Saving tax as an Individual Property Investor

property investors

Individual Property Investors

As an individual property investor in the UK, it is vital that you know about all of your options regarding the management of your investments. By not being fully aware of all your options, you open yourself up to greater tax liabilities and risks. Individual property investors that aren’t fully clued up often pay the most through their wallet. Here is a simple article that can help you save tax as a property investor.

Individual property investors that are unaware of the all of their options run the risk of paying much more money in tax than they need to and wasting their hard-earned money. Not being fully aware of what you are doing and what you can be doing means that you open yourself up to unnecessary risks and liabilities. Here is some simple advice on how you can be saving money as an individual property investor.

Managing through a Limited Company

The most efficient way that individual property investors can save money on their tax bill is by managing their properties through their own limited liability company. Doing this can save money in a number of ways. By running your individual properties through a limited liability company, you can benefit from the extra limited liability protection that a company is able to offer. In addition to this, limited companies are taxed very differently to individuals. Individual property investors are liable to pay income tax on their profits; specifically they must pay 40% tax on their higher rate income as well as 45% on their additional tax rate. Limited companies are able to enjoy at much lower corporation tax rate of 20%. Therefore tax rates favour companies and business much more than individuals.

Therefore, managing your properties through a limited company not only offers extra legal protection, but it is also able to protect your profits from higher rates of tax.

Additional things to consider

Despite the benefits listed here there are also a number of important considerations about choosing to manage your property through a limited company. Once again it is important be aware of all your options and how they will ultimately impact you and your tax bill. For example, managing your properties through a limited company might lead to a smaller tax bill but it also makes it more difficult to extract profits from the company, since the money that is made will have to be held in that company. Because of this, managing your property investments through a property company may not be the best option for someone who regularly needs access to their profits often. In addition to this individual property investors are also able to enjoy a wider range of capital gains tax reliefs when compared to limited companies.

Operating through a limited company may be beneficial for those who find that they are involved in the development side of the property business. It can also be more tax efficient for those who are investing in property for the longer term as part of their retirement plan.

If you would like to learn more about taxes as a property investor, or if you would like to learn more about Accountant Croydon and how we can help you and your business, you can visit our homepage here for more information.

Tax relief for Charitable Donations

tax relief

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 you 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.

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. This can be done either through the self-assessment tax return or by asking HMRC directly to amend you tax code.

If you have any further questions about receiving tax relief through charitable donations, or if you would like to learn more about Accountant Croydon and how we can help you and your business, you can find more information on our homepage here.

Limited Liability Company

limited company

Starting a new business ca be an exciting yet daunting experience. There will be a lot of confusing terms you may not understand, and a lot of rules and regulations that you will have to adhere to. In this article we will look to clear up some confusion about starting your business as a limited company, and how it may differ slightly from other structures such as a Sole trader or limited Partnership.

Starting your own limited company is simple. The whole process begins with the registration of your proposed company with Companies House. When doing his, you should be sure to seek professional advice from a good company formation agent before proceeding any further.

Trading as a limited company in the UK has numerous benefits over trading as a sole trader.

The main benefit of trading as a Limited company is that the shareholders of the company have what is called limited liability. This means that in the case of the company facing any difficulty, either legally or financially, and it is unable to clear its debts, then the personal finances and assets of the shareholders are protected. If the business was to go bankrupt then each shareholder will only be required to pay a value that is equivalent to their nominal share value. If the company is wound up, then debts of the company can only be cleared by the assets that that company holds. This is different to a Sole trader where the trader’s personal assets may be at risk.

Another benefit of trading as a limited company is that the tax efficiency it offers can be better than that of a Sole trader. A limited Company is able to offer more opportunities and better flexibility when it comes to the taxation of personal income and profits. All limited companies in the UK qualify for 20% corporation tax on all of their profits. This differs to a Sole trader where they are charged more through income tax. This corporation tax applies to the profits of all limited companies regardless of the amount that they earn. The directors of the limited company can also save tax by taking their salary from the company in combination with dividends payments, by doing this they can ensure that they remain in a lower tax band.

