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Saving tax as a Property Investor

If you are an individual property investor in the UK, it is essential that you are aware of all of your options surrounding how you manage your investments so that you can ensure that you are paying as little tax as possible. An Individual property investor that is unaware of the rules is likely to be paying significantly more tax than may be necessary. Here is a short article on How to save tax as a Property Investor.

Limited Company management

One method that a UK property investor can do is manage their properties through their own limited company. They do this not only because they can benefit from the limited liability protection, but also because they can save a significant amount of tax through the comparatively favourable Corporation tax regime.

Due to the number of extra personal tax increases that have been levied by the government and the fall of corporation tax rates, managing your property investments through a limited company might be the best option for reducing your tax bill.

Examples of the increased restrictions on individual taxes include:

  • Restrictions on the interest relief for residential landlords
  • Consistently reducing the basic rate tax band between 2010 and 2016, pushing a large proportion of people into higher rate Income Tax band
  • Introducing the High Income Child Benefit charge that claims back Child Benefit that is claimed by households where any individual has an income over £50,000
  • Withdrawing personal allowances from individuals with an income over £100,000
  • Introducing the ‘additional rate’ on income over £150,000
  • Increasing almost all National Insurance rates
  • Increasing the Capital Gains Tax rate to 28% for higher rate taxpayers (while this was later reduced to 20%, this does not include residential property)

These increases mean that base corporation tax rates are significantly lower than the 40% higher income tax and 45% additional tax rate bands that most property investors fall into. Not only can managing your property investments in a limited company offer better tax rates, but it can also offer better relief on both interest rates and losses.

Additional things to consider

While investing through your own limited company may be able to save you tax on your income, there are other factors that are important to take into account before you start. Managing your property investments through a limited company can be difficult if you will need easy access to your profits. This is because while Corporation tax rates may be lower than income tax rates, when it comes to extracting profits from the company, you may find some difficulty. An individual property investor is also able to enjoy a wider range of capital gains tax reliefs over a limited company’s.

Other than this, operating through a limited company can be more tax efficient for those who are looking to be more involved in the development side of property investment. It can also be more convenient for a property investor that is looking to the longer term and buying for their pension plan.

If you would like to learn more about the tax implication for a property investor, or if you would like to learn more about Accountant Chelsea and how we can help you and your business, you can visit our home page here for more information.

What is National Insurance?

Introduced in 1911, National Insurance (NI) is a system of contributions that is paid by employers and workers towards the cost of certain state benefits. These contributions are taken out of every workers salary and is used to fund the NHS. Unemployment benefit, Sickness and Disability allowances and the state pension.

If you are earning a salary that is above your yearly personal allowance of £11,000, then you will be required to pay both National Insurance contributions and Income tax.

If you are an employee of a company or business, and you earn more than £115 per week, then you must pay National Insurance on earnings above that amount. Past that you will then be required to pay 12% on any amount you earn up to £827. Any amount that you earn greater than £827 will be taxed at a rate of 2%. For example, if you were earning £1,000 per week, then you would be charged no National Insurance on the first £115. You would then be charged 12% on the next £827 and finally 2% on the remaining £173.

If your salary for the year is greater than your personal tax free allowance then your income tax and National Insurance contributions will be taken out of your salary before it is paid to you. These payments are made through the Pay as you Earn system (PAYE) where you are given a special tax code from HMRC that will correspond to the correct amount that you are required to pay. It is important to remember that it is completely your responsibility to make sure that you have the correct tax code and are paying the right amount of tax; not HMRCs or your employers. If you find that you have been paying too much tax then you can contact HMRC and receive a refund. If you find that you have been paying too little then you must contact them and pay the difference. Failure to do so can have serious consequences if left uncorrected.

The amount of income tax and National Insurance contributions that you make is based on which tax code you have. Every year HMRC will send out a notice that will inform you of what you code is and how much you will have to pay. This code can be found on your payslip and is usually made up of a few numbers and letters.

If you still have further questions about National Insurance, or if you would like to learn more about Accountant Chelsea, you can visit our homepage here for more information.

What is PAYE?

