Tax efficient pension contributions

Posted on May 1, 2012 by

Who should pay contributions into your pension fund: you or your employer? If you control the company you work for, the most tax efficient solution is almost certainly for the company to pay as your employer.

The company can set a reasonable level of pension contributions against its profits subject to corporation tax (at 20%, 24% or 25%), and it pays no employers’ NI charges on those pension contributions. A ‘reasonable level’ is where the salary plus benefits, including pension contributions, form a commercially reasonable remuneration package for the work done. As long as the total package is set at a commercial level or below, the company can receive tax relief for the remuneration payments.

If you pay pension contributions as an employee, you need to extract the funds from your company. If you do this by a salary, this creates an income tax charge in your hands. The company receives tax relief on salary payments but it must pay employers’ NICs at 13.8%, with no upper limit. You are also subject to NICs on your salary at 12%, which then reduces to 2% on salary over £42,475 per year. So unlike pension contributions paid directly by the company, salary payments carry NICs of up to 25.8%.

If you take dividends from the company to pay your pension contributions, there are no NICs payable by you or the company. But the company does not receive tax relief on the payment of dividends. So the only tax relief due on the pension contributions is due at your marginal tax rate, on up to 100% of your earned income, capped by your annual allowance (see below). Dividends are not earned income, so if you only take dividends and no salary or other employment benefits from your company, the tax relief on your pension contributions is limited to £3,600 per year, which is the minimum for a person with no earned income.

Your annual allowance caps the amount of your pension contributions which attract tax relief. If this allowance is exceeded by pension contributions paid by you or your employer, you will pay a tax charge at your marginal rate. The annual allowance is now £50,000 per year, but this is extended by unused allowances brought forward from the previous three tax years. Thus the exact amount of annual allowance will be different for each individual, depending on his or her pattern of pension contributions.

Posted in Ipswich Accountant | Leave a comment

Team complete

Posted on April 23, 2012 by

Welcome to Rosey Basker who joins the RDP Accountants team today as a trainee, based at the Martlesham Heath office. There was tremendous interest in this position, more than 60 people applied and Rosey was the sucessful candidate.

Rosey studied A level Accounts and is now studying towartds the Accounting Technican qualification. RDP Accountants might start entering office karokee competitions now because Rosey is also great singer!

Rosey will be working on the accounts for small businesses and VAT returns, under the supervision of Nicola Bulmer.

Posted in Ipswich Accountant, Uncategorized | Leave a comment

Budget 2012

Posted on March 29, 2012 by
Personal Allowances
The big news for individuals is that the personal allowance will increase to £9,205 from 6 April 2013, so you have to wait another year for that extra tax-free income. The personal allowance has already been increased by £630 from 6 April 2012 to £8,105, and the other allowances are increased as indicated below.A source of complexity for older taxpayers is the application and withdrawal of age-related allowances, which are currently given when the taxpayer reaches age 65. These age-related allowances are withdrawn when the taxpayer’s total income exceeds £25,400 (for 2012/13).

From 6 April 2013 those who reach age 65 on or after that date will not receive an age-related allowance, but will instead be entitled to the standard personal allowance of £9,205. This allowance is expected to rise to £10,000 in April 2014 or 2015. The existing age allowances given to people born before 6 April 1948, will be frozen at current rates as shown below.

Personal allowances for 2012/13…

Under 65 (standard allowance): £8,105 (2013/14 – £9,205)
65-74: £10,500 (2013/14 – £10,500)
75 and over: £10,660 (2013/14 – £10,660)
Minimum married couples allowance*: £2,960 (2013/14 – TBA)
Maximum married couples allowance*: £7,705 (2013/14 – TBA)
Blind person’s allowance: £2,100 (2013/14 – TBA)
Income limit for allowances for age related allowances: £25,400 (2013/14 – TBA)
Income limit for standard allowances: £100,000 (2013/14 – £100,000)

* given where one partner was born before 6 /4/1935, as 10% reduction in tax.

