Taxing Times 4

Tax is, well, taxing!  As it's a very specialised field, a year ago I brought in some help.  Tax Accountant Tony Tesciuba (who also happens to be my Uncle) offered to answer personal and small business tax queries.  

This has been hugely popular, so much so, that this is now the fourth instalment of the Tax Tony saga - just in time for the 30 September deadline (after that point the Inland Revenue no longer guarantees to do the self-assessment tax calculations for you).  The process itself is simple, MoneySavers are invited to ask their question in the Chat Forum (see original link) and then they're collated and answered here in one big article.

Oh and I nearly forgot, it's important to remember the answers below are Tony's not mine, and in return for his hard work I agreed to tell people about his website www.tesciuba.com.

Here again folks and pleased to be so.  Answering these questions impresses on me each time just how complicated our tax system is so that ordinary people have little chance of following it without professional help.  That cannot be right and increased complexity will be Gordon Brown's unfortunate legacy.

There is an accelerating trend for returns and forms to be filed online, for tax and VAT.  Yes, there have been teething troubles, but overall, greater automation has improved the system and reduced processing errors and delays.  On-line VAT registration is a recent innovation and seems to have speeded up the process enormously.  I would strongly encourage all VAT registered traders to file their quarterly returns on-line and pay by direct debit.  You get immediate confirmation of the filing and know that the money will get to the right place.  In return, HMRC allows 7 days extra for the filing and payment.

Quite a few questions are again about making the first contact with HMRC, perhaps a little later than the rules require.  I think, quite deliberately, the Revenue has a policy of encouraging potential recruits to the taxpayers' club and those front line staff that I have dealt with have invariably been courteous and helpful.  Putting off registration only makes things worse.  Possibly much worse if they catch you before you tell them.  The general rule is that the deadline for notifying HMRC of new sources of income if no tax return has been received for the previous year is 5 October.  There is a special rule for notifying commencement to trade as self-employed: you must register within three months of the last day of the month in which self-employment commenced, whenever that was in the year.

I have had to debunk a couple of urban myths this time.  The boom in buy-to-let has made some decent capital profits for those fortunate enough to have got in early.  It is not true that such profits are always subject to CGT.  Property trading, like any other form of trading, is subject to income tax, not CGT.  Once you are talking about income tax, the private residence exemption cannot apply, even if you have lived in the property for a while.  There is a widespread belief that if you run a business from home, you can claim a proportion of the total domestic expenditure as an expense.  That has never been correct and HMRC is clamping down on this.  You can only claim the additional costs that the business causes.  These are likely in most cases to be very small.  Sorry.

The answers to these questions are based on tax law at 20 September 2006.  They are general in nature and are no substitute for taking professional advice specific to your own circumstances.  While the answers are given in good faith, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the author or by MoneySavingExpert.com.

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Full time employment and self employed

MoneySaver's Question:

I am in full time employment earning £22,000 and paying tax and NI through PAYE. I have also over the last year earned around £5,000 in self-employed work (have also been paying the extra NI).  Do I need to include my main income and the tax I have already paid on my tax return?

Does the £4,000-odd tax-free limit apply to the £5,000 I have earned in my self-employed work or would this have been eaten up on my salary for main employment?  Also, I was wondering what expenses I can claim? It is computer-based work that I do from home, so had to buy a laptop which I hoped I would be able to claim back on and also broadband costs?

Tax Tony's Answer:

You put both sources of income on your return.  The personal allowance is set against your total income and will have included in your PAYE code.  So you will in effect pay 22% tax and a bit of National Insurance on your self-employment income.

You can claim capital allowances on your computer and the business proportion of your broadband costs.

Employed or self employed? 

MoneySaver's Question:

I am recently divorced after 37 yrs. During my marriage I only ever did occasional cleaning jobs & was paid cash in hand.  When my husband left I was forced to take on more regular work in order to fend for myself.  I have two part-time jobs.

1) Pays me monthly by Direct Debit. Hours vary but payment stays the same.
2) Pays me weekly by Direct Debit. I work 7hrs per week.

I have never paid tax or National Insurance on either of these.

I also receive a monthly maintenance payment from my ex husband. This is for the next 18 months only.  I am about to add to this by advertising myself as available to visit pets in their own homes when owners are away.

Am I classed as employed or self employed? Will the pet visiting be classed as a business? How do I stand legally on tax & NI?

Tax Tony's Answer:

You probably stand illegally I'm afraid.  Either your part-time employers are failing to operate PAYE (which is not your fault) or you have failed to register as self employed.  The pet visiting sounds like a self-employment.

Small earnings exception

MoneySaver's Question:

I have been a registered childminder for about a year and notified Inland Revenue and NI office at the time. I completed a small earnings exception for my NI and received acknowledgment. I have not received a self-assessment form from the IR though. Am I right in saying that the NI office will have notified the self-assessment people that I don't earn enough to pay tax?

Tax Tony's Answer:

Your registration as self employed was made to HMRC and so is all you need to do.  Just to avoid any problem building up, it probably would be wise to telephone your local tax office and make sure your tax return has not gone to the wrong address.

Implications of ex gratia payment in lieu of redundancy

MoneySaver's Question:

2 weeks before I was due back from maternity leave after my baby died, my employer told me they'd reorganised and my job had gone so offered a new job that they'd created. However it was unsuitable for my circumstances (breaching the Sex Discrimination Act) so they offered me my old job title back but with a different role.

So I mentioned voluntary redundancy... They agreed but then got scared (because of the maternity complication) so suggested I quit and, after I've left, they make me an ex gratia payment by cheque. Annual leave and salary were settled under PAYE as normal.

Also, they told me by email that I wouldn't be liable for tax/NI as I wasn't an employee when the cheque was sent (2 days after the "my last day will be" date in my resignation letter) but... I was still on their payroll to receive my Statutory Maternity Pay and received my P45 weeks after the cheque (when my SMP finished) and it gave my leaving date as after the cheque.

The covering letter said it was "in recognition of the valuable contribution you have made to the development of the business over many years". I know an ex gratia payment is tax/NI free if (1) it's not due under your contract (wasn't), (2) wasn't an accepted custom (wasn't) and (3) not related to your work - so this bit worries me! So do you think...

1. It WAS related to my work?
2. I was still an employee?
3. tax/NI is due on it?
4. The taxman would chase me or my ex-employer?
5. It would be classed as payment in lieu of redundancy/compensation, even though my ex-employers don't say as much (they know I'd have taken them to court for constructive dismissal/SDA otherwise)?

I'm not trying to dodge paying tax/NI but if that's the case, I'd have been better off being made redundant properly!

Tax Tony's Answer:

As you suspect, I also think your former employer has made a mess of this.  They have walked into the most basic trap by writing "in recognition of the valuable contribution you have made to the development of the business over many years".  That makes it pay for work that you did and so taxable.

