SLATERS CHARTERED ACCOUNTANTS

162A London Road
Chesterton
Newcastle Under Lyme
Staffordshire,ST5 7JB
Tel: 01782 566101 Fax: 01782 566090
 
Practical tax tips to guide you through the tax system and help you plan to minimise your liability.

Please use this guide to identify areas where you could take action, then contact us for advice and to discuss the most appropriate way forward.

CONTENTS

A few essentials 2 - 3
Introduction 2
Self assessment timetable 3
Family matters 4 - 8
Husband and wife 4
Jointly owned assets 5
Children 6
Civil partnerships 8
What about unmarried partners? 8
A word of warning 8
Working for others 9 - 13
The tax code 9
Benefits in kind 9
Expense payments 11
Other transport issues 12
Working for yourself 14 - 20
Choosing a business structure 14
The tax regime 15
Value added tax and your business 18
Tax and your investments 21 - 25
Pensions 21
Tax free savings 22
Capital gains tax 23
Preserving the inheritance 26 - 29
The current regime 26
So what’s the problem? 26
Mitigating the liability 27
Dates for your diary 30 - 31
Things to remember 32

 A FEW ESSENTIALS
 Introduction
 In the UK the greater bulk of income tax which flows into the exchequer does so by deduction at source. The tax is taken from income before it is paid to the taxpayer and most of this happens by way of Pay-As-You-Earn (PAYE).
This collection system will no doubt be familiar to almost everyone who is in employment and also to those who receive pensions. Most of the rest of the income tax collected at source comes from deductions made by banks or building societies from interest paid to savers. Most of us, children, the retired or working people alike, will have savings accounts of one sort or another and many might also have shares from which income arises in the form of dividends.
These too are treated as having suffered income tax at source.As these circumstances cover the overwhelming majority of individuals, more than 80% of the population will have little or no regular contact with HM Revenue and Customs (HMRC), the organisation that administers and regulates all taxes in the UK.Around 9 million taxpayers have something more than a regular income taxed under PAYE and interest on savings. Instead they might have income from their own business or receive rent from a property.
Alternatively, it may be that their income is high enough to attract higher rate tax so that the tax deducted at source is insufficient. These taxpayers may be asked to complete a self assessment return each year and then they will have direct contact with HMRC.

 Tax Planning
If not asked to complete a tax return, it remains the taxpayer’s responsibility to advise HMRC if there is a new source of untaxed income or a capital gain that will lead to a tax liability. Please contact us for further advice if this affects you.

Income tax is not the only means by which the government relieves us of our hard earned cash. You may own assets such as a precious antique, a second home or shares. If such an asset is sold, the chances are that a profit will arise and this may give rise to a liability to capital gains tax. Details of any capital gains may have to be included on the self assessment return.

Inheritance tax may be payable on the assets that you give to others in your lifetime or leave behind when you die. At one time very few individuals had to worry about this tax. Rises in house prices have changed that and many more estates have now become liable. Careful planning can help to minimise this tax but it means that more and more of us cannot ignore this potential burden on our estate.

Many of those in business have to understand the principles of value added tax because they will have to act as an unpaid collector of this duty. In addition, those who run their business through a limited company will be concerned about corporation tax - a tax on their company’s profits.

This booklet is designed to provide you with a simple guide to all of these taxes from five perspectives - that of the family; the working man or woman in employment; the person running their own business; the taxation of investments; and, finally, knowing that nothing is certain except death and taxes, the potential liability on your estate.

Please use the guide to help you identify planning opportunities, pitfalls to avoid and areas where you may need to take action and then contact us for further advice. 


Tax Planning
Remember to keep all tax related documents such as interest statements, dividend vouchers, pay certificate form P60 etc. Place everything in an envelope or folder through the year as it is received. Then you can simply hand this to us when we need to prepare your self assessment return.
  • Income tax and capital gains tax are both assessed for a tax year which runs from 6 April to the following 5 April.
  • Shortly after 5 April - SA returns are issued by HMRC.
  • 30 September following - paper returns must be submitted if HMRC are to calculate the tax due.
  • 31 January following - final date for submission of return and all outstanding tax to be paid. There is an automatic penalty for late filing of the return of up to £100 and more serious penalties for on-going default.