As well as this, operating as a limited company is also another major benefit, and provides a certain professional statue to your business that you may not have if you operated a Sole trader. This can be a major benefit when it comes to looking for external investment, since investors are more likely to put their money into a registered, limited company rather than a Sole trader. Limited companies benefit from a more corporate and professional image that sole traders do not have that can make customers and suppliers feel more comfortable with doing business with you.

Registering as a limited company also provides guaranteed business continuity. This means that if a director were to die, then the business will be able to continue as usual and any shares that were previously held by the director may be acquired by others.

While there are a number of benefits to operating as a limited company, there are also some disadvantages. These include the higher costs of accounting and administration in order to ensure that you are fully compliant with all the necessary rules and regulations. There is also the issue of the withdrawal of funds from a company, which is not as simple as taking profits out of a sole trading business. All in all there are a lot different factors to take into consideration when deciding whether a limited company is right for you.

If you have any further questions about trading as a limited company, or if you would like to learn more about Accountant Croydon and how we can help you, you can visit our homepage here for more information.

What is Income Tax?

income tax

income taxAs the name suggests, income tax refers to the tax that you owe on money that your job or business has earned. While most people will pay income tax to some degree, there are many factors that affect the amount that you actually owe, and not all forms of income are subject to Income tax.

Income tax is owed on earnings such as:

  • Money you have earned from your employment.
  • Profits that you make if you are self-employed. This includes services that you sell through websites and apps.
  • Certain State benefits
  • Most pensions, including state, company and personal pensions and retirement annuities
  • Rental income (unless you are a live-in landlord and get less than the rent a room limit)
  • Benefits that you receive from your job.
  • Income from a trust

You don’t have to pay tax on things such as:

  • Interest from savings that are under your savings allowance
  • Income from tax-exempt accounts, such as Individual Savings Accounts (ISAs)
  • The first £5,000 of dividends from the ownership of company shares
  • Certain State benefits
  • Rent that you receive from a lodger who is staying in your house and that is below the rent a room limit

Income Tax allowances and reliefs

Most people residing in the UK are allowed a Personal allowance of tax-free income. This refers to the amount of income that you are allowed to receive before you are required to pay tax. The amount of tax that you pay can also be reduced if you qualify for certain Tax reliefs.

How can you pay your income tax?

Most people who pay Income Tax pay it through PAYE. PAYE (or Pay As You Earn) is the system that your employer or pension provider will use to deduct both Income Tax and National Insurance contributions from your salary or pension. Your employer will know how much to deduct based on your Tax Code.

However if you are self-employed or earn a high income, your financial affairs may be more complex and you may choose to pay your Income Tax and National Insurance through Self-Assessment, which you will need to fill in every year in your tax return.

State benefits

The most commonly claimed benefits that you are required to pay Income tax on include:

  • The State Pension
  • Jobseeker’s Allowance
  • Carer’s Allowance
  • Employment and Support Allowance (contribution based)
  • Incapacity Benefit (from the 29th week that you receive it)
  • Bereavement Allowance
  • Pensions paid by the Industrial Death Benefit Scheme
  • Widowed Parent’s Allowance
  • Widow’s Pension

The most commonly claimed benefits that you are not required to pay Income Tax on include:

  • Housing Benefit
  • Employment and Support Allowance (income related)
  • Income Support – though you may have to pay tax on Income Support if you are involved in a strike
  • Working Tax Credit
  • Child Tax Credit
  • Disability Living Allowance
  • Child benefit (Income based)
  • Guardian’s allowance
  • Attendance allowance
  • Pension Credit
  • Winter Fuel payments and Christmas Bonus
  • Free TV licence for over-75s
  • Lump-sum bereavement payments
  • Maternity Allowance
  • Industrial Injuries benefit
  • Severe Disablement Allowance
  • Universal Credit
  • War Widow’s Pension
  • Young Person’s Bridging Allowance

In order to work out if you should be paying Income Tax, you will need to add up all of your taxable income, including the taxable state benefits. Work out your tax-free allowances and then subtract your tax-free allowances away from your taxable income. If you find that there is money remaining, then you are required to pay Income Tax.

