MAH, Chartered Accountants

Category: Personal tax

  • Master Your Tax Return: Avoid These Key Mistakes

    Master Your Tax Return

    Completing a self-assessment tax return can be daunting, even for experienced taxpayers. As the January 31 deadline approaches, many individuals find themselves rushing to submit their returns, which often leads to common mistakes. Understanding these pitfalls and how to avoid them can save you from penalties and stress.

    Common Tax Return Mistakes

    1. Not Realizing You Need to File

    It’s crucial to know whether you need to file a self-assessment tax return. For the 2024/25 tax year, the threshold for mandatory registration has increased from £100,000 to £150,000 for those earning through PAYE. However, if your income exceeds £125,140, you may still face a tax bill on any interest income due to the additional rate tax band. Always check if you need to register for self-assessment to avoid unnecessary penalties.

    2. Omitting Income

    When filling out your tax return, ensure that you report all sources of income. This includes:

    • Bank interest (excluding ISAs)
    • Freelance work
    • Rental income
    • Dividends and investment income
    • State pension income
    • Any cryptoasset disposals

    HM Revenue & Customs (HMRC) receives data from various platforms and financial institutions, so failing to disclose all income can lead to serious consequences.

    3. Missing the Deadline

    Late submissions result in immediate penalties. For those filing for the 2024/25 tax year, missing the 31 January 2026 deadline incurs a £100 fine, with additional penalties accruing over time. To avoid this, start preparing your return early and keep track of important dates.

    4. Incorrect Claims for Allowances

    Be aware of the property allowance and trading allowance introduced in previous years. For example, you can claim up to £1,000 against property or trading income without needing to itemize expenses. Familiarize yourself with these allowances to ensure you’re not overpaying taxes.

    5. Claiming All Relevant Tax Reliefs

    Maximizing your tax reliefs can significantly reduce your tax bill. Common reliefs include:

    • Pension contributions
    • Charitable donations
    • Blind person’s allowance
    • Marriage allowance

    Consulting with an accountant can help ensure you’re claiming all eligible reliefs.

    Tips for Avoiding Mistakes

    1. Hire an Accountant
      Accountants specialize in tax legislation and can help navigate the complexities of your self-assessment. They can also provide valuable advice on what documentation is needed.
    2. Prepare Early
      Starting your tax return well in advance allows ample time to gather necessary documents and reduces the likelihood of errors caused by rushing.
    3. Double-Check Your Work
      After completing your return, take a break before reviewing it again with fresh eyes. This practice helps catch mistakes that may have been overlooked initially.
    4. Utilize Tax Software
      Consider using accounting software designed for tax management. These programs often include features that help prevent common errors and streamline the filing process.
    5. Stay Informed
      Tax regulations can change frequently; staying updated on current laws and requirements is essential for accurate filing.

    By being proactive and informed about common mistakes and how to avoid them, you can navigate the self-assessment process with greater confidence and accuracy this tax season.

    Get professional advice on Tax Return from MAH Chartered Accountants.

  • Tax Efficient Director Salary and Dividends for the 2024/25 Tax Year

    Tax Efficient Director Salary and Dividends

    As we enter the 2024/25 tax year, understanding the most tax-efficient methods for extracting income is crucial for directors of limited companies in the UK. This article focuses on Tax Efficient Director Salary and Dividends 2024/25, outlining key tax rules and strategies that can help you optimize your financial outcomes while minimizing tax liabilities. Whether you’re a seasoned director or new to the role, these insights will guide you in making informed decisions about your income structure.

    Key Tax Rates and Allowances for 2024/25

    • Personal Allowance: £12,570
    • Dividend Allowance: £500
    • Basic Rate: £12,571 to £50,270
    • Higher Rate: £50,271 to £125,140
    • Additional Rate: Over £125,140

    From April 2024, the dividend tax rates applicable are as follows:

    • First £500 of dividends: No tax due to the dividend allowance.
    • Dividends within the basic rate band (total income below £50,270): Taxed at 8.75%.
    • Dividends for total income above £50,270 and below £150,000: Taxed at 33.25%.
    • Dividends where total income exceeds £150,000: Taxed at 39.35%.