    Back to contents



    FAMILY MATTERS


     Husband and wife

     

    Married couples are taxed as independent persons, each of whom is responsible for their own tax affairs. All individuals are entitled to a basic personal allowance of £5,225 before any income tax whatsoever is paid.

    The tax bands and rates shown in the box are applied to each spouse separately, so that each may earn up to £39,825 before they start to pay higher rate tax. There is no aggregation of income, no sharing of the tax bands and the basic personal allowance may not be transferred from one spouse to the other.



    2007/08 Income Tax Rates

    £ %
    0 - 2,230 10
    2,230 - 34,600 22*
    Over 34,600 40**

    *10% on dividends, 20% on other savings income
    **32.5% on dividends

    Tax rates for 2008/09

    The government proposes to radically change the tax rates for 2008/09 onwards when the 10% starting rate will be abolished for earned and pensions income and the 22% basic rate of tax will be reduced to 20%.

    The higher rate of tax will continue at 40%. The starting rate will continue to be available for savings and investment income and capital gains. There are no changes to the tax rates applicable to dividends.

    The government also propose that from 2009/10 the point at which people start paying the higher rate of tax will be increased significantly to £43,000. The effect of this change will be partly offset by significant changes to the national insurance bands.

    Higher allowances for those aged over 65
     The basic personal allowance is increased to £7,550 where the taxpayer is aged 65 or over on the last day of the tax year in question and to £7,690 where the age on that day is 75 or over. This more generous allowance is reduced by £1 for every £2 that the taxpayer’s income exceeds £20,900. It cannot be reduced below the basic allowance of £5,225.

    Married couples allowance
     IIn the past, a married couples’ allowance was available, given in the first instance to the husband. This is now only available to those couples where at least one spouse was born before 6 April 1935.This allowance can be worth over £600 per year to a couple depending on age but its detailed application is complex. It is worth noting, however, that this allowance can be transferred to the wife or shared between the spouses if they so choose.

     Minimising the tax bill

    It follows from the basic rules set out above that tax is minimised if husband and wife equalise, as far as possible, their income so that all personal allowances are fully utilised and higher rate tax is minimised.

    Example
    I    n 2007/08 Alan and Angela have employment income of £100,000 and no savings income. If this is split equally between them, the total tax bill for the couple is £22,829. If only one spouse has income of £100,000 and the other has nothing, the total tax bill leaps to £31,414 - an additional £8,585!

    Jointly owned assets
    Married couples will often own assets in some form of joint ownership and, if they do not, then it is usually advantageous for tax purposes for transfers to be made to ensure joint ownership. This can have benefits for income tax, capital gains tax and even inheritance tax.

    Where assets are owned in joint names any income is deemed to be shared equally between the spouses. If the actual shares of ownership are unequal, income is still deemed to be split equally unless an election is made to split the income in the same proportion as the ownership of the asset.

    One exception to this rule is shares in close companies (almost all small, private, family owned companies will be close companies) where income is always split in the same proportion as the shares are owned.


    Tax Planning

    If you and your spouse are both involved in running a business, income will be equalised if you are equal partners or equal shareholders. Alternatively if only one of you is involved, the other could be employed even if only to use up their personal allowance.



    Where assets are owned in joint names any income is deemed to be shared equally between the spouses. If the actual shares of ownership are unequal, income is still deemed to be split equally unless an election is made to split the income in the same proportion as the ownership of the asset.

    One exception to this rule is shares in close companies (almost all small, private, family owned companies will be close companies) where income is always split in the same proportion as the shares are owned

    Example
    A buy to let property is owned three quarters by Helen and one quarter by her husband Mark. If nothing is done the net rental income on which tax is payable will be split 50:50. If an election is made the income will be split 75:25. A choice can be made according to which is most desirable when other income of the spouses is taken into account.

