Having an understanding of tax law is essential to work within those laws to bring the most out of it for our clients. For self-assessment of income tax, the requirement is to file an online or paper tax return to HMRC detailing all of the income and capital gains and account for tax allowances and reliefs if any. HMRC then uses these figures to calculate the tax bill or it could be worked out with a little effort.
The income tax year starts from 6 April to 5 April is referred in the UK. If a tax return (or notice to file if you file online) is received by the previous 31 October, the tax liability and any balance owed must be paid to HMRC by the next 31 January. The acceptable payment methods for income tax to HMRC include direct debits, credit or debit cards payment, BACS, and internet banking.
Following are the different rates of income applied in the computation of income tax and also after considering all of the sources of income and applying for all the claimed reliefs:
||12,571 – 37,700
||1 2,501- 50,000
- Upto income of 100,000 after which it reduces @£1 for every £2 earn
If a Gift Aid donation is made or has a personal pension contribution, the basic rate income band increases by Gross Gift Aid donations and personal pension contributions.
Allowable Business Expenses
Self-employed businessmen can deduct allowable business allowable expenses and costs from their revenue to work out the taxable profit. Allowable expenses do not include personal amounts withdrawn from the business to pay for private expenses.
In a limited company conduit, the rules are a bit different, and any business expenses or costs can be deducted from the profits before working out the taxable profits. Any item of personal use is to be reported as a company benefit. Costs that can be claimed as allowable expenses include:
- Staff costs for employees and salaries, bonuses, pensions, benefits, agency fees, subcontractors, employer’s National Insurance can be claimed
- Rents, utility bills for heating, lighting, business & water rates, security, property insurance and an exclusive portion of the use of the home as an office.
- Insurance costs related to the office such as public liability insurance, professional indemnity insurance premiums
- office costs of the business premises, equipment with a use of fewer than 2 years,
- stationery costs of the business including phone, mobile, fax and internet bills, postage, stationery, printing,
- Vehicle insurance, repairs and servicing, fuel, parking, hire charges, vehicle licence fees, breakdown cover, train, bus, air and taxi fares, hotel rooms, meals on overnight business trips can be claimed
- Vehicle expenses can be claimed using a mileage allowance instead of the actual costs of buying and running the personal vehicle
- printer ink and cartridges, computer software which the business uses for less than 2 years, regular payments to renew computer software licence even if used for more than 2 years, other software for the business can be claimed under capital allowances unless cash basis of accounting is used.
- repairs and maintenance expenses of business premises and equipment, alterations to install or replace equipment, capital allowances for integral parts of a building, e.g. water heating systems can be claimed,
- Subscriptions to trade or professional journals, trade body or professional organisation membership if related to the business, sponsorship payments
- Legal and professional costs covering hiring of accountants, solicitors, surveyors, and architects for business reasons are claimable expenses
- Financial costs for Bank, overdraft, credit card charges, interest on bank and business loans, hire purchase interest, leasing payments, alternative finance payments, for example, Islamic finance can be claimed as an expense, however under cash basis businesses can claim expenses up to £500 only.
- Clothing expenses, for example, uniforms, protective gear and costumes for actors
- goods bought to sell on, goods for resale (stock), raw materials, direct costs from producing goods
- business expenses for newspaper ads, directories, bulk mail advertising (mailshots), free samples and website costs
- Bad debts i:e amounts of money included in the revenues but not recoverable. These can also be written off if a business is sure that they are irrecoverable.
- Training costs that help improve the skills and knowledge of staff in the business for example refresher courses
- Businesses can claim capital allowances for equipment, machinery, and business vehicles such as cars, vans and lorries and computers or printers used in business used for business under the traditional accounting mechanism.
- If the business uses a cash basis most capital equipment can be treated as an expense, but this does not include land, buildings, cars and motorcycles. Capital allowances can usually be claimed on cars and motorcycles.
Following expenses cannot be claimed
- Staff expenses such as cost of carers or domestic help, e.g nannies
- Training courses for starting a new business, expand into new areas of business, including anything related to the current business
- Non-business driving or travel costs, fines, travel between home and work.
- Entertaining clients, suppliers and customers, event hospitality.
- Fines for breaking the law
- Payments to political parties, gym membership fees, donations to charity
- Expenses for buying building premises, legal costs of buying property and machinery if traditional accounting is used, cannot be claimed as expenses instead these costs can be claimed as a capital allowance.
- Bad debts cannot be claimed under the cash basis of accounting because the money has not yet been from the business debtors.
- Debts not included in turnover, debts related to the disposal of fixed assets, for example land, buildings, machinery, provisions for bad debts Repayments of loans, overdrafts or finance arrangements
- Goods or materials bought for private use
- Depreciation of equipment
- The £1,000 tax-free trading allowance cannot also be claimed if the business is claiming capital allowances.
This means that capital allowances on eligible capital equipment do not need to be calculated. Any vehicles apart from cars and motorcycles purchased when using the cash basis must stay in the cash basis even if the business then switches to use the accruals basis.
Businesses can claim allowable expenses that relate to the business expenses or costs. If an individual is working from home, apportionment of expenses or costs incurred on a reasonable basis can be claimed such as heating, electricity, Council tax, mortgage interest or rent and internet and telephone use. Complex calculations can be avoided to work out the business expenses by using simplified expenses, which use flat rates for vehicles, working from home and living on the business premises.