You have had enough to worry about and need not be concerned about this.  It is your employer's problem, not yours.  They should have deducted basic rate tax, even though the payment was made after you left.  PAYE is their responsibility, not yours, so HMRC will chase them, not you.  You would remain liable for higher rate tax (on the grossed up amount) but I assume that does not apply in your case.

Higher rate tax payer

MoneySaver's Question:

 I am a higher rate tax payer.

1. Do I need to complete a tax return?
2. What happens about the tax on my savings?
3. My wife does not pay tax. What happens about tax on interest earned in our joint account?
4. How does paying tax at the higher rate affect my personal pension payments and should I be doing something about this?

Tax Tony's Answer:

You should inform HMRC that you have savings income due to be taxed at the higher rate and complete a return if they send one to you.  That would be the place to claim the higher rate relief on your pension contributions.

Interest already earned on your joint account is split 50:50 between you and your wife for tax purposes.  Assuming your marriage is strong enough (!) you should transfer all your savings to accounts in your wife's sole name to avoid the higher rate tax.

How can I pay less tax?

MoneySaver's Question:

I am a salesperson, with a basic and bonuses based on how much I sell.  My basic is not very high so I don't pay much tax on it but the commissions are pretty high and I usually get taxed around 40 - 50%

How could I be less taxed on them? Would making a limited company invoicing my employer for my services (commissions) be more profitable for me? While still being an employee of my actual company to get my basic.

Tax Tony's Answer:

Sorry, this is a non-starter.  Your limited company would be caught by IR35, putting you in pretty much the same position as if the commissions had been paid through the payroll, but with much more paperwork.

Higher rate tax band raised

MoneySaver's Question:

I am a higher rate tax payer. Last year I had gift-aided £1,200 to a charity and I wrote to the taxman to get 18% back. They did give out a refund but I think it wasn't calculated correctly. What they did was to simply raise my high rate tax band by £1,200. I think they should have raised it by £1,200 * 100 / 78 = £1,538

Tax Tony's Answer:

I agree with you.  A simple mistake has been made: mixing up gross and net.  Call them and point out the error.

Returning to the UK from working abroad

MoneySaver's Question:

I have just returned to the UK from working abroad for four years, in various countries which have tax agreements with the UK. Now I realise my salary cannot be taxed for what I earned abroad, but what happens when I start my new job in a few days? Will I be hit hard by the tax man? Do I have to pay a year of tax for the seven months I am back in the UK working?

On top of this, I do some freelance work. How do I go about paying tax on this? With my salary from my normal job standing at £32,000, when do I go over the threshold and on what will I have to pay 40%?

Tax Tony's Answer:

The split year treatment will apply so that you will be taxed on your UK earnings only from your return.  You should get a full year's personal allowances, so you will be hit somewhat less hard than the rest of us.

You have to register as self-employed.  Call the Helpline for the Newly Self-Employed on 08459 15 45 15.  For 2006/07, higher rate tax starts once total annual income exceeds £38,335.  40% tax applies to the balance.  Watch you do not pay too much National Insurance.  The helpline will explain what you need to do.

Income tax and tax credits

MoneySaver's Question:

I have entered my details for my full-time job, and the system has calculated I owe HMRC some money. This figure is exactly what my daughter receives for Tax Credits - have I missed a figure out on my form?

Tax Tony's Answer:

One of Gordon's many unnecessary complications of our tax system has been the separate reporting for income tax and tax credits, so that the same information has to be provided twice to the same government department.  Brilliant.  To answer your question:  No.  This is merely coincidence.

Umbrella companies

MoneySaver's Question:

I currently work through an agency but get paid through an umbrella company. As best as I understand it, I'm not PAYE. Although I often earn around £450 - 500 a week before deductions, I get a tax allowance on my mileage to work and back of 40p a mile, which mounts up to £160 a week. By the time I get paid, I can bring home between £350 - 440 a week, although the umbrella company recently completed a form for me which shows my basic wage as being anywhere between £60 and £260 a week depending on how many hours I've done. Does this sound right? They say it's because they claim lots of different tax allowances for me, but I'm not sure which ones.

Do I need to fill in a self-employed tax return or not? Will the umbrella company do it for me? I hardly seem to pay any tax or NI, so I'm confused by the whole thing. In one week, I put in 37 hours, earning £555 before deductions. I only had £4.79 tax deducted and no NI. The following three weeks in a row, I had tax refunds and NI credits showing on my payslip - only for small amounts but credits all the same. Am I likely to get hit with a massive tax bill at some point?

Tax Tony's Answer:

I cannot make head or tail of this.  You need to sit down with whoever is responsible for this and not go away until you fully understand what is going on.  HMRC is having a go at umbrella companies, which it sees as responsible for widespread abuse.  Be careful.

Gross interest or not?

MoneySaver's Question:

My wife has just been paid her state pension for the first time. £86-80 pw (£4,513 pa).  Her only other income is dividends from Company Shares which amounted to £2,388 gross (tax credit £237) last year and she has bank interest paid gross (£242 last year).

Can she still have her bank interest paid gross in future bearing in mind that tax is deducted from her dividends as she will be over the tax threshold next year? I expect a small increase in divs and bank interest in future.

Tax Tony's Answer:

I make it that your wife's total gross income is just below the age related personal allowance of £7,280.  As soon as her income passes this, she must tell her bank to stop paying gross interest. 

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Stamp Duty on house purchases

MoneySaver's Question:

Bearing in mind the £250,000 stamp duty limit, if I was to buy a house for, say, £300,000, could I buy half of the house in my name and half in my wife's name to avoid paying the ridiculous stealth tax of 3% of the whole price?  There are people advertising ways to escape this, but you have to buy their book.....

Tax Tony's Answer:

If only it were that simple.  Do not buy the book and put the price instead towards the Stamp Duty that you will certainly have to pay.

Buy-to-let mortgages

MoneySaver's Question: 

We bought a buy-to-let property last year and this is our first year of filling in a SA on rentals so sorry if this seems naive.

Question 1: I know we can class the broker's fee as an expense - but what about the mortgage lender's arrangement fee? It was added to the mortgage - does that matter? It was quite a sizeable chunk (£499).

Question 2: My husband is taking a day off work to fit a new bathroom - can his loss of earnings be classed as an expense? (He's employed by a temping agency and will lose a day's salary, as he's paid by the hour according to a timesheet completed by his customer).

Question 3: Can all losses (we've made a loss in this first year) be carried forward to next year?

Tax Tony's Answer:

1. Yes, both are deductible expenses in the “finance charges, including interest” box on the land and property page.

2. No.

3. Yes and offset against the first profit that you make.

Property to Let (not a buy to let mortgage)

MoneySaver's Question:

I bought a flat with a 90% mortgage and lived in it for 2 years. I then moved into my now husband's house and rented out my old flat.  I am not on my husband's mortgage so my flat is my only mortgage.  The difference between rental income and mortgage payments is approx £100 per month.  I assume that I should be declaring this.  Can I increase my mortgage payments to the same amount of rental income so that my profit is nil and therefore not have to pay tax? 