PAYE, or Pay As You Earn, refers to the money that is taken from your wages to pay tax. The PAYE system is used to pay both your income tax and National Insurance. When you are paid, your employer will deduct your income tax and your National Insurance from your payslip and pay it to HMRC, which you will be able to view each month. In some cases there may be other payments in addition to these made from your payslip, these can include things like student loan repayments or pension contributions.

Every tax year you will be sent a notice of coding by HMRC and your employer will be sent a copy of you PAYE code. This code is used to determine the amount of income tax you pay on your earnings. It is important to remember that although your employer is sent your PAYE code, they are not told how that code is calculated. This means that your employer won’t know whether or not you are in the correct bracket and it is your responsibility to make sure you have the right code. Failure to do so may result in you paying more tax than you need to. If there are any errors and the wrong amount of tax is collected it is still up to the employee to pay any unpaid tax. This can be avoided by using the correct PAYE tax code therefore it is important to check and see if what you are paying is correct. If you think that something is wrong, you should contact HMRC who will issue your employer with a revised tax code.

Altogether PAYE is a three party process that involves HMRC, your employer (or pension provider) and you. HMRC will calculate and send your tax code to you. Your employer will then use your tax code to work out how much tax to take off of your weekly or monthly salary. This tax and National Insurance contribution is regularly paid by them to HMRC.

If you are confused or worried about whether or not you have been given the correct PAYE code, you can simply ask your employer what code they have been using or look at your most recent payslip to find out.

If you have any further questions about PAYE, or if you would like to learn more about Accountant Chelsea and how we can help you, you can visit our homepage here for more information.

What is Capital Gains Tax?

A Capital gain or loss is the profit or loss that you make when you sell an asset for a price other than what you paid for it, Capital gains tax is the tax that is levied on the profit you make when you sell the asset for a value greater than what you paid for it.

Capital gains tax (CGT) is not counted as a separate tax but is rather seen as a part of income tax. It is important to remember that this tax is placed solely on the profits that are made from the sale (i.e. the difference between the price it was bought for and sold for) and not the entire value of the sale. This means that if the asset was sold for a loss then no capital gains tax will be due. CGT only applies to asset that have been acquired after 20th September 1985, since that is when the tax came into existence.

There are a number of ways an assets can be disposed of. These include:

  • Selling the asset
  • Giving the asset away as a gift
  • Swapping the asset for something else
  • Receiving compensation for the asset. e.g. insurance payout for damage

Paying your Capital Gains Tax

Capital gains tax is paid whenever you dispose of or sell a chargeable asset. This includes assets that are:

  • Personal possessions (except for your car) that are valued at over £6,000
  • Any property that isn’t regarded as your main home
  • You main home if it is very large, used for business or has been let out
  • Shares that are not in an ISA or PEP
  • Business assets

If you are selling an asset that you are the joint owner of, then you will only owe CGT on your share of the capital gain. CGT can be reduced by claiming tax relief if it applies to the type of asset you are disposing of.

Capital gains tax is not owed on the profits made on assets in ISAs or PEPs, UK government bonds and gilts, pools, betting and lottery winnings.

When you don’t pay Capital Gains Tax

You will not  have to pay any capital gains tax on any profits that are within your total annual tax-free allowance. This amount is £11,100 for each person and £5,550 for trusts. Any gift given to a civil partner, husband, wife or charity doesn’t attract any capital gains tax.

CGT is not to be confused with other forms of tax such as Income tax, Dividend tax, Inheritance tax, Stamp duty Land Tax or Corporation tax.

If you have any further questions about Accountant Chelsea and how we can help you and your business, you can visit out homepage here for more information.

What is Income Tax?

As you may have guessed, income tax refers to the amount of tax that is placed on the income that you earn from your job or trade. Earnings that are subject to income tax include:

  • Self-employed earnings
  • Employment earnings including ‘benefits in kind’
  • Most pension income (personal, occupational and state pensions)
  • Certain social security benefits
  • Interest earned on income from a trust
  • Rental income

It is important to note that not all of these forms of income are taxable. In the UK, every citizen is entitled to up to £11,000 of tax free income. This means that if you are a UK citizen then any amount of income that you earn up to £11,000 between the 6 April to 5 April of the next year is free from any tax. Income tax is owed regardless of age and the amount of tax that is paid is dependant on the amount that is earned.

