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Protect Your Assets for your Loved Ones Today – Check out these Advanced Inheritance Tax Planning Strategies

I think it’s time we walked about a topic we have put on hold for weeks. Today, I want you to picture what life will be for your loved ones when you are gone.

For many of my clients, inheritance tax planning is not something they are open to talking about. After all, it is hard to envision the outcome for your family upon death. However, today we will look at two strategies you can use to protect your family from financial backslides due to poor estate planning.

A few weeks ago, I had a guest over to talk about the basics of inheritance planning (use of wills and gifting). This week, you will be learning more about inheritance tax planning from our guest Mr. Aidan Dow of Aidan Dow Wealth Management.

Aidan talked about two main inheritance tax planning strategies you can pay attention to in order to secure your family’s future. They are:

  • Using Family Trusts

You may use family trusts to keep your estate within your family. With a trust in place, your beneficiaries have a legal standing to inherit your estate. You set up a trust and transfer assets. You then name your beneficiaries – those to whom your wealth will transfer – and trustees to enforce the conditions of the trust.

Trusts protect inherited property, as Aidan pointed out. One circumstance where having a trust matters is when you want to ensure the inheritance still passes to your children even with the remarriage and divorce of your surviving spouse.

  • Investing in Assets with Tax Benefits

If you are passionate about propagating small businesses and hold no fear for high-risk investment, this method of inheritance tax planning would be suitable for you, Aidan affirmed during our session.

Assets such as in-shares and venture capital trusts fall outside your estate when owned for more than two years. With such assets, you can save your beneficiaries from paying the 40% inheritance tax usually charged on property worth above £325,000.

So, the next time you are thinking about taking care of your loved ones with inheritance tax planning, remember these strategies. Additionally, consult with an expert to help you plan your estate the best way you can.

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

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What’s New on Public Sector IR35 2017-18?

A lot of doctors are working with the NHS as a locum doctor and IR35 has become a big issue to most doctors. It is nearly the anniversary of the public sector IR35 rule that kicked-in from April 17. Here we have provided the updated guidelines on the tax implications if you are inside IR35 and being paid to your Ltd company, the expenses claims and considerations of closing down a company.

Tax Treatment When You Are Inside IR35 and Being Paid to Ltd Company

A lot of locum doctors were deemed inside IR35, they still have active limited companies and being paid to the company bank account, but after tax/NI deducted as an employee. This caused a lot of confusion when it comes to corporation tax and income tax. And most importantly how one can avoid being taxed twice for the same income.

As the income inside IR35 were still technically ‘employment income’, you would declare this income under Self-Assessment, but you may not have additional tax liability on this income as taxes were already deducted.

When it comes to Ltd company corporation tax, the same gross income should be treated as the ‘revenue’ for the company. But equally, the same gross amount will be taken out as ‘director’s salary’ so that the income will not be taxed under corporation tax.

For example, Dr Rebecca being paid £6,000 gross per month, the tax/NI deducted was appx £1,500. That gives net amount of £4,500. Dr Rebecca would need to count the £6,000 as revenue, but £6,000 as ‘director’s salary’ which is ‘deductible expense’, so there’s no corporation tax charged on that income. And that income would declare the IR35 under her Self-Assessment.

Expenses Claims

If you still run an active company, any expenses that are necessary for the company are still tax deductible, e.g. your bookkeeping software or subscriptions. When you are doing any consultancy jobs that are outside of IR35, the expenditures that are directly related to those activities are still tax deductible.

When inside IR35, you may not claim travel and subsistence the same way as a self-employed individual. As you are technically an ‘employee’, you may only claim the travel to temporary workplace and that are necessary for you to perform your job. You may not claim travel from home to ‘clients’ office’ by justifying your home is your usual workplace, as those will be treated as usual work commute.

Company Strike Off Considerations

Some individuals might feel as though it is not worth to keep the company running and they just want to do the job, get paid and be tax efficient. In order to close down the company, the company has to be at least 3 months dormant. One thing to be aware of is the final assets of your company, if its less than £25,000 then you can do a normal strike off. Anything remaining will be counted as capital gain. If there is more than £25,000 you might need to use a liquidator to apply for members voluntary liquidation.

Summary

  • You would need to make sure you declare the income as employment income in your self-assessment.
  • Inside IR35, you are technically an employee, so any expenses related to the work that is inside IR35 you will claim the expenses as an employee.
  • You need to look at your long-term vision, if running a business is not your long-term vision then you would need to look at closing down the company.

