Helping Clients Reduce their Personal Tax Bill

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Personal Tax UK

The tax year ends on 5 April. Most accountants will be working hard to ensure their self-employed clients, and those who are company directors, take the necessary action to reduce the amount of personal tax they need to pay. This blog highlights some of the more straightforward, and legitimate, actions available to reduce a personal tax bill. As always, advice should be taken to ensure HMRC’s rules are fully followed and to avoid any unnecessary enquiries.

Ensure clients use their personal allowance effectively

The annual personal allowance of £12,570 has been frozen by the government until 2026 at the earliest. When a client earns more than £100,000 in a tax year, the allowance is reduced by £1 for every additional £2 earned. This means when a client earns more than £125,140, the personal allowance is removed completely. Preserving the personal allowance for your clients should be a priority, and there are steps you can take to achieve this, as shown below.

Maximise contributions to a personal pension scheme (England, Wales and Northern Ireland)

Contributions to a personal pension scheme can be made up to a maximum of £40,000 in a tax year. The government tops up contributions at the basic rate of tax. Which means for every £100 a taxpayer contributes to a personal pension scheme, the government will add £25 to the pension pot. Higher rate taxpayers can claim another £25 through their self-assessment tax return.

Pension contributions help reduce the amount of tax an individual will pay. If your client earns over £100,000 they should be making a contribution into a personal pension scheme.

If a client earns £125,140 in taxable income and makes a contribution of £20,112 into a personal pension scheme, the government will automatically add £5,028 to the pension pot making a total contribution of £25,140. This reduces taxable income to £100,000 and the personal allowance of £12,570 is preserved.

When the individual completes their self-assessment tax return, the total contribution by the individual and the government attracts relief. This means a further £10,056 of earnings is allowed tax free resulting in a total tax saving of £15,084 (£10,056 plus £5,028) alongside the contribution to the personal pension scheme of £25,140.

Higher tax payers in Scotland pay more tax then the rest of the UK with more complex rules around tax and allowances. Specialist advice should always be taken on the tax efficiency of contributions to a personal pension scheme.

Pension Carry Forward Allowance

In addition to the annual pension contribution of £40,000 highlighted above, an individual can carry forward their pension allowance from the previous three tax years. This means an individual can potentially make a single contribution of up to £160,000 into a personal pension scheme (£40,000 from the current year and £40,000 from each of the previous three tax years).

The rules around this can be complicated and professional advice should always be taken.

Dividend Allowance for company directors

If your client is the director of a limited company, in the 2022/23 tax year they can claim a dividend allowance of £2,000. The allowance is being reduced to £1,000 in the 2023/24 tax year and then reduced again to £500 in the 2024/25 tax year.

Ensure all employment-related expenses are claimed

 If your clients are self-employed they will usually operate as a sole trader. These clients will pay income tax and national insurance on the profits made from their business. As accountants, you should advise your clients to keep records of all expenses they have incurred ‘wholly and exclusively’ for business purposes. These expenses reduce the amount of profit from self-employment to be included on the annual self-assessment tax return. Some of the more common expenses a self-employed individual can claim are shown below.

Pension Tax relief

The pension tax relief highlighted above is available to the self-employed. The maximum contribution in a tax year is £40,000.

 Business mileage

If your clients are traveling to a place of work which isn’t a permanent or geographical base, they can claim mileage at the following rates for a personal vehicle:

  • first 10,000 miles at 45p per mile
  • any miles over the 10,000 threshold at 25p per mile.

Home working expenses

HMRC allows the self-employed to claim a flat rate based on the hours worked from home each month. The allowances are as follows.

Hours of business use per month Flat rate per month
25 to 50 £10
51 to 100 £18
101 £26

Alternatively, HMRC will allow expenses to meet the additional costs of heating and lighting a work area at home. This calculation is more complex and is generally made based on the space used while working at home by allocating a proportion of the costs of:

  • heating
  • electricity
  • Council Tax
  • mortgage interest or rent
  • internet and telephone use.

Clients will need to find a reasonable method of dividing these costs, for example by the number of rooms used for business or the amount of time spent working from home.