Income Tax rates

The amount of income tax that is paid each year depends on a number of factors. For example the amount earned must be above the personal tax allowance amount. The amount of tax them depends on which tax ‘band’ the amount earned falls into. The rates of tax are as follows:

  1. Personal Allowance – Up to £11,000 – 0% tax
  2. Basic Rate – Between £11,001 to £43,000 – 20% tax
  3. Higher Rate – £43,001 – £150,000 – 40% tax
  4. Additional Rate – Above £150,001 – 45% tax

The way the tax bands work is by charging tax at that rate of interest only on the amount that falls within that bracket. For example, if someone was to earn £50,000 a year, £11,000 of that will be covered by their personal allowance and will therefore be tax free. The remaining £39,000 are taxed differently. 20% tax (basic rate) will be charged on the next £32,000, since that fall within that band. The remaining £7,000 will fall into the higher bracket and subsequently be charged at 40% tax.

It is important to note however that income tax differs from other forms of tax such as Dividend tax, Corporation tax, Inheritance tax, Capital Gains Tax etc. These all apply to different situations and affect Sole Traders, limited Companies, Contractors and Partnerships differently.

If you have any further questions about Income tax or if you would like to learn more about Accountant Chelsea and how we can help you, you can visit our homepage here for more information.

What is the IR35?

What is an IR35 form?

If you are a contractor, or self-employed consultant in the UK, then you may already be familiar with the IR35. The IR35 is very important and has made a massive impact to contract workers and business in the UK. In fact, it has since become extremely unpopular and caused a real issue for many contractors, but what exactly is the IR35?

IR35

Named after the Inland Revenue (IR) leaflet and the press release number that announced it (35), the IR 35 came into full effect in April 2000 and was designed at preventing contractors from operating a limited company to reduce their tax and NI contributions. It’s main aim was to prevent these individuals from benefiting from contractor tax benefits while also evading the responsibilities of limited company ownership.

Before the IR35, a one-person company could offer services to clients as a limited company that was operated by a single person. By doing this, they could then pay themselves their salary through dividend payments, thereby reducing their NI and tax payments. This was being exploited as a loophole that HMRC could legally do nothing to stop. Because of this, the government then reacted by introducing the IR35 legislation to combat it.

The IR35 works by creating a hypothetical contract between the end client and the contractor. This agreement means that the contractor is then treated as though they are directly employed by the end client without any intermediaries (e.g. an Umbrella Company). This relationship between the contractor and the client can be categorised in two ways:

  • A genuine contract for services by an intermediary
  • A hypothetical contract of service between the end client and the contractor

If the agreement between the contractor and the end client is believed to be ‘disguised employment’, then the company of the contractor would be required to pay all of the unpaid NI contributions as well as the tax that has bee avoided (instead of the end client or agency).

When does the IR35 apply?

The IR35 only applies if the company doesn’t qualify as a managed service company (MSC). A Managed Service Company is a company that employs a composite company to handle their accounting and administration. If the MSC rules are not applicable, then the IR35 will come into effect and form the agreement between the end client and the service company.

The following factors determine whether the IR35 rule is applicable in your case or not.

  • Financial risk
  • Control
  • Provision of equipment
  • Substitution right of dismissal
  • Employee benefits

Conclusion

Most of the factors listed above will be explained in your contract. To be on the safe side always ensure that your contract reflects what you practice at work.

If you would like to learn more about Accountant Chelsea and how we can help you and your business, you can visit our homepage for more information.

Tax Relief for Charitable Donations

Tax relief for charitable donations

Any donations made by an individual to a charity or to a community amateur sports club (CASCs) are given a tax relief and are not taxed. Through this method, the tax that would be paid goes to you or the charity. This however differs based on whether you made the donation through Gift Aid, straight from your wages or pension via the Payroll Giving Scheme, through the transfer of land, property or shares or through your will.

These rules apply to Sole Traders and Partnerships, the rules are different if you are making a charitable donation through a Limited Company.

It is very important that you keep records of all charitable donations that you have made so that they can be taken off of your total taxable income. Keeping detailed records of these donations will help prevent any issues or confusions that may be brought up by HM Revenue and Customs (HMRC) when claiming Tax Relief.

