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Tax Return: DIY or NOT?

It is now the mid of 2017 which means it is time for people to start filing their 16-17 tax returns. There are people that wonder if they are able to do their tax returns themselves or if they would need to hire an accountant to do it for them. Different people have their own opinions and understanding of what a tax return is and what is required. Today we will run through the basic requirements and reliefs for Self-assessment which will give you an opportunity to decide whether DIY tax returns are a good choice for you.

 

Does Self-Assessment Apply to You?

 

Employee: If you only have a salaried job and that is your only source of income, you are less likely to be required to file a self-assessment. Because your taxes are being taken care of by PAYE tax code. However, this duty is required if you earn more than £100k per year. Also, if you claim the child benefit plus you earn more than £50k a year, then you are required to file a self-assessment and declare the high income child benefit tax charge.

 

Also if you claim professional expenses, e.g. medical doctors claim their professional fees, etc, you may find it quicker to receive a tax rebate when you claim it via filing a self-assessment. In particular, you will need to do so if your expenses are more than £2,500.

 

Self-employed: Currently, there’s a £1,000 exemption for self-employment income, which means that you may not need to file tax return if you earn less than that for the year. If not, a full self-assessment tax return is required.

 

If there are expenses and eventually you quit your job and you pay tax on your employment income then you might find it beneficial to file a self-assessment. This is because if you are making a loss you can use the loss to offset your employment income and get some tax refunds to aid your cash flow.

 

Company directors: If you are director of a company you are required to file a self-assessment, as you may receive dividend income which is not taxed at source. However, in the event your company is dormant, or your business is making a loss where no dividends to take, you can avoid this duty.

 

Investors: Income from stocks and shares, investment properties, and capital gains are required to be declared via self-assessment. However, If your rental income is less than £1,000 then you do not need to declare it. Also if you are renting out a spare room, the rent-a-room scheme means that you do not have to declare the rental income if it is less than £7,500 (under the current legislation).

 

 

Some DIY-able Tax Relief

 

  1. Charitable Donations – Charitable donations can help you reduce the total taxable income. In particular, for individuals who earn more than £100k and start losing personal allowance, some charitable donations may well protect your personal allowance.

 

  1. Pension Contribution – You can contribute into a personal pension and get tax relief. If you are a basic rate taxpayer, you get £20 tax relief for every £80 you contribute. And if you are a higher rate taxpayer, the tax relief you get will be even more.

 

  1. ISA – With an ISA you earn tax-free interest, including a stocks and shares ISA. Your money is in a tax-free environment.

 

  1. Usual Saving Accounts – If you have a joint account with your spouse or your family member, but they are earning under the tax-free threshold (currently is £11,500), or not earning at all, then you may consider telling the bank as they will be able to give the interest without deducting the tax. This is because the bank will usually deduct 20% of the tax before they pay the interest.

 

  1. Tax-efficient Investments – Investing in certain types of small businesses provides some tax relief. If you invest £10,000 in a Venture Capital Trust, where it provides funds to those small businesses, then you get £3,000 back from the government. When the businesses start making money, they will start paying your dividends which are tax-free as well. But this type of investment can be risky too, so please do seek for advice from a financial advisor to review your investment strategy as a whole.

 

What If You Don’t Fill in A Tax Return on Time?

 

There are late filing penalties if you do not file the self-assessment on time. The deadline for this is 31st January each year, i.e. the deadline for 16-17 tax return is 31st January 2018. If you are late for less than 3 months then the penalty is £100. If it is more than 3 months, there will be a daily penalty which could be around £10 a day. If you do owe any tax, then you might have a late payment penalty as the deadline is also 31st January and the penalty depends on how much tax you owe.

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Paying Her Majesty: Understand your tax codes and how taxes are collected

Most people feel as though if they are an employee then their tax bill has already been taken care of, but that is not always the case. There are people who have several employments and they do get confused about their tax code. For example, we’ve worked with medical professionals, and when a trainee doctor is working on rotation basis, he/she may have several employers in a year, so the tax code might not all be correct. Some of the HR departments do provide people with the wrong tax codes so individuals will end up having underpaid or overpaid tax.

Tax Codes

1150L – The most common tax code for the current year is 1150L. For 17/18, your tax-free allowance is £11,500, this is where the code comes from, the tax code is calculated by dividing the allowance by 10. The letter L at the end means you will always have a tax-free allowance available which can also be referred to as ‘Personal Allowance’. This tax code is a normal tax code and it can be found on your payslips or documents.

1100L – In 16/17, the normal tax code was 1100L which can mainly be found on your P60. Last year’s personal allowance was £11,000. Each year the code is different and the personal allowance may change so you need to be aware of that to prevent any confusion.