     Capital gains tax
     Independent taxation also applies to capital gains tax. Each spouse is entitled to take advantage of the annual exemption of £9,200 before any capital gains tax has to be paid. Therefore it is often most tax-efficient for sales of assets to be made by husband and wife jointly.

    Transfers may be possible shortly before a sale with no adverse consequences because transfers between husband and wife do not give rise to capital gains tax.Capital gains tax is payable on the amount of capital gains over the annual exemption at 10%, 20% or 40% depending on the income of the taxpayer in the year of sale. In effect the taxable gains are treated as the top slice of income and this allows further potential saving if assets are owned jointly, as maximum use can be made of each spouse’s 10% and 20% bands.

     Separation
    The breakdown of a marriage will often involve the transfer of assets between spouses. The marriage continues until the decree absolute but, for transfers of assets to be entirely free of a charge to capital gains tax, the transfer must be made before the end of the tax year in which the separation takes place.

    Separation is deemed to happen when the couple cease to live together as man and wife - quite different to the date of the decree absolute which is often much later.

    Example
    If a couple cease to live together on 30 April 2007, transfers of assets must be made between them by 5 April 2008 for capital gains tax to be avoided. Conversely, for inheritance tax, transfers taking place before the granting of a decree absolute will continue to be exempt. Even after this date, transfers will not usually be a problem.There is usually no tax relief on maintenance payments made by one former spouse to another nor on any payments required by the Child Support Agency.

    Children
    It is often assumed that children are not taxpayers until they achieve some particular age. In fact HMRC will tax a child just as readily as anyone else if the child has sufficient income to make them liable.
    Transferring income to children
     Children have their own personal allowances and tax bands. Where their only income is, at best, a few pounds from a paper round or a Saturday job, there may be scope for transferring income producing assets to the children to use up their personal allowance.

     Tax Planning

    There is nothing to stop you employing your children in the family business so as to take advantage of their personal allowance provided that they are old enough (generally they must be at least 13 years old), they do not work more hours than is legal and they do actually carry out work for the business.

    The problem is that if the parents do this the income will still be treated as belonging to them (until the child is 18 or marries) unless the gross income arising from such sources is not more than £100 per annum. However grandparents and others are not subject to this rule
    Children and capital gains
    Children also have their own annual exemption for capital gains tax so that assets transferred to them which have a bias towards capital growth rather than income may prove to be more advantageous.

     Repayment claims
    Where children have significant sources of income from which tax has been deducted, such as bank interest or trust income, they will almost certainly be entitled to a repayment. In such cases a repayment claim should be made.


    Tax Planning

  • There are still quite a few ways income can be transferred to children tax efficiently:
  • Buy them premium bonds - winnings are tax free
  • Buy National Savings Children’s Bonus Bonds or National Savings Certificates - these are tax free

Friendly Societies offer 10 year, tax exempt savings plans for children for up to £25 per month

Child Trust Fund
 For children born on or after 1 September 2002 a Child Trust Fund has been introduced. The idea is to encourage tax efficient savings, with the government’s help, to build a savings fund which the child can access once he or she reaches 18.

The government’s initial contribution is £250 or £500 for low income families, with a further payment of £250 (and again £500 for lower income families) once the child reaches the age of seven.

Other contributions of up to £1,200 per annum can be added to the fund by family or friends and, although there is no tax relief on making the contributions, the fund is tax exempt. This is therefore a tax efficient medium to which regular transfers can be made.

Tax Planning
There are still quite a few ways income can be transferred to children tax efficiently: buy them premium bonds - winnings are tax free

buy National Savings Childrens’ Bonus Bonds or National Savings Certificates - these are tax free

Friendly Societies offer 10 year, tax exempt savings plans for children for up to £25 per month

a parent can contribute to a pension scheme for a child contributing up to £300 per month gross (net cost £234 per month) even though the child has no earnings.

