Childcare costs paid by an employer (up to £55 per week) are, with effect from 6th April this year, only tax exempt for employees who pay tax on their earnings at the basic rate, i.e. 20%.

The rules have been tightened up so that everyone receives the same amount of tax relief (£11 per week) which means that a 40% taxpayer is only allowed to receive £28 of childcare costs from their employer before paying tax on the rest.

However,some poor drafting of the tax legislation has meant that if you are in the fortunate position of being able to keep your salary low and take the rest in dividends you should still be able to receive the full £55 per week tax free from your employer.

As always the paperwork has to be correct so you should speak to your accountant to make sure you qualify. And, if your accountant doesn’t know about this, e-mail us and we’ll help.

HMRC are reminding tax credit claimants to renew claims by July 31 or their claims may stop.

If you’re self employed and you will not have your final income figures for 2010/11 by the end of July you will be allowed to extend the notification period until January 31, 2012 but you must still contact HMRC before the end of July to renew your claim.

And don’t forget there are tax planning situations attached to tax credit claims. Just this afternoon we managed, by extending a self employed client’s year end from March 31 to April 6  to claim a tax repayment for 2009/10  while making sure he  qualified for full tax credits in 2010/11 and 2011/12.

A couple of weeks ago Emily Coltman, the Chief Accountant of FreeAgent, wrote an excellent article on how to save tax before the end of the tax year.

When you operate through a limited company you have to think about two year ends – the company year end and the (personal) tax year end which is April 5th.

This article will hopefully help you squeeze the last drop out of any available personal tax savings. I’m sorry you only have a few days left to do this but it is possible.

First make sure you understand the way FreeAgent handles money taken out of the company by way of its Smart User Payments.  When you take money from your company it’s important to remember:

1. Dividends do not affect the company’s (corporation) tax bill because they are taken after the tax has been “paid”
2. Money “borrowed” from the company, provided it is repaid within nine months of the company year end, will not increase the corporation tax liability.

But on the other hand don’t forget if you delay taking money out of the company you may find that when you “catch up”, i.e. repay the loan and take the money you need in that year, you end up being taxed at a higher rate of tax (40%) as compared to spreading your income over two years when it may well only be taxed at 20%.

My suggestion to save tax is based on reducing your personal  income for the year ended 5 April 2011 by deferring some of your income to next year.

Some examples of when this will be beneficial are:

• If you’re paying tax at 40% during 2010/11 but know that your income for 2011/12 will be substantially less and will only use part of your basic (20%) band;
• If you have children and are claiming Tax credits and find that your income has increased by just over £25,000 from 2009/10. (Your Tax Credits will remain unchanged if the increase is less than £25,000).
• If, for whatever reason, you want to defer a personal income tax liability by 12 months

And this is where it starts to become difficult and it may be worth talking it through with your accountant! Some scenarios may help you see what it is possible:

• John Smith has taken dividends of £60,000 during the year to 31 March 2011 which means he will be paying 40% tax on some of his income. Throughout the year he had a balance on his director’s loan account of £25,000. If the £60K was treated as director’s loan repayment £25K and dividends of £35K  John would not be liable to tax at 40%.
• Anne Jones claims Tax Credits and is about to take a dividend of £10K which will mean she will not qualify for Tax Credits next year. If instead of treating this as a dividend she shows it as a loan from the company by coding it to her director’s loan account her income will remain below the threshold and she will receive another 12 months of Tax Credits.
• George Brown has had a really profitable year and has £100K in his company bank account. He wants to buy a house and needs to pay a deposit of £35K before April 5. If he takes  a dividend of £35K he will pay higher rate tax on all of it. Next year he intends to take a “career break”. The house will be let and the rent will cover the mortgage. By treating the £35K as a loan and paying a dividend of the same amount after April 6 he will only be taxed at 20%.

I am conscious that because we’re nearly at the end of a tax year some of these ideas  may mean making adjustments to dividends which have already been declared and I can only repeat what FreeAgent say on their site

And of course officially you shouldn’t retrospectively declare or alter dividends

However, I do believe there are situations when dividends can be declared either illegal or void but this is a difficult area and I would recommend you speak to your accountant before making any adjustments.

Finally, if your accountant can’t help or you don’t have an accountant contact us and we’ll help you.

About 18 months ago a client told me she was changing to another accountant to save money. I don’t know how much she was going to save and to a large extent it’s irrelevant as today she sent me an e-mail which said

I have to say I’ve not be thrilled by the service at *************** but I guess you get what you pay for. ……….. I get the impression my current accountant is working for the tax man rather than me and she’s not been able to advise me on how I can get the best assistance during this next 12 months or so.

This  client’s circumstances will change dramatically in the next year – her income will drop considerably and she will have to work fewer hours in her business. Unlike her new accountant, however, I regard this as an opportunity to use tax planning and Tax credits to minimise her loss of income.

A case of the glass being half full rather than half empty. When did you last hear an accountant say that?

If there was ever a reason for filing your tax return online it has to be the different ways HMRC define a deadline!

If you send in a paper self assessment tax return for the 2009/10 tax year, it must reach HMRC by midnight on Sunday 31 October 2010. Which seems very clear until you read the detail.

Remember if you do miss the deadline for a paper return you can still avoid a penalty by submitting a return online as long as you do it before January 31st.

Yesterday’s Lex Column in the  FT had an interesting article about retailers and VAT which said that the increase in VAT next January would appear to present them with “a lose-lose decision: absorb it and hurt margins, or pass it on and hit consumer demand”.

Lex then commented “This underestimates the dark art of retailing”.

German retailers faced a similar prospect four years ago. According to a Bundesbank study, many raised prices in advance and enjoyed healthier margins as the public brought forward purchases to avoid the rise. So when VAT changed only 10% of prices changed and in the following few months there were more and bigger price reductions than was typical

A warning, however, if you supply retailers – the long notice period before the VAT increase gave them the time and the excuse to squeeze their suppliers.

Alistair Darling’s increase in income tax for those whose “adjusted net income” exceeds £100,000 per year takes effect from 6 April 2010.

In very simple terms if your adjusted net income is between £100,000 and £106,500 you will be paying tax at 60% on the top £6,500 and once it exceeds £150,000 you will be paying tax at 50%. In between these two amounts it falls back to 40% just to make it easy to understand!

There are ways to mitigate the increase but it is important that steps are taken as soon as possible to achieve the best possible result.

P.S. The title of the post comes from a quote by Denis Healey who in 1974 when Chancellor of the Exchequer said he would

squeeze property speculators until the pips squeak

This is frequently mis-quoted as

tax the rich until the pips squeak

Either way the sentiment was and still is the same.

The passing of the tax return deadline (January 31) doesn’t make tax planning any less important or urgent.

Believe it or not there are other equally important dates in the year – April 5th (the end of the tax year) and your business year end, for example – which should be considered in tax planning.

Over the next few weeks I shall be giving readers some useful pointers on subjects such as tax credits, dividend planning and profit sharing.