Income Tax Rates
The tax rates for 2012/13 have not been changed from those applicable in 2011/12 (see below), but the threshold at which the 40% tax rate is applied is reduced to £34,370.

The reduction in the 40% threshold is balanced by the increase in personal allowance by £630. This means that in 2011/12 you start to pay 40% tax when your total income before allowances exceeds £42,475. In 2012/13 the 40% tax threshold is set at exactly the same amount: £42,475, before deduction of personal allowances. You can increase your own personal 40% threshold, by making donations under Gift Aid or paying personal pension contributions in the tax year.

Rates for 2012/13
Savings rate* (10%) – 0 to £2,710
Basic rate (20%) – 0 to £34,370
Higher rate (40%) – £34,371 to £150,000
Additional rate (50%) – over £150,000

* Only applies if non savings income is below this amount.

The rate on dividends remains at 10% for basic rate taxpayers, 32.5% for higher rate and 42.5% for additional rate. All come with a 10% tax credit.

Rates for 2013/14
There was much speculation before the Budget about the removal of the 50% rate that applies to taxable income above £150,000. This 50% additional rate remains in place for 2012/13, but will be reduced to 45% from 6 April 2013. The Government has also published most of the other tax rates and thresholds for 2013/14 as follows:

Savings rate* (10%) – 0 to £2,770 (estimate)
Basic rate (20%) – 0 to £32,245
Higher rate (40%) – £32,246 to £150,000
Additional rate (45%) – over £150,000

* Only applies if non savings income is below this amount

The rate on dividends will 10% for basic rate taxpayers, 32.5% for higher rate and 37.5% for additional rate. All come with a 10% tax credit.

Child Benefit
Another area of speculation was the withdrawal of child benefit from families where at least one parent pays tax at 40% or higher.

The Chancellor listened to reason and has decided to taper the withdrawal of child benefit where the higher earner’s net income (after losses but before allowances), exceeds £50,000. For every £100 of income over £50,000, a tax charge will apply equivalent to 1% of the child benefit received by the family. This will lead to the complete withdrawal of child benefit at £60,000 of net income. This tax charge is to apply from 1 January 2013, and will be collected through PAYE and self-assessment from the higher earning partner in the family.

If you, or your partner, are currently in receipt of child benefit you don’t have to do anything now. HMRC will be writing to all those affected by this change later in 2012. However, please discuss with us how you could re-arrange the distribution of income within your family, to reduce the affect of the withdrawal of child benefit. Any action in this area should be taken as soon as possible to ensure the new arrangements are in place for the full tax year 2012/13.

Tax Credits
The following summarises the rates and thresholds that will be cut or frozen in 2012/13 compared to 2011/12.

Child Tax Credit
Family element – £545 (2011/12 – £545)
First income threshold – £15,860 (2011/12 – £15,860)
Second income threshold – withdrawn (2011/12 – £40,000)

Working Tax Credit
Basic element – £1,920 (2011/12 – £1,920)
Couple and lone parent £1,950 (2011/12 – £1,950)
30 hour element – £790 (2011/12 – £790)
Childcare element:
Maximum costs for one child – £175 per week (2011/12 – £175 per week)
Maximum cost for all children – £300 per week (2011/12 – £300 per week)
Percentage of costs covered – 70% (2011/12 – 70%)
First income threshold – £6,420 (2011/12 – £6,420)
Withdrawal rate – 41% (2011/12 – 41%)
Income rise disregard – £10,000 (2011/12 – £10,000)
Income fall disregard – £2,500 (2011/12 – N/A)

The income disregard provides a buffer for changes in income, so overpayments of tax credits do not arise where income varies within this threshold year on year. This affects families with fluctuating incomes, such as the self-employed. If you are in this position you need to finalise your profit figures as close to the tax year end as possible and provide those figures to the Tax Credits office without delay.

