Here’s how to earn tax-free money through doing something you love.

Spare time earnings may be tax-free

The new trading tax allowance for individuals of £1,000 was introduced from 6 April 2017 and applies for the 2017/18 tax year onwards. In broad terms, the allowance means that individuals with trading income below the annual threshold may not need to report it to HMRC and may not need to pay tax on it.

This allowance may be particularly useful to individuals with casual or small part time earnings from self-employment, for example, people working in the ‘gig economy’ (Deliveroo workers and such like), or small-scale self-employment such as online selling (maybe via eBay or similar). It means that:

  • individuals with trading income of £1,000 or less in a tax year will not need to declare or pay tax on that income
  • individuals with trading income of more than £1,000 can elect to calculate their profits by deducting the allowance from their income, instead of the actual allowable expenses.

Practical implications of the allowance include:

  • where actual expenses are less than £1,000, deducting the trading allowance will be beneficial, whereas if actual expenses are more than £1,000, deducting the actual expenses will give a lower profit figure, and ultimately a lower tax bill
  • where income is less than £1,000, but the individual makes a loss, an election for the allowance not to apply may be made – in this case, the loss in the usual way and include the details on their tax return, meaning that loss relief is not wasted

Example – Income less than £1,000

Graham enjoys picture-framing in his spare time, and he occasionally frames prints for family and friends for a small fee. During the 2018/19 tax year he received income of £700 from this source, and his expenditure on framing equipment amounted to £300. As Graham’s trading income is less than £1,000, he does not need to report it to HMRC and he does not need to pay tax or national insurance contributions (NICs) on it.

Example – Income exceeding £1,000

Mary enjoys baking and makes celebration cakes to order in her spare time. In 2018/19, her income from cake sales is £1,500 and she incurred expenses of £300. As Mary’s expenditure is less than £1,000, she will be better off if she claims the trading allowance. Her taxable profit will be £500 (£1,500 less the trading allowance of £1,000).

More than one source of trading income

Although the trading allowance may work well for many small-scale traders, care must be taken where a person’s main source of income is from self-employment and their secondary income is from a completely separate small-scale business. HMRC will combine income from all trading and casual activities when considering the trading allowance. In this type of situation, where the allowance is claimed, the individual will not be able to claim for any expenditure, regardless of how many businesses they have and how much their total business expenses are.

Example – More than one income source

Mark is a self-employed car mechanic and has income of £30,000 in 2018/19. His business expenditure for the year is £10,000. In his spare time, Mark buys and sells old collectable car magazines via the internet. During 2018/19 he received net income of £1,000 from this source. If Mark claims the trading allowance against his part time income, he will be unable to claim expenses of £10,000 against his car mechanic income, and his taxable profit for the year will be £30,000. If he doesn’t claim the trading allowance, his taxable profit for the year will be just £21,000.

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Is tax payable on tips?