Tax codes beginning with ‘K’ – This tax code means you do not have the full personal allowance. Normally, HMRC will send a letter explaining why your tax code is like this and you will have a detailed calculation. If you have underpaid tax from a previous year you may have this tax code because it saves you time from having to fill in a tax return. In some cases, if your underpaid tax is more than £3,000 you can pay an amount upfront and the rest can be collected via tax code.

BR – Another tax code is BR which stands for ‘Basic Rate’. Normally, it is used for people that have a second job and they pay tax at basic rate tax bracket. Everything they earn will be deducted by 20% because 20% is the basic rate. For example, if you earn £1,000 you will need to pay £200 tax.

D0 – This tax code applies to people that have more than one job here they earn a higher rate. This means that you fall within the 40% tax bracket.

D1 – This applies when an individual has more than one job and where all income are taxed at 45% becomes appropriate.

NT – This particular tax code means no tax is being deducted. This is quite rare but if you are not a UK resident and you do not subject to UK tax then you do not have to pay tax.

0T – This tax code usually applies to people that have zero tax-free allowance. Usually, if you are earning over £100,00 for every extra £2 you earn above £100,000, you lose £1 of personal allowance. In 17/18, you will lose your personal allowance completely if your salary is over £123,000.

Second Payment on Account

If less than 20% of your tax is paid by tax code then you might have to pay tax twice a year. This is called, ‘Second Payment on Account’. From tax year 16-17, the dividend tax changed so for some director only companies or contractors who have taken dividends may have a second payment on account.

In regard to this, it is advised to do your tax return as early as possible just to make sure you have some funds to prepare as you are required to pay half of next year’s tax bill upfront. It is important to take note that the deadline for 16/17 self-assessment is 31st January 2018 and the deadline for the second payment on account for 16/17 is 31st July 2018.

If you feel as though next year your situation is going to change and you do not think you will have a tax bill which means you will have nil then you can claim reduction on second payment on account.

Running as a Limited Company? When to Pay Company tax

A company is a separate entity, separate from yourself, so on itself it has its own deadline and its own financial year. It depends on when the company was registered. Normally, the financial year is 12 calendar months but it is not the usual calendar months. For example, if the company started in 1st April 2016 then your financial year ended 31st March 2017. Corporation tax which is the company’s self-assessment needs to be paid 9 months and 1 day after your financial year ends.

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Is Your Business In Sleep Mode? Critical Issues For Dormant Companies

Currently, the IR35 is heating the public sector and is affecting a lot of NHS doctors that are working as a locum via limited companies. Because of IR35, the trust or the agency are using the blanket approach to push everyone into either PAYE or umbrella companies.

As a result, lots of locums would stop using limited companies. Those companies would be inactive. And some of them are even considering closing down their companies to avoid the hassle. However, setting companies aside doesn’t mean no responsibilities at all. Here are some critical issues you may need to be aware of.

What defines a company as inactive?

A dormant company is a company that does not have any activities, there are no major transactions apart from minimal transactions if there is a bank account still open and the bank is still charging a fee.

If you have any activities even though you have any money coming in but you still have a pile of cash and are still running payroll out of the company then your company is not dormant. It just means you do not have any sales coming in but you still incur payroll costs. You still have to file a full set of accounts, the company tax return and declare what a standard company needs to declare.

Filing Confirmation Statement

If your company qualifies as dormant, it doesn’t mean you do not need to do anything for the company. For instance, every limited company is required to fill a confirmation statement once a year. A confirmation statement is a replacement of annual return. The detail is very similar to any return, it confirms who are the shareholders/directors are, the address and it makes sure all information is up-to-date. You would also need to declare the people with significant control, this is not only the shareholder but the person who has more than 25% of shares. If you file the confirmation statement online then there is a fee of £13 but if you file it by paper then you need to pay £40.

If you forget or do not file the confirmation statement there is no penalty. It is your responsibility as director to file it on time, if you leave it for a while then Companies House will assume your company is no longer trading so they will automatically dissolve your company.

Filing Company Accounts

If your company is dormant then of course there is no transactions and no activities but you still need to file dormant company accounts. You still need to declare how much shares your company is holding and some basic information. The format is much simpler than the normal set of accounts but it is still something you need to file. It needs to be filed within 9 months after the accounting period.

Responsibilities to HMRC

For a dormant company, by law corporation tax is not required, but it is still your responsibility to let HMRC know the company is dormant, or simply file a nil Corporation tax return to fulfill the requirement. If you do not file the company tax then they will still issue the penalty.

This applies to companies that are VAT registered as well, you still need to file your quarterly VAT return except you would put everything as zero.

What happens with your self-assessment?

