This can be spent on one single event (for example, the Christmas party) or in several chunks over the course of the year.

This would save tax of £60 for a higher rate taxpayer, plus National Insurance savings of up to £18.45 for the company and £16.50 for the employee - a total saving of £79 per person!

Note that:

• If you exceed the £150, the whole amount becomes taxable, so make sure you keep it below £150.
• VAT is claimable on the employee entertaining (for VAT registered businesses only, of course). But the £150 limit is the total including VAT.
• If you have a ‘husband and wife’ company with both partners on the books as employees/directors or company secretaries, you can still claim the £150 for both of you.
• You can even claim it for the kids if they are genuine employees!
• The £150 limit applies to your company financial year, not the tax year to 5th April.

Click here for Working from home allowance

Please get in touch with your usual contact at K&H for more information.

Every employee who works from home is entitled to be paid a £3 per week tax-free home-working allowance.  

You do not have to pay this week by week. Instead you can choose to pay it as a lump sum (e.g. to coincide with Christmas). This means that £156 can be paid as a tax-free lump sum now, which would save tax of £62 for a higher rate taxpayer, plus National Insurance savings of up to £20 for the company and £16 for the employee – a total saving of £98 per person!   

Note that for the purpose of this rule, ‘employees’ are anyone on the payroll and any director or company secretary of the company.    

• The £3 allowance can be paid for each week in which some work is done from home. This includes business-related phone calls, logging on to do emails or other computer-based work, bookkeeping and even discussing business issues with your spouse or partner!
• If you decide to make this £156 payment, you just need to record it in your accounts as: ‘Home working allowance for [name] for [1.1.2011 to 31.12.2011]‘. No other paperwork is needed.
• If you are an employee/director of more than one company, it would appear that you can claim the allowance for every employer company.
• If you are already making a claim in your accounts for ‘rent of home’ or ‘use of home as office’ or similar, this is likely to include the £156 so no extra claim can be made.
• You can only pay it for one year – you cannot backdate for earlier years but it does not matter which month it is paid.

Click here for Employee entertaining    

Please get in touch with your usual contact at K&H for more information.

There are a number of legal and business issues to consider before you decide to incorporate, but here we will just look at the tax issues (ignoring things such as business use of cars).

The different tax bills are as follows. In each case I have assumed that all the profits have been withdrawn from the business. The tax bills include Class 4 National Insurance for the self-employed.

Tax Bills as a Sole trader:

Profits of £25,000 gives a £5,105 tax bill

Profits of £30,000 gives a £6,555 tax bill

Profits of £35,000 gives a £8,005 tax bill

Profits of £40,000 gives a £9,455 tax bill

Profits of £45,000 gives a £11,182 tax bill

Profits of £50,000 gives a £13,183 tax bill

Tax bill as a Company:

Profits of £25,000 gives a £3,600 tax bill (saving £1,505)

Profits of £30,000 gives a £4,600 tax bill (saving £1,955)

Profits of £35,000 gives a £5,600 tax bill (saving £2,405)

Profits of £40,000 gives a £6,600 tax bill (saving £2,855)

Profits of £45,000 gives a £7,600 tax bill (saving £3,582)

Profits of £50,000 gives a £9,325 tax bill (saving £3,858)

In my view, every sole trader business with profits over £30,000 should give serious thought to incorporation.  The saving is nearly 30% of your tax bill at incomes of £30,000 or more.

If you feel we can help in any way, please don’t hesitate to contact me.

If you have still to file your tax return, then please read on. You need to act quickly to avoid having to pay the following penalties.

The filing date for the 2011 tax return is 31 January 2012. If the return is late, penalties will apply as follows:

• an initial £100 fixed penalty - even if no tax is due or all the tax is paid on time
• after 3 months, daily penalties of £10 per day, up to a maximum of £900
• after 6 months, a further penalty of 5% of the tax due or £300, whichever is greater
• after 12 months, another 5% or £300 charge, whichever is greater. In serious cases, the penalty after 12 months can be up to 100% of the tax due.

This means that if you do not send in your 2011 tax return until 30 September 2012, you will have penalties to pay of £1,300 even if no tax is payable.

New penalties also apply for paying late. These are 5% of the tax unpaid at:

• 30 days
• 6 months, and
• 12 months

Interest is charged in addition to these penalties.

Further details can be found at www.hmrc.gov.uk/sa/deadlines-penalties.htm

Of course this is only half true, or in fact one-third true, which is why Wayne Rooney tried to get the PCC to punish the Sunday Times for its recent ’2% tax rate’ story about him (here).