Tax Tony's Answer:

It is the mortgage interest that you deduct in arriving at your rental profit, not the full mortgage payment.

You certainly have to tell the Revenue if you are making a profit.  I think it would be safest to tell them even if you are only breaking even or making a loss.  Better that than them finding out some other way.  When you come to sell the flat, you might be subject to CGT.  There is a special relief for homes that are subsequently let, so reporting the rental now avoids awkward questions later.

You can re mortgage the property up to 100% of its value when you first put it up for rent.  Probably you would only want to re mortgage up to the point at which you are not making a profit beyond that the interest would go unrelieved.  You can then use the money raised to pay off your domestic mortgage.

 
Non resident landlord scheme

MoneySaver's Question:

I am going to start my career break Jan 2007 and will be renting out my home to cover my mortgage. I will be abroad for over 6 months so I think I qualify as a non-resident landlord so can receive my rent gross and pay any tax due later, presumably I will receive a tax return.

I have spoken to the tax office and they don't see very clear on it.

As it's 3/4 into the tax year, will I have to wait until the New Year to start?  How much tax might I pay?  I am told my property will rent for around £425 pm and I am a standard rate tax payer.  Can things like agents' fees and other costs be taken off before paying tax?

Tax Tony's Answer:

MoneySaver's Question:

My wife has been self-employed as a music teacher for a number of years, and does a proportion of her teaching from home. I do her accounts for her. Having had a quiet year last year because of time off to have a baby, this year's payment due in January has come as a bit of a shock as she did not need to make payments on account last year, so I'm trying to reduce the £1,300 liability for this year (and another £650 for the first payment on account) by making sure I'm claiming all the expenses we can.

Previously we've claimed some capital allowances for new instruments purchased (reducing by a % for personal use), and expenses for music and stationery purchased and miles driven to a couple of schools she teaches at, as well as 10% of phone, utility and council tax.

I read somewhere else that I could be claiming the home running costs based on number of rooms (she uses the study - though it's not exclusively for teaching, one of 6 rooms in the house, therefore 17% - and there is some overspill into other rooms). I also read that mortgage interest can be included. As turnover is under £15,000 I'm only doing the short return, so really the numbers are academic until HMRC ask to look at them, but would this sound like a reasonable amount to claim (i.e. is it sufficiently 'normal' that they're unlikely to question it)?

I know she could also pay me a salary as I do her accounting and some accompanying for her, although since I pay higher rate tax that would be counterproductive, but are there any other normal 'working from home' amounts I'm missing?

Tax Tony's Answer:

First thing's first.  If you expect your final tax bill for 2006/07 to be less than it was for 2005/06, you can apply to reduce your payments on account by ticking box 18.6 and putting the reduced figure in box 18.7.  Be careful.  If it works out that you have reduced the payment incorrectly, you will be charged interest on the difference from the date you should have paid the full amount based on last year.

Now I am going to disappoint you.  HMRC has a real downer on people claiming home running costs.  The general principle is that you can only claim expenses actually incurred wholly and exclusively for the purposes of the business.  They say (quite rightly) that you cam only claim the additional costs caused by working at home, such as the extra heating for occupying the house when it would otherwise have been empty.  You would be paying water rates, council tax and mortgage rates anyway, so you cannot claim these as business expenses.  It is simply wrong to claim a proportion of the total household bills, whatever you may have read.  HMRC has said that they will not ask for additional evidence if an employee working from home claims £2 a week (£104 a year).  There is no corresponding guidance for the self employed, but that is the best guideline we have.

It is a different story if part of the house is occupied exclusively by the business, such as a dentist's surgery or a garage.  But then you are into business rates and restricted CGT exemptions on your private residence, so you do not want to go there.

Mile allowance

MoneySaver's Question:

I am self-employed and have a van that I use exclusively for business. When it broke down I had to use my wife's car for a few days. Can I charge the miles I did in the car at 40p/mile, or could it only be at the lower rate as I do more than 10,000 miles a year in the van? I charge all the actual expenses of the van against the business - I don't use the 40p/mile scheme.

Tax Tony's Answer:

You cannot chop and change, but if the use of the car is only on rare occasions, claiming 25p a mile would probably be an acceptable compromise.

Home working PC

MoneySaver's Question:

I bought a PC in Nov 2004 for doing necessary evening work for my employer at home, and still use it for such (about 75% work/25% personal use).

Can I retrospectively claim any allowance? And can I claim some sort of allowance each year (presumably diminishing?)

Tax Tony's Answer:

No, I think not.  The general rule for employees' expenses is very restrictive.  Employees expense claims are limited to those “wholly, necessarily and exclusively incurred in the performance of the duties”.  HMRC would say that if you need a computer, your employer should provide one.

 Utility bills

MoneySaver's Question:

I have never completed any tax return forms and consequently never received any tax rebates (sigh!!) ever in my working career - started 16, now 36 (ish).
Since May 2005 I have been employed full time (basic rate payer) with a company and classed as 'home based', I claim business mileage from home to wherever I travel to for meetings etc but what I wanted to know is; am I able to claim anything for lighting, heating etc?

I have increased my salary by £12,000 since May 2005, but being home based really boosts those bills up especially the winter ones so wondered if there was any tax relief for home workers.

Tax Tony's Answer:

HMRC will accept that you have incurred costs of £2 a week without further evidence.  To claim more, you would have to provide evidence of additional costs that you would not have incurred otherwise.  This will be very difficult to do.  Even the £2 is given grudgingly.  Go on the HMRC website and search for Tax Bulletin 79 October 2005.

Personal use allowance

MoneySaver's Question:

I am a party planner and run home parties.  I purchase products at a whole sale price from the head office and sell them at a higher retail price.  If I also use products myself and so not sell them on do I have to pay tax on the ones I use as if I have sold them on?  Or is there a personal use allowance?

Tax Tony's Answer:

If you buy from the wholesaler for your own personal use, there would be no tax implications and you are welcome to keep the discount.  If however you buy for your business and then withdraw the goods from stock (for example leftovers from a party) you have to pay the full retail price, or be taxed on the difference.  There is no personal use allowance.

Married Couples Allowance

MoneySaver's Question:

My Mother died earlier this year (21 March) and my father (age 93) has received a tax assessment for 2005/06 that has removed any reference to married couple's allowance. He has already lost his higher personal allowance as his income is about £24,000. The loss of married couples allowance for 2005/06 seems unfair as my mother's death only occurred about 3 weeks before the end of tax year. Is it correct?

Tax Tony's Answer:

Personal allowances are given for whole tax years and so your father is entitled to the married couple's allowance for 2005/06.  He should call his tax office and point out the mistake.

The Low Incomes Tax Reform Group sponsors a scheme to help older taxpayers.