    Recommended Salary and Dividend Strategy

    To maximize tax efficiency while minimizing National Insurance contributions, directors should consider a combination of salary and dividends. For the 2024/25 tax year, a recommended structure is as follows:

    • Salary: Set at £12,570, utilizing the full personal allowance.
    • Dividends: Up to £37,700, which keeps total income within the basic rate band.

    This structure results in a total income of approximately £50,270, ensuring that no higher rate tax applies.

    Example Calculation

    For a director taking a salary of £12,570 and dividends of £37,700:

    Income SourceAmount (£)Tax RateTax Due (£)
    Salary12,5700%0
    Dividends5000%0
    Dividends37,2008.75%3,255
    Total Income50,2703,255

    In this scenario, the total tax liability would be approximately £3,255, making it an effective option for directors looking to minimize their tax burden while drawing a reasonable income from their company.

    Considerations for Higher Earnings

    If a director’s total income exceeds £50,270 due to additional dividends or other sources of income:

    • Any dividends above this threshold will incur a higher tax rate of 33.25%.
    • For total incomes exceeding £125,140, dividends will be taxed at 39.35%.

    Conclusion

    In conclusion, the strategy of combining a salary set at the personal allowance level with dividends up to the basic rate threshold continues to be one of the most effective methods for directors in the UK for the 2024/25 tax year. This approach not only minimizes tax liabilities but also ensures compliance with National Insurance contributions, which are essential for securing state pension benefits. By leveraging the principles of Tax Efficient Director Salary and Dividends 2024/25, directors can optimize their income while maintaining financial prudence. For personalized advice tailored to your specific circumstances or any changes in your financial situation throughout the year, consulting with a qualified accountant is highly recommended.

  • Tax Efficient Director Salary and Dividends for 2023/24

    Tax Efficient Director Salary and Dividends

    As of the 2023/24 tax year, there have been adjustments to the tax landscape for directors in the UK. Tax Efficient Director Salary and Dividends remains a crucial strategy to ensure that directors extract income while minimizing tax liabilities. In this article, we will explore key strategies for balancing salaries and dividends to remain within the latest tax thresholds.

    Key Tax Rates and Allowances for 2023/24

    To optimize your director pay, understanding the tax rates and allowances is vital. The following rates are important to keep in mind:

    • Personal Allowance: £12,570 (unchanged).
    • Dividend Allowance: £1,000 (reduced from £2,000).
    • Basic Rate Band: £12,571 to £37,700.
    • Higher Rate Threshold: £50,270.
    • Additional Rate Threshold: £125,140.

    From April 2023, the dividend tax rates are:

    • First £1,000 of dividends: No tax due.
    • Dividends within the basic rate band: Taxed at 8.75%.
    • Dividends for income above £50,270 but below £150,000: Taxed at 33.75%.
    • Dividends for income above £150,000: Taxed at 39.35%.

    Salary and Dividend Strategy for Tax-Efficient Pay

    To achieve tax-efficient director pay, the most common approach is to combine a modest salary with dividends. For 2023/24, consider this structure:

    • Salary: £12,570 (maximizing the personal allowance).
    • Dividends: Up to £37,700 to stay within the basic rate band.

    This ensures a total income of around £50,270, preventing any higher tax rates from applying.

    Example Calculation of Director Pay

    Here is an example for a director who takes a salary of £12,570 and dividends of £37,700:

    Income SourceAmount (£)Tax RateTax Due (£)
    Salary£12,5700%£0
    Dividends£1,0000%£0
    Dividends£36,7008.75%£3,211.25
    Total Income£50,270£3,211.25
    Example Calculation of Director Pay

    As seen in this example, the total tax liability would be £3,211.25, making this a tax-efficient method for directors.