There are also changes to the tax credit rules from April 2012, which affect the number of hours the adults in the family must work to qualify for working tax credits. Lone parents are not affected by these changes.

Cap on Tax Reliefs
The Chancellor wants to deal with wealthy individuals who take advantage of tax reliefs that have no annual limits, such as relief for trading losses, charitable donations, and capital allowances. He is proposing that from April 2013 all such tax reliefs will be capped at the greater of £50,000 per year or 25% of the taxpayer’s gross income. If this idea becomes law it could significantly affect loss-making businesses that are not conducted through a company.
Savings and Investments
Enterprise Investment Schemes
From 6 April 2012 there are two schemes which you can use to achieve tax relief for investing in small unquoted companies: the seed enterprise investment scheme (SEIS) and the enterprise investment scheme (EIS). The tax relief given under each scheme is shown below for 2012/13:Rate of income tax relief: SEIS – 50%, EIS – 30%
Annual maximum investment qualifying for income tax relief: SEIS – £100,000, EIS – £1,000,000
Capital gains tax relief on investment: SEIS – 18% or 28%, EIS – deferred relief

Both the company and the investor have to qualify in order to receive tax relief under SEIS or EIS. The rules for both schemes are very complicated, so please talk to us before deciding to use either scheme.

Pension Contributions
In spite of much speculation about a reduction in tax relief for contributions to registered pension schemes, there has been no change in the tax relief rates or annual allowance for 2012/13. The annual allowance is the limit on pension contributions that attract tax relief, whether those contributions are paid by the individual, his employer, or calculated as a deemed rise in the value of a final salary scheme.

Each individual has a personal annual allowance of £50,000, plus unused annual allowance brought forward from the previous three tax years. If the value of the contributions made to the pension scheme exceed the taxpayer’s annual allowance, an annual allowance tax charge applies on the excess contributions, set at the taxpayer’s highest rate of income tax.

Annual allowance: 2012/13 – £50,000 (2011/12 – £50,000)
Lifetime Allowance: 2012/13 – £1,500,000 (2011/12 – £1,800,000)

Independent Savings Accounts (ISAs)
The ISA savings limits applicable in 2012/13 for those over 18 are:
Overall limit – £11,280
Cash up to – £5,640
Balance in stocks and shares up to – £11,280

For those aged 16 & 17:
Overall limit – £5,640
Cash up to – £5,640
Balance in stocks and shares up to – nil

For Junior ISA:
Overall limit – £3,600
Cash up to – £3,600
Balance in stocks and shares up to – £3,600
Capital Taxes

top
CGT
There has been no change in the rates or thresholds for capital gains tax (CGT):The rates for 2012/13 are…

Annual exemption – £10,600
Annual exemption for most trustees – £5,300
Rate for gains in basic rate band – 18%
Rate for gains above basic rate band – 28%
Rate for gains subject to entrepreneurs’ relief – 10%
Lifetime limit for entrepreneurs’ relief – £10,000,000

Overseas Owners
Currently only UK resident individuals pay CGT on gains, even when the property is located in the UK. The Government is considering how CGT can be applied to gains made on residential property in the UK, when the owner is resident in another country. Any changes will apply from April 2013 at the earliest.

Employee Shares
If you acquire shares through an approved share option scheme run by your employer, you must pay CGT on gains made when you sell those shares, after deduction of your annual exemption. The CGT will be charged at 18% or 28%, as the conditions for the entrepreneurs’ relief rate of 10% are unlikely to be met. The Government is considering changing the rules for approved share option schemes so the 10% rate can apply to shares acquired by employees. Any changes will apply from 6 April 2013 or later.

Inheritance Tax
The inheritance tax (IHT) nil rate band remains frozen until 2014/15. This is the amount of a person’s estate that is free of inheritance tax. However, for deaths occurring on and after 6 April 2012, when at least 10% of their estate has been left to charity, a reduced rate of IHT applies to the chargeable estate. Gifts made to charities are exempt from IHT.

