Reply to: Ideas for legitimate expenses..

[Hiram King Of Tyre]

I do like the idea of making high pensiion payment for 3 reasons:

1. I'm 49 in June so can get 25% tax free before the age goes back to 25
2. It reduces the impact of any IR35 decision going against me
3. It reduces the "worthwhile" factor for an IR35 investigation

[ASB]

Surely even if one is worried about making a 25k payment say just increase salary by 25k then do a salary sacrifice of 25k and have the company make the payment. ??

Net result is the same but the theoretical salary has increased by 25k.

[dude69]

I believe you're right but he's worried about the "wholly and exclusively" test

But that's wrong too. As he is running a one-man company, and generating all the income, his package is clearly a commercial rate for the job, and there is no possible argument that a handsome package for the only person bringing in any income is not "wholly and exclusively" for the purposes of the job.

If he was giving a £50k/year pension to his secretary/wife, then yes, that would not be "wholly and exclusively" for business purposes

[Hiram King Of Tyre]

He's wrong, that change on A Day, a couple of years ago.

I believe you're right but he's worried about the "wholly and exclusively" test

[dude69]

Pension payments don't avoid tax though, they just delay it (although you can take 25% tax free.

The limitation for me is that the accountant advises that pension payments shouldn't exceed salary

He's wrong, that change on A Day, a couple of years ago.

[DaveB]

This is not the plaice for jokes like that...

It all sounds a bit fishy to me.

[Hiram King Of Tyre]

Pension payments don't avoid tax though, they just delay it (although you can take 25% tax free.

The limitation for me is that the accountant advises that pension payments shouldn't exceed salary

[xoggoth]

Good grief! You mean this crappy government actually is simplifying something instead of just talking about it?

[daviejones]

oh my cod!

This is not the plaice for jokes like that...

[dude69]

Great post Dude, isn't the £50k for R&D though?

No.

Read:

http://www.hmrc.gov.uk/legislation/pu451.pdf

It's intended to take 95% of businesses (including very small ones such as childminders) out of worrying about capital allowances - they can just treat capital purchases as expenses.

[bangface]

That is a carp suggestion ...

oh my cod!

[Archangel]

Hi guys, im new to the forum but not new to contracting.

My end of year is due in April so im looking to burn some of the extra cash in my Ltd company to prevent the tax man getting too much of it.
Just wondering what some of you guys were putting through as legit expense claims.

basically, i rather spend my cash than let the taxman take it, so no matter how stupid the expense, lets here about it!!

Pension is the best way to burn it.

[Archangel]

The good news is as of April, you can write off the full cost in year 1, up to £50,000 of expenditure per year.

Great post Dude, isn't the £50k for R&D though?

[dude69]

What's this first-year capital allowance?

it's the first-year capital allowance for small companies.

Instead of being allowed to write off the cost over a number of years, you can write off a higher proportion for tax purposes than normal accounting practice.

In accountancy terms, assuming you have £10,000, and buy a PC for £1,000, and you assume that you will scrap it after 5 years, then using simple straight-line depreciation, that is £200/year; then year 1 your accounts look like this:

Balance Sheet
Fixed Assets:
Tangible: £800 (your PC's value)
Current Assets
Cash in hand: £9,000

Total current assets: £9,800



And on your accounts:
Income:
Sales Income: £15,000

Expenses
Depreciation: £200
Salaries: £5,000 (just an example)

Total expenses: £5,200

Profit: £15,000 - £5,200 = £9,800

That is your annual profit before tax, as far as the shareholders of your company are concerned.

For the next five years, you would also have a £200 expense on your accounts for depreciation. After five years the PC is scrapped.

But depreciation is NOT an allowable expense for Corporation Tax. Instead you get a capital allowance, based on the capital spent.

So

Allowable Profits: £9,800 + £200 = £10,000
First year Capital allowance (50%): £500
Profits chargeable to CT: £10,000 - £500 = £9,500

The subsequent years, you get a 25% writing down allowance, based on the residual unrelieved value.

So end of year 2, your asset is worth £600. But HMRC have already relieved £500 of the cost. You can write down 25% of the REMAINING unrelieved cost - £125. Leaving a residual value of £375.

If you sell the PC at the end of year 3, for £400, as far as your accounts are concerned, you make no profit - you sold an asset worth £400, for £400. But as far as HMRC are concerned, you made a £25 profit.

On your accounts, you would have made £9,800 profit (£10,000 sales, £200 depreciation). But HMRC say, you made £10,000 profit + £25 profit against the unrelieved cost. So you are taxed on £10,025. 20% of which is £2,005.

So your accounts says:

Profit before tax £9,800
Tax £2,005
Profit after tax £7,795

It is this money £7,795 that is distributable as a dividend (it is possible to have more profits than cash in hand, in the case that you have a high value of fixed assets - the assets are on your balance sheet, but the whole cost of paying for them has gone from your bank account).

The good news is as of April, you can write off the full cost in year 1, up to £50,000 of expenditure per year.

[vhadiant]

Don't forget that the first-year capital allowance is 50%.

So if you spent £500 on stuff, that's only £250 off your profits, and £50 off your tax bill

What's this first-year capital allowance?