    What to Do When Earnings Exceed £50,270

    If a director’s total income exceeds £50,270, it’s essential to understand the tax impact:

    • Dividends above this threshold are taxed at 33.75%.
    • For total income over £150,000, dividends are taxed at 39.35%.

    Conclusion on Tax-Efficient Director Pay

    In conclusion, the combination of a salary set at the personal allowance level and dividends up to the basic rate threshold is one of the most effective strategies for tax-efficient director pay in the UK for the 2023/24 tax year. This method minimizes tax liabilities and ensures compliance with National Insurance contributions.

    For tailored advice, consider consulting a qualified accountant to adjust the strategy based on your specific financial situation.

    Get professional advice on tax-efficient director pay from MAH, Chartered Accountants.

  • Gift Aid

    If you give money to charity then you can obtain tax relief if you are a higher rate taxpayer and the donation was made to a registered charity in the EU (plus Norway, Iceland and Liechtenstein).

    You can also obtain relief for donations made to Community Amateur Sports Clubs (CASCs) that were registered with HMRC when you  made the donation.

    Paperwork

    You’ll need to make a gift aid declaration to the charity, whether its in writing/electronic/verbal and you should also receive and keep a receipt for the donation.

    Tax relief

    Your basic rate limit will be increased by the donation, grossed up by the basic rate 20%, and this means that you will save tax.

    For example, if you give £1,000 to charity and are a 40% taxpayer, your basic rate will be increased by £1,000 x 100/80 = £1,250. The tax saving is then £1,250 x (40%-20%) = £250

    Carry back to previous tax return

    You can claim gift aid early by including it in your previous tax return upto 31 January.

    For example, you make a donation in October 2021, and you can claim it in the 2010/21 tax return (instead of waiting until the following year for 2021/22 tax return).

    Shares/property

    There are sometimes reliefs available, but you should check the rules

  • Pension contributions tax savings

    Pension contributions can be a great way to save tax.

    Disclaimer

    Decisions about whether or not to make pension contributions should normally be led by investment considerations and our clients generally use financial advisers to decide whether or not to contribute as the money will usually be locked away and there can be various risks involved as well.

    We can only comment on the tax side. We are able to recommend a financial adviser if needed.

    Tax relief

    There are 2 main forms of tax savings that are usually relevant to our clients:

    1) personal contributions: tax relief at source to increase the pension pot and also an increase in the 20% tax band will reduce the amount of 40% or 45% tax paid and result in a tax refund in the self assessment.

    2) corporation tax: employers pension contributions are tax deductible, so the company will save tax at 19% (in 2021) on the amount of contributions paid.

    Allowances

    There is an annual allowance of £40,000 that is eligible for tax relief and this includes both employer contributions and also amounts that clients contribute personally, based on the tax year upto 5 April each year.

    Clients can also carry over unused allowances from the previous 3 years if they need to invest more.

    However, it should be noted that personal contributions are limited to an individual’s earnings, although the company can contribute an extra amount to utilise the £40k allowance. If there are no taxable UK earnings, the limit is much less (£2,800 gross in 2021/22).

    There are some other circumstances, please check HMRC to confirm, for example if individuals earn more than £200,000 a year.

    Personal contributions

    Personal pension contributions are typically made from net pay (after tax) via payroll into a company scheme or from paying separately into a personal plan (eg SIPP).

    Our clients will generally receive 20% “relief at source” on their pension contributions automatically by their pension scheme as the provider adds 20% to the pension pot.

    When completing their self assessment, we need to enter the gross payments into the tax return, which is the actual contributions paid plus 20%.

    If they’re a 40% or 45% taxpayer they’ll also then receive a tax refund as the higher rate tax band will be increased by the gross contributions.