The limits and rates for 2012/13 are…

Nil rate band: £325,000 (2011/12 – £325,000)
Rate payable on death: 40% (2011/12 – 40%)
Rate payable when 10% of estate left to charity: 36% (2011/12 – 40%)
Rate payable on lifetime gifts to certain trusts: 20% (2011/12 – 20%)

Stamp Duty
You pay stamp duty when you purchase a property in the UK. There has been a lot of talk about how some people have avoided paying SDLT on high value homes. The tax avoidance scheme usually involves an off-shore company.

To deal with such schemes the Government has introduced new rates of SDLT on purchases of residential property valued at over £2 million:

- 7% charge on purchases by individuals from 22 March 2012; and
- 15% charge on purchases made on or after 21 March 2012, by companies, collective investment schemes, or partnerships where a member is a company or a collective investment scheme

An annual tax charge may also be applied to the value of residential property held by certain companies, where each property is worth over £2 million. Any such charge will apply from April 2013.
Business Tax

top
Simplification
The Government wants to simplify the accounts small businesses (partnerships and sole-traders) have to prepare for tax purposes. It is consulting on whether preparing accounts on a cash basis would be easier, and standard allowances could be used for the business use of vehicles and the proprietor’s home. Any changes are likely to apply from April 2013 or later.Corporation Tax
The small profits corporation tax rate remains the same at 20% for the year from 1 April 2012.

However the main rate for large companies is reducing from 26% to 24% and will be 22% by the year from 1 April 2014.

Capital Allowances
The rates and thresholds of the main capital allowances will apply as follows for 2012/13…

Main pool: writing down allowance: 18% (2011/12 – 20%)
Special rate pool: writing down allowance: 8% (2011/12 – 10%)
Annual Investment Allowance (AIA) cap: £25,000 (2011/12 – £100,000)
Employers
NI
For 2012/13 the main rates and thresholds for NI contributions are:Lower Earnings Limit (LEL) for Class 1 NICs – £107/week
Employer’s class 1 above £144/week not contracted out – 13.8%
Employee’s class 1 not contracted out from £146 to £817/week – 12%
Employee’s additional class 1 above £817/week – 2%
Self-employed class 4 from £7,605 to £42,475 per annum – 9%
Self-employed class 4 additional rate above £42,475 per annum – 2%
Self-employed class 2 – £2.65 per week
Voluntary contributions class 3 – £13.25 per week

The Government is consulting on how to integrate the administration of income tax and NI for employers and the self-employed. Any changes are unlikely to take effect until 2014 or later.

Share Schemes
The Government wants to encourage more employees to acquire shares in the companies that employ them. Small and medium sized companies can use the Enterprise Management Incentive share option scheme (EMI) to grant share options to employees, but there is a £120,000 cap on the value of share options each employee can acquire. The Government plans to raise this cap to £250,000 as soon as possible.

Cars and Car Fuel
Car Benefit

The tax charge for the private use of a company car is based on a percentage of the list price of that car when new, the percentage being based on the vehicle’s CO2 emissions.

From 6 April 2012 cars with CO2 emissions in the band 76-99g/km will be taxed at 10% of list price. Those with CO2 emissions of 100g/km will be taxed at 11% of list price, with the percentage increasing in 1% steps for each additional 5g/km. From 6 April 2013 the 10% list price band will reduce again to 76-94g/km. A car with CO2 emissions of just 115g/km will then be taxed at 15% of list price.

From 6 April 2014 the 11% of list price will apply to cars with CO2 emissions in the band 76-94g/km, with a 1% step up for every addition 5g/km of CO2. From 6 April 2015 the minimum percentage of list price will be 13%, and from 2016 the minimum percentage of list price increases to 15%.