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

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Learn the Basics of Inheritance Tax

This week, I would like to tell you a bit more about inheritance tax. In previous weeks, we talked about how you can make the most of tax breaks on a general level. This week, join me in understanding how inheritance tax (IHT) works.

It is not easy for us to talk about morbidity and death, but the best way to leave your family members free of debt and finance-related stress is to plan for it. Inheritance planning is essential for the financial and general well-being of those you leave behind. My guest expert this week was Aidan Dow and owner of Aidan Dow Wealth Management. Aidan introduced the three basics of inheritance tax. They are:

  1. Wills and Inheritance Distribution

Over 60% of the UK population does not have a will. This figure is concerning considering that wills form the basis of inheritance planning. It ensures only those you want to inherit your property do so. It also allows you to redirect your property to take advantage of tax breaks.

  1. Nil Rate Band

Nil rate bands refer to the value of a property that is tax-free. For inheritance, this band stands at £325,000. If your estate is valued at below this figure, you do not have to pay inheritance tax. Every pound above this amount is taxed at 40%.

  1. Gifting Assets

You can avoid IHT by understanding how potentially exempt transfers work. These transfers apply to assets you gift to others, but under the seven-year rule. Under this rule, such assets will not be counted as part of your estate only if you are alive seven years after gifting them. They then fall under the property of the people you passed them to.

However, gifting assets such as cash as wedding presents or charity donations automatically mitigates or eliminates the IHT on your estate.

  1. Married couples

Transferring assets between married couples triggers no taxable gain. In some cases, individuals may want to leave the assets to the surviving spouse. It triggers no IHT at the first death, but it may trigger higher IHT at the second death as the nil rate band for the first death was wasted. Therefore, it worth noting that you may wish to consider ways to fully utilize the nil rate band to save £130,000 worth inheritance tax.

Of course, IHT has many other facets; these are just the basics. Follow our future blogs to get the latest on the more technical side of IHT in the coming weeks.

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

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Save Money This Year with Tax Breaks for Couples

It was Valentines Season, and as you celebrate with your significant other, I thought you could use a few pointers about how to make your status as a couple work for you – financially speaking. For this feature, couples will refer to married pairs (because marriage is recognized by the law).

Here are a few tips to help you put money aside for other household items.

How can I save money as a married spouse?

Under the current UK tax regulations, the following scenarios can result in tax breaks for married couples:

  1. Marriage Allowance

For couples in different tax brackets, marriage allowances present a great tax relief option. If you earn less than £11,500 and your partner falls within the £11,501-45,000 tax bracket, you can transfer 10% of your unused personal allowance to your partner. He/she will then be able to save up to £230 per annum.

  1. Sharing ownership of Buy to Let Property

Transferring ownership of a property between a married couple will incur no capital gains tax. This is what makes it a great tax relief strategy for couples. This strategy involves one spouse transferring shares of a property to the other. If your spouse earns lower income and pays tax at lower rate, this enables part of the property income being taxed at lower rate. However, the overall situations of both partners need to be assessed in order to determine whether or not this strategy is a good fit.

  1. Transfer of Business Ownership

If your partner makes a significant and legitimate strategic contribution and bringing him or her on board was part of your long-term business strategy, transferring shares of your business to them will help you save tax in the long term. Your business will enjoy the first £5,000 tax-free allowance, while the payment of dividends and salaries to you and your spouse will reduce the taxes owed by the business.

  1. Savings on Wedding Cost

This is a creative way for couples to save money through tax relief if they’re planning to get married. Donating valuable wedding decorations to your church, or a charity that is close to your heart, is considered as charitable donations and you can get tax relief from it. However, be aware of the limitations. For example, you will not get tax relief if the size of the donation is more than 4 times of the tax you’ve paid in previous year.

  1. Inheritance Tax

As a married couple, you and your spouse could double your nil rate band for inheritance tax purposes. What that means is that your inheritance value could go untaxed for up to £650,000 if your spouse did not utilize his/her inheritance tax.

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

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Brexit: Looking at the Bigger Picture

A few interesting things happened this past week. The Eagles won the US SuperBowl for the first time in history. And EU leaders met to discuss one of the most crucial topics for UK companies: Brexit.