How much stock can I claim as an expense?

MoneySaver's Question:

I have a part time eBay business, and this is the first year I've completed a tax return, so sorry if this is a silly question! I started my business in May 2005, and bought quite a lot of stock over the next few months. By April 2006 I'd sold about 50% of it.

My question is, how much of the cost of that stock can I claim as an expense? Can I claim it all, or just the cost of the items that I've actually sold during the year?

Also, can I claim the cost of educational materials (books, classes etc) related to my area of business as an expense?

Tax Tony's Answer:

Just the stock you have sold or written off.  The rest can be deducted in the later year when it is sold or written off.

Probably not – they are just putting you in the position to trade, rather than an expense wholly and exclusively for the business.

Can I claim against old equipment?

MoneySaver's Question:

Hi, I have been preparing to be self employed for some years now. As a result I have bought equipment over 8 or 9 years, most is second hand. I do not have receipts for the goods, can I put a value to these items and claim them against my tax now that I am self employed?

Tax Tony's Answer:

Any personal assets that you bring into the business come in at their market value on the day they are introduced, whenever they were bought.  I suppose that receipts are somewhat irrelevant, as it is the market value now, not the original cost that matters.  You will have to be realistic about the market value of 8 or 9 year old kit.

Items bought specifically for the business come in as expenditure (capital or revenue as appropriate) at their full price on the first day of trading.  You will need receipts to support the cost, in the normal way.  I think in theory you can go back seven years, but I would wonder if anything more than say six months old was really pre-trading expenditure.

Mystery shopping

MoneySaver's Question:

I do mystery shopping and need a fax machine to send/receive some assignments. My old one went kaput and I bought a new one. Am I allowed to claim its cost against tax?

Tax Tony's Answer:

If you are self-employed, claim capital allowances.  If employed, I fear not.  This cost should be met by your employer.  

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Should I pay myself through dividends?

MoneySaver's Question:

I'm a registered self employed sole trader. I'm expecting to make roughly £17,000 for this tax year. I'm a computer programmer so I don't buy or sell stock and have no need to make large investments in my work.

I was wondering whether it is still worthwhile to incorporate a limited liability company? Since I believe dividend tax is only 10% above £2,100 and corporation tax is currently nil, would I save money buy paying myself through dividends?

Tax Tony's Answer:

Incorporation was a great wheeze a few years ago, but the advantages are gradually being whittled away.  For example, the nil rate band of Corporation Tax has gone and the rate is now 19% on all profits up to £300,000.  At £17,000 profit, there would be perhaps £1,000 to save in tax overall, but at the cost of much greater formality.  Because limited companies are so much more complicated than sole traders, you would struggle without paying an accountant to explain how to get the tax advantage and to do all the paperwork for you.

One thing to watch out for: as things stand now, the person you are working for has to decide whether or not you are an employee and so if PAYE should be applied.  If you incorporate, that responsibility (and the risk of getting it wrong) passes to you under the notorious IR35.

By the way, dividends are completely free of tax and NI for anyone below the higher rate tax threshold, but that might well change in the coming years.
 

Is it worth creating a company?

MoneySaver's Question:

I earn around £37,000 from my regular day job and have recently registered as self employed and become a sole trader for some work on the side. I expect to earn around £10,000 profit from this in the first year and more in the subsequent years.

Some advice I got (not from a pro.) was that it probably wasn't worth creating a company because of the extra paper work, but I'm going to be paying 40% on all of that extra income...so how can I reduce that tax burden?

Tax Tony's Answer:

Incorporation will not save any tax for you, because you have already used up your allowance and lower rate bands.  And, yes the paperwork would be an unnecessary burden – unless you have some non-tax reason to incorporate.

There is no magic wand to make your tax bill go away.  You could look at using some of the extra money to fund a pension or to make Gift Allowance donations.  Check that you are not paying more than the maximum National Insurance on the HMRC website.

 
Personal and business account mix up

MoneySaver's Question:

I am sole trader. I do mainly consulting work, so no stock there. However, I have been developing small solar power systems and have bought and sold some stock but mainly it has been for research and development purposes. So firstly, (1) can I include this in my calculation?

When I started up 18 months ago, I used my personal account for business use and things got a bit muddled. Now I have a business account, so I have two sources of records of income and expenditure. (2) Can I just mark business expenditure on my personal bank statements as evidence?

Finally, I have inputted as much information on income/expenditure into 'Personal Accounts' by Accountz.com but I can't see any way in which it can produce a sensible report for tax purposes. (3) Any ideas?

Tax Tony's Answer:

1. If you have used this kit in your business, yes, you can claim its cost as an expense.

2. You did the right thing setting up a separate account for your business.  It makes things much easier and should avoid having to show HM Revenue & Customs your personal bank statements, if you are ever the subject of an enquiry.  Even so, there is absolutely no reason why you should not include the expenditure (and income) that went through your personal account in the early days.  You should have proper receipts for your expenditure rather than just rely on the bank statement entries.

3. I do not know this software, so can't suggest anything beyond reading the manual more carefully or speaking to their support people.  The preparation of accounts for tax purposes is your responsibility, so you do need to get your records in order.  Remember that  you only have to complete the boxes on the self employment pages of your return.  HMRC is not expecting anything fancier than that. 
 

Being a new sole trader

MoneySaver's Question:

I have started my photography business in July this year.  Because I tend to work on projects, and I'm starting out I don't know how much I'm going to earn from the tax year Apr 2006-Apr 2007.  I have also recently done a temporary accountancy position, which I paid tax on.

I'm not sure what figure I would fill in on income and I don't know what things I can offset against this.  For example, I do a fair amount of travelling, eating away from home, paying out for equipment etc.

Tax Tony's Answer:

On the 2007 tax return you will have to include your income and expenditure from the date you started to 5 April 2007.

By the time you come to fill in your return, you will have actual income and expenditure figures.

The cost of travelling to assignments will be a valid expense, together with modest food bills if you are travelling regularly or staying away over night.  Your equipment will qualify for capital allowances. 
 

What records form part of my ‘accounts'?

MoneySaver's Question:

I am a self-employed sole trader. I currently have two main records for my income, one accounting for every payment that went into my bank account (who paid me the money, deposit no. etc) and one record which lists income by the payee's name.

Does this sound acceptable? Are there any other records which should form part of my "accounts" (apart from original documents such as bank statements, receipts etc)?

Tax Tony's Answer:

Assuming this system records all your income, however paid, yes that sounds fine.  You need to keep receipts to justify all expenditure except occasionally for small amounts where obtaining a receipt is impractical.  There is a helpful leaflet about record keeping for the self employed on the HMRC website.

There are additional record keeping requirements if you are registered for VAT or have any employees or sub-contractors. 

Accepting cheque payments in US Dollars 

MoneySaver's Question:

I am a sole trader who builds websites. A very small amount of my income comes to me as cheques in American dollars, which are then paid into my bank account. My bank takes £5 from each cheque for commission.