    For example:

    Pension statements show personal contributions of £8,000 in the tax year. This is declared in the tax return as the gross value £8,000 /80%*100% = £10,000. This will result in a tax refund of £10,000*20% = £2,000 if they’re a 40% taxpayer or £10,000*25%= £2,500 if they’re a 45% taxpayer.

    Employer contributions

    The company will get a corporation tax deduction on its contributions into registered pension schemes and there will not be any income tax or NIC payable on employer contributions.

    There needs to be a contractual arrangement/obligation for the company to make a separate contribution to the client’s personal contributions, whether its into a company pension scheme or a personal SIPP or pension plan.

    So to save corporation tax, the client has to show that the company is making an employer’s contribution.

    Our clients usually explain to their pension provider that they want to make an employer’s contribution before making the payment. This is important because we need some documentation from the pension provider to prove that its an employer’s contribution.

    The contributions can be made throughout the accounting year or as a lump sum, but the company will obtain the corporation tax deduction in the accounting period in which the company pays the contributions.

    The pension contributions cannot be accrued or backdated.

    The contributions can also be included R&D tax credit claims (for the proportion of time spent on eligible R&D projects)

    For example:

    Director salary is £8,000 and has a personal SIPP and no auto enrolment. Although the salary is low, the company can still pay £40,000 into the SIPP as long as the correct forms are filled in to show its an employer’s contribution. Tax relief in 2019 would be £40,000*19%.

    If the company year end is 31 December, £40k could be paid in March and another £40k in December to maximise contributions in this particular accounting year, as it straddles the 5 April tax year end used for the £40k allowance.

    Income from state & other pensions: 

    These are usually taxable and need to be included in the self assessment tax return.

    State pensions: the client should have a letter with their weekly State Pension amount

    Other pensions: the client should have a P60 or similar annual statement, the total gross amount before tax needs to be declared in the self assessment.

    Other circumstances

    Pensions can be very complex. Further advice should be sought from a partner at MAH if dealing with:

    • something different to the examples and explanations above
    • early/flexible access to pension pots & lump sum payments/refunds
    • overseas pension schemes

    (Notes from HMRC manuals are below)

    BIM46035:

    A pension contribution by an employer to a registered pension scheme in respect of any director or employee will be an allowable expense unless there is a non-trade purpose for the payment.

    contributions are paid wholly and exclusively for the purposes of the trade where the remuneration package paid in respect of a director of a close company, or an employee who is a close relative or friend of the director or proprietor (where the business is unincorporated) is comparable with that paid to unconnected employees performing duties of similar value.

    NIM02716:
    Section 308 ITEPA 2003 provides that an individual is not liable to income tax where an employer makes a payment to a registered pension scheme (“RPS”; NIM02715). Where that section applies, such a payment is disregarded in the calculation of earnings for Class 1 NICs purposes.

    EIM01570:

    registered personal pension scheme arrangements made by an employee (or director) may provide for employer contributions as well as employee contributions. Where, under such arrangements, the employer pays employer’s contributions the contributions are not chargeable on the employee as earnings of the employment (Section 308 ITEPA 2003).

    RPSM05400020:

    a deduction can only be given for the period in which the contribution is paid.

    I make regular accruals regarding pension costs in my company accounts, can relief be given in respect of these accrued amounts?
    No. Tax relief can only be given on contributions that have actually been paid. The amount shown in the profit and loss account in respect of obligations in respect of defined benefit schemes may be substantially different from the amount of contributions paid to the scheme. But it is only the amount actually paid that can be considered for tax relief.

  • Tax efficient director salary and dividends 2022/23

    THIS ARTICLE NEEDS TO BE UPDATED FOR THE NEW NIC THRESHOLDS ETC

    Compared to 2021/22, the personal allowance threshold will not change and will stay at £12,570 per year and the higher rate tax will also still start at £50,270.