Since I felt that this issue concerns you, I invited an expert on EU trading to offer a new perspective on what Brexit means to business owners.

This week, my guest was Charles Markowicz. Charles runs a firm that helps companies from non-EU countries acclimate to the trading conditions of the EU. As a business owner working on issues of EU compliance for over two decades, Charles had some unique opinions to share about Brexit. Hopefully, you can learn from his insights.

Brexit is a time for evaluation

One of the first factors Charles noted is that the Brexit negotiations are volatile and business people should treat it as such. As Brexit negotiations are underway, you as a business owner should keep informed and look at all possible scenarios. What would a hard Brexit mean for your company? What would a soft one? How likely is either outcome? Are you prepared for both these scenarios? Do you have contingency plans in place? Only by evaluating the position of your business can you better prepare for any Brexit outcome.

You need to be ready for the cost

During our conversation, Charles pointed out a significant point: businesses based in the UK can expect the downside of losses in terms of time and money for as long as Brexit negotiations run. He cited a study that showed the UK’s economy could take a hit of about 2-3% from a soft Brexit and up to 15% from a hard Brexit.  Even the English pound has taken hits so far. You need to accept, that Brexit might have adversely affected your company, before moving on to step three.

The best course of action: prepare a plan

One path Charles proposed was expanding your market. For instance, setting up a subsidiary in an EU country or one per continent, preferably one with English speakers. The benefit of such market diversification is that your business would be able to source materials cheaply and export products despite the outcome of Brexit.

To summarize, being aware, staying informed and preparing for the consequences of Brexit is the best way to look at the bigger picture for your company.

Don’t forget to follow me on Facebook/Youtube for these and more interesting takes on emerging financial issues.

Have an engaged, informative week!

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

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The Tax Season Highlight: 3 Reasons to Feel Positive About Taxes

As the taxing season comes to an end, I wanted to give you a few reasons not to dislike the taxation process.

A lot of my clients are doctors and majority of them have negative feelings about tax. I understand why there would be a lot of negative emotions surrounding taxation. We work hard five to seven days a week to get our paychecks, then have to hand over a chunk of our earnings to the government, or at least that is what it feels like. You are not alone if you share these feelings. However, I made this trip to your inbox to show you that negativity is not necessary when it comes to paying taxes. Below I have compiled a list of three tips to help you feel more motivated to participate in the tax process.

Here are the 3 tips that will help you feel more positive about paying tax

  1. Tax rules are there to help us pay less tax

Have you always thought that the taxes were too high? It turns out that it doesn’t have to be. If we look out for the taxation guidance, only a small portion of the information is about how the Government collects taxes. There’s more information showing a multitude of tax reliefs including exemptions, allowances, and deductibles that you can file for to optimize your tax bill. All you have to do is take advantage of them. Seek out a professional and assess which provisions apply to you. I do this for my clients so that they can minimize their tax expenditure.

  1. Look on the profitable side

I was so excited the first time I paid my corporate tax. I know this sounds absurd, but it’s true. And do you know why? It’s because having to pay corporate tax meant that I was doing good and my business was profitable. If I owned a struggling firm, I wouldn’t have to cater to pay taxes. So (Name), the next time you feel like taxation is a burden, look on the positive side: at least your business is healthy.

  1. Money you pay into the system is still YOURS

The taxes you give to the government are still yours. Here’s why. That tax money you pay is what goes into funding free public healthcare so that you pay little or next to nothing when you visit a public hospital. It funds the public education for your kids or those of your friends and family as well as the pension and unemployment benefits that you may enjoy one day. Ultimately, the taxes you pay benefit you too.

I hope you have enjoyed this wrapping-up-the-tax-season session. Remember that loving the Tax Man comes down to one key element – looking on the bright side, which I hope you will.

Don’t forget to follow me on Facebook for more tips on how to discover your ability to create wealth next week!

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

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Organise Your Finances the More Efficient Way

Dear Client,

I hope you had a great week.

Last time I was in your inbox, we went through how you can discover your ability to create wealth. This week, I picked out a topic that I hope will help you get through the tax season without any hitches.

Do you sometimes look through your books and wonder how to put all your finances in order before the tax man rolls in? Do you find it hard to sit down to spreadsheets to organize your finances? If you do not have a problem organizing your finances, then congratulations, I’ll just be helping you do it more efficiently. However, if you are like many entrepreneurs I know who think of bookkeeping as a chore, then you can thank me later for showing you that bookkeeping does not have to be expensive, exhaustive or time-consuming.

