Saving self employment tax

This article describes ways to save self employment tax.

PAYE and NIC payments

Employers who make average monthly PAYE and NIC payments to HM Revenue & Customs of less than £1,500 may choose to pay this quarterly rather than monthly.

This also applies to contractors in the construction industry.

NIC and benefits in kind

Since 6th April 2000, employers will pay National Insurance Contributions on all benefits in kind which are taxed.

Dispensations

HM Revenue & Customs is keen to minimise the paper work involved with year end P11D forms. If there are expenses that are paid to your employees which they claim back as 100% business use, you may be able to agree with HM Revenue & Customs that these do not need to be shown on the P11Ds. If they agree they will issue a formal dispensation.

Year end forms

You must provide your employees with their end of year forms P60 by 31st May following the end of the tax year and with forms P11D by 6th July.

First year allowances

Small and medium sized firms can claim a first year allowance of 40% on capital items purchased from 2nd July 1998. This is higher than the normal capital allowances given of 25%.

To qualify you must have two of the following conditions:

• Your turnover is less than £11.2 million
• Your assets are valued at less than £5.6 million
• You have less than 250 employees.

The first year allowance does not apply to the purchase of motor vehicles.

It should be noted that it is not always beneficial to claim the first year allowance. This could be applicable, for example, where there is a high balancing charge in the general pool that negates the first year allowance. In this case it may be better to disclaim the first year allowance and to increase the general pool by the additions. A formal disclaimer must be submitted to HM Revenue & Customs for the first year allowance not to apply.

Short life assets

A claim can be made for assets with an expected life of less than five years, for example computers, to be treated as short life assets. As the asset is expected to be disposed of before the five-year period, you will obtain relief on the disposal straight away, rather than if it was added to the general pool. If you still have the asset after the five-year period it is transferred to the general pool at the written down value at that date.

Pre-trading expenditure

If you have expenses in respect of your self-employment in the seven years before you commenced trading, you may be able to claim these items against your profits. The expenditure is treated as an expense incurred on the first day of trading.

Partnership tax return

Having completed your partnership tax return, you must sign and date the declaration on page eight of the return. Some tax districts will reject the return if the name of the partner signing the return is not printed underneath the signature.

Turnover less than £15,000

If your annual turnover is less than £15,000 you do not need to itemise every expense on the tax return. Instead you can fill in the three boxes on the front of the self-employment pages and then go direct to page three.

Pool cars

If you use a company car at work, there is no tax payable if you use a pool car. To qualify, the car must be available to, and be used by, more than one employee. It shouldn't normally be kept overnight at or near an employee's home. Private use of the car must be incidental to business use.

Pay your spouse

If your spouse helps you with your business, you can pay them a reasonable amount for the work they do. Regard should be given to the tax and National Insurance limits as both may be payable, depending on the amount paid. For 2007/2008, if their salary reaches £100 per week, they would pay National Insurance. If you pay £100 a week or more you will also have to pay employer's NI.

1.  
2. Self employment
3. Saving tax
4. Starting a business
5.