Modern day accountants for small businesses and salaries professionals have transformed their scope of services to deliver better solutions to their clients. It is a common practice among Salaried professionals and business owners to seek advice on tax reduction from their accountants; nonetheless, who wants to pay higher taxes? Given the dynamic requirements, here are 10 planning tips that will allow business owners to reduce higher tax brackets in the UK.
#1 – Contribute to Pension Funds – One of the most common ways to avoid the higher tax bracket is to invest in private pension funds or Employers Pension fund via Salary sacrifice. The annual allowance is a limit on the amount (£40000 for current year) that can be contributed to your pension each year, while still receiving tax relief. For instance, if your taxable income is£60,000 and you decide to invest 5% of your income into pension funds (i.e., £2600), then you revised taxable income would be £(52,000-2600) = £49,400. You may have to adjust amount if any private fund has tax relief at source.
#2 – Contribution to Private/ Qualified Overseas Pension Scheme – As per the current guidelines by HMRC, there are a set of specific overseas pension schemes where a resident of UK can invest to meet his future requirements. However, the same has penalties if the person withdraws from such pension funds before the age of 55 years. For a detailed insight into ROPS, click here.
#3 – ISA Allowances – The term ISA stands for “Individual Savings Account”. An allowance of £20,000 is allowed on the current tax year for individuals and the interest or Income earned on that amount will not be put under taxable bracket. For example, your ISA account had an existing balance of £90,000 before the current tax year. So, you can add another £20,000 investment to the same account this year; a total of £1,10,000 without having to pay any taxes on the mentioned Interest or income in the current tax year ISA balance.
#4 – Donate – As tax payers, there is a leverage in terms of donations. As per the current guidelines, one can claim a deduction through Gift Aids. Computation of deduction for such is made by offering £1 deduction for every donation of £1.25.
#5 – Job Expenses Through Professional Subscription – Expenses incurred by individuals on professional membership fees which enable the person to execute his job is declared tax-free.
#6 –Work from Home Expenses – As an employer, any expenses incurred while offering work from home to existing or new employees will be eligible for tax deduction. Some prominent examples of such expenses are computers, use of mobile phone for work, internet bills, etc.) In addition to that there is an allowance to be use of home currently £6 per week. These expenses are allowed for deduction only if your employer has not made reimbursement of those expenses.
#7 – Lease car Scheme – Cars that have been leased in the name of the business are allowed to claim a deduction equal to the amount spent on monthly lease repayments and fuel for the purpose of meeting business requirements. However, this fuel and maintenance doesn’t include expenses (proportion of amount) incurred by the business owner for commuting from office to home or vice versa.
#8 – Enterprise (EIS/ SEIS) Scheme – For the purpose of boosting entrepreneurial form of business within UK, investment in Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) have been made tax-free. If you are a resident of UK, then you can invest in these forms of setup to enjoy tax deduction; EIS – up to 30% of investment and SEIS – up to 50% of the investment.
#9 – Employment Expenses – Expense that are specific to certain kinds of job fall into this category. HMRC should have sufficient evidences to support that the claimed deduction was necessary for the individual to perform his job, Employer has not made reimbursements and the cost of such expenses cannot be greater than the value of the overall job.
#10 – Other Tax-Free Allowances –There are also some other set of tax-free allowances that are available to a taxpayer in form of relevant income sources:
•Interest on savings: £500 or £1000 for current tax year based on your gross income
•Rent a room scheme: up to a threshold of £7,500 per year tax-free
•Rental Property Allowances: up to £1,000 a year in tax-free allowances for income.
•Capital Gain: up to £ 12,300 in tax year called the Annual Exempt Amount
•Dividends: up to £2,000 as per dividend allowance this year
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