As Wayne would no doubt be keen to explain to you, the 2% is the tax on money lent to him by his limited company. BUT the full truth is that there are two other taxes that need to be paid:

• Corporation Tax of about 20% to 30%
• personal tax of 25% to 36%, when the loan is eventually converted into taxable personal income

Having said that, taking a loan from your limited company can be a very effective strategy to defer and possibly reduce your overall tax bill. To benefit, you will need to fill in some extra tax forms and you must usually:

• have a limited company with surplus cash in it (e.g. money it is saving for the annual Corporation Tax bill)
• have used up your 20% basic rate tax band
• be able to get a return on more than 2% on the money you borrow, for example by putting it in a mortgage offset account to save 6% interest, which equates to 10% gross of tax - which is what I do
• be able to repay the loan at the end of your company accounts year (or within nine months of it, to avoid other tax traps)

You may also save even more tax by deferring income into later years when your tax rate is lower.

Another benefit is that by putting the money back into your company before its account year end, your balance sheet will show a much bigger cash balance on its published accounts, and this should improve credit ratings.

Let me know if you’d like to know more about how this works and if you can benefit.

Is there anything else Wayne and I have in common?

It may be possible to avoid or reduce this payment.  Here’s how.

1. If you have done your tax return to 5 April 2011 and the actual liability is less than the previous year.

2. You do not need to make a POA at all if the tax liability on the 5 April 2010 tax return was less than £1,000, or if at least 80% of the tax due for 2009/10 was paid at source (e.g. under PAYE or tax deducted from interest paid to you by banks).

3. If you have not done your 5 April 2011 tax return but expect the liability to be less, you can ask the tax man to reduce the POAs. Be warned: if it turns out you should have paid the original amounts after all, you will have to pay interest and possibly even penalties if the tax man thinks you didn’t have a good reason to reduce the payments!

4. It is too late to make pension contributions for the year to 5 April 2011, but if you have made a loss in a business since 5 April 2011, you may be able to carry those losses back to the 2011 tax year and reduce the tax liability and payments. Note that this applies only to sole trader and partnerships (including LLPs), NOT limited companies.

Please see the notes below to find out more about the rules for payments on account. For general tax-saving tips and ideas have a look at Andy Scott’s top 21 tax tips

If you’d like to speak to me or one of the team at K&H about this or anything else, please call 0118 923 5800 or email mail@kandh.co.uk

Notes

• The tax rules state that you must pay an estimate of your tax liability for the year to 5 April 2010. Half is payable on 31 January 2011 and the other half on 31 July 2011.

• The total amount you have to pay is equal to the actual liability for the year to 5 April 2010, although if the total liability for that year was less than £1,000, you don’t have to make any POAs.

• Once you have worked out your actual tax liability to 5 April 2011, you can get an immediate refund of any overpayment (with interest). Any balance payable over and above the POAs does not need to be paid until 31 January 2012.

• The POA applies only to income tax, not to any Capital Gains tax.

• If you have done your 5 April 2010 tax return and you are due to make a POA on 31 July 2011, you should have been sent a payment reminder with a payslip by HMRC in late June/early July.

• Payment can be made to HMRC by direct debit, direct payment by internet or phone, at your bank, Post Office or by post. Cheques should be made payable to ‘HM Revenue & Customs Only’ and you will need to know your UTR reference for the payment.  Further payment information can be found HERE

• If you pay late, you will be charged interest and (if more than 30 days late) ‘tax-geared’ penalties starting at 5% of the tax due.

Andy Scott qualified as a Chartered Tax Adviser (CTA) in 1994. 
He joined the firm in 2001 to head the taxation services department of the firm and is now tax director, specialising in advance tax planning services for high net worth individuals and highly profitable businesses. 
Andy is also Client Director to many of K&H’s major clients and manages in-house taxation training matters.

You’ve had a Racing Greyhound for quite a while now, haven’t you?
I have 50% of a bitch called Hazel Grove Girl currently running at Swindon. I have owned her for approximately four months but have had other dogs on and off since 1997.

So they are a bit of a hobby, not kept as pets? 
They are working animals and not pets!

But you do have pets at home, don’t you?
We have recently become the proud owners of two Chihuahua puppies who are 11 weeks old. They make very good alarm clocks, especially if you like getting out of bed at quarter past five in the morning.

You raced pigeons at one time, didn’t you?
Yes, in my teens and early 20s I did race pigeons in partnership with my brother.  I would like to do it again but my wife refuses to have flying rats in our garden.