The question of whether tips and gratuities are taxable and subject to National Insurance Contributions (NICs) often results in a lively debate. Broadly, their treatment will depend on how they are paid to the recipient.
Cash tips handed to an employee, or say, left on the table at a restaurant and retained by the employee, are not subject to tax and NICs under PAYE, but the employee is obliged to declare the income to HMRC.
Where HMRC believe that employees in a particular employment are likely to have received tips which have not been declared, they will generally make an estimate of the tips earned on the basis of facts available to them. HMRC often make an adjustment to an employee’s PAYE tax code number to reflect the amount likely to be received during a tax year and the tax and Class 1 NICs due will be collected via the payroll.
By contrast, if an employer passes tips to employees that are either handed to them (or the employees) or left in a common box/plate by customers, the employer must operate PAYE on all payments made. Tips will also be subject to PAYE if they are included in cheque and debit/credit card payments to the employer, or if they pass service charges to employees.
The obligation to operate PAYE remains with the employer where the employer:
• delegates the task of passing the tips or service charges between employees, for example to a head waiter in a restaurant; or
• passes tips/service charges to a tronc (see below) but the tronc is not a tronc for PAYE purposes.
Examples
Marcia, a restaurant owner, passes on all tips paid by credit/debit card to her employees. She has made a payment to her staff and must operate PAYE on these payments as part of the normal payroll.
Franco, also a restaurant owner, allows all cash tips left on tables to be retained in full by his staff. However, to ensure the kitchen staff receive a share, he collects all the cash tips and shares them out to the staff at the end of each day. Franco is involved in the sharing out of the tips and he must therefore include the amounts received as part of the payroll and operate PAYE on them.
Troncs
Where tipping is a usual feature of a business, there is often an organised arrangement for sharing tips amongst employees by a person who is not the employer. Such an arrangement is commonly referred to as a ‘tronc’. The person who distributes money from a tronc is known as a ‘troncmaster’. Where a person accepts and understands the role of troncmaster, he or she may have to operate PAYE on payments made. Broadly, under such arrangements the employer must notify HMRC of the existence of a tronc created and provide HMRC with the troncmaster’s name.
There are no hard and fast rules regarding how a tronc should operate and HMRC will apply the PAYE and NIC rules to the particular circumstances of each tronc. Where payments made from a tronc attract NICs liability, responsibility for calculating the NICs due and making payment to HMRC rests with the employer. If a troncmaster is responsible for operating PAYE on monies passed to the tronc by the employer and has failed to fulfil his or her PAYE obligations, HMRC can direct the employer to operate PAYE on monies passed to the tronc from a specified date.
NICs
Legislation provides that any amount paid to an employee which is a payment ‘of a gratuity’ or is ‘in respect of a gratuity’ will be exempt from NICs if it meets either of the following two conditions:
• it is not paid, directly or indirectly, to the employee by the employer and does not comprise or represent monies previously paid to the employer, for example by customers; or
• it is not allocated, directly or indirectly, to the employee by the employer.
Review business records
It is worthwhile checking that businesses treat tips and gratuities correctly. From time to time HMRC carry out reviews of employers’ records to make sure things are in order for PAYE, NICs and separately for the National Minimum Wage (NMW). Any errors in tax and NICs treatment could prove costly.

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Director’s loan accounts: recording personal expenses

HMRC commonly find errors in relation to directors’ loan accounts when making routine reviews of company tax returns. This article looks at the importance of maintaining proper records of cash and non-cash transactions between the company and the directors.
Directors’ personal expenses
A statutory rule states that a company may not deduct expenditure in computing its taxable profits unless it is incurred ‘wholly and exclusively’ for the purposes of the trade. As companies are separate legal entities that stand apart from their directors and shareholders they do not incur ‘personal’ expenses. However, many companies, particularly ‘close’ companies (broadly, one that is controlled by five or fewer shareholders (participators)), pay the personal expenses of the directors. It is important to note that where payments, either made to or incurred on behalf of a director, do not form part of their remuneration package, these amounts may not be an allowable company expense and may not therefore be deductible for corporation tax purposes. In such circumstances it may be appropriate for these items to be set against the director’s loan account. However, establishing whether a payment forms part of a director’s remuneration package can be complex.
Accounting disclosure requirements for directors’ remuneration include sums paid by way of expense allowance and estimated money value of other benefits received other than in cash. The money value is not the same as the taxable amount, although this is often used in practice. This means the onus is on the director to justify why amounts not disclosed in accounts should be accepted as part of the remuneration package rather than debited to his or her loan account.
Where the expenditure forms part of the remuneration package it will be an allowable expense of the company and the appropriate employment taxes (PAYE income tax and NICs) should be paid. Where the expenditure does not form part of the remuneration package the relevant amount should normally be debited to the director’s loan account.
Cash transactions
Cash transactions between the company and directors may have tax consequences. Broadly, at the end of an accounting period, if the director owes the company money, a tax charge may arise. Subject to certain conditions, a charge may arise where a director’s loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. The tax charge (known as the ‘s 455 charge’) is the liability of the company and is calculated as 32.5% of the amount of the loan. The tax charge can potentially be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the accounting period.
Record-keeping
Good record keeping of all cash and non-cash transactions between a company and its directors is essential. Poorly kept records can mean that information provided is not accurate, which in turn may result in non-business expenditure incurred by the directors being incorrectly recorded or mis posted in the business records and claimed in error as an allowable expense. Conversely, justifiable business expenditure incurred by the directors may not be claimed or claimed inaccurately. Consequently, directors’ loan account balances may be incorrect resulting in s 455 tax being underpaid, or corporation tax relief not claimed by the company at the appropriate time.