Giving through Gift Aid

If you make your charitable donations through Gift Aid then the charities and CASCs that receive the money can claim an extra 25p for every £1 that you give. This is all at no extra cost to you.

While charities can claim Gift Aid on most donations, some payments don’t qualify for tax relief. This includes donations:

  • From Limited Companies
  • Made through Payroll Giving
  • That are a payment for goods or services
  • That started as loans but no longer need to be repaid
  • Made up of shares
  • Where the donor receives a ‘benefit’ over a certain limit
  • Made from charity cards or vouchers
  • Of membership fees to CASCs
  • Received before the charity or CASC was registered

If the money you are giving meets the conditions for tax relief, you will have to make a Gift Aid declaration for the charity to claim. This can be done through a form that you can receive from the charity. You must provide a declaration to each charity that you make a donation to through Gift Aid.

Donations that you make must be less than 4 times what you have paid in tax (Income and Capital gains tax) in that tax year in order to qualify for tax relief.

In addition to this, if you pay tax at a higher or additional rate, then you are also able to claim the difference between the rate that you pay and the basic rate on you donation as tax relief. This can be done either through the self-assessment tax return or by asking HMRC directly to amend you tax code.

If you would like to learn more about tax relief, or if you would like to know how Accountant Chelsea can help you and your business, you can visit our homepage here for more information.

What is a Contractor?

What are Contractors?

In the UK, there are three different ways that someone can be employed in the UK. These include:

  • Being an employee of a company on a permanent, or a fixed-term contract. These employees are the most common types and are entitled to both salary and benefits. Their salaries are also subject to National Insurance contributions as well as PAYE tax. People who are employees are entitled to certain employment rights, and are required to carry out the work that they are required to do.
  • Being a worker that works only on a temporary basis (a temp). Workers usually work through an agency or on a short term contract. The salaries of workers are also subject to PAYE tax and National Insurance deductions. Workers also have fewer employment rights compared to employees.
  • Or by being a self-employed worker. Being self-employed can include being a limited company, a freelancer, a sole trader or a contractor. Self-employed workers have very few employment rights compared to the other two categories.

Working as a contractor can still fall into any of these three categories depending on the services that they provide their clients. If a contractor is working through an Umbrella company for a client, then that company is classed as their employer rather than the client. If they are the owner of a limited company of their own or if they operate by themselves, then they are classed as a Sole Trader.

Contractor or Temp?

Even though there are some similarities between the two, a contractor differs to a temp. When working as a Temp, you are paid your salary by an Agency and the work that you are required to do is under the control of the client (just like with any other employee). As a temp you are also eligible for holiday and sick pay and in general mos of the same other rights as permanent employees. Most temps usually work as short term employees. A contractor on the other hand is responsible for finding and dealing with their own work. A contractor can either work through an Umbrella Company, who will pay their wages and and taxes on their behalf, as a Sole Trader or as their own Limited Company. A contractor is generally a higher-paid professional compared to a temp. A contractor can also work for several clients at a time, hire their others to work for them and can also work for longer contracts.

Contractors are also able to enjoy more freedom with the work that they do, compared to the regular employees of a company. Contractors are able to decide for themselves what they work they do themselves and the exact amount that they take on. However an employee is contractually required to complete the work that is provided by their employer. The agreement between a client and a contractor is that usually the contractor agrees to provide work to that client that follows an agreed schedule. Once that work has been completed, then the client is under no obligation to offer any more work to the contractor, nor is the contractor obliged to accept any work that is offered.

While employees are paid a salary based on the number of hours of work that they have completed, contractors are paid on the completion of specific tasks that the client has set them, as stated in their contract. Contractors are also given better tax benefits compared to employees, however they are also entitled to fewer employment right compared to employees. If you decide to do contract work, it is extremely important that you understand and complete an IR35 otherwise if you have been found by HMRC to be in breach of it, you can face serious penalties.

If you would like to learn more about Accountant Chelsea and how we can help you and your business, visit our homepage for more information.

A guide to Inheritance Tax

inheritance taxWhat is Inheritance Tax?