The rate on non-dividend savings income up to £5,000 is at Nil rate provided the taxable non-savings income does not exceed £5,000.
A dividend allowance effectively taxes the first £2,000 dividends received at 0%. Dividends above this limit are taxed at the following rate of tax.
Non-saving income includes income from pensions, self-employment profits and employment earnings. Only after the non-saving incomes are assessed, savings income is assessed to income tax. To the extent that the starting rate is not used up by non-savings income, the lower rate will apply to savings income.
Personal Savings Allowance
UK individuals earning a certain amount of interest on their savings, are entitled to a tax-free amount every tax year and called the personal saving allowance which is dependent on the rate of tax. The amount of allowance on which Nil tax is payable for 2021-22 and 2020-21 is as under:
A 0% band for 2021/22 and 2020-21 amounting to £5,000 is also available but is restricted by non-savings taxable income so that none of the band will be available if that income is above their personal allowance & Blind Person’s Allowance if claimed, plus the £5,000 starting rate.
This has been made clearer from the following examples:
Z has a non-savings income of £11,000 and he also received £600 in savings income.
Z’s non-savings income is below £17,570 (12,570+5,000) and his savings income is within the 0% savings rate of £5,000. He will not pay any tax on his savings nor on his non-savings.
Z has a non-savings income of £17,000 and he also received £600 in savings income.
Z’s income is still below the £17,570 (12,570+5,000) threshold and therefore £570 of his savings income is covered by the 0% savings rate. The remaining £50 is covered by the Personal Savings Allowance of 1,000 so he will not pay any tax on his savings nor on his non-savings.
Z has a non-savings income plus his saving interest falls between £17,571 and 50,000 and he also received £600 in savings income.
Z’s non-savings income plus his saving interest falls between £17,571 and £50,000, so he will not be entitled to the 0% starting rate but his savings income will be covered by the Personal Savings Allowance of £1,000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.
Z’s non-savings income is between £50,001 and £150,000 and he also received £600 in savings income
Z will not be entitled to the 0% starting rate and only £500 of his savings income will be covered by the Personal Savings Allowance. The remaining £100 is taxable at 40% and he will need to contact HMRC to arrange payment.
The maximum amount of pension savings one can have each in each of the tax years that can benefit from tax relief is restricted to the annual allowance. The amount of annual pension allowance which lets UK individuals contribute into a private pension scheme is £40,000 each tax year on which they can get tax relief on these contributions.
Based on this a basic taxpayer would receive a maximum pension tax relief of £8,000 @ 20% of £40,000 towards their pot. If they are higher taxpayers of 40%, the maximum pension tax relief of £16,000 @ 40% of £40,000 and for additional taxpayers, maximum pension tax relief of £18,000 @ 45% of £40,000.
To understand this example, assume that the salary income is £50,000 in which you contribute @ 3.5% and the employer contributes @ 6% and there is a personal pension scheme in which the contribution is up to an amount of £12,000.
||Employers Contribution @ 6.0%
The annual allowance limit applies to all private pensions if there is more than one, including pensions in a tax year
If the annual allowance is utilized for the current tax year, it is possible to carry over any annual allowance not used from the previous 3 tax years.
|Total amount available
The example used in this carry forward allows for a contribution of £95,000 without exceeding the annual allowance in 2021-22. To avail the carry forward two conditions must be satisfied.
Firstly, the earning must at least not be less than the amount earned that is intended to be contributed in total this tax year excluding the employer’s contribution. Secondly, in each of the carry forward tax years, the taxpayer must be a member of a UK-registered pension scheme excluding the state pension.
If the earnings are at least £95,000 in the tax year 2021-22 then the amount can be used for the carry forward allowance.
If the ‘threshold income’ is over £200,000 or the adjusted income’ is over £240,000, there will have a reduced or tapered annual allowance in the current tax year. Adjusted income includes salary, rental income, dividends, savings interest plus employer pension contributions and is the amount of the total taxable income.
If the total income exceeds £240,000 in any tax year and goes up to £312,000, the annual allowance of £40,000 falls by £1 for every £2 increase in income so that it stands reduced to £4,000 after the earning threshold crosses £312,000. Exceeding the annual allowance could mean an additional tax bill called the annual allowance charge, adjusted from the rest of the tax liability.
Depreciation is the accounting methodology used by businesses to spread the cost of an asset over the life of the asset in the income statement. Every business tends to spread this cost differently. To avoid dissimilar treatments depreciation is disallowed and replaced with capital allowances instead.
Capital allowances affect how tax relief can be claimed when businesses buy more expensive assets for business use, such as laptops, computers and printers, Office furniture, Equipment & Tools but do not include cars which are treated slightly differently.
For Plant and machinery
Three main categories of the capital allowance include the
- Annual Investment Allowance- 100% claim and includes the purchase of plant and machinery such as equipment, machinery and to work vans, but not cars.
- Main rate pool- claim @18% includes plant & machinery, equipment and furniture,
- Special rate pool- claim @8% includes parts of a building considered integral known as the integral features, assets with a long life of over 25 years, thermal insulation of buildings and cars with CO2 emissions of more than 130g/km,
Businesses can claim Capital allowances on cars based on CO2 emissions of the vehicle and whether it is new or second hand. Here are the applicable rates:
|New & unused
||< 50 gm/km
||< 110 gm/km
|New & unused
||Between 50-110 gm/km
|New & unused
* FYA = First Year Allowance
**WDA = Written Down Allowance