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Year-end tax planning tips

As the end of the 2018/19 tax year approaches, it is worthwhile taking time for some last-minute tax planning. Here are some simple tips that may save you money.

  1. Preserve your personal allowance: the personal allowance is reduced by £1 for every £2 by which income exceeds £100,000. For 2018/19, the personal tax allowance is £11,850, meaning that it is lost entirely once income exceeds £123,700. Where income falls between £100,000 and £123,700, the effect of the taper means that the marginal rate of tax is a whopping 60%. Where income is over £100,000, consider making pension contributions or charitable donations to reduce income and preserve the personal allowance. Where this is an option, consider also deferring income until after 6 April 2019 to reduce 2018/19 income.
  2. Claim the marriage allowance: the marriage allowance can save a couple tax of £238 in 2018/19. Where an individual is unable to utilise their personal allowance, they can make use of the marriage allowance to transfer 10% of their personal allowance (rounded up to the nearest £10) to their spouse or civil partner, as long as neither pay tax at the higher or additional rate. The marriage allowance must be claimed.
  3. Pay dividends to use up the dividend allowance: family and personal companies with sufficient retained profits should consider paying dividends to shareholders who have not yet used up their dividend allowance for 2018/19. The dividend allowance is set at £2,000 and is available to all individuals, regardless of the rate at which they pay tax. The use of an alphabet share structure enables individuals to tailor dividend payments according to the individual’s circumstances.
  4. Make pension contributions: tax relieved pension contributions can be made up to 100% of earnings, capped at the level of the annual allowance. The annual allowance is set at £40,000 for 2018/19 (subject to the reduction for high earners). Where the annual allowance is not used up in year, it can be carried forward for up to three years.
  5. Transfer income-earning assets to a spouse or civil partner: where one spouse or civil partner has unused personal allowances or has not fully utilised their basic rate band, considering transferring income earning assets into their name to reduce the combined tax liability (but non-tax considerations such as loss of ownership should be taken into account).
  6. Put assets in joint name prior to sale: spouses and civil partners can transfer assets between them at a value that gives rise to neither a gain nor a loss. This can be useful prior to selling an asset which will realise a gain in order to take advantage of both partners’ annual exempt amount for capital gains tax purposes.
  7. Make gifts for inheritance tax purposes: individuals have an annual exemption for inheritance tax of £3,000, allowing them to make gifts free of inheritance tax each year. Where the allowance is not used, it can be carried forward to the next year, but is then lost.

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Salary v dividend for 2019/20

A popular profits extraction strategy for personal and family companies is to extract a small salary, taking further profits as dividends. Where this strategy is pursued for 2019/20, what level should be the salary be set at to ensure the strategy remain tax efficient?
Salary
As well as being tax effective, taking a small salary is also advantageous in that it allows the individual to secure a qualifying year for State Pension and contributory benefits purposes.
Assuming the personal allowance has not been used elsewhere and is available to set against the salary, the optimal salary level for 2019/20 depends on whether the employment allowance is available and whether the employee is under the age of 21. The employment allowance is set at £3,000 for 2019/20 but is not available to companies where the sole employee is also a director (meaning that personal companies do not generally benefit).
In the absence of the employment allowance and where the individual is aged 21 or over, the optimal salary for 2019/20 is equal to the primary threshold, i.e. £8,632 a year (equivalent to £719 per month). At this level, no employee’s or employer’s National Insurance or tax is due. The salary is also deductible for corporation tax purposes. A bonus is that a salary at this level means that the year is a qualifying year for state pension and contributory benefits purposes – for zero contribution cost. Beyond this level, it is better to take dividends than pay a higher salary as the combined National Insurance hit (25.8%) is higher than the corporation tax deduction for salary payments.
Where the employment allowance is available, or the employee is under 21, it is tax-efficient to pay a higher salary equal to the personal allowance of £12,500. As long as the personal allowance is available, the salary will be tax free. It will also be free of employer’s National Insurance, either because the liability is offset by the employment allowance or, if the individual is under 21, because earnings are below the upper secondary threshold for under 21s (set at £50,000 for 2019/20). The salary paid in excess of the primary threshold (£3,868) will attract primary contributions of £464.16, but this is outweighed by the corporation tax saving on the additional salary of £734.92 – a net saving of £279.76. Once a salary equal to the personal allowance is reached, the benefit of the corporation tax deduction is lost as any further salary is taxable. It is tax efficient to extract further profits as dividends.
Dividends
Dividends can only be paid if the company has sufficient retained profits available. Unlike salary payments, dividends are not tax-deductible and are paid out of profits on which corporation tax (at 19%) has already been paid.
However, dividends benefit from their own allowance – set at £2,000 for 2019/20 and payable to all individuals regardless of the rate at which they pay tax – and once the allowance has been used, dividends are taxed at lower rates than salary payments (7.5%, 32.5% and 38.1% rather than 20%, 40% and 45%).
Once the optimal salary has been paid, dividends should be paid to use up the dividend allowance. If further profits are to be extracted, there will be tax to pay, but the combined tax and National Insurance hit for dividends is less than for salary payments, making them the preferred option.