 Child Tax Credit
The Child Tax Credit is means tested and potentially available to families who have responsibility for one or more children. It is a tax free payment made direct to the main carer and it will be available where combined income is less than £58,175 or £66,350 if there is a child under one year old.

There are several elements to the credit and claims can be complicated. Please talk to us.          


Tax Planning
Many couples who are entitled to a tax credit do not receive it because they fail to apply.

There are several elements to the credit and claims can be complicated. Please talk to us.

 Civil partnerships
 All the special rules for married couples, both those dealt with in this section and those covered in other sections of this booklet, apply equally to same-sex couples who have entered into a civil partnership.

What about unmarried partners?
 It still pays to equalise income as much as possible, as income tax will be minimised. However transfers of assets may be liable to capital gains tax and, if substantial, could also lead to an inheritance tax liability. It is vital for unmarried couples to each make a Will if they wish each other to benefit from the other’s estate at death.

 A word of warning
There is a limit to the extent to which a couple should allow the tax tail to wag the familial dog! To do so has been known to have a high cost in terms of family relationships. There must be as much trust in matters of finance as in those other areas that go with the institution of marriage!
Moreover transferring assets or interests in a business between husband and wife can, and often does, attract the interest of HMRC.

This is especially where it is obvious that it has been done primarily for tax saving purposes. Transfer of ownership of an asset must be real and complete, with no right of return and no right to the income on the asset given up.
If a spouse or child is employed in a business it must be a real job for which work is clearly being undertaken and if a non-working spouse is given shares in an otherwise one-person, private company,

HMRC may regard this as a sham and continue to tax the working spouse on all of the dividends.
Always seek advice from us to determine the best way to arrange your business and personal affairs within the family unit.

Checklist for couples

  • Try to equalise your income.

  • Consider placing assets in joint names.

  • If you have children consider making use of their personal allowances.


 Back to contents



 WORKING FOR OTHERS

Few avoid working for others at some time in their life and most will have encountered the PAYE system operated by employers to collect the income tax and national insurance (NIC) due on wages and salaries.

The tax code

Ensuring the right amount of tax is taken relies on a PAYE code, issued by HMRC and based on information given in a previous self assessment return or on returns supplied by the employer. The employee and not the employer is responsible for the accuracy of the code.

 

Tax Planning

If you are unsure about your code and are anxious not to end the tax year under or overpaid, then you should have it checked. Please talk to us.

 

Code numbers try to reflect both your tax allowances and reliefs and also any tax you may owe on benefits in kind. If you are in receipt of a state pension an adjustment will be made for this. HMRC may also try to collect tax on untaxed income or tax owing from an earlier year.

The code may even try to allow for higher rate tax that has to be paid on investment income. You do not have to agree to tax owed on untaxed income and prior years’ underpayments being dealt with in this way. As can be imagined, with this many complications, and some guess work involved, getting the code exactly right can be difficult and the right amount of tax will not always be taken. Get in touch if you would like us to check your code number for you.

For many employees things are simple. They will have a set salary or wage and only a basic personal allowance. Their code number will be 522L and the right amount of tax will be paid over under PAYE.

Others will be provided with perks in their employment or they may be paid by the employer for expenses incurred. The more common examples of these complications are considered below.

Benefits in kind

Company cars

Company cars remain a popular benefit and for some a real status symbol, despite recent increases in the tax charge they give rise to.

The charge on cars is calculated by multiplying the list price of the car by a percentage which depends on the CO2 emissions of the car. The table below shows the percentages for 2007/08. Remember this is the amount being charged to tax, not the tax itself.
Only the list price is used, irrespective of age (except that there are special rules for classic cars), and the cost of any extras must also be added.
The CO2 emissions of all cars are listed in well known car magazines or can be found on the internet. The definitive official figure for each car can be found on the Vehicle Registration Document.Discounts apply to certain environmentally friendly cars. For cars registered before 1 January 1998, the charge is based on engine size.

