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TonyTax
TonyTax, Tax Consultant
Category: Tax
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I am 52 and have just retired (04/01/2014) and will now receive

Resolved Question:

I am 52 and have just retired (04/01/2014) and will now receive a pension of £30,000 p.a.
I am thinking of setting up my own mobile car valeting business to supplement my pension income. I have just received my P45 showing I earn't over £42,000 from April 2013 to Jan 2014. I'm assuming therefore that my pension for the rest of this tax year will be taxed at 40%.
Is there a legitimate way of reducing this liability if I set up my business before April as there will be set up costs for me in terms of purchasing a vehicle, wet and dry hoovers, pressure washer, water tanks and a mobile generator in addition to products and there will be no way I will recooperate these set up costs before April..........Also given I have a £30k pension should I be looking as setting up as sole trader or company in order that my pension is considered as income to be offset against any losses? .
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Can you tell me how much you would be looking to spend on the capital items you mentioned please. Would you be looking to buy a van as opposed to a car?
Customer: replied 2 years ago.

Hello, I was thinking of a large 4X4 car so it could also be used for other things as well given I would be working from home and lack of parking spaces, so approximately £15,000.


 


Other items ....start up.cleaning and wax products will be approx. £350, Petrol generator £450, Industrial car valeting hoovers wet and dry £300 total, Power washer £250


 


so £15,000 on car/van and up to £1500 other equipment before I can start, many thanks

Expert:  TonyTax replied 2 years ago.
Thanks.

Leave this with me while I draft my answer. There is a fair bit to type so please bear with me.
Customer: replied 2 years ago.

Thanks very much, sorry I should have made it clear that it was my intention to keep my current car for normal private day to day use unless you advised otherwise as the equipment which is quite bulky would need to be kept in the vehicle.

Expert:  TonyTax replied 2 years ago.

Hi again.

If your income has already hit the £42,000 level for 2013/14, then the pension you receive up to 5 April 2014 will be taxable at 40%. You might have considered paying additional pension contributions before you retired which could have reduced your taxable income.

SOLE TRADER

If you set up a business as a sole trader now I'd advise you to run your first accounts to 5 April 2013 and future accounts to each subsequent 5 April thereafter. This would make sense from an administrative and tax point of view. The tax year ends on 5 April and you want to avoid the taxing of some profits twice in the opening years which may happen if you choose an year end other then 31 March or 5 April. HMRC will treat a year end of 31 March the same as a 5 April year end.

You will be able to claim tax relief for your capital expenditure in the form of capital allowances which you can read about here. There are different types of allowances but the main ones are the Writing Down Allowance and the Annual Investment Allowance.

With the WDA, you claim a proportion of your capital expenditure in each trading year against your profit at the rates you will see in the link I have given you, gradually writing down the expenditure. This method smoothes the allowances you get each year. Allowance claims have to be reduced to reflect private usage.

With the AIA, you can claim up to 100% of your capital expenditure subject to a limit against one year's profits and if this gives you a loss you can claim tax relief for it against other sources of income as you will read here. Again, the claim has to be reduced to reflect private usage. If your accounting period is less than 12 months, the annual maximum that you can claim under the AIA rules is reduced. The annual maximum claim is £250,000 so for an accounting period of just over two months if you started out today, you would be limited to claiming tax relief on around £41,781 (61 days / 365 days x £250,000).

Take a look here for some example claim calculations. The new annual limit came into effect from 1 January 2013 and lasts until 31 December 2014 as you will read here.

If you are self-employed you pay tax and national insurance contributions on your taxable profit regardless of your drawings from the business bank account if you operate one separately from your personal bank account.

You can register as self-employed here.

LIMITED COMPANY

The capital allowances operate in much the same way for companies as they do for individual sole traders and partnerships. However, company trading losses cannot be offset against your personal income. You only pay personal tax when you take cash out either in the form of salary or dividends. The company itself will pay corporation tax at 20% on profits up to £300,000.

Salary will be subject to tax and employee and employer national insurance contributions. This can be inefficient from a tax point of view though the company will be able to claim employment expenses (gross salary and employer NIC) as a deductible expense in its accounts. Dividends are not a tax deductible expense but they are not subject to a direct tax deduction and are not liable to national insurance contributions. In the hands of the shareholder (you), a dividend is treated as basic rate tax paid and there is only further tax to pay if the recipient is a higher rate taxpayer. Read about dividends and tax here.

I hope this helps but let me know if you have any further questions.

Customer: replied 2 years ago.

Hi not sure I understand,


 


Are you saying even if I set up as sole trader now running my accounts from April 2013 I will still pay 40% tax on my pension regardless of the fact that my set up costs and capital allowances and income from my new business will likely take my total income for the year ending April 2014 below the 40% threshold.


 


Or is my tax liability it if my old salary was 42k to January, my pension income January to April 5th is 6k giving £48k income total


 


Income from new business February to April 5th £2k giving total income 50K less business set up costs of say £15k for vehicle and other equipment - does this not take my income for the year down to £35k???


 


 

Expert:  TonyTax replied 2 years ago.

I didn't say that at all.

If you look at the links I gave you, you will see what you can do with a trading loss. There is no point in me typing what can be read in a very good document. However, I will summarise it for you.

You don't have a trading loss until you have incurred one so between now and 5 April you may pay some tax at 40%. When you complete a tax return in which you will include your trading figures and claim for capital allowances, you have a choice as to whether to claim tax relief for the loss against other income for the 2013/14 tax year or 2012/13 or both depending on the size of the loss or against income of one or more of the three previous tax years depending on the size of the loss, earliest year first, or to carry it forward for offset against future profits from the same business.

In the first four years of a trade, you have a greater choice as to how best to utilise losses than you do in later years. Many people running a new business don't have another source of income in the same tax year so the rules allow them to claim tax relief against earlier tax years' income in the first four years of a business.

If you claim tax relief for a trading loss in 2013/14 which will largely have been incurred due to your purchase of capital equipment, against your 2013/14 income, when your tax return is processed any tax overpaid on your other income in that tax year will be repaid to you. So, it would be in your interest to complete and submit a tax return as soon as possible after the end of the tax year.

TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15754
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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Expert:  TonyTax replied 2 years ago.
Hi again.

I can see that you have read my answer to your question. If you need further clarification, please let me know. If not, would you kindly rate my answer so that I get paid for my work. Thanks.

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