Below, I will take you three steps to help you organize your finances the more efficient way

Step 1: Embrace Technology

There are numerous applications and technologies available today that are dedicated to helping you manage your finances. For instance, you can switch from manual data entry to simply scanning receipts to track expenditure by using Receipt Bank? Or that cloud computing services such as Xero Accounting can feed your bank statements into your accounting system so that you do not have to? Those systems nowadays cost as little as £20 per month, and they are designed to make your life easier. All you have to do is take advantage of them.

Step 2: Seek Help In Cost-Effective Ways

As an entrepreneur, having others help you will save you time, money and energy as you organize your finances. An easy way to get help is to have your spouse or children to handle the admin and bookkeeping tasks, so that you focus on building the business. You can pay them a salary that do not trigger much tax burden, and help reduce tax for you business the same time.  However, if you are solo, you can also now outsource bookkeeping in affordable way by hiring an accountant in India (or somewhere else in the world). Make sure you do try those freelancers first before you commit, so that you have the reliable person work for you. Also do consider protecting your data by having proper system and Non-disclosure Agreement.

Step 3: How and when to hire the right accountant for your business

Sometimes you have to spend money to save money. Hiring an accountant is an efficient way to organize your finances because a) you won’t have to worry about doing it yourself b) accountants will leave you free to build your business and c) the right accountant will not only get your finances in order but also optimize your tax bill. Wondering who the right accountant is? Here are the criteria: It is important to hire someone who thinks more like a business owner, rather than an employee; the ones who understand your vision and values; the ones who understand your financial pressure and work towards helping you achieve your financial goals.

I hope that today, you have taken away a lesson that will help you organize your finances the more efficient way. Don’t forget to tune in for more financial tips next week!

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

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Discover Your Ability to Create Wealth

Happy New Year!

I hope you had a great holiday and are looking forward to trying out new opportunities this year!

As we move on to 2018, I just wanted to let you in on a few things. First, new year, new me, new us! We are rebranding our firm and the weekly LIVE show on Facebook. I will be showing up every Monday for a live chat on Facebook talking about subjects related to wealth building, so don’t forget to tune in each week! Simply subscribe to my Facebook page and look out for WealthAbility LIVE every Monday to get your weekly dose of interesting and motivating money advice from me (and a few other experts).

Number two, as we welcome the new year, here is a piece of advice I thought you would appreciate. It’s a little something on what I call the three pillars of wealth building. With them, you can discover your ability to create wealth.

So, what are the 3 Pillars of Wealth-Building?

For me, they are the tools you can use to not only create but also maintain wealth. I hope they are for you too.

1. Your Health

Your health is your ultimate wealth. When you are healthy, you can accomplish tasks that will help you build your wealth. Tasks such as decision-making, learning and even dealing with stressful situations. Keeping yourself healthy is essential to you and to your business.

2. Inner Work

Sometimes we find ourselves dwelling on what is going wrong in our lives. We blame ourselves for failed relationships and are afraid to talk to others about our work for fear they will learn of our failures. However, I have learnt from experience that when you appreciate your accomplishments and your potential to add value to other people’s lives, when you accept that you are not perfect and embrace your authentic self, you can look past failure and insecurity to set and achieve your goals.

3. Be Comfortable with the Numbers

Do yourself a favor this year. Learn to be as comfortable with your numbers (or at least knowing the basics of your finances) as you are with counting your hard-earned notes.  This does not mean you have to know all the details of finances inside out, just like a financial professional. But just the basics tools that is sufficient to look after yourself. It is just as it important to know how to look after your own health, feed your body with the right food, and when to seek out the doctor, it is essential to know the state of your finances and know when to seek out financial professionals for guidance.

Last Thoughts

I hope this dose of inspiration helps you discover your ability to create wealth this year. Stay tuned for more informational pieces next week!

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

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VAT in the Healthcare Industry

In the healthcare industry, there are some VAT related issues that can arise. Today we will be giving some guidance on VAT, this will be helpful for you as we will cover the important areas such as how you can account for VAT and when you need to register for VAT etc. Even if you are not in the medical industry, some of the points we will discuss might apply to you too. We will also share some questions commonly asked and some scenarios that some of our clients have been through.