Other business expenses the self-employed can claim

The government allows the self-employed to claim a range of business related expenses which can be offset against profits, including:

  • meals and accommodation when working away from the office base
  • Uniforms
  • premises costs such as rent, business rates, utilities and maintenance costs
  • financial costs for business banking and insurance
  • costs of IT equipment and software, broadband and mobile phones
  • stationery
  • business insurance
  • legal costs and accountancy fees
  • advertising and marketing
  • training and professional subscription costs.

If fixed assets or equipment are purchased for a self-employed business (such as a computer or office furniture) a capital allowance can be claimed via the annual self-assessment.

Other tax allowances

HMRC allows all taxpayers to claim a range of allowances and reliefs regardless of how the income is earned. Some of the more common allowances and reliefs available to your clients are shown below.

Married Couple’s Allowance

Clients who are married or in a civil partnership can transfer up to 10% of their personal allowance to their spouse or civil partner. To benefit as a couple, the lower earner must normally have an income below the personal allowance (£12,570) and the spouse or civil partner must have an income below the higher rate tax threshold (£50,270).  Transferring the personal allowance can save around £250 per year in tax. HMRC allows the amount to be backdated for up to three years (around £750 further tax saving).

Personal Savings Allowances

Most people are allowed to receive some savings interest which is tax-free:

  • non-taxpayers or basic rate taxpayers are allowed up to £1,000 per year
  • higher rate taxpayers are allowed £500 per year.

Additional rate taxpayers do not receive any personal savings allowance.

Some clients may be eligible for the ‘starting rate for savings’ (otherwise known as the ‘savings rate band’). This allows an individual to receive savings interest of up to £5,000 per year tax-free.

To be eligible for the savings rate band, an individual needs to have income of less than £17,570 per year. Every £1 of income above the Personal Allowance reduces the starting rate for savings allowance by £1.

Individual Savings Account (ISA) Allowance

Everybody has an ISA allowance of £20,000 per year. An ISA holds cash, or stocks and shares, in a tax free investment account. You do not pay tax on any earnings made through an ISA investment and there is no need to include these in a self-assessment tax return.

Lifetime Savings Account (LISA)

Self-employed workers find the Lifetime Savings Account to be appealing because the government adds 25% onto the amount an individual contributes each tax year. If the full allowance of £4,000 is invested each year, an individual will have £5,000 invested before interest is earned.  Lifetime ISAs can be used by anyone aged 18 years to 50 years.

Capital Gains Allowance

If a client makes a profit on an investment (or second property) they must pay capital gains tax. Everybody has a capital gains tax allowance of £12,300 per year. A married couple or those in a civil partnership can make gains of £24,600 a year without paying any tax.

Individuals can transfer assets to a spouse or civil partner tax-free before sale. This is particularly useful if one partner pays a higher rate of tax than the other.

Tax avoidance schemes are usually too good to be true

From time to time, clients will bring various tax reduction schemes to your attention. Some of the more common examples include offshore payments through a complex chain of companies and employee benefit schemes using loans or credit facilities. Most tax avoidance schemes do not work and HMRC has far-reaching powers to investigate those who benefit from such schemes and advisors who facilitate them.

You should always apply the test that if ‘it sounds too good to be true’ then it most likely is.

In recent years HMRC has used ‘accelerated payment notices’ for the full amount of any tax and national insurance they have calculated as due. Payments need to be made within 90 days of a notice being served.

If a client is considering any tax avoidance scheme, or has received an accelerated payment notice, you should insist specialist legal and tax advice is taken.

How Initor Global can help with your client’s personal tax

At Initor Global we have accountants and tax specialists who can meet your outsourcing needs. Our experts can prepare your clients self-assessment tax returns and calculate any tax due to ensure all deadlines are met.

If you want to find out more about our accountancy and tax services, or arrange a free consultation, please contact us on hello@initor-global.co.uk or visit our website at initor-global.co.uk.

You can also call us on 0203 519 2121.

Disclaimer

This blog draws on information published by HMRC and other professional bodies. It is not a complete guide to personal tax. Information may be subject to change and Initor Global accepts no responsibility should you decide to rely on the information we have published in this blog. Professional advice should always be taken as necessary based on your individual circumstances.