Income tax should not be confused with other forms of tax, such as Corporation tax, Dividend tax, inheritance tax, capital gains tax and stamp duty land tax.

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

What is Corporation Tax?

corporation tax

corporation taxYou’ve probably read all about corporation tax before, but do you actually know what it means, when it applies and who has to pay it? In this article we explore what corporation tax is and what it means.

What is it?

Simply put, Corporation tax is something that is charged on the profits of a business. It is not however to be confused with income tax, that mainly applies to Sole Traders and individuals. Corporation tax is expected to be paid by limited companies. If the company is a UK company or if they are a foreign company with a UK branch/office then they must pay corporation on their eligible profits.

Corporation tax is due on:

  • Trading Profits
  • Investment profits
  • Chargeable gains

How is it paid?

Corporation tax is paid in a process of 4 steps. In order to pay your corporation tax bill, you must:

  1. Register your company for corporation tax when you establish a business or restart a new one.
  2. Ensure that you keep updated accounts and prepare your tax return in order to work out how much you will need to pay.
  3. Pay any outstanding tax that you owe or report that you have none to pay.
  4. File your return for the previous 12 months at the end of your accounting period.

Corporation tax is not to be confused with other forms of tax such as dividend tax, capital gains tax, inheritance tax etc.

Get help

Knowing when and how to pay your corporation tax bill is extremely important to prevent any penalties or repercussions from HMRC. Working with a tax adviser and having someone from the outside look in at your situation can be immensely helpful in organising your company’s accounts and can make life so much easier for you in the long term.

You might also be looking at starting up your own limited company but have not considered how tax will affect your profits. In some cases it might be more beneficial to set up your business as a Sole Trader rather than a limited company, we explain the differences between the two here.

This is where we can help. We can sit down with you and identify what your goals are and help set targets for you and your business. If you would like to find out more about a Accountant Croydon and how we can help you, you can visit our homepage here.

 

What is the IR35?

ir35

The IR35, also known as ‘Intermediaries legislation’, is a set of rules that affect an individual’s tax and National insurance if they’re contracted to work for a client through an intermediary. An intermediary can be your own limited company, a service or personal service company or a partnership. If any of these describes the agency you work for then you will need to follow an IR35. If this is the case, then the intermediary will have to operate through PAYE and National Insurance contributions on any salary or wages paid to you during the tax year.

The IR35 came into effect in 2010 and is designed to prevent contractors from pretending to be permanent employees of a company and benefiting from the tax advantages of being a contractor without accepting the increased responsibility of company ownership. This ensures that they are held to the same standards as other employees and have the same level of responsibility, control and liability that is expected of directors.

This may also apply if you if you, your intermediary or client are abroad, work in the construction industry, are an office-holder, work with your partner/spouse, or are working through an intermediary for a charitable organisation.

However if you work for a client through a Managed Service Company (MSC) or an employment agency, then this does not apply.

It is the responsibility of the intermediary to follow the rules of IR35 legislation when it applies. If you are a part of a partnership or a director of your limited company then you must make sure that all relevant legislation is followed, and take responsibility for the decision of whether it applies to certain situations or not. Failure to comply with the rules of IR35 can lead to serious consequences, with interest and penalties on any extra tax or National Insurance that is owed. These consequences are even greater if it can be proved the IR35 rules were deliberately ignored.

When a working contract begins it is important to establish what the employment status is between the worker and the client for each contract or engagement. Usually, there is a contract between the intermediary and the client, whether it be a direct contract indirect through another party such as a recruitment agency. The employment status of each contract should be worked out based on the facts of the contract and is not influenced by any job title, label or description. This must be done for each individual contract.