What Services Can You Register for VAT?

If you become a locum doctor and you are doing freelance work, for the treatments and services that has a primary purpose of restoring human health, you will not be able to charge VAT for this so you do not register for VAT. This is due to the fact that it is necessary for people and the government want it to be affordable which is why it is exempt for VAT registration.

On the other hand, if you are a freelancer but also do a bit of medical legal work on the side, you are able to register the legal work for VAT. However, you do not have to if you do not reach your threshold. Currently, the threshold is £85,000 for any role in 12 months. If you are doing that level of medical legal work then VAT is something that you would need to watch out for. However, if you only do it on an ad hoc basis then it is probably not worth for you to register yourself for VAT and having to do all of the paperwork as it does cost money to submit a VAT and it takes up a lot of your time.

Another similar situation is a dental practice. As a dental practice, you are not only providing a treatment but you are also selling products, which you may register VAT for. In this case, you are able to register for VAT only when your business has reached the threshold mentioned.

Locum Doctors and Agency Workers

VAT implications for locum doctors who are working under a limited company and/or work via an agency can be a grey area. The limited company might become a staff supplying service as the company is supplying medical staff. You would need to be clear within your contract between yourself and your agency as well as any clients. You need to figure out whether you are working as a service provider as a medical professional or if your company providing medical staff. If you are providing medical staff, that service can be registered for VAT. If you are providing medical services as a medical professional then you cannot register for VAT.

Providing Work and Services Under a Company

Some people ask whether they are able to set up a different company just for medical legal work. If you put all of the VAT-able work to that company just to receive a payment and provide medical legal service then you can set up a company for this purpose. This can apply to you especially if you are a self-employed medical professional or if you are doing medical legal work it can also be classed as self-employment. Setting up a company can be tax efficient for you because you can get tax-free dividends and dividends cost less than your personal income tax. It is important to note that when it comes to setting up a company, please do seek legal and professional advice.

One thing you cannot do is split a company. For example, if you do medical legal work and use two companies to run it, you may think that each of the companies will be under the threshold. However, this isn’t the case as you are the person who provides the service which means you control both companies. In this case, you would need to combine the revenue when it comes to considering the VAT.

When Do You Need to Register and What Happens Once You Register?

You are able to voluntarily register even if you are under the threshold. You might be worried that you will not be notified once you reach the threshold and you forget to register so it is important to take care of this when you can so you do not forget about it.

Whenever you do register, you need to set-up an effective date. For example, if it is November but you want the effective date to start on the 1st December, any services/invoices you provide would need to start charging VAT from this date. There may be some delay from the date you register and the date you receive the VAT certificate, which means you might receive it after the effective date. You must not charge VAT until you receive the certificate. But within that time period you can do either of the following:

  • Increase the price by 20% and state it is a service fee. Once you do receive the certificate, you can just reverse the service fee and start charging VAT, OR
  • Invoice the service as it is, and issue a VAT-only invoice once you have received the VAT certificate.

You need to make sure you are transparent and let your clients know what is happening so that you have set some expectations for them.

From the effective date, any overhead expenses that you have paid VAT for you are able to claim it back from HMRC by doing your quarterly VAT return. It is something you would need to be really organised with and make sure you are able to record and provide the relevant paperwork on a quarterly basis. It is always beneficial to be compliant especially if HMRC decide to do a VAT investigation.

What to Reclaim

  • You are able to claim Any bill that clearly states you have paid VAT for, you need to make sure you keep the bill for your records. If something is VAT inclusive but it does not show the VAT on the actual bill then you would still need to include the VAT when you reclaim it.
  • If you are newly VAT registered, you can backlog some expenses. For services, you can backlog for 6 months and if you have any equipment or any goods that you have paid VAT and still own you can backlog for 4 years.
  • You need to watch out for things like entertainment as if it is for business purposes such as entertaining your staff then you can claim the VAT but if you are entertaining clients then you cannot. You might not be able to claim 100% of the VAT if it is a combination of business and personal use.
  • When it comes to a medical practice, anything directly related to the medical legal work you can claim the VAT on. For the overheads, such as rent, you can only claim an apportion of the VAT back if you are using the office to do treatments but also medical legal work.

De-registration

If you see yourself doing less VAT-able work, you can choose to deregister VAT. When your revenue goes down and do not want to be registered anymore, HMRC will not automatically deregister you so it is important to evaluate your situation yourself. You need to make sure is based purely on business decisions instead of tax mitigation strategies.

