 2009/10). The new rules allow any unused part of the nil rate band on the death of the first spouse or civil partner to be passed to the surviving spouse or civil partner for use on their death.

Say Fred dies on 1 October 2009 with an estate worth £650,000 and his wife did not use her nil rate band when she died previously, he now has the benefit of two nil rate bands totalling £650,000. Now Fred’s executors will pay no IHT at all. The amount of the nil rate band that can be transferred is the proportion of the nil rate band that was unused on the death of the first spouse or civil partner.

For example if on the first death, 50% of a 325K nil rate band was unused, if on the second death the nil rate band is 350K at that time, then 50% x £350K = £175K is available for use in addition to their own nil rate band. There is a maximum of an amount equal to the nil rate band in force at the time of the second death that can be used in addition. Therefore, it doesn’t matter how many ex-spouses or civil partners there are, it is not possible to have a total nil rate band of over 650K in 2009/10.

http://www.southsideaccountants.co.uk/choose-accountant.html

A tax enquiry often starts because HMRC has some information on you. They try to select those cases where they feel there is a good chance of a successful outcome from their point of view.

They keep a file on you so that as much information as possible is kept in one place.

This means that they can review your affairs properly and it is often information from other sources that may lead to an investigation. So ensure you are properly prepared before meeting with the inspector as they have information from many sources…

The Informers

HMRC have a special hotline for informers to call as well as being able to report via the HMRC website and all informers can do so anonymously if they wish. There are many jealous neighbours, disgruntled customers, exlovers and particularly ex spouses out there. Not all accusations are true but it could be the start of your enquiry.

The Curious Inspector

Part of the make up of being a tax inspector is to be naturally curious. How do their neighbours afford that expensive new car? They read local newspapers; scan the Internet, etc looking for anything that they can check against the information they hold on you.

If you’re going to do a job cheaper for cash, you’d better hope, it’s not for a tax inspector. Do you know what all your customers do for a living?

From Other Taxpayer Enquiries

Fred in the course of his investigation mentions that you lent him £15000. The Taxman may want to discuss with you where you got this £15,000 from.

Other Taxpayers Accounts

For, example the inspector can request details of who commissions or rent in another taxpayer’s accounts are paid to, in order to ensure they are declared by the recipient.

Links With Customs & Excise & Government Departments

The Revenue are now combined with Customs & Excise as well as having better links with other government departments. This also means that when your investigation finishes and you have undeclared cash takings, you are also likely to be clobbered by the VAT man for the VAT due on them. Even worse, if you weren’t registered and your higher income now puts you over the VAT registration limit.

The Stamp office will report property transactions.

Explanations On Your Tax Return  Or rather, a lack of them. For owners of small businesses, enquiries often stem from their business accounts. The simplest way to avoid an investigation is to avoid an enquiry being made into your Return in the first place. The best way to do this is to explain anything unusual when your Tax Return is submitted rather than just sending it in without any explanations.

Your Tax Return is originally processed by a computer that carries out analytical checks on the figures to look for unusual items. If you know there is something unusual, explain it in the white space on your return, and then HMRC are far less likely to start an enquiry. It is crucial your accountant does this although often it doesn’t seem to happen.

Examples of things you might explain:
♦ If profits or drawings are low, how have you lived?
♦ If you introduced some money into the business, where did it come from?
♦ If the gross profit margin has changed significantly, why is this?
♦ If any expenses are unusually high, why is this?
♦ If sales have fallen, why is this?

You are looking for anything that is unusual, looking particularly at what HMRC already knows about you from previous years.

Most of these will have simple explanations, so give them now and stop an enquiry being made.

Another reason for an enquiry could be that you haven’t declared any interest being received in the year but HMRC knows you have an interest earning account. Is this where you have filtered away undeclared profits they wonder?

Get It In On Time

Sending Returns in late is also more likely to lead to an enquiry, so be organised. After all, if your Return goes in late it’s an indication you are disorganised and so maybe your accounting records are a bit disorganised and may not be correct.

Random enquiries – a percentage of returns are also randomly selected for enquiry and there’s nothing you can do to prevent this

Remember also, ignorance of the law is no excuse. As Lord Denning once said, “ignorance is a misfortune, not a privilege.”

http://www.southsideaccountants.co.uk/taxation-services.html

Where you sell listed company shares at a loss this would be treated as capital loss. This loss can be offset against capital gains araising  in the same tax year or in future tax years.

Capital gains/ losses are calculated by deducting the orginal cost of the asset, plus any enhancement expenditure, from the selling price. The cost of the shares includes any fees paid on the purchase of the asset (shares)  and the money received on sale is reduced by any fees incurred on the sale of the asset (shares).  Tax allowable fees include legal fees, stamp duty and stockbroker’s fees.

Any Capital losses must be offset against any gains arising in the same tax year and if there is a net gain, then the annual tax free exemption (currently £10,100) is applied. If there is a net loss, it  is carried forward to future years until relief can be given.

Using  losses in this way is a key tax planning point, so it is  recommend you take advice from us before selling any shares at a  loss.

Payments made on personal injury claims are not taxable, regardless of how this payment is received – lump sum or through periodic payments. Further, any interest paid as part of the damages is tax free but interest paid as result of late payment of the award is taxable.

HMRC Employment Manual paragrah 31835 says“The tests that apply to travel expense relate to the nature of the expense and not to the amount.” It goes on to say: “You should not refuse a deduction for first class rail travel, if that has been incurred, on the basis that the same journey could have been made more cheaply in standard class”. As long as the travel and hotel costs were incurred wholly and exclusive for your business the full cost is tax deductible.

If you decide to rent a room in your house or flat to earn some dosh, the taxman cannot touch the rent you receive up to £4,250 per year ie this is tax free income. He has called this “Rent a Room Scheme”. This scheme would apply if you rent a room in your furnished family home where you live. Your lodger can take up either a single room or an entire floor of your home. If you charge extra for meals and laundry, you would need to add this to the rent you receive. If the total amount of money you receive from your lodger exceeds £4,250 then you have two options:

• You pay tax on any income over £4,250 without deducting any expenses or

• Take the rent you receive and deduct your expenses to work out your profit. You then pay tax on this profit.

This scheme will not apply if you split your home into separate flats and you let out the separate flat(s). If you do this than you declare the rent you receive from this in the normal way.

Income Tax

For the tax year 2009-2010 you can earn up to £6, 475 per year before you start paying income tax. If you are over 65  you can earn a bit more before you start paying tax.

National Insurance

For the tax year 2009-2010, you can earn up to £110 a week before you pay any National Insurance contributions.