Fuel Benefit

Where a company car driver receives free fuel, the taxable benefit is calculated as the percentage of the list price for the car applied to a set value, currently £18,800. This will rise to £20,200 from 6 April 2012. The maximum taxable benefit of receiving free road fuel for private use will increase from £6,580 (for 2011/12) to £7,070.

The taxable benefit when fuel is provided for private use in a company van is frozen at £550 for 2012/13.
VAT

top
The VAT rates remain unchanged at…Lower rate: 0%
Reduced rate: 5%
Standard rate: 20%

The registration and deregistration limits from 1 April 2012 are…

Registration turnover: £77,000 (1 April 2011 – £73,000)
Deregistration turnover: £75,000 (1 April 2011 – £71,000)

Changes from 2013
The following changes to the VAT rules will be made in 2013…

- The standard rate of VAT will apply to the supply and installation of energy saving materials in non-residential buildings used for non-business purposes by charities. Currently the lower rate of VAT applies
- The invoicing rules will be simplified
- Exemptions will be introduced for commercial Universities
- Cable-car rides will attract the reduced rate of VAT, where each cable car holds fewer than 10 passengers.

Proposals
The Government is consulting on the existing VAT law in the following areas, so expect changes in the future…

- Hot take-away food
- Sports nutrition drinks
- Self storage
- Hair-dressers’ chair-rental and
- Alterations to listed buildings.
Posted in Ipswich Accountant | Leave a comment

RDP Accountants Changes

Posted on March 28, 2012 by

Wioletta Stroz joined RDP Accountants on 19 March. She is already qualified as an AAT Technician and is now studying towards the ACCA qualification.

Wioletta joins Nicola Bulmer, who has also achieved AAT Technician and is studying towards the CIMA qualification and Mandie Hart who gives everyone a cheery welcome when they call or visit our office in Martlesham Heath.

We said good bye to Claire Blizard in February who after 7 years service with RDP Accountants has moved to a management accounting role nearer where she lives.

The team will be completed next month when a AAT trainee joins the team. There were more than 60 applicants for this job and it makes me feel for people who are currently out of work when there is so  much competition for such a vacancy.

We have also come to an arrangement with Saracens House in the centre of Ipswich, where we can meet with potential new clients (and existing clients) by appointment.

Posted in Ipswich Accountant | Tagged , | Leave a comment

Flat Rate VAT Scheme: Bad debt relief

Posted on December 15, 2011 by

I have made a very surprising discovery about the flat rate scheme. A VAT registered business has the choice between

  1. Accounting for VAT on the basis of sales invoices raised in a quarter, minus purchase invoices received from their suppliers in that quarter OR
  2. The cash basis which is customer receipts minus supplier payments.

    For most businesses the cash basis is better, you only pay over the output tax to HMRC after your customer has paid you.

The Flat Rate Scheme is available to smaller businesses. Under the flat rate scheme you would normally ignore the VAT you have been charged by your suppliers and pay HMRC a fixed percentage of your GROSS turnover ( i.e. including the VAT you have charged your customer). The applicable percentage is determined by the sector in which the business operates.

The flat rate scheme can be really good for people who effectively sell their time, where the amount of VAT that they could claim back is quite small.

What I now discovered is, even when you are using the cash basis under the flat rate scheme, you can still get relief for bad debts. This is the case even though, under the cash basis, you won’t have paid any VAT to HMRC, because your customer has not paid you. Here is a the link to the HMRC notice with a worked example. It’s paragraph 14.2

HMRC Notice 733

Posted in Ipswich Accountant | Tagged | Leave a comment

Clean Joke for light relief

Posted on November 8, 2011 by

This is a favourite joke of mine. It has nothing to do with accountancy but as a friend said recently I am feeling as if “the weather is over me”, so a chuckle is like medicine.

A man had a pet elephant. He tried to take it through customs by foot and was refused by the official. “I am afraid you can’t take an elephant through here sir”. He protested but to not avail.