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

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Mid-Year Tax Planning – Allowance Maximisation

Have you considered mid-year tax planning so that you can take action in time to maximise your allowances and save tax? Mid-year tax planning is around October and there is less than 6 months till 17/18 tax year ends. A lot of people overlook things during the tax year and do not take action which causes them to not take advantage of available allowances and they receive a high tax bill. We are going to share some tips on what you need to consider at this time of the tax year to make the most of your entitled allowances.

3 Major Allowances You Need to Consider

  1. Pension Contribution – If you are paying tax on the 20% threshold, every £80 you invest in your pension pot, the taxman will top-up £20. It is effectively 25% return of investment. No other investment will give a good return as this and it is relatively stable. Despite your income level, you will always need to consider this type of allowance first. For most small businesses, it has now become an obligation for employers to contribute pension to their employees if they are an eligible worker. This type of contribution is funding your retirement and it is funding your future. Even if you could squeeze around £15 per month to your pension pot, that small amount will build up and eventually will give support your lifestyle when you retire. Currently the annual allowance is £40,000. It will be reduced when your income is over £150k. So consult your financial advisor if you consider investing relatively high amount of it.
  2. ISA Allowance – You might want to consider having some savings which is something that everyone can afford to do. A type of savings account is an ISA that is available at the moment. For 17-18 tax year, you can invest up to £20,000 worth of funds into an ISA. There is a cash ISA available as well as a stocks and shares ISA. The interest and dividends you earn from that particular ISA wrapper is tax-free as well. You do not have to have a lot of money in order to start saving, every small contribution counts. In reality, cash ISA can be very useful for when you are considering some emergency funds. It is easily accessible and the interest in it is tax-free.
  3. Venture Capital Trust – This allowance does require more amount of money and is relatively high-risk but the reward is really good. Every £10,000 you invest in a VCT, you receive £3,000 as a tax relief which means you get cash back from the government. It is a government scheme and the money goes towards UK start-up companies. It is a government incentive to encourage people to invest in UK businesses because these are the type of businesses that are very ambitious. The government wants to boost the prosperity and wants these companies to grow. Running a business is not always easy, most small business owners will have a brilliant idea but they might need a certain amount of capital which a VCT can provide.

If you can afford to invest then this is something you can consider, especially if you are earning more than £100,000 as an employee. This can help to reduce tax bill for someone who cannot form a company to run their business and have to be a sole trader but also earn a significant amount of profit. The downside is that you are investing in a small business and it is not always stable, it can be very risky therefore you would always need to consider your risk profile. If you are interested in investing then do seek for professional advice on this matter as a financial advisor will analyse your risk profile. There are different types of investments out there and it is not a good idea to put all of your money into a VCT so you do need to spread out your investments. This is to ensure that you always have some investments to lean on when one goes wrong. Once you have invested, the money will be tied up for at least 5 years, in order for you to keep the tax relief, which means that if you have some immediate cash needs then this is not an option that you should consider. However, if that is not the case then once the small companies grow and pay dividends, the dividends you receive are tax-free.

Things You Need to Double-Check

There are other situations that are quite common and should not be overlooked. If you are an employee you need to double-check if you have made sure your tax code is correct. For example, if you have a wrong tax code and are earning £70,000 but your tax code is BR this means only 20% can be taken from everything you earn which. This means you are under taxed which is a situation that you would want to avoid so do check your tax code if you are on PAYE.

If you are self-employed and the business has just started to take off, you can consider restructuring and looking out for the tax deductions so you do not miss out on them.

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

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Cash Out or Not? The ‘Exotic’ Ways to Use Cash in A Business

If you are running a profitable business it is likely that you have quite a lot of cash in the business and often you will be advised that if you take too much dividends or a high salary you will get taxed. This causes you to have cash in your business that you do not know what to do with. There are different strategies to take into consideration in order to enable you to use that cash in your business.

Aidan Dow, the company director of Aidan Dow Wealth Management Ltd, has taken some time to sit with Hannah Xu to talk about the different strategies and the steps you can take.

What to Do If You Want to Keep Some Cash in The Business?