Do I need to include each of these £5 commissions as income on my tax return, even though they never actually appear in my bank account and I never receive the cash?

Tax Tony's Answer:

Strictly speaking, your income is the amount before the charge and the £5 is an expense.
 

Retirement implications

MoneySaver's Question:

I am a sole trader and my accounting year end is 30 April. I wish to retire on 30 Oct 2009. I understand that any profit earned between 1/5/09 and 30/10/09 is added to my 09/10 liability. Is my overlap relief able to be offset against the whole liability or just that part earned between 1/5/09 and30/10/09?

What happens to any unused capital allowances? Can I leave it to my tax return for the year to 5/4/10 to let the revenue know of the cessation or am I required to inform them earlier and if so would the tax due fall sooner? 

Tax Tony's Answer:

You plan to cease trading in tax year 2009/10 and so your 2010 return will be the last to include business income.  You will put the date of cessation in what is currently box 3.8 and that is the only notification needed.

You will have included your profits for the year ended 30 April 2008 in your 2009 return.  So the profits to be assessed in your final 210 return will be those from 1 May 2008 to cessation on 30 October 2009.  Your overlap relief brought forward will be offset against the profit for the whole of this period.

The business assets will be transferred to you at their market value.  Any diffence between that and the remaining capital allowance balance will be a balancing allowance or charge in the final period.

Any unused overlap relief can be used to increase a terminal loss carry back claim.  

Off shore declarations 

MoneySaver's Question:

I'm a sole trader, and I've done some work off shore (Guernsey) – and am paid by sterling cheque. How much (if any) do I have to declare?

Tax Tony's Answer:

Assuming you are a UK resident – all of it.

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Should I register as self employed?

MoneySaver's Question:

My main income is from examination marking for which I am taxed at the standard rate and have to claim back overpaid tax at the end of April each year. I also receive some income from supply teaching and this is counted as my main employment so I am not taxed unless I reach the threshold (which I don't). Would I be better to register as self-employed? Also how do I find out whether I owe money for N.I.? I tried to contact DWP last year and they said they would be sending out details but they never did.

Tax Tony's Answer:

Although your question is not clear, it sounds as if you are employed by both the examination board and the supply teaching agency.  There is no option to register as self-employed.  If you are employed, you are employed and that's it.  National Insurance should be taken care of through PAYE.  Persist with DWP if you are waiting for a reply from them.

How do I register?

MoneySaver's Question:

I have a full time job as a college lecturer earning £30,000 and have also been gradually building up freelance planning application and building regulation application jobs into local authorities for a local company.

At first I did a few jobs as favours for family and friends but now I am being paid a fee for doing these jobs. I realise I will have to inform the tax people but how do you advise I go about this.

I have also had to buy large items such as a large format printer as well as other surveying items and advised to buy an indemnity to be able to carry out this work. Can you advise please?

Tax Tony's Answer:

Call the Helpline for the Newly Self-Employed on 08459 15 45 15.

Claim capital allowances on the printer and deduct the other items as expenses.  The self-employment pages and notes in your tax return will explain how to go about this.

Class 4 contributions

MoneySaver's Question:

As self employed when do Class 4 contributions cease to be payable. Is it in the accounting year in which you reach 65 or is it the first full year after ones 65th birthday.

Tax Tony's Answer:

It took me a while to find this one!  Class 4 contributions cease to be payable at the beginning of the tax year following your 65^th birthday (60 for women).  Class 2 is weekly based and stops on your 65^th/60^th birthday.  Note that exception is not automatic and must be applied for. 

What hurdles might I encounter? 

MoneySaver's Question:

I am 66 and retired but have the opportunity of a part-time self-employed job paying around £200 per week on submitting an invoice. What bureaucratic hurdles am I likely to encounter, do I have to register with somebody, how much tax am I likely to pay (I draw a Government pension of under £90 a week) and can I offset any expenses against my tax liability?

Tax Tony's Answer:

You are obviously a resourceful person if someone is paying £10,000 a year for a part-time job.  If your business is simple, self assessment should not give you too many headaches.  Step 1 is to register as self-employed by calling the Helpline for the Newly Self-Employed on 08459 15 45 15.  Make sure to tell them your age so that they will excempt you from National Insurance.

You can deduct the expenses that you incur wholly and exclusively in earning the profits of your business.  It is hard to be more precise without more details.

£7,280 of your total income (pension plus self employment) will be tax free.  The next £2,150 will be taxed at 10% and the balance (at your level) at 22%. 

Do I need to complete a self assessment?

MoneySaver's Question:

I set up and registered as self employed a couple of years ago as I was doing some freelance telemarketing work for a couple of companies. This work dried up. I submitted my first self-assessment return in January 2006 and all was OK, my calculations accepted etc.

However I have not done any self employed work for over a year now (not since any that was included in my first SA). I have been an employee of a University since. However I have continued to pay my NI contributions as hoped to get more work self employed. Do I need to do a SA this year as it will be a nil return in that part and surely my other earnings will have been taxed at source?

Tax Tony's Answer:

You are wasting your money on the Class 2 National Insurance.  As it is very simple to set up again, I suggest you call the helpline on 0845 9154655 and stop it.  You could have applied to be excepted from class 2 when your self-employment income fell below the threshold (currently £4,465), let alone when you stopped working.  So you can at least ask for a refund of the over payment: I do not know if it will work.

You will have to do a tax return if they send you one.  Put the date of cessation of your business in box 3.8 of the self employment page.  That should stop you getting returns in future. 

How do I declare my earnings? 

MoneySaver's Question:

I work full time as a journalist but earlier this year began some regular freelance work. I have never done freelance before and was wondering how I go about declaring my earnings for tax purposes.  Do I also have to pay an extra National Insurance contribution?

Tax Tony's Answer:

Call the Helpline for the Newly Self-Employed on 08459 15 45 15
 

 Accountants

MoneySaver's Question:

I send all my business information to my accountant around about this time - is the deadline the same for my accountant i.e. September or is this not classed as self-assessment, also what are reasonable fees for this service - my books are reasonably simple but my accountant puts his fees up every year for the same amount of work, finally - can you recommend a good tax-information book for small businesses so I can ensure I'm claiming all that I am entitled to (and maybe some more)?

Tax Tony's Answer:

The self assessment deadlines are the same whether you use an accountant or not; 30 September if you want small underpayments to be recovered through your PAYE code and 31 January as the final date.

You should shop around if you are not happy with your accountant's fees.  It does not surprise me that they are rising every year – ours certainly do.

HMRC's website is an excellent resource and highly recommended.  If you want a book, visit a reputable bookseller and see which of the various guides published by newspapers and others fits your level of complexity and understanding. 

What are the advantages of forming a limited company? 

