Month: May 2018

Example of Property Income: Interest deduction

In 2017/18, if a landlord incurs loan costs on a let dwelling, the allowable deduction is only 75% of the cost. The remaining 25% gets tax relief at 20% in the income tax calculation.

  • This restriction does not apply to furnished holiday accommodation.
  • This also does not apply in case landlord is a company.
  • This applies only in case of residential property.

Example

Jack has employment income of £26,000 and rental income of £20,000. Costs are loan interest of £2,000 and other allowable expenses of £3,000.

£
Employment 26,000
Property £(20,000-(75% x 2,000) – 3,000 15,500
Personal allowance (11,500)
Taxable Income 30,000
Income Tax £30,000 x 20% 6,000
Less tax reducer £(2,000 x 25%x 20%) (100)
Income tax liability   5,900

Apologies, I lifted this straight out of ICAEW Vital magazine. I could not resist seeing such a simple and beautiful example.

Conclusion:

Basically, this change effects only tax payers whose total income goes over higher rate threshold (i.e. £46,351 for the tax year 2017-18) without deducting finance cost.

Example 1 : John has salary income of £30k and rental income of £15k and finance cost of £10k. John’s total income without deducting finance cost is £45k , this is below £46,351 thus no effect for John.

Example 2  : Jane has salary income of £30k and rental income of £25k and finance cost of £10k. John’s total income without deducting finance cost is £55k , this is above £46,351 thus this will effect Jane.

To learn how it will effect, see HMRC guidance.

Bonus fact:

  1. HMRC guidance mentions 82% of landlord will not be effected as their total income, without a deduction for finance costs, does not exceed the higher rate threshold.
  2. In tax year 2016-17, out of UK adult population of 53.2 million , c 30.2 million were tax payers (57% of adult population). Around 4.4 million (8%) were paying tax at 40% and 333k (0.6%) tax payers are in 45% tax bracket. Click here for Source.
  3. As per BBC article date June 2017. There are 15k individuals with incomes over £1m and 4k over £2m.

Pensions: Banded earnings and savings for employers

Ensure correct pay is used to calculate pension

We recently took a new restaurant client and were reviewing their employee pension arrangements under auto enrollment.

We noticed that the client (employer) was contributing pension on full pay rather than qualifying earnings.

Qualifying earnings  – These are your earnings from employment, before income tax and National Insurance contributions are deducted, that fall between a lower and upper earnings limit that are set by the Government.

Example: CD Ltd has an employee Jane and her monthly salary is £1,500.

Pension on full pay Pension on qualifying earnings
Monthly salary

£1,500

 Monthly salary

£1,500
Threshold – full pay

£0

 Threshold – lower band

£503
Pensionable pay

£1,500

 Pensionable pay

£997
Employer contribution @ 2%

£30

 Employer contribution @ 2%

£20

Additional employer’s contribution under full pay method is of £10.

This employer has c30 employees. Thus yearly savings are of c£3,500.

This employer also has couple of employees over upper limit, thus additional savings.

Restaurant trade inherently has a high staff turnover and it’s advisable to postpone staff pension deductions for three months to avoid deducting pension for staff members who work for a short time with the employer. We also implemented at this client which will result in additional savings.

Caution: Please ensure employees are communicated about these changes.

 

 

Can a child hold shares in a company ?

Can a child hold shares in a company

There is no statutory provision prohibiting a child from owning shares.

Please note contracts cannot be forced against minor thus it’s advisable that that shares are fully paid up.

Dividend income is deemed under ITTOIA/S629 to be that of the parent for tax purposes, and is not treated as the child’s. So there is no tax advantage in holding shares in a child’s name.

I read a good article which gives alternatives to registering child as a shareholder. Click here.

If the client still wants to allot share to a child. Then a bare trust is needed. There is no legal requirement to create a formal document to create a bare trust.

Name in the register of members can be simply – Mr Parent as bare trustee of Mr Child.

National Minimum wage (NMW) a matter of months

What should be NMW for an employee who is 20 years and x months old.

My colleague Neel was working on a client and asked me this interesting question.

What should be NMW for an employee who is 20 years and x months old.

NMW is given in terms of whole years like

25 years and over                            £7.83

21 to 24                                                £7.38

18 to 20                                                £5.90

As always HMRC has been kind enough to make a manual about NMW and share it with us.

See link NMWM03050.

Its states that the worker should be paid £5.90 till he reaches his 21st birthday.

Tax answers at a Glance – a nice little book

I recently read a nice book  : Tax answers at a Glance written by authors from HM Williams Chartered Accountants.

Given below is few of things which I learnt:

  1. Gordon Brown started the trend of announcing tax rates for future years.
  2. When you buy petrol,  most of the monies goes to the Government c60-80% depending on the petrol prices. The petrol pump owner gets c1% , even the credit card company gets more to process the transaction. I thought the Sheikhs were making all these monies. See RAC website.
  3. Expenses allowed – Stationery :
    Allowed – reference books which are necessary for your job. Cost of stationery used strictly for your job.

Not allowed – Costs of books you feel you need to do your job properly, but which    are not necessary for it i.e. Subscription to journals to keep up with general news.

4. Working time directive cover domestic servants as well.

 

 

Link to publishers website