If you have a company there is nothing to stop your company from having investments which means you can open investment accounts on behalf of your company. This enables you to put some funds in these investments, it is key to know how long you think you can tie the money up. If you are looking at using that money before 3-5 years it is recommended not to have an investment account or taking stock market risks. It is a good strategy to have an investment account for the business which is also separate from your name and taxed separately to your own name.

It is important to know what your objective is and how much cash you will need for the short-term but if you do not need it then an investment account is a good option for you. With interest rates so low, if you are keeping cash in the business, effectively over 2-3 years that money is going backwards. Whereas, if you can afford to tie up for 3-5 years and take some investment risk then that money will keep pace with inflation which will keep your business healthy. The money is there to call on when you have needs and you can take it out in a more tax efficient way.

What Are the Risks?

Because you are in  control of the company’s money, you can control how much risk you take with the investments. You are not restricted within the company regulations to be fixed to a low-risk or high-risk. You are able to pick your risk which means you have the flexibility of having it towards the low risk side which is down towards cash or bring in some risk in with some equity exposure.

Company Pension Contribution

A company can make pension contributions to an individual, this means that the individual will get better remuneration even though you cannot access it until you reach retirement age. It is tax efficient for the company because the company does not pay National Insurance on the pension contribution. If you are paying yourself more or the company is paying individuals more then the company would have to pay National Insurance on the salary payments it makes. If the company pays into a pension on behalf of the individuals, in some ways it feels like a salary because it is a benefit but the company does not pay National Insurance on that contribution.

Pension contribution is one of the tax deductions for your company tax. An example of this is if you have kids there is employer supported childcare which you can take advantage of.

Advice on Having Cash in The Company

  1. Know how much cash the company needs for running costs for 3-4 years before you consider tying up any cash in investments.
  2. Understand the risk, understanding your own risk profile and how the company risk profile may be different from your own risk profile because they are two different entities. Saving for the 20-30 years will have a different risk profile of saving for 4-5 years and it alters the investment profile quite dramatically by having two different time scales.

Venture Capital Trusts

Venture Capital Trusts have been running for about 20 years and it is a government scheme used to encourage investments in smaller companies and start-up companies. The government is offering really good tax breaks for people taking risks and investing in these companies. Most people start to consider this option once they have used up their ISA allowance and their pension contributions. Any money you put into a Venture Capital Trust you get tax relief on. If you invest £1, you get 30% tax relief on that £1. Throughout the life of that VCT you will get a dividend payment and it will be tax-free.

VCT are made up of a collection of up to 20 or 30 individual venture type companies, they offer growth opportunities and offer diversity because you cannot access this area of the market through normal stock markets. They are high-risk investments so it is best not to invest in them purely for the tax relief. Once you put money in, you cannot access the capital for 6 years. You cannot change the risk profile within the 6 years which is unlike a pension.

Are VCT’s and Pension Contributions Good Options for People Who Are Not Risk-Takers?

The default rate of VCT’s failing is quite high and it is up around 40%. It is a fund of different venture companies which means there is a fund manager sitting over that and picking the best investments for their Venture Capital Trust. What they usually do is meet 1000 different companies and each year they will only invest in 6. By narrowing it down it helps to reduce some of the risk. They will also pay out to these venture companies capital, so over the period of 6 years they will give a small amount in year 1 then more in year 2 etc. What eventually happens is that the companies that are not doing so well do not get much of the money because they tend to fail within 2 or 3 years. The companies that do well will receive more money and the default rate drops from 40% to 14%.

Pension Contributions are very tax efficient. Once you put money into your pension you can play around with the risk level you are taking within that pension which is positive as you are not locked into high-risk. Although you do not have access to the money, you have access to the risk within the pension.

What is Tax Relief?

If you earn anything over £11,000, you will pay 20% tax on that and if you earn over £45,000 you will pay 40% tax. If you are in that bracket and you are earning over £11,000, anything you contribute into a pension the government will give the equivalent of the amount of tax back. If you invest £1 you will get £1.40 invested which is worth it.

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

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How Not to Forget to Pay Yourself

One of the most important factors of building wealth of any kind is to start paying yourself. It does not matter the amount that you pay, even if it is a small amount, the most vital part is that it will accumulate over time. In Tony Robbins, ‘Money Master the Game’, it mentions the power of compounding where it explains that time can actually make a small amount accumulate so that when you get to retirement age you will have a healthy pension retirement fund. It also tells us that it is very important to start paying ourselves no matter what the income level is. Some people may question the fact that they will be living on paycheque by paycheque but the point is that you should not wait until you are earning over a certain amount before you start paying yourself. As long as you are receiving an income, you should pay yourself and then eventually start to think about planning and paying your bills etc.

