Category: Tax Tip

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How to pay zero inheritance tax 

Statistically most people won’t die leaving enough assets to need to pay inheritance tax. Although, to be pedantic, it isn’t the deceased person who pays the inheritance tax anyway.

For those with a little more wealth then you can avoid inheritance tax completely by giving away anything over the current limits and then living for another 7 years. (This means that you shouldn’t leave your tax planning to the last minute) 

The snag is that you need to give away those assets UNCONDITIONALLY. I.e. you can’t give your house to your kids on condition that they continue to let you live there. You have to TRUST them to do the right thing.  

So, the question is, how much do you trust your potential beneficiaries? 

(I’ll share a little more serious inheritance tax planning next time) 

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Pay your spouse a salary 

This is a favourite bit of advice from ‘Dave at the pub’ and he may well be right as it reduces the corporation tax that you pay. If your spouse works in your business, then it would be right and fair to pay them for that work. Remember that all expenses must be ‘wholly and necessarily for the purposes of business’ so, if your spouse doesn’t work in your business, it could be fraudulent.  

We always ask our clients to provide a realistic job description (if we do your bookkeeping then you can’t include this as one of their tasks! Nor can you claim diary management if you trade from a mobile phone and book all your own appointments) and an estimate of the number of hours worked. This should show that the salary is reasonable for the work they do. You should pay them at least minimum wage and deduct relevant employment taxes.  

Please don’t try to claim that minor children are working in your business! There is separate legislation covering minors in the workplace and you will need to get authorisation from their school and the local council as well as your insurance company. 

Save corporation tax, pay PAYE/NI 

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Sole trader £1k allowance or utilising losses 

£1,000 income allowance 

If you have a small side hustle or startup with income (not profit) of less than £1,000pa then you don’t need to report this to HMRC 

BUT 

you might choose to do so. 

If the business is making a loss, then you can either offset this ‘sideways’ against your other personal income in the same year to reduce the overall tax paid OR carry it forward to set against future profits from the same business and therefore minimise future tax. This sideways loss relief is particularly useful if you are starting your business as a side hustle to your main employment. 

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Claiming VAT on mileage

Last week I mentioned the increase in the flat rate mileage allowance from 45p to 55p (for the first 10,000 miles). But did you know that you can also claim VAT on part of this allowance? The amount that you can claim is the VAT on the fuel element which varies each quarter and depends on the engine size of your car.

This is the same rate used for company car fuel and you can find the latest list here.

https://www.gov.uk/guidance/advisory-fuel-rates

eg if your fuel rate is 17p you can claim 17p/1.2x.2=2.83p VAT on the 55p.

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Mileage rate for private cars used for business 

It’s long overdue but, finally, the HMRC allowable mileage rate has been increased from 45p per mile to 55p per mile (for the first 10,000 miles per tax year). This change has been backdated to April. 

All other mileage rates are unchanged. 

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Tax efficient salary 

For many years it used to be more tax efficient for director shareholders to take low salary and high dividends but things have changed.

Over the last 3 years the optimal salary/dividend policy has changed because:

  • Higher corporation tax rate of 25% introduced with a marginal rate of 26.5% 1 April 2023
  • Dividend tax free band reduced to £500 2024/25
  • Employer NI starting point reduced to £5000 2025/26
  • Employment allowance increased to £10500 2026/27
  • Dividend tax rates increased to 10.75%-39.35% 2026/27

It keeps us accountants on our toes revamping all our models each year!

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Keep your bookkeeping up to date! 

This is the single biggest thing that you can do to minimise tax and penalties. If your records are up to date you will:

  • know when you need to VAT register so no late registration penalties
  • know how much tax you are likely to need to pay so you can squirrel it away long before the due date so no late payment penalties
  • know how much profit after tax is available to take as dividends so no penalty tax on overdrawn directors’ loan accounts (DLA)
  • have up to date information to ask your accountant for advice before you make any major business (or life) decisions

Frankly, I’m sick of being asked to help directors out of a hole long after the time has passed for action. Whilst I might sympathise, I can do much more if provided with basic information and consulted early rather than having to refer clients to HMRC for a Time to Pay arrangement after the event when we are finally given information to START preparing the accounts.

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Free bookkeeping sessions!

I’m delighted to announce that Zoho Books are sponsoring me to run quarterly bookkeeping advice sessions for them. With the introduction of MTD more small businesses are doing their own bookkeeping. Each session will start with a webinar and advice on what you can claim and there will be plenty of time for you to ask questions.

➡️ Find out more here​. 

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You can’t claim fuel for your own car! 

Instead, as an employee of a limited company, you can claim mileage of 45p per mile which covers not just fuel but the annual costs and wear and tear. 

In order to do this you need to document your business mileage. Date, start and finish point, and business reason for the journey eg customer name, supplier name, or perhaps a course you attended. 

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VAT on mileage

Don’t forget to claim the VAT on business mileage. 

You can’t claim VAT on the full 45p but you can claim on the fuel element. You can find out the current fuel element Advisory fuel rates – GOV.UK (www.gov.uk) 

For instance, if my car has a fuel rate of 14p. This means that, for every mile, I can claim 14p *20/120 = 2.33p in VAT. There is no VAT on the remaining 31p as that is deemed to be for insurance, maintenance, wear and tear etc. 

fuel around the date of the journey ie when you you fill up before or after the trip. 

*If you’re interested then it’s because the 45p is an allowance and EU/UK law states that you can’t claim VAT on allowances. The EU did one of their usual accommodating moves and agreed that, as long as there was a valid VAT invoice for fuel around the same date (eg filling up before or after the mileage) then the company could claim VAT on the fuel element of the 45p. 

All you need to do is to keep a VAT invoice* (not a credit card receipt please!) for filling up just before or after your trip