MoneySaver's Question:

I have been self employed for 5 years and grossed over £30,000 in 2005/06. I am VAT registered and considering forming a Limited Company. What are the advantages for me please?

Tax Tony's Answer:

You have not told me your profit or the type of business you are in, so it is difficult to say.  It is likely to be a bit borderline.

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MoneySaver's Question:

Who has to complete a self assessment? I know this is probably a bit obvious, but there's nobody around to tell me whether I need to or not?

Tax Tony's Answer:

You have to complete a tax return if they send one to you.

The guidelines for who should be completing a tax return are published on the HMRC website. In short, if you have any income that is not taxed (or not taxed at your highest rate) or any capital gains in excess of the annual exemption, you must tell HMRC.  Specifically, you must register as self-employed within 3 months.

Novice tax payer 

MoneySaver's Question:

Me and my boyfriend have recently started giving music lessons from our home. We are earning way under our tax paying threshold but I'm not sure if I still need to fill in a Self Assessment form. We've set up this 'business' partly out of financial desperation and as such have had no advice from anyone about what we need to do about paying tax. We do keep records of income and expenditure though.

Tax Tony's Answer:

I am afraid you will have to register as self employed.  You must do this within three months of setting up or face a £100 fine.  Call the Helpline for the Newly Self-Employed on 08459 15 45 15.  They are very helpful and will take you through the process step by step.  If your income is below £4,465 each you can apply at the same time for exception from Class 2 National Insurance.

You need to consider whether there are two self-employed businesses running side by side or if you should be registering as a partnership.
 

Self Assessment Payments

MoneySaver's Question:

I settled my July self assessment payment at the very last minute on 31 July – the last day possible – directly through the Revenue's website using my debit card.  Only trouble is, when my bank statement came through it showed that the payment only went down on 3 August.  But I have a receipt from the Revenue's site saying that I paid on 31 July.

Am I inevitably going to have to pay a fine for this?  Should I just wait for the revenue to send me a new statement of account, or I wonder if it would be better for me to ring them and come clean, hoping that they might be a little lenient?!

Tax Tony's Answer:

Don't panic!  The 5% surcharges (they are not fines) only apply to the balancing payment on 31 January and then only bite after 28 days and again after 6 months.  The worst that could happen to you for a late payment on account would be interest.  Anyway, HMRC has correctly recognised your payment date as 31 July, so you have nothing to worry about.  The date on your bank statement is irrelevant.

eBay 

MoneySaver's Question:

I'm a 23 year old Police Officer and I've never ever filled in a tax return or anything along those lines - I've always merrily (well, not merrily really) paid whatever tax they've set me and grumbled about it when I got my P60 at the end of the year. 

I also buy and sell occasionally on eBay - does that have any impact? It's usually only a few hundred pounds a year - and the profit I make per item is no more than a fiver normally.  Do I need to self assess or anything similar?

I have a vague recollection of receiving some sort of form from the tax man this year - but I filed it and I can't recall what it was (shameful I know - but I'm sick of paperwork...)  Can you (or anyone) please advise what I should be doing?  I do recall being told I can ask for all sorts of tax allowances as a Police Officer as well - but no-one I work with seems to be sure. How organised we are...

Tax Tony's Answer:

Selling junk cleared from your attic on eBay is not a trade and is not taxable.

If you buy goods with the specific intention of selling them on eBay, that is trading as much as if you had opened a shop.  HMRC has a task force working with eBay to identify traders who should be paying tax.  So, if this applies to you, you should register as self-employed as soon as possible.

Various living expenses paid to Police Officers are not taxed.  See the HMRC website for further information.

Gifts and working abroad 

MoneySaver's Question:

I have two questions re self-assessment:  (1) As a self-employed researcher, if I receive gifts from a family member (e.g. my mother gave me money to buy a car) is there any tax implication for me? (There is no inheritance tax issue for my mother by the way). Or should she lend me the money and it gets written off after a certain number of years?
(2) When I'm working abroad are my hotel and food costs tax deductible?

Tax Tony's Answer:

(1) What a generous relative.  Wonderful.  No tax implications for you.  (2) If genuine and not a jolly, yes.  

What should I be doing?

MoneySaver's Question:

I am in full time employment, I have completed a few self employed jobs in the evenings (I am a computer programmer) and I have also set up a company for an internet venture, this is only at start up stages not in profit.

I received a tax return from the IR but I'm not sure what I should be doing with it. Is the tax return related to my SE work for the company or both?

Tax Tony's Answer:

You will get a personal tax return for your income, including any dividends or salary from the company.  The company will get a return for it to report its profits for corporation tax purposes.  Companies involve a great deal of administration and complication.  You will need professional advice. 

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CGT and 2nd properties

 MoneySaver's Question:

Hi, I have my main residence occupied by me and my wife, we also have a flat that we rent out bought (or buying) with an interest only mortgage.  I understand that I can sell my main residence without any CGT liability, if we then moved into the flat, how long must we live in it for that to be considered our main residence prior to selling, thus avoiding any CGT on the flat.  Is this possible so that we can keep any gains on both properties without paying CGT?

Tax Tony's Answer:

Residence is not defined in the legislation, but takes its normal meaning.  The HMRC manual describes it as, “the dwelling in which that person habitually lives: in other words his or her home”. 

There is no minimum period of occupation.  The test is qualitative, not quantitative.  You could have a home for just a few weeks.  Conversely a holiday cottage that you visit only occasionally over many years would not be a residence.

If you move into the flat and really make it your home, you should be fine.  Only having the one property is a big help.  I will resist the temptation to suggest a minimum period of occupation.  Overnight would probably be pushing your luck.

I assume you know that the exemption depends on your periods of actual and deemed occupation?  Occupation on the date of sale is not of itself enough to exempt the whole gain.  The rules are in fact very generous, if the property has been your residence at some time during ownership.  Have a look at the Capital Gains Tax and the Family Home factsheet on my website and at the HMRC helpsheet IR283 Private Residence Relief.

What can be deducted?

 MoneySaver's Question:

I sold a property in July last year.  The property was my main residence for about 12 months when I first bought it in 1998.  I paid about £2,000 in estate agents' fee.

Which expenses can I deduct in arriving at the chargeable gain, please? I have no other capital gain in the year.

Tax Tony's Answer:

You have quite a complicated calculation to do and it might be worth getting professional help.  You can certainly deduct the legal fees paid on both purchase and sale and the estate agents' fees on sale.  Capital improvements not already claimed as repairs can be claimed.

About half the gain will be exempt because out of eight years of ownership, you lived in the property for one year and will be deemed to have lived in it for another three.  Some or perhaps all of the balance will also be exempt due to lettings relief, again because this was once your home.  Whatever is left will attract non-business taper relief of about 25% (depending on the exact dates) and then the annual exemption of £8,500.

You might have far less CGT to pay than you expect.