What is inside and outside IR35?

If you are allowed the same benefits, responsibilities and control as a permanent employee, then you would most likely be classed as inside IR35 (or caught by IR35). The main things that determine whether you are inside or outside IR35 are control, financial risk.

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

Sole Trader vs Limited Company

sole trader

Difference between sole trader and Limited Liability Company

First start-up businesses face a daunting task in making the right choice between sole trader and limited company. No matter the size of your business it must take a legal structure. The structure you select depends on the level of financial and legal responsibility you are willing to take.

In the UK it estimated that 3.3 million businesses operate as sole traders, while 1.6 million operate as limited companies. If you are at a cross road about this idea, this guide will help you determine which of the two could be your best fit.

Liability

A sole trader you are the owner, business and the manager or the proprietor. This is to mean there no distinctions between the business and you, your personal assets are unprotected. Any business debt counts as your debt, and personal assets (house, car, etc.) can be used to clear the debt.

An LTD is a separate legal entity, you are its shareholder and can only serve as a director or as an officer. Your liability is limited and your personal asset are protected.

National insurance and tax

Within a limited company corporation tax of 20 % is payable on company’s taxable profits. Office holders and other employees are subject to NI and PAYE on earnings and other benefits. Income tax is also levied on dividends and other distributions for shareholders.

For a sole trader you are required to pay class 2 NI (£ 2.80 per week), and class 4 NI depending on the profits exceeding £ 8060. A 40% tax levy is charged on all taxable income exceeding £ 32001, and 45% on any value exceeding £150,000.

Losses

As a sole trader you can easily offset trading losses against your income. But in a limited liability company trading losses can only be against other business income, not individual’s income.

Extracting profits

In a sole trader cash can be withdrawn without causing any tax effect.

In a limited company you will be taxed on:

  • Any income withdrawn (distributions are taxed as dividends while earnings are subject to PAYE levy and NI)
  • Employment benefits received
  • Shares or securities (given at a lesser market value)

Filing accounts

At the end of every financial year a limited company must prepare and submit statutory accounts. The returns are filed with HMRC for corporation tax, a copy is also sent to companies’ house and shareholders. All accounting standards must be met when preparing accounts.

Within a sole trader you are not required to prepare your accounts for taxation. However for the sake of the well-being of your business it will be necessary to prepare accounts. This will help to work out profits and collect debts.

Borrowing

Since there is no distinction between you and the business in a sole trader you are free to borrow from business account. It’s basically your account.

In an LTD there is a restriction (as per companies’ act 2006) that limits the amount a director can borrow from the company.

Paying yourself

In a sole trader profit can be withdrawn without any limit. This does not count as remuneration since you are not an employee. Any salary paid to family member or spouse must be commercially justified for tax purposes.

In a limited company there are no limits to the salary you can get but the income is subject to NI and PAYE. Only commercially justified Salary can be paid to family member or spouse so as to aid taxation.

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

What is National Insurance?

national insurance

national insuranceIntroduced 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 more than your Personal Allowance of £11,000 per year, then you are required to pay Income Tax as well as make National Insurance Contributions.

If you are an employee, then you must pay NI if you earn more than £115 per week. If you are earning more up to £827, you must pay 12% on that amount. Any extra earning you may have over £827 at taxed at a 2% rate.

So for example, if you were earning £1,000 per week you would pay nothing on the first £115 that you earn, then 12% on the next £672, and then 2% on the remaining £173.

If your earnings are above your personal allowance for the year then your Income tax and National Insurance contributions will be taken out of your salary before it is paid to you. This is done through a system known as PAYE (Pay As You Earn) where you are assigned a tax code from HM Revenue and Customs (HMRC) that corresponds to the amount you are required to pay. You must remember however that it is your responsibility to make sure that you have the correct tax code, not your employers or HMRC. If you find that you have been paying too much Income tax then you can contact HMRC and receive a refund. If you have paid too little, you must inform HMRC and pay what is owed. The system is the same for National Insurance contributions, however if you find that you have been paying too much, you will be unable to claim any of it back (Unless the mistake has been made by HMRC).