    From 6 April 2022 the dividend tax rates will all increase by 1.25% :

    First £2,000 of dividends: no tax due to dividend allowance

    Dividends at basic rate (total income below £50,270): 8.75%

    Dividends for total income above £50,270 and below £150,000: 33.25%

    Dividends where total income is above £150,000: 39.35%

    Many of our clients prefer to keep cash in their company until they need it and to avoid higher rate of income tax. In this case, from April 2022 onwards we would recommend a salary of £9,100 (it is £8,840 for 2021/22) and dividends of £41,170.

    So for a company owner with total income of £50,270, their income tax for 2022/22 will be £2,945:

    IncomeTax
    Dividends:
    Personal allowance left after salary £9,100£3,470£0
    Basic rate dividends subject to dividends allowance£2,000£0
    Basic rate dividends taxed at 8.25%£35,700£2,945
    Total for dividends£41,170£2,945
    Salary£9,100£0
    Total income and tax£50,270£2,945

    If a director/owner takes dividends above this level, they will need to pay tax at 33.25% on the excess dividends above total income of £50,270 and 39.35% for excess dividends above total income of £150,000.

  • EMI Schemes (Enterprise Management Incentive)

    EMI schemes (Enterprise Management Incentives) are tax advantaged schemes offered by H M Revenue & Customs to small and medium sized businesses (“SME”) for incentivising the SME’s employees.

    EMI schemes are share option schemes which fundamentally provide tax savings for both the employee and the SME whilst also providing the facility for the SME to incentivise and reward its employees.

    EMI Scheme

    Current perception of EMI schemes

    It is a common misconception that EMI schemes are complicated and EXPENSIVE! This is not the case.

    Whilst the set-up of the scheme may cost a certain amount of money, the tax advantages achieved can far outweigh the scheme’s implementation costs.

    It is true that the rules surrounding EMI schemes are detailed and may be viewed as complicated. However, the government has put in place such rules so that the maximum number of SMEs and employees can benefit from the available tax advantages and, in turn, incentivise SMEs and employees for commercial progression.

    Advantages of using an EMI scheme

    The employee will not be subject to any PAYE or NIC on acquisition of shares when he/she exercises the share options. The only times PAYE/NIC may be payable are if the share options were granted at a discounted value or if the share options are exercised after a disqualifying event.

    In comparison to a simple reward of shares (which triggers a PAYE/NIC liability on acquisition or vesting), the EMI scheme provides a tax free environment of growth so that the employee can benefit from a tax free uplift in value of his/her shareholding.

    The company also benefits from a Corporation tax saving on the value of the shares passed to the employee when the share options are exercised. It is therefore a win-win situation for both the employer and employee.

    If the employee sells his/her shareholding then there may be a Capital Gains Tax liability that arises. However, being in an EMI scheme also enables the employee to take advantage of Entrepreneurs’ Relief. Entrepreneurs’ Relief means that the employee will only pay tax at 10% on the gains made from selling the shares.

    Certain conditions of the EMI share option scheme

    Employees: generally only those employees who work for 25 hours or more per week are eligible for EMI options.

    Employee: the total market value of an employee’s unexercised share options cannot exceed £250,000 at any given time.

    Company: the total market value of all unexercised EMI share options cannot exceed £3m at any given time.

    Company: the SME must not be under the control of another company.

    Company: the company must have Gross Assets of less that £30m.

    Company: it must have fewer than 250 full time employees.

    Company: it must be carrying out a qualifying trade as its main purpose.

    Shares: the shares subject to the EMI option plan should be ordinary, non-redeemable, and fully paid up shares.

    Grant: the options must be granted for bona-fide commercial reasons and not to avoid tax.

    Process

    The process to get an EMI scheme set up for an SME starts with understanding a client’s needs and what outcome is sought. Once this has been established, we can start structuring the EMI scheme which entails communicating with H M Revenue & Customs and putting in place required share option agreements with the relevant employees.

    Communication with H M Revenue & Customs is for approval of scheme qualification as well as obtaining their agreement to the company’s share valuation. The most advantageous valuation is always sought for the client company.