Inheritance tax is the tax that is charges on the property, money or possessions (collectively known as the estate) of someone who has passed away. The amount of inheritance tax that is owed is often a concern for a lot people because of how it will affect their family after they have passed away. There are a number of things to be aware of both in terms of what you will owe and what you can do to reduce that amount.

How much Inheritance tax do you pay?

If the total of your estate is below £325,000, or if you leave the entirety of the estate to your partner, then inheritance tax does not need to be paid. This also applies if you plan on leaving your estate to your a charity or a community amateur sports club (as long as they are approved).

The curernt rate of inheritance tax is set at around 40% of the total of the estate. However this amount can be reduced to 36% as long as 10% or more of the estates total value is left to a charity. There are also some tax exemptions available such as the business relief scheme that allow you to pass on certain assets free of inheritance tax.

Who pays it?

An executor will be appointed if you have written a will before you pass away. This person will arrange for fees to be paid to HMRC on behalf of the estate. This is important because in some cases additional fees may be incurred, such as when you inherit rental properties.

Outside the UK

If you have lived outside of the UK for a long period of time then you don’t have to pay any inheritance tax on any assets that you own in the UK. This also applies to excluded assets that are based overseas.

Want to know more?

It is important to know that Inheritance tax differs from Dividend tax, Income Tax, Capital Gains Tax, Corporation tax and stamp duty land tax.

If you would like to learn more about Accountant Chelsea and how we can help you and your business, you can visit our homepage here to find out more.

Enterprise Investment Scheme (EIS)

eisThe Enterprise Investment Scheme, or EIS for short, is a series of tax reliefs in the UK that exist in succession to the business expansion scheme. The aim of the EIS scheme is to encourage investors to support small unquoted companies that qualify for trade in the UK.

For investors, investing in smaller, unlisted companies is quite risky, and as a result investors usually steer clear of them. The EIS scheme aims to encourage investors to invest by offering some form of income tax or capital gains tax reliefs in order to offset some of the risk of the purchase of shares in those companies.

These tax benefits can include:

  • 30% upfront income tax relief of up to a maximum investment of £1 million, which can also be carried back to the previous year.
  • 100% inheritance tax relief (as long the investments have been held for at least 2 years at the time of death)
  • Capital gains tax deferral for the life of the investment
  • Tax-free growth
  • Tax relief from investment losses

The EIS scheme is aimed at helping small but high-risk companies raise enough capital to fund their growth by making them appear as more attractive investments.

In order to qualify, the shares in the company must be ordinary, full-risk shares and cannot be redeemable or carry any preferential rights to the company’s assets. They may have preferential rights to dividends, but they cannot include rights where:

  • The rights attaching to the share include the scope for the amount of the dividend to be varied based on a decision taken by the company, the shareholder or any other person
  • The right to receive a dividend is ‘cumulative’. This refers to a dividend being payable but not actually paid and the company is obliged to pay at a later time when funds become available.

The shares cannot be issued under any reciprocal arrangement where the owners of the company agree to invest in each other’s company in order to receive tax reliefs

The shares can also not have been purchased using a loan where the terms of the agreement would not have been made had the money been used to purchase anything else. There also cannot at any time be any arrangements to structure the company activities to benefit from any tax relief that is offered by EIS, where those activities have no commercial purpose other than to generate EIS tax relief.

The investment can either be made directly into the company or through an EIS dedicated fund.

Available EIS tax reliefs

Income tax reliefs are only available to individuals who have subscribed for shares in an EIS. These individuals are allowed up to 30% of the cost of those shares that can be offset against the individual’s income tax liability for the same tax year that that investment was made. The EIS relief can be claimed for up to a maximum of £1 million investment in these shares, which will give a maximum tax reduction of £300,000 for one year.

All or part of the cost of the purchase of these shares can also be carried back to the previous tax year. The relief is then given against the income tax liability of the preceding tax  year rather than the year that those shares were purchased.

The EIS income tax reliefs can only be claimed for individuals that are not connected to the company.

If you have received a tax relief on the cost of shares that you have purchased and then sold those shares after they have been held for a certain period of time, then any profit that has been made from the sale of those shares would be free from capital gains tax.

If you would like to learn more about EIS or if you think you may be eligible for EIS relief, then visit the Accountant Chelsea homepage to find out how we can help you.