If the car has a diesel engine the charge is increased by 3% (except that it cannot exceed 35%). However diesel cars registered before 1 January 2006 and which met the Euro IV emission standards do not suffer this supplement.


Example

Paul has a BMW 320d (diesel) registered on 1 February 2007. It has an original list price of £20,955 and CO2 emissions of 169. Paul had extras fitted to the car costing £1,000 (VAT inclusive).

In 2007/08 the taxable benefit will be £5,050 (20,955 + 1,000) x 23%*). If Paul is a higher rate taxpayer the tax due on this will be £2,020 for the year. * 20% from the table below plus 3% diesel supplement.

Fuel for private use

A separate charge applies where fuel is provided by the employer for a company car. The charge is calculated by applying the percentage figure used to calculate the company car benefit to a fixed figure which for 2007/08 is set at £14,400.

2007/08

CO2 emissions (gm/km)
(round down to nearest 5gm/km)

% of car’s list price taxed/span

up to 140

15

145

16

150

17

155

18

160

19

165

20

170

21

175

22

180

23

185

24

190

25

195

26

200

27

205

28

210

29

215

30

220

31

225

32

230

33

235

34

240 and above

35

 

 

Tax Planning

The fuel benefit charge can be expensive. On a typical mid-range diesel car, for example, the cost to a 40% taxpayer is roughly equivalent to paying for 11,000 miles worth of fuel.

It may be cheaper for the employee to pay for all the fuel and to reclaim from the employer the cost of business miles driven based on a specific log of business journeys undertaken. HMRC have published advisory rates for the cost of fuel which can be used for this purpose.

 
Engine Size Petrol Diesel LPG
1400cc or less 11p 10p 7p
1401cc to 2000cc 13p 10p 8p
Over 2000cc 18p 14p 11p

Note that, for all purposes, travel from home to work and back is not usually business travel.

                                                           

Medical Insurance

The employee is taxed on the amount of the premium paid by the employer.

Home and mobile phones and the provision of broadband

There is no benefit on the provision of a company mobile phone even where it is used privately. However this is limited to one phone per employee. Where home telephone bills are paid by the employer, the amount paid will be taxable. The employee may make an expense claim for the cost of business calls only but none of the line rental.

There is generally no benefit on the provision of home broadband access where the employer subscribes for the service for the employees home and the employee needs this access in order to carry out their job.

Cheap or interest free loans

If loans made by the employer to an employee exceed £5,000 in a tax year, tax is chargeable on the difference between the interest paid and the interest due at an official rate - currently 6.25%.

Tax Planning

Contributions by an employer to an approved pension scheme are tax and NIC free. This may be far better than any other perk. You may want to sacrifice some of your ‘normal’ salary to do this. Please talk to us to make sure your salary sacrifice scheme is effective.

 

Childcare costs

Childcare costs paid for by an employer are exempt from both income tax and NIC. This applies to a place in an employer operated nursery or where the employer pays for registered or approved childcare. In this latter case the exemption is limited to £55 per week and any excess over this is subject to tax and NIC.

The costs will normally be paid in the form of vouchers or alternatively paid direct to the childcare provider. Any scheme must be open to all employees or all employees at a particular location.

Registered or approved childcare includes childminders, nurseries and play schemes registered by Ofsted, out of hours clubs run by a school on the school premises or by a local authority and childcare schemes run by approved providers.

Expense payments

Reimbursed expenses

Reimbursed expenses are taxable as a benefit but the employee can claim a deduction for those expenses incurred wholly for business purposes. The two will usually cancel out each other.

At the end of each tax year, the employer has to send a summary of all benefits to HMRC on form P11D. As well as the perks listed above, this form will include the reimbursed expenses.

The employee can then make an expense claim either on a self assessment return or by letter.

Because, often, nothing is taxable, employers can ask to be excluded from this process if they write to HMRC. This is known as a dispensation.

