Tips to avoid paying too much tax if you’re self employed
According to Which.co.uk, we paid an estimate of £12.6 billion in unnecessary tax in 2012. People who are self-employed or have their own businesses are particularly prone to overpaying tax. But by doing a bit of research and accessing your tax options, you can maximise your income and safeguard your finances for the future. Spreading income tax payments among the family Every individual that is able to work has a personal allowance of £9,440 for the financial year 2013/14. If you are earning over the 20% rate band for income tax, it may be wise to employ a family member to share a part of your workload. Income up to £9,440 would be free of income tax for him or her, and an allowable expense for you. This is especially ideal for any children you have over 16 that can work over the holidays as their wages are also tax deductible. Furthermore, no national insurance is payable if they earn less than £149 per week. Additionally, members earning between £109-148 are entitled to certain state benefits such as building towards the state pension. Using the personal allowance to its maximum Rather than one individual holding the bulk of the income and facing a higher rate of income tax, it is of best interest to arrange the finances in a way that lessens the tax burden. This can be achieved by building up a state pension for your partner and/or make pension payments to build up a retirement pot. These contributions are tax relievable at the marginal rate of the payer. On a further note, £3,600 can be contributed per year irrespective of earnings so consider pensioning for any of your children helping out at the business. Taking advantage of tax free opportunities Use up you and your partner’s cash ISA limit of £5,760. Gift any surplus funds to your partner if he/she is a lower tax payer than you. Be careful of the liquidity position of the business, it may be troubling to recall back the funds. The £100,000 ceiling Try not to exceed earnings of £100,000. For every £2 of income over £100,000, your personal allowance falls by £1. This means that at an income of £118,880 you will have lost all your personal allowance of £9,440. The £9,440 is then taxed at a rate of 20%, and the £18,800 over £100,000 is taxed at a rate of 40%, meaning that your marginal rate of tax on this slice of income is a whopping 60%. You can consider increasing your pension contribution to preserve your personal allowance. Note that the maximum annual allowance is £50,000 but you can use any unused annual allowances dating back three tax years to increase your contribution. Maximising your tax allowances Each person has an annual capital gains tax allowance that can be reached before the gain is taxed. This figure amounts to £10,900 for the financial tax year 2013/2014. With sound financial planning, you can get up to £20,340 tax free each year (£9,440 for personal allowance and £10,900 for Capital Gains Tax). Be well organised and keep good records The deadline for the online tax return is 31st January (31st October for the paper tax return). Failure to commit to the deadline may result in penalties. Keeping your records in an organised manner can make your life a lot easier especially if HMRC decides to investigate. Plan ahead Good forward financial planning can maximise successful tax strategies. That’s why at Tax Affinity Accountants we make sure to sit with all our clients and run through the options for good financial planning. By Wilson Law Tax Affinity Accountants are considered in the market to be experts in Tax and Accountancy in the UK. Based in Kingston upon Thames they have clients right across the UK as well as Europe, Middle East and North America. For more information visit www.taxaffinity.com. To read more interesting articles like this visit www.taxaffinity.com/blog. Please feel free to comment and share this with your friends. Every year many people across the UK get a tax credits renewal pack. If you do get one you need to check your renewal forms and make sure you pass on the correct information to the Tax Credits Dept.
This article can help you find out some of the information you need to check, how to work out your personal income(s), and how to avoid common mistakes. Check the information presented Renewal packs usually include the an Annual Review notice (TC603R) plus an Annual Declaration form (TC603D or TC603D2). And everyone needs to renew by 31 July or whatever date is shown on letters from HMRC. A tax year runs from 6 April one year to 5 April the next. The important information that you need to check on your Annual Review notice is:
If there is anything incorrect you must tell HMRC straight away. Especially if anything is wrong on your notice or if anything has changed and they have the wrong information. If previously you have claimed tax credits as a single person - or as a couple your notice should say this, a couple is known as a 'joint' claim. You should be making a 'joint' claim if you are:
Your form should also show the country you live in most of the time. It doesn't matter if you sometimes go to other countries for holidays for up to 8 weeks (and in some cases up to 12 weeks) as this is usually still allowed. And you may also be able to get tax credits if you live outside of the UK for a valid reason. But you will need to confirm these extra conditions with HMRC before applying for them. Your work or benefits should also be reported, showing the country you work in most of the time with the number of hours a week you usually work. It can also show you if you got any benefits, for example Income Support or Employment and Support Allowance. If you have any disabilities your notice will explain if you were paid the disability part of Working Tax Credit. This also applies to severe disabilities and their allowances receivable. If you have a child or children then your notice should show the correct information about them. You can usually get Child Tax Credit for a child up to 20 years old, with the conditon that they are in full-time education or an approved training course. And if you work are working at least 16 hrs per normal week and have to pay for a registered or approved child minder or carer, you may be able to get an extra Working Tax Credit payments to help with these costs too. How to work out your total income for your Annual Declaration It is worth noting that some social security benefits are taxable, such as contribution-based JSA (Job Seeker's Allowance), and as such they will count as income when you make a tax credits claim. Other types such as Disability Living Allowance, don't count as income. So be careful to be sure if your benefit is taxable. If your not sure ask rather than guessing and getting the claim incorrect. If you're in employment, you should have a P60 from your employer at the end of the tax year (5th April), which will show your earnings and tax paid for the whole tax period (6th April to 5th April). You need to include income from all types of jobs you have had in the tax year so it may need several P60's for filling it in. If you cannot find your P60, then don't worry as most payslips usually show a running total of all earnings and tax paid for the year. If you still cannot get the full information you can provide an estimate but make sure to give the actual income figure no later than 31 January or again it can mean having to pay tax credits back at a later date if you've claimed to much. You must also remember to add in:
If you're self-employed your income will be the net profit you made in the tax year. If you haven't had a profit or loss drawn up prior to sending in your tax return, then you will need to give an estimate of your profit and again you must provide an actual by the 31st January or you may have received too much or less in Tax Credits. If you made a Net Loss on self employment, just give a figure of zero. But please do note if you had any other income during the year, you can take the loss off this income. Be careful to get the best advice and support Bear in mind that other income like pensions, shares, income from property (sale or rental), income that you receive from abroad and savings need to be also declared. If in doubt the best thing to do is ask a professional as the self employment and other incomes can become a bit tricky and you could end up claiming less or more than your due. Tax Affinity Accountants are experts is tax and accountancy. Based in Kingston upon Thames they cover the whole of the UK and help make sure clients get the correct amount of tax credits for their situations. Visit www.taxaffinity.com for more information or if you feel you need help in filling in the forms. Follow Tax Affinity on twitter at @tax_affinity to find other useful tips and advice. |
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