What was the last book you read?
I tend to have several books on the go at one time and often never finish any of them.  I am currently reading the Dick Frances novel Risk, a biography of The Last Kaiser of Germany and a very interesting history book called The Time Travellers Guide to the Middle Ages.  I am an avid reader of the BBC History magazine each month and a Member of the National Trust and English Heritage. 

Do you have a favourite TV programme?
I tend to sleep through more television programmes than I watch. I don’t watch soaps but I do enjoy Holby City. I am not a member of the Tina Holby Fan Club, but I did find out how to join! 

You’ve done quite a bit of travelling over the past few years. Any memorable moments that you’d like to share?
My last holiday destination was Libya! It was an interesting country and I am surprised that they are now in Civil War. An outsider’s impression of the country at the time was that the view of the average person, or rather of those who spoke English, is that they were contented with Gadaffi.

For a pure holiday, Canada would be my favourite destination. For historical sites, Jordan, Egypt and Turkey would be my favourite destinations.

Do you have any favourite place in Britain?
Britain as a holiday destination has some very interesting historical sites. Our last short break was in Scotland when we went in search of the Antonine Wall, ending up becoming lost and thinking we had found it, when in fact we had found the remains of an open cast coal mine. For beauty, Northern Ireland is stunning – especially the drive between Belfast and the Giants Causeway.  It is a pity that you do feel tension from the two communities because it is a beautiful place in which to live.

Have you got any money-making tips that you’d like to share?
Don’t own any pets or racing greyhounds! It is a bottomless pit.

Any short-term – or long-term – plans ahead?
A visit to Syria, subject to the political situation and my wife’s health.

Andy lives in Hungerford with his wife Sarah.

Previously it was paid either by monthly direct debit or quarterly bill.

It will now be paid in two instalments on 31 July and 31 January. The tax office will send out the bills showing the amount due in April and October for payment in July and January.

The bill can be paid by telephone banking, Bank Giro, at the Post Office, by direct debit or by cheque.

If you have any queries or comments, do let me know.

HMRC’s version of Hal churns out penalty notices without any apparent human intervention, so this is extremely efficient, compared with most of what HMRC does. The level of penalties and areas of tax that they apply to is growing, with monthly PAYE bills being the latest addition to their fine farming.

Reasonable excuse – what HMRC says

One of the few ways of avoiding having to pay these penalties is by making a ‘reasonable excuse’ claim. HMRC says that this is only available when there is “some unforeseen and exceptional event beyond your control” and they give three examples:

• When HMRC or its computer Hal goes wrong or gives out bad advice
• When your computer fails while submitting a return online
• Serious illness

They say that not having enough money to pay or relying on someone else who lets you down does NOT count.

Reasonable excuse – the reality

However, the outcome of tribunal and court cases suggest that, in fact, the following situations can be accepted as an excuse to avoid penalties:

• Lack of funds caused by non-payment by a customer who was a local council
• An accountant failing to advise on special rules relating to a film investment
• Fire or major theft

Some more unexpected tribunal successes were:

• Where the introduction of the national minimum wage left a charity short of cash
• When a cheque bounced because the bank manager fell ill before agreeing a new overdraft
• Where a tobacconist had no cash to pay because of smugglers
• When the taxpayer’s car crashed on the way to the bank to pay the tax, and the forms got lost under the seat of the damaged car!

Remember that, whatever your excuse, you will need to prove it (e.g. keep screen shots of error messages from failed online submissions etc.) and there are time limits for appeals.

The lesson from this is that it is usually worth appealing against any fines, just in case.

If you have any questions about this, please let Andy Scott or me know, or if you have your own story about a reasonable excuse claim, please post a comment.

This scheme is called Rent a Room and it has special rules that apply when you take in a lodger.

Under the scheme, a certain amount of gross income can be received tax-free from letting a room or rooms in the house you live in (that is, before expenses).

This tax-free amount is £4,250 per tax year.

You do not have to take part in the scheme if it is not to your advantage. Instead, you simply declare all your letting income and claim expenses as mentioned earlier.

Do the rules mean I do not have to pay tax on the rent I get?
As long as the total rent you get during the tax year is no more than £4,250, you do not have to pay tax on that income.

If you do not receive a tax return and you receive rent of £4,250 a year or less, you do not need to tell the tax office about this income.

What happens if the rent is more than £4,250?
In this case, you can choose between:

Paying tax on the profit you make from letting the room, worked out in the normal way (see above)

Or

Paying tax on the amount of rent over £4,250

Will I have to pay Capital Gains Tax when I sell my home?
The Rent a Room scheme makes no difference to the Capital Gains Tax rules that apply when you sell your home.

If you have any comments on this post, I’d love to hear from you.