Tax Planning

Check if a dispensation is in place. If not, the employee must include reimbursed expenses shown on the P11D as income and then claim a deduction for the business portion of the reimbursed expenses.

If the employee does not receive a tax return they can write to HMRC to claim the deduction.

 

Mileage claims

Many employers pay a standard rate of mileage to all employees who use their own cars for business journeys. HMRC set authorised rates for business mileage which are currently 40p for the first 10,000 miles in a tax year and 25p thereafter.

If the employee is paid for business miles at less than the authorised rate, tax relief is available on the difference. If, however, the employee is paid at more than these rates then the excess is taxable.

Tax Planning

If you are paid less than the authorised rates to use your own car for business purposes remember to claim a deduction on your return or write to HMRC to make your claim.

 

Example

In 2007/08 Dave travels 14,100 business miles in his own car and is paid 32p per mile by his employer.

Dave can claim tax relief of £513 ((10,000 x 40p) + (4,100 x 25p)) - (14,100 x 32p).

Mileage payments do not have to be shown on the form P11D unless more than the authorised rates are paid.


Other transport issues

Vans

Where employees are provided with a van, and the only private use of this is to go to and from work (including any incidental private use on the way), then no taxable benefit may arise. If there is private use beyond this, there is a benefit of £3,000 per annum and an additional £500 if fuel is provided for private as well as business journeys. Prior to the current tax year the benefit on the provision of a van with unrestricted private use was only £500 or £350 for an old van.

Tax Planning

Most double-cab pick-up trucks are treated as vans and are still a tax efficient way to avoid the car benefit charge even though there has been a significant increase in the van benefit.

 

Employee Checklist

 

  • Check your tax code to avoid substantial underpayment at the year end.

  • Don’t reject a perk just because it is taxable.

  • Company cars don’t have to be expensive; choose wisely to minimise the benefit.

  • Consider paying for fuel yourself and reclaiming business mileage.


Back to contents



 WORKING FOR YOURSELF

Starting up a business of your own is a big step and not one to take lightly. The taxation of your business is only one of many commercial and legal aspects of starting a business that you will need to consider.

Preparation is the key and a proper business plan should be one of the first things you should do. However tax matters are our main concern here.

Choosing a business structure


The alternative business structures are:

 Sole Trader
 This is the simplest form of business since it can be established without legal formality. However, the business of a sole trader is not distinguished from the proprietor’s personal affairs. If the business incurs debts which are unpaid, the creditor can seek repayment from the sole trader personally.

Partnership
A partnership is similar in nature to a sole trader but involves two or more people working together. A written agreement is essential so that all partners are aware of the terms of the partnership. Again the business and personal affairs of the partners are not legally separate.
Sole trades and partnerships are often referred to as unincorporated businesses.

 Limited Company
A company is a legal entity in its own right, separate from the personal affairs of the owners and the directors. A company provides specific liability which means that the creditors of the company cannot make a claim against the owners or the directors except in very limited circumstances. Often this advantage is somewhat eroded because a bank, for example, may seek personal guarantees from the directors.
These potential advantages carry the downside of greater legal requirements and regulations that must be complied with.

Limited Liability Partnerships (LLPs)
LLPs are a halfway house between partnerships and companies. They are taxed in the same way as a partnership but are legally a corporate body. This again gives some protection to the owners from the partnership’s creditors.
In this section we consider the differing tax treatments of the alternatives but you should choose which structure is right for you based on more than just the tax issues alone.
Many will start off as a sole trader, taking advantage of the lack of any formal procedures to establish the business. Some, however, will need the protection of limited liability because they are in a high risk business or they may need the additional stature that is seen as attaching to a limited company. Alternatively, they may need to establish and protect a particular name which only the formation of a limited company will allow them to do.

