Get to grips with your Tax

Hopefully most adults in the UK are fully aware of the tax system and don’t run into any avoidable problems.

We might look at tax as a giant ball ache but it has to be done. Otherwise we wouldn’t have the NHS and other key services that we heavily rely on.

Like many things money related, I have been slow on the uptake when it comes to understanding my tax situation.

NOT GOOD ENOUGH.

Part of my master plan (if you can call it that), is to run my own property business. My younger self wouldn’t have had any hopes of running a business as I didn’t even know what taxes where associated with Limited companies.

Going forward, my intention is to buy rentals via a limited company. What chance will that property business have if I am not aware of the tax implications associated with having a limited company. Not only that, there are the tax laws associated with having rental properties.

Many contractors, who I have worked with over the years, tend to put their tax to the back of their mind and worry about it when their tax bill comes. Looking back in 2012 when I started contracting via a limited company, I should have put 20% of my wages into a separate account to cover my corporation tax. But at the time I honestly had no idea what corporation tax was.

Unfortunately, for the first 6 years of having a limited company, I never bothered to get my head around tax. This brought me a few nasty surprises from my accountant and the usual anxiety I tend to get whenever money is concerned.

As I wasn’t fully aware of the tax system I always thought I had more money than I actually had. This is illustrated in my good old (less than 1% interest) Premium bonds and the fact that I built up a decent amount of savings in there.

After a few good years contracting I had reached £70,000. I got into commissioning when the oil prices were high and the 1st 4-5 years I was very fortunate and was able to get some good savings behind me.

During this period, I was that clueless, I got a £10,000 loan to pay my tax bill. And this happened 2 years in a row.

I was that deluded I thought I was going to win a big prize in Premium bonds and would rather take a loan out to pay my tax bills. So after paying these tax bills with loans, I let myself believe that I still had £70,000 savings.

Choosing to ignore the £20,000 loan was typical of me at the time. Not to mention the £6,000 of interest on top of that. So I didn’t have £70,000, I was now down to £44,000 when factoring the loan into the equation.

Finally realizing the importance of understanding tax, only took me 35 years. This lack of knowledge has no doubt cost me a significant sum of money and contributed to my previous negative mindset towards money.

As I have a limited company and properties that I rent out, understanding what I need to pay the Taxman each year is complicated. My limited company is for electrical contracting and the properties (4 rentals) are personal so I have to add any rent received to my earnings.

Due to changes brought in by George Osborne back in 2016, landlords in the UK have to pay tax on any rent received. The old way of paying tax on any profit received was fair in my opinion. To side step this extra tax I have signed my 4 rentals over to my wife as a declaration of trust.

Mrs Duffy will pay roughly 20% tax instead of the 40% I would have had to pay so it was a no brainer. The changes to property tax, is the reason why property limited companies are becoming more and more popular for landlords and property investors.

Get a grip

The following example is going to be hypothetical and we will use the limited company I have recently set up to buy rentals. Despite having zero properties within my newly formed company, I am going to imagine I have a few and they are making a decent return.

Corporation Tax for Limited Companies

The current tax rate for 2020 is 19%. We will use an £80,000 turnover to avoid the added complication of paying VAT.

Let us imagine DUFF PROPERTIES has earned me £80,000 and my accountant manages to knock off £20,000 in expenses from the top line. I now have to pay corporation tax on £60,000 and that would be £11,400 (19% of £60,000).

I am now going to imagine I have fucked contracting off and DUFF PROPERTIES is my full time job. The money I have left over after expenses and corporation tax is £48,600.

My first £12,500 is tax-free. I am going to spend it all so I have another £36,100 to spend. This will be classed as dividend payments.

Looking at dividends, the first £2,000 is tax-free. The remaining £34,100 is taxed at 7.5% and this totals £2,707. This will take my total tax for 2020 to £14,107.

Self-assessment tax

The £11,400 from above will be paid to HMRC Corporation TAX. The £2,707 falls under my self-assessment that needs to be completed by the end of January to avoid fines.

To see the guidelines for self-assessment tax or any other tax, visit HMRC.gov. For me personally, I get my accountant to complete my self-assessment to ensure it is done correctly. My self-assessment will take into account PAYE tax I owe from taking dividends out of my Limited company.

Self-assessment payments are due by 31st January (1st payment) and also 31st July (2nd payment).

If you are required to complete a self-assessment, you or your accountant will need your UTR (Unique Tax Reference), NI (National Insurance Number) and Employer reference. Another point is that you may have to pay 50% of the projected self-assessment for the next year. This is where it can get a little complicated so it might be worth sending your accountant a quick e-mail for clarification.

Getting to grips with my tax has been difficult. This is because I have let my finances get messy and have brushed taxes to the back of my mind. Now I have an improved understanding, I feel it will help to save me from unnecessary costs and will help me in the future as I attempt to build a property business.

The tax changes that I have mentioned stopped me from buying another rental back in 2016. I could have used some of that premium bond money and bought 2 rentals. This could have led to 1 or 2 rentals a year but I let my negative emotions stop me from doing so.

Now I have a bit of tax knowledge, it is another string to my bow. Reading book after book on self-development it seems someone somewhere has done what you are trying to achieve. There is a solution to every problem it just takes a little bit of effort.

Where there is a will there is a way.

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