In this article, we will be breaking the whole process down into a couple of steps in order to make things clear on how you can pay yourself and how you can make the idea of paying yourself more fun and positive.

Be Clear with Your Value and Objective

First of all, in order to not forget to pay yourself you will need to prioritise your needs. You cannot neglect your needs and then think about paying yourself. If you do not know what you need and if you do not prioritise your own needs then it is very hard to make things easy. You need to decide how much you need to pay your bills, groceries etc. You will also need to consider the other aspects that are important to you because if you are living under a certain budget then you cannot have a lot of luxury things. You need to decide on what you value the most. For example, if you value going out that is completely fine but you would need to let go of what is not important in order to fund the parts of your life that are the most important to you. Always know your value, know what you need and be clear on why you need that extra money.

Set Income Goal

After you have decided what you need the extra money for and why, you can start to set an income goal. It does not matter whether you are self-employed or employed, you are always able to set an income goal. If something is really important to you, you will always find the extra money. When people state they cannot afford something what it really shows is that they do not want to do whatever it takes to pay for that or they choose not to buy that. Instead of saying you cannot afford something you should start to ask yourself how can you make it affordable and then set some income goals.

If you are self-employed, you might want to work backwards and figure out how much you need to fulfil your needs and the things you value the most. You are then able to work out your bare minimum and how much you have to earn as a minimum for that particular month in order to support yourself. If you are on a fixed-contract or if you are an employee, you can still set some goals based on how much you actually need in order to support the lifestyle you really want. You might want to consider negotiating a pay rise or sell some unused items from your home to create some income.

Put a % of Income Aside First

Whenever you have a pay cheque, you need to make sure you put a small percentage aside for your long term financial future. You should not wait to pay yourself after you have paid for the expenses and there is a bit of money left over. It will not work this way, you need to make sure you pay yourself first before anything else.

When you have a business, you need to use the same concept. Whenever a customer or client pay you, you need to put aside a small percentage first and then use the rest to pay bills or expenses. If you find out you do not have enough money to fund your expenses it does not mean you have to borrow from yourself, it just means you need to re-think your current strategy. You have to strategize your business to make sure you are making extra income or figure out if there are any expenses that you can save for the time being.

This concept works for personal finance too. If you are an employee, when you receive your net pay, you can put a small percentage into your pension pot. This is a very tax efficient approach because every £80 you pay in; the government will put £20 on top and for a higher rate tax payer the government will top up even more. Paying your pension means you will get 25% return and no other investment can be as good as that.

You can also consider putting money into an ISA which will allow you to earn some tax-free interest. If you have an investment ISA or if you sell the shares then all the dividends you get from your ISA wrapper is tax-free as well.

Tax Efficiency

When you are a business owner, especially a limited company, once you decide how much money you need to fund your lifestyle it is important to go through everything with your tax advisor or accountant. You need to make sure you are extracting money in a tax-efficient way and doing it properly because when you have a limited company you cannot randomly withdraw money. You can either have a salary or dividends but you would need to work out which option is the most tax-efficient. If you have a home-based business, there are certain expenses you can claim as a business expense and you can let your company pay for it. An example of a type of business expense is use of home, which means that if you are working from home a portion of your bills will be paid for by your business.

If you are self-employed, there is no restriction. Whatever you earn, you can use as long as you have sufficient funds to pay all of your expenses as well as your tax bill. There are certain strategies as mentioned that you can use such as pension contribution and the ISA wrapper.

If you are earning really good profit but for some reason you cannot incorporate as a company it is best to consider taking more advanced advice on things like Venture Capital Trust investment which will give you good tax relief as well. Every £10,000 you invest will give you back £3,000. However, please note that this type of investment is very risky as it involves funding start-up businesses and it is likely that they will fail. If they succeed you will get tax-free dividends.

If you are running a profitable business from a limited company, you can think about retaining some money. You do not need to extract the money if you already have enough to fulfil your needs. Business can sometimes slow down, it is always ideal if you have money to have it in a vault account. You can also set up investment funds under the company name in order to keep the cash in there and get some return.

If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please direct message the author of this article so we can arrange a chat.

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