The amount of Income Tax and NI contributions you make is based on your tax code. Every year, HMRC will send out a notice to inform you what your tax code is and how much tax you have paid. This code can be found on your payslip and is usually made up of a few numbers and a letter.

If you have any further questions, or if you would like to learn more about how Accountant Croydon can help you and your business, visit our homepage for more information.

Enterprise Investment Scheme (EIS)

eis

eisThe Enterprise Investment Scheme (or EIS for short) is a series of UK tax reliefs that are intended to encourage investors to support small unquoted companies that carry out a qualifying trade within the UK.

Investing into smaller companies that are not listed on the stock exchange is usually a much riskier investment, and therefore investors are much more reluctant to do so. The EIS was brought into effect to offer some tax reliefs in order to offset that risk to investors. These ta reliefs can be in the form of income tax, or capital gains tax reliefs to those that purchase shares in smaller companies.

These tax benefits 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 is designed to help small, but high-risk companies raise the finance that they need for expansion and growth by making them more appealing investment options to investors.

In order to qualify for EIS, the shares in the company concerned must be ordinary, full-risk shares and may not be redeemable or offer any preferential rights to the company’s assets in the even of a winding up. They may also have preferential rights to dividends, but they may not include rights where either:

  • The rights 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 dividends is ‘cumulative’. In this case the dividend is payable but not actually paid and the company is allowed to pay it at a later time when the funds become available.

The shares that are sold can also not be issued in any sort of ‘reciprocal’ arrangement. This refers to cases where the owners of one company can agree to invest in the owners of another company for the sole purpose of receiving tax benefits. Shares purchased for the EIS also cannot be bought using a loan which would not have been given if the money was to be used to purchased anything other than the shares in question.

At no time can there be any plans to structure the company’s activities for the sole purpose of allowing another party to benefit from EIS tax relief. This also includes activities that have no commercial purpose other than to generate tax relief.

If you have any more questions about EIS or if you think that it may apply to you, or if you would like to learn more about Accountant Croydon and how we can help, visit our homepage today to find out more.

 

What is a Sole Trader?

sole trader

What doe Sole Trader mean?sole trader

Setting up a new business can be daunting, but it doesn’t have to be. When taking up a new trade it is important to know the different implications of each business structure, as they each carry their own particular tax implications and legal risks. Here we will outline the important implications of trading as a Sole Trader and how is differs from a limited liability company.

If you alone control and run the business, with no one else; then you are considered as a Sole Trader. This is regardless of whether you employ other workers, if just you own the business then you are described as self-employed and a Sole Trader.

As the sole owner of the business, you will have full control over its ownership and business dealings. You will also be considered as the owner of all of the assets of the business as well as any profit that it made. However it is important to know that you will also be considered responsible for all of the debts and legal responsibilities taken on by the business.

Benefits of being a Sole Trader

  • Any profit that you earn after tax is yours to keep
  • You have full control over your business and don’t have to answer to any boss above you or any investors as you are the sole owner
  • Since you are a smaller business you will be able to offer your clients a more personalised and tailored experience. Which may be preferred by a lot of customers
  • You are free to trade when you please and take holidays when you want
  • After you have registered with HMRC, you will be able to begin trading almost straight away

Disadvantages of being a Sole Trader

  • Trading as a Sole Trader means that you are liable for the actions of your business rather than a separate entity. This means that if the business was to find itself in debt, then you are liable for that debt. This means that if the business was to face significant financial debt, then the you may find that your home and personal savings are risk
  • It is often a challenge for Sole Traders to raise extra finance they need to expand their business
  • Since all the decisions are made by you the Sole Trader, then it may be difficult to find help in important decision making from others

If you would like to learn more about being a Sole Trader or about Accountant Croydon and how we can help you, then you can visit our homepage.