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Tax-free investments using Premium Bonds

Premium Bonds (PBs) are an investment product issued and maintained by National Savings and Investments (NS&I), which in turn, is backed by HM Treasury. With a return rate comparable with regular savings accounts (currently 1.40%), it is not difficult to see why PBs remain one of Britain’s favourite ways to save – around 21 million people currently have almost £72 billion invested in PBs.
The Autumn Budget on 29 October 2018 included a range of enhancements to PBs, aiming to encourage a stronger savings habit and boost the opportunity for young people to save. The changes should also help make PBs more accessible to everyone.
Currently the minimum amount of PBs that can be purchased is £100 (or £50 by standing order). This minimum investment limit will be cut to £25 by the end of March 2019. This will apply to both one-off purchases and regular savings and should help make this product more accessible for a wider range of people.
In addition, the rules on who can purchase PBs are being changed. Currently, only parents and grandparents can buy PBs for children under 16. Although the timescale is yet to be confirmed, it has been announced that in future it will be permissible for other adults to buy PBs on behalf of children. The person purchasing the bonds for children will have to be over 16 and must nominate one of the child’s parents or guardians to look after the bonds until the child turns 16.
Once held for a full month, bonds are included in a monthly draw and the investor stands a chance of winning a cash prize. The larger monthly prizes currently include two £1 million prizes, five £100,000 prizes and eleven £50,000 prizes.
The maximum Premium Bond holding is £50,000 and there do not appear to be any current plans to increase this limit.
Weighing up the pros and cons
Before making or increasing an investment in PBs, it may be worthwhile taking time to consider a few pros and cons, including:
Pros
• All investments are effectively government-backed, so all money put into PBs is secure.
• A married couple or civil partners may invest a sizeable £100,000 between them.
• There is a very small chance that the holder could receive a very high return on an investment.
• Any prizes won are free from income and capital gains tax.

Cons
• No regular interest payments are made on investments in PBs.
• Most people who buy PBs will earn only a small amount as a percentage of the money they contribute.
• Unless the investor wins one of the bigger prizes, their return is unlikely to beat inflation.
• It can take up to eight working days for the money to reach the investor’s account when PBs are cashed in.
Electronic investments
NS&I has confirmed that it will be launching a new PB app, which is designed ‘to make saving easier’. Following the success of the NS&I Premium Bonds prize checker app, the new app will allow customers to buy and manage their PBs as well as most other NS&I accounts.
Summary
Although Premium Bonds are not strictly an ‘investment’, they can be encashed at any time with the full amount of invested capital being returned – and in the meantime, any returns by way of ‘winnings’ will be tax-free. The odds on winning a prize in any one month are currently 24,500 to one, and there is a negligible chance of winning a million. With the full facts in mind – investing in PBs stills presents a half-decent option for many.

