Tag: tax tip

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Inheritance rates and bands 

After my slightly tongue in cheek tax tip last week suggesting that you can avoid inheritance tax (IHT) completely if you trust your beneficiaries enough to hand over everything sooner rather than waiting for your death here are the latest inheritance rates and bands 

  1. Nil-Rate Band (NRB) – The first £325,000 of an estate is normally taxed at 0% 
  1. Residence Nil-Rate Band (RNRB) – An additional £175,000 allowance may apply if a main residence is left to direct descendants (children, grandchildren, etc.). Combining these two bands gives you £500,000 
  1. Married Couples / Civil Partners – Unused NRB and RNRB can generally be transferred to a surviving spouse or civil partner. So the combined tax-free allowance is up to £1,000,000 
  1. Annual Gift Allowance – an individual can give away £3,000 per tax year free of Inheritance Tax. (If you don’t use the exemption in one tax year, you can carry it forward one year only, allowing up to £6,000 to be gifted in some circumstances) 
  1. Marriage / Civil Partnership Gift Allowance – You can make tax-free gifts when someone is getting married or entering a civil partnership: 

£5,000 to your child.  

£2,500 to a grandchild or great-grandchild 

    £1,000 to anyone else 

      1. Other Useful Small Exemptions 

      Small gifts exemption: up to £250 per person per tax year to any number of individuals 

      Normal expenditure out of income: regular gifts from surplus income can be immediately exempt from IHT if they do not reduce your standard of living and are properly documented 

        1. Other lifetime gifts to individuals are usually outside the estate if the donor survives 7 years after making the gift. (Gifts within 7 years may still be taxable, although taper relief can reduce the tax after 3 years) 
        1. Reduced Rate for Charitable Giving – the usual rate for IHT is 40% but this is reduced to 36% if at least 10% of the net estate is left to charity 
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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.