This mainly relies on your personal circumstances. If you do not have any dividends income to declare and everything goes through PAYE, even if you think you do not need to file a self-assessment, it is better to let HMRC know rather than leaving it.

Closing down the company

If you think you will never use the company again, in order to reduce the hassle of having to take on all these responsibilities, you might decide to close down the company completely. For most contractors, if their net assets are less than £25,000 then the majority of the time they do qualify for the striking off process. It is important to check with Companies House to see if you do qualify for the striking off process.

There may be issues that will affect this such as if you still have payment arrangements with creditors then you might not qualify. You would need to go through a liquidator so that they are able to deal with this for you and close down the company.

If your company does qualify for striking off then there is an application on Companies House that needs to be signed by all directors. However, before you do the application you need to de-register for VAT, PAYE etc. Any obligations need to be fulfilled and every order needs to be paid, especially HMRC debt. After this process, you are then able to continue with the application, the company will normally be dissolved within 2 months. Within the 2-month period you need to make sure you close down all business accounts because if you do not all the business assets will go to the crown, which means you end up losing all the money.

Have you found this article useful? For more insights and support from our penal of financial experts, please be free to request to join our exclusive Facebook group Tax Deductible Lifestyle Tribe.

For more details of the tax breaks and tailored advice, please get in touch with the author of this article!

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Taxable vs Non-Taxable Income (in the UK)

Not all income are created equally. We all think it is good when receiving money but there are different ways to receive it. The most common way to receive money is by earned income i.e. we earn income by exchange of value. The other way is if you sell some assets, for example if you sell a property or car and it is not regular, then it is a capital gain. These two are very common forms of income and with any type of income you will need to pay income tax. However, there are certain types of income that you do not need to pay tax on.

Tax-free Income

Rental Properties: If you have just started to rent out a property and by the end of the tax year you only receive less than £1,000 of earned income from the rental property then you do not need to declare that amount. If you have your own property and rent out your spare room and receive rental income, there is a Rent A Room Scheme where you can earn up to £7,500 for the year without having to declare the income. If you jointly let a property as a couple, you will share the £7,500 allowance, i.e. £3,250 each.

Self-employed: If you are self-employed, you don’t have to declare your self-employment income if earning less than £1,000. But you may still find beneficial to fill in a tax return if you receive less than £1,000 in sales but you have a lot of expenses, as you can use a trading loss to offset your earned income.

Interest from ISA Accounts: When you earn interest in an ISA account you do not have to worry about the tax as well because you are in an ISA wrapper and that protects you from income tax. If you have a stocks and shares ISA then that protects you from capital gains tax as well. In 17/18, you have an allowance of £20,000 to invest into the ISA, the allowance will be different each year.

Capital Gains Tax: In terms of capital gain, you do have annual exemption. If you make capital profit of less than £11,300, which is the annual exemption in the current tax year, you do not have further capital gains tax burden.

Dividends: Dividend allowance is still £5,000 in current tax year, but it will decrease to £2,000 in the next tax year. However, if you invested in Venture Capital Trust and receive dividends from that, the dividends are tax-free.

Some misconceptions

1. Receiving Health Insurance: In most cases, receiving health insurance is not a tax-free perk. By the end of the year, the company will report the benefit in kind via P11D, which means you would need to pay tax on.

2. High-Income Child Benefit Charge: At the moment, most people may overlook the fact that there may be a tax charge when receiving child benefit, i.e. High Income Child Benefit Charge. This means that if one of you is earning more than £50,000 a year then you start getting charged. You would need to fill in a tax return to declare this and report the tax charge.

3. Forex Trading: Some people say Forex trading is tax free, but it depends on the type of activity. It can be treated as trading like normal earned income, capital gain or just gambling. If you are entering a Forex betting contract, that is just spread betting, then that might be something that you may not have to pay tax for. If it is normal trading where you buy and sell currency then that is more like a capital transaction. If you make a profit of less than £11,300 for the year then you do not have to pay tax on your gain.

4. Receiving Cash from Parents: Normally, this is just a cash gift and you do not need to worry about the tax. In some cases, there may be inheritance tax implication if parents give cash gifts and died within 7 years. However, there is £3,000 annual gift allowance that is free from inheritance tax. Also if you get a cash gift at your wedding, then your parents can give you up to £5,000 that is exempt from the inheritance tax. If it is from your grandparents then the amount that they can give and would be exempt is £2,500. Borrowing money is not an income as you are not exchanging value on that and eventually you would have to pay it back.

Have you found this article useful? For more insights and support from our penal of financial experts, please be free to request to join our exclusive Facebook group Tax Deductible Lifestyle Tribe.

For more details of the tax breaks and tailored advice, please get in touch with the author of this article!