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Make the most of your allowances

The tax system contains a number of allowances which enable individuals to enjoy income and gains tax free. In seeking to maximise your tax-free income, it makes sense to take advantage of available allowances. The following are a selection of some of the allowances on offer.
Personal allowance
Individuals are entitled to a personal allowance each year, set at £11,850 for 2018/19, rising to £12,500 for 2019/20. However, not everyone can benefit from the allowance – once income reaches £100,000 it is reduced by £1 for every £2 by which income exceeds more than £100,000 until it is fully abated. Reducing income below £100,000 will help preserve the allowance.
The personal allowance is lost if it is not used in the tax year – it cannot be carried forward (although in certain circumstances it is possible to transfer 10% to a spouse or civil partner). To prevent the allowance being wasted, various steps can be taken depending on personal circumstances, including:
• paying dividends to use up both the dividend allowance and any unused personal allowance;
• transferring income earning assets from a spouse to utilise the unused allowance;
• paying a bonus from a family or personal company;
• accelerating income so that it is received before the end of the tax year.
Marriage allowance
The marriage allowance can be beneficial to couples on lower incomes, particularly if one spouse or civil partner does not work. The marriage allowance allows one spouse or civil partner to transfer 10% of their personal allowance (as rounded up to the nearest £10) to their spouse or civil partner, as long as the recipient is not a higher or additional rate taxpayer. The marriage allowance is set at £1190 for 2018/19 and £1250 for 2019/20, saving couples tax of, respectively, £238 and £250. The allowance must be claimed: see www.gov.uk/apply-marriage-allowance.
Trading allowances
Individuals are able to earn income from self-employment of up to £1,000 tax-free and without the need to declare it to HMRC. Where income exceeds £1,000, the allowance can be claimed as a deduction from income in working out the taxable profit, rather than deducting actual costs. Where allowable expenses are less than £1,000, claiming the treading allowance instead will be beneficial.
Property allowance
A similar allowance exists for property income, allowing individuals to receive property income of up to £1,000 tax-free without the need to tell HMRC. Where property income is more than £1,000, the individual can deduct this rather than actual costs when computing profits for the property rental business if this is more beneficial.
Rent-a-room
The rent-a-room scheme allows individuals to earn up to £7,500 tax-free from letting a furnished room in their own home. The limit is halved where two or more people receive the income.
Savings allowance
Basic rate taxpayers are entitled to a savings allowance of £1,000, while higher rate taxpayers benefit from a savings allowance of £500. Additional rate taxpayers do not get a savings allowance. ISAs provide the opportunity to earn further savings income tax free.
Dividend allowance
All taxpayers regardless of the rate at which they pay tax are entitled to a dividend allowance, set at £2000 for both 2018/19 and 2019/20. This can be useful in extracting profits from a family company in a tax-efficient manner.
Capital gains tax annual exempt amount
Individuals can also realise tax-free capital gains up to the exempt amount each year – set at £11,700 for 2018/19 and at £12,000 for 2019/20. Spouses and civil partners have their own annual exempt amount. Time sales of assets to make best use of the annual exemption.

The above is only a small selection of the allowances available.

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Abatement of the personal allowance

Not all taxpayers are able to benefit from the personal allowance – once income exceeds £100,000 the allowance is gradually reduced until it is eliminated in full. However, there are steps which can be taken to reduce income and preserve entitlement to the personal allowance.
The personal allowance is set at £11,850 for 2018/19, rising to £12,500 for 2019/20.
When is it abated?
Once an individual’s ‘adjusted net income’ exceeds £100,000, their personal allowance is reduced by £1 for every £2 by which ‘adjusted net income’ exceeds £100,000.
The measure of income for these purposes is ‘adjusted net income’. This is an individual’s total taxable income before personal allowances and after deducting certain reliefs, such as:
• relief for trading losses;
• donations to charity through the Gift Aid scheme (deduct the grossed-up amount of the donation); and
• pension contributions (deduct the gross amount).
Example
Polly has taxable income for 2018/19 of £120,000. She makes pension contributions paid gross of £5,000.
Polly’s adjusted net income for £2018/19 is £115,000 (£1250,000 – £5,000).
As her income is more than £100,000, her personal allowance is reduced. The personal allowance for the year of £11,850 is reduced by £1 for every £2 by which her income exceeds £100,000.
The reduction in her personal allowance is therefore £7,500 (1/2(£115,