Tax Planning
 If you operate as a limited company, there is a legal separation between you as the owner and the company itself. This means you cannot use the company cheque book as if it were your own! This requires a certain discipline without which all kinds of difficulties can occur. Many will start off as a sole trader, taking advantage of the lack of any formal procedures to establish the business. Some however will need the protection of limited liability because they are in a high risk business or they may need the additional stature that is seen as attaching to a limited company. Alternatively, they may need to establish and protect a particular name which only the formation of a limited company will allow them to do.

The tax regime
Unincorporated businesses
A new business must register with HMRC within three months of commencing to trade. Income tax is paid on the profits of the business. The amount that the proprietor, or a partner in a partnership, draws out of the business (referred to as ‘drawings’) is irrelevant. Profits are taxed on a current year basis as shown by the example.

Example

If the accounting period (or ‘year’) end is 31 March then, in the tax year 2007/08, the profits for the year ended 31 March 2008 will be taxed. If the year end was 31 August then, in the tax year 2007/08, the profits for the year ended 31 August 2007 will be taxed.

Many businesses choose 31 March (or even 5 April) as their accounting period end but this is not compulsory.

Where losses arise at the beginning of a new business or if the profits grow appreciably month on month, then the choice of the accounting date can be important. Accounting dates early in the tax year give a cash flow advantage as there is a longer period of time between earning the profits and paying the tax. However the earlier the accounting date is in the tax year the more profits are assessed twice in the early years of a business. The taxpayer is eventually allowed to claim relief for the double assessed profits know as overlap relief. This may be 20 years from now when the business stops trading. Over the lifetime of the business the actual business profits are assessed.

Working out profits

Profits are calculated using accepted accounting practices and crucially this means that profit is not necessarily simply receipts less payments. Instead it is income earned less expenses incurred.


Tax Planning
 Try to incur expenditure just before rather than just after the year end, as this will accelerate your tax relief. Examples of the type of expenditure to consider bringing forward include building repairs and redecorating, advertising and marketing campaigns and expenditure on plant and machinery.

Capital allowances
 When assets are purchased for the business, such as machines, office equipment or motor vehicles, capital allowances are available. As with expenses, they are deducted from income to calculate taxable profit.

Capital allowances
  Writing Down Allowance
Motor Cars** 25% (reducing balance) - £3,000 max.
Industrial and Agricultural Buildings and Hotels 4% (straight line)
*For small businesses: first year allowances (FYAs) of 50% for 12 months from 6.4.07 (1.4.07 for companies). 40% otherwise. For medium-sized businesses: FYAs of 40%.For all businesses: 100% FYAs on expenditure on energy saving plant and machinery. **100% FYAs on new cars with CO2 emissions not exceeding 120 gm/km until 31.3.08.#6% on certain long life assets.

Payment of tax

A person who is self employed, either as a sole trader or a partner in a partnership, will usually pay tax twice a year, on 31 January and 31 July. At first this may seem confusing and is best explained by an example.

Example

A business starts on 6 April 2007. Profit for the period to 31 March 2008 is £10,000. Tax and Class 4 NI due in 2007/08 is £1,165.

On 31 January 2009 tax and Class 4 NI payable is £1,747 being £1,165 balancing payment for 2007/08 and £582 (50% of £1,165) payment on account for 2008/09.

On 31 July 2009 £583 will be payable being the second payment on account for 2008/09.

Profit in the year to 31 March 2009 is £30,000 and the tax and Class 4 NI on this is £6,937.

On 31 January 2010 the payment is £9,240. This is made up of £5,772 balancing payment for 2008/09 (£6,937 - (£582 + £583)) plus £3,468 payment on account for 2009/10.

On 31 July 2010 a second payment on account for 2009/10 of £3,469 is due. And so on …

Tax Planning
 The payments on account system can make tax payments very volatile if profits fluctuate widely from year to year. You must plan ahead carefully to avoid nasty shocks.

 Companies
 Unlike sole traders and partnerships who pay tax on profits only (and drawings are ignored), companies have two layers of tax. The first is tax payable by directors and shareholders on money they take out of the company and the second is corporation tax which is due on the company’s profits.