The next day the man tried again hoping that someone else would be on duty. “I am sorry sir. As I explained yesterday, there’s no way you can take an elephant through the border”.  There was a heated exchange but the guard was adamant.

The next day the border guard looked up and say the same man, again with the elephant but this time, there was a piece of bread lodged in each ear of the elephant. The guard leapt to his feet “I told yesterday and the day before, you can’t take your elephant through the border!!!!”

The man grinned knowing that he had triumphed.“It’s none of your business what I put in my sandwiches!”

Posted in Uncategorized | Leave a comment

Selling your Business

Posted on November 2, 2011 by

On the recommendation of my friend Nick Strong I attended a seminar yesterday in London organised by BCMS Corporate about “Selling Your Business for the Maximum Value”. I hasten to add ,this is not because I am planning to sell my business but to find out what BCMS had to say on behalf on my clients!

BCMS stated that on average they are able to obtain a final value of 2.5 times the lowest offer received.

There were 2 key things which really stood out to me.

1 What could the buyer do with your business?

I think it was Steve Jobs who said that, when it comes to a new gadget, a baby boomer will typically as “What is it?” whereas their child would be more likely to ask “What can I do with it?”. This came to mind when the speakers talked about the value of a business. They argued that traditional valuation models place too much emphasis on past performance. The value of a business depends on what the buyer will be able to do with it. For this reason, premium valuations are more likely to be obtained when selling to someone entering the market from overseas or a business providing complimentary goods/services as opposed a competitor. Just as features are more important than benefits, the future is more important than the past.

This made me think of the stock market. The price of a quoted share is determined by sentiment about the future prospects of the company more than the past performance.

2 Establishing choice of buyers

It was emphasised many times yesterday that at all stages the seller must ensure they have a choice of potential buyers. For BCMS this means approaching an average of 240 potential buyers at the beginning right through to keeping in dialogue with those unsuccessful at the final stage . To burn your bridges to early is very dangerous and gives the buyer the upper hand.

I must say I was very impressed with BCMS, the presenters and the approach that they advocated. I would recommend anyone thinking of selling their business to attend a BCMS seminar.

Posted in Accountant | Tagged | 3 Comments

Being an accountant in practice

Posted on October 12, 2011 by

Last week we celebrated the 10th anniversary of RDP Accountants opening our Martlesham Heath office. I had previously worked for a life and pensions insurance company in Colchester and then briefly on a freelance basis, for a credit risk insurer based in Canary Wharf.

As anyone who has their own business will know I have found it very rewarding to build up the business although of course it has its own challenges! I remember in the early days coming to terms with the fact there was no IT department to phone or office removals department to ask to move some furniture around. It’s DIY when you are running a small business!

In 2001 I was fortunate to find Mr John Moorby a chartered accountant with a small practice  who was looking to retire. We came to an arrangement for John to pass over his clients to RDP  and we moved into his office in Martlesham Heath.

It’s been great to get to know our clients , who now number around 250. Many surveys of business people show accountants to be their most trusted adviser and this is a role things brings a great sense of responsibility.

Cutting Cake

I am grateful to all who have helped us grow over the last 10 years. Richard & Derek from RDP Colchester and my staff past and present , Katy, Christine, Bev, Claire, Mandie, Isaac and Nicola.

We look forward to the next 10 years!

Posted in Ipswich Accountant | Leave a comment

Happy 10th Birthday RDP Accountants Ipswich

Posted on October 6, 2011 by

First 10 Years: A piece of cake

Posted in Ipswich Accountant | Leave a comment

New Tesco TV Advert

Posted on October 3, 2011 by

To mark RDP’s 10 years in Martlesham Heath we have created a new advertisement for Tescos TV.  I don’t think the Coen brothers will be quaking in their boots but I hope you like it!

Posted in Accountant, Ipswich Accountant | Tagged , | 1 Comment