    Once the above are in place, the company is in a position to grant the share options to its employees. These grants should then be notified to H M Revenue & Customs within 92 days in order to preserve the related tax advantages.

    Annual filings with HMRC are also required for an EMI scheme so that HMRC can be kept informed of the scheme’s activities.

    Further information

    HMRC’s website also provides brief details on the benefits of using an EMI scheme.

    Where can MAH help?

    We can provide you with a free, no obligation consultation for initial advice on the EMI scheme and can demonstrate how it may be beneficial for your company. There are both, financial and non-financial benefits for offering employee incentives under the EMI scheme.

    To book your consultation with our tax specialist Prashant Malde, please contact us.

  • Overseas Workday Relief – OWR

    Overseas Workday Relief – OWR

    Have you recently started to live and work in the UK but consider your “home” country to be elsewhere? If so, you are likely to be a UK resident but non-domiciled in the UK.

    If prior to becoming UK resident, you were also non-UK resident for a continuous period of 3 tax years, you are likely to be eligible for a special Overseas Workday Relief (“OWR”) exemption.

    Such individuals who earn income (either abroad or both in the UK & abroad) are able to benefit from the “remittance” basis of taxation which means that the UK revenue authority would not tax income which is earned abroad and kept abroad.

    As always, the related tax rules are complex and somewhat confusing.

    Overseas Workday Relief:

    Individuals who become resident in the UK but continue to work abroad can benefit from the Overseas Workday Relief which is premised on the UK’s remittance basis rules of taxation. Under the OWR an individual’s income for work performed overseas is potentially not taxable in the UK.

    OWR is available to an individual for the first 3 tax years when the individual becomes UK resident. A significant number of workers come to the UK for short or medium term placements and miss this tax saving opportunity. The OWR is not available after the first 3 tax years, therefore proactive planning on an individual’s circumstances would stand to benefit the most.

    Remittance basis:

    An individual in the above explained UK resident but non-domiciled position will be able to  select the remittance basis of taxation in order to benefit from UK tax savings. There are various conditions to be met in order to claim the remittance basis such as not remitting your foreign income or capital gains into the UK, and forgoing your personal allowances in the year of the claim.

    In addition, for the Overseas Workday Relief to apply, employment duties need to be performed wholly or partly abroad, accurate records of travel and the duties performed need to be kept, and income relating to the overseas proportion of employment duties need to be kept abroad.

    The retention of income abroad for non-UK domiciled individuals can be tricky and needs to be planned carefully.

    Overseas Workday Relief

    Cleansing of mixed fund accounts:

    When foreign income and gains are kept abroad (most likely in one or more bank accounts) for more than one year, the accounts can end up becoming “mixed fund accounts”. A mixed fund account is one which contains any mixture of capital, capital gains, income etc.

    The 2017/18 and 2018/19 tax years are golden years where the government is bringing in rules for helping remittance basis users and allowing them in segregating their mixed fund accounts to achieve a more tax efficient remittance strategy. This facility is not likely to be available after the 5th April 2019. Until now the disadvantage was to the tax payer as any remittance from the mixed fund account would first favour H M Revenue & Customs’ position for taxing that remittance. Taxpayers will now have the ability to decide which funds to remit and will know beforehand whether that remittance is made out of capital or whether it is taxable income/gains.

    We assist clients in arranging their UK tax affairs so that they are not paying excessive tax.

    Where can MAH help?

    We can provide you with a no obligation consultation in order to determine your exact circumstance. You may already be in the UK and have started working here in which case you should get some professional advice as fast as possible. You could be planning your move to the UK in which case you can proactively plan your tax affairs so that you can save as much UK tax as possible.

    Book your free no obligation consultation

    A free, initial, no obligation consultation is available, which should reveal to you whether there is any possibility of saving tax given your residence but non-domiciled status in the UK. To book your consultation with our tax specialist Prashant Malde, please contact us.