Property traders

MoneySaver's Question:

Hi, I'm new to this, but here's my question: A few months ago, my wife and my sister put a deposit down off plan on a new flat, with a view to reselling. The completion date is October, and going by previous sales, they may make much more than planned. Would it be possible at this point to add my name, and my sister's husbands name to the deeds, to mitigate the CGT? They also plan to continue buying/selling in future, should they set up a company?

Tax Tony's Answer:

You have given the game away by telling me that they put down the deposit “with a view to reselling”.  Your wife and sister-in-law are property traders, not investors and so are subject to income tax, not CGT.

It is too late to put this property into a company, but a company might be a good idea if they are going to trade regularly.  As a generality, small companies pay less tax than individuals making the same profit, but at the cost of much greater complexity and formality.  The big advantage for property traders is that they tend to reinvest the profits in the next property, rather than drawing the money out.  Until the owners do not take the money out, they have no personal income to tax, so giving some flexibility.

You should take professional advice about the best structure for you.

CGT on home occupied rent free by a dependent relative

MoneySaver's Question:

I'm filling in my 2005/6 tax return and this time I cannot write "Gains less than £8,500 on disposals less than £34,000" on the form.

Until the mid 1970's, I lived with my mother in my late father's house. She had a life interest in half the house and I owned the other half (Dad had died "intestate"). I got married, moved out and struggled to buy a home for my new family.

Mum died in late 2004 and I got probate and sold my late father's house, free of Inheritance Tax by filling in form IHT100 using the magic phrase "Relief under the provisions of 55(2) Finance Act 1894 as modified by s14(A) Finance Act 1914 as applied to Inheritance Tax by Paragraph 2 Schedule to Inheritance Tax Act 1984".

I believe there is a Capital Gains Tax relief on a second home, occupied rent free prior to 1988 by a dependent relative. What is the magic phrase I should write, when reporting the sale of my half of dad's house?

Tax Tony's Answer:

Now you are just showing off!  You have got the statutory references a bit muddled, but I think you are referring to the Estate Duty surviving spouse exemption.  I vaguely remember this from my exam days long ago, but have never seen it in practice, until now that is.

You are a bit vague about when you sold the house.  I assume it was very soon after your mother's death, so that there was no gain to talk about on the half that you inherited from your Mum.

As your mother was already widowed in 1988, she fitted the dependent relative definition then.  Provided you did not charge your Mum a rent (or at least no more than any running costs that you incurred) and the house was her only home from 1988 until she died, the gain on your half of the house is wholly exempt.

Unlike the normal private residence relief which is given automatically, dependent relative relief has to be claimed.  Strictly speaking, you will need to complete the Capital Gains pages.  Complete columns A to G on page CG2 writing “Private Residence Relief” in column G.  Columns H and L will be nil.  This is over-egging it a bit and you should get away with just writing something like “Private Residence relief claimed on disposal of private residence occupied by dependent relative before 6 April 1988” in box 23.9 of the main return (other information).
 

Which tax might I be liable for? 

MoneySaver's Question:

My mum bought a house for me and my brother to rent from her after university, we both lived there until we decided we wanted to move, at which point, my mum put the deeds in our names and made us joint owners, so we could have our inheritance before she died. We sold the house and kept the profits bar £10,000 each which we paid back to my mum.  Are we liable for CGT seeing as it was our main residence till we sold it?

I can't work out if we are liable or not seeing as we only owned it for a month till we sold it, or because it was a gift, the only tax we would be liable for is Inheritance tax if she died within 7 years?

Tax Tony's Answer: 

Oh dear, you are not going to like me.

When your Mum gifted the house to you and your brother, the CGT rules state that the transfer happened at market value.  As you sold it only a month later, the price you got will, near enough, be the market value that applies to your Mum's gift.  She made the capital gain, not you, so she has the CGT liability.  Unless you tell me otherwise, the house was never her home, so there is no private residence relief.

Unless you can prove that property prices in the area exploded during your month of ownership, you have no gain in the first place and so no gain to exempt.

The value of the gift for IHT will be the market value on the date of your Mum's gift.  That will drop out of her estate if she survives 7 years.  I think you will be struggling to deduct the £20,000 from the IHT value, but all being well, your Mum will live to a very ripe old age and the point will not arise. 

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Charity

MoneySaver's Question:

My wife & I run a small registered charity, which is non profit making.

Can we claim any personal tax relief for use of a room in the home as an office from which we run the charity, or for web hosting fees for the charity site, or anything else for that matter? We take no income or fees from the charity. Can we claim VAT refunds for any charity expenses or purchases for its sole use?

Tax Tony's Answer: 

If you have no income from the charity, you have nothing to offset the costs against. I suggest you ask the trustees to pay all necessary expenses.

Advertising and certain other costs can be supplied to charities without charging VAT.  It is not a matter of claiming the VAT back.  Have a look at http://www.hmrc.gov.uk/charities/vat-how-it-affects-charities.htm

Child Education 

MoneySaver's Question:

Our 9yr old is struggling at school, so we are currently paying for him to have extra tuition in English/Maths with someone who tutors from home. The cost of this is approx £80pm, sometimes more. Can tax relief be claimed for this? Many thanks.

Tax Tony's Answer:

No, sorry.

SIPP payments 

MoneySaver's Question:

When I make a payment to my SIPP the SIPP claims standard rate tax relief so for example I only have to pay £78 pounds into the SIPP to contribute £100 pounds.  My question is what amount do I have to put on my tax return to get higher rate tax relief £78 or £100?

Tax Tony's Answer:

The gross amount, £100, as it clearly states next to box 14.6 on your return and in green bold above that, just for emphasis.

Should I bother?

MoneySaver's Question:

I am a higher rate tax payer who has never completed a tax return. I don't have savings to speak of, but I do gift aid to charity (£100 per month regularly, plus extras as and when they crop up) and have never claimed the tax difference back. I also have a company pension scheme, and believe I can claim the tax difference on that too.

My concern is simply not to rock the boat. I have heard so many horror stories about how difficult it is to complete a self-assessment, and how frequently the tax office gets it wrong, that up until now I have figured that it's simply better to lie low and forfeit a few quid! Is this stupid?

Tax Tony's Answer:

Yes it is a bit daft.  I haven't heard any horror stories about straightforward self assessment cases.  You are entitled to these reliefs and I think you should be claiming them.  

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Tax on dividends

MoneySaver's Question:

I am a basic rate taxpayer. I bought US and UK shares last tax year (outside of an ISA). Will I need to pay tax on dividends?

Tax Tony's Answer:

First of all, you have to double check that you are a basic rate taxpayer.  The amount to include for your UK dividend is 100/90 x the cash you receive.  For the US shares, count the dividend before any withholding tax is taken off.  If your total income remains below the higher rate threshold, you are a basic rate tax payer.

No additional tax is payable by UK basic rate taxpayers on UK dividends: the 10% tax credit fully discharges the liability.  Conversely, you cannot reclaim the tax credit if you are not a taxpayer.

The US dividend is overseas income.  You will be subject to UK income tax on the gross amount, but can deduct any US tax withheld at source from your UK liability.  Ask your broker how to obtain a form to apply to the US authorities for the dividend to be paid gross.  Then the full amount will be subject to UK tax, but at only 20% if you are a basic rate taxpayer. 

Selling implications 

 MoneySaver's Question:

I was gifted some shares earlier this tax year by a relative.  My ex-wife also transferred some shares to me as part of our divorce settlement (I gave her the cash equivalent at the prevailing price on the divorce date). Am I correct in thinking that, for tax purposes, the share price as at the date of my acquisition is what I should use for calculating any CGT liability when I sell these shares at some future date?  Also, what, if any, proof is the tax man likely to require as, naturally, I have no contract note for any of the shares concerned?

Tax Tony's Answer:

You can look up the share price in the financial pages of the newspapers archived at your local library.  That is all the proof you need of the market values. 

Cashing in a performance bond

MoneySaver's Question:

I need to raise cash to help my daughter buy her first house and will provide her with a cash gift.

In September 1985 I invested £7,000 in a Scottish Equitable Performance Bond and shortly afterwards it was assigned to my wife on a Financial Advisor's advice as I was (and still am, just) a higher rate tax payer.

Since then my wife has withdrawn £3,850 under the 5% p.a. allowance from time to time. The Bond is now valued at around £25,000.

Will my wife incur any tax liability on encashing this Bond now? The policy is on my life and her total income in the current tax year will be about £5,400.

Tax Tony's Answer:

Gains on life policies are taxable only if total income (including the gain) takes the taxpayer into the higher rate band.  It sounds as if your wife is safely within the basic rate band, but it would be a good idea to ask the insurance company to confirm the amount of the gain before cashing in the bond.

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Pension contribution carry-back

MoneySaver's Question:

My husband is self-employed and we each have smallish incomes that mean we receive Child Tax Credit and EMA (Educational Maintenance Allowance) for our teenagers.

In September 2005 he made a single payment to a stakeholder pension, asking for it to be treated as if paid in 2004/05 to reduce our family income for 04/05 for Tax Credit purposes. It didn't move us into a different income bracket for EMA purposes. We are currently finalising our income figures for 2005/06, and find our total family income just above an EMA threshold value. We were all set to make another single pension payment, to be treated as relating to 05/06 and thus nudge us below the threshold, but this dispensation seems to have disappeared in the pension 'simplification'.

1) Is that correct, or can we still use carry-back (if that's the right phrase)?

2) Can we ask for the carry-back we used last year to be cancelled, increase our income retrospectively for 04/05, and have that payment treated as if made in 05/06 (which is when it was made anyway)? There wouldn't be any overall alteration in our tax or tax credit position, (the two changes would cancel each other out approximately), but our kids would receive an extra £600 or so in EMA and that would be a very welcome boost to our family's finances.

Tax Tony's Answer:

Here is another example of both the complexity of our tax system and of the horrendously high marginal tax rates paid by some low income families.  I am not sure what policy goal is achieved by forcing poorer people to perform such complicated tax planning.

To answer your questions, pension carry back has indeed gone, so a payment made now will not get you below the EMS threshold for 2005/06.  If you are feeling charitable, a Gift Aid payment now can be carried back to 2005/06, but this claim must be made on your tax return and is not available if you have already submitted it.  See the notes to box 15A.4 on your return.  Gift Aid is also deductible for tax credits.

Your other suggestion to cancel last year's pension carry back would also work.  You are in time to amend your 2005 return, which you can do by letter (stating clearly which boxes you are changing) or by telephone.  The deadline for amendment is 31 January 2007. 

Pension mis-selling compensation 

MoneySaver's Question:

I have received compensation following a pension mis-selling complaint and when I received my yearly statement of payments the compensation figure was also included as a single contribution to my overall fund.

As a 40% tax payer can I include this compensation on my tax return along with my monthly payments to claim higher rate relief?

Tax Tony's Answer:

Yes you can.

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Tax on interest free loan

MoneySaver's Question:

I am a basic-rate taxpayer, an employee paying through PAYE. In the last tax year (05/06) an uncle lent me money, it came to about £2,600-£2,700.  The understanding was I would pay it back (with no interest) in the near future but no firm date/repayment schedule was arranged.  This tax year (06/07), when I offered to pay back part of it he said I could keep the whole amount he'd lent.

If I do this, or if I pay back part of it, do I need to pay tax on the amount I keep? If I do need to pay tax on it and the untaxed income is below £2,500 (e.g. I pay him back a few hundred pounds of it), can I just do it via PAYE, which seems simpler

Tax Tony's Answer:

Stop worrying. There are no tax implications whatsoever.
 

Tax on a cash gift

MoneySaver's Question:

My father-in-law has just lent my husband and I £130,000 to buy a property/business, which has been put into my name only.  He is now suggesting that he does not want the money to be paid back. Can he do this and can I accept this without any tax implications?

Tax Tony's Answer:

He certainly can do this.  Why ever not?  There are no income tax implications, but the gift will be subjest to Inheritance Tax should your father-in-law die within 7 years.

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Property income and small employment 

MoneySaver's Question:

Earlier this year I took a voluntary redundancy from work. I was paid a lump sum (part of which was taxed), and I was paid a lump sum of my pension (taxed) and get monthly payments (taxed). Since that time I have done some part time work, which again has been taxed at source. I presume I have no problems there? However, presumably the situation will change after April 5th 2007 with the new tax year?

I also dabble a little with some PEPs and ISAs. I think these are tax free?

My main concern is that I jointly own a property with my wife, my brother and sister-in-law. We rent the property and each month I receive a rent payment, which is put into a joint bank account belonging to my wife and I. Do I "wake up" Mr Taxman - I presume I/we (?) ought to be paying some tax on this, or is it likely that he will never know about it?

One other thing, I may take some part time employment which may pay very small sums (approx £10 a time), but I think it will be reimbursements.  How do I stand with that?

Tax Tony's Answer: 

Your pension is paid under PAYE and you should check your coding notice for next year when you get it.  The PEPS and ISAs are tax free and do not have to be reported to HMRC.

I think you know full well that your property income and the small employment income are taxable and should be declared.

Carer's payment 

MoneySaver's Question:

Myself and my husband are adult carers. We both work full time.  We receive a payment of £962 per month as carers under the supporting people scheme as well as our earnings. We have asked our worker is this taxable she tells us it is not but we remain concerned. Is this correct?

Tax Tony's Answer:

At first I thought this question was about the tax exemption available to foster carers, but that only applies to families looking after children in their own home. 

The supporting people scheme is just a source of funding available to local authorities to help vulnerable people to live independently in sheltered housing.  To me, the income paid to you sounds taxable, but I might be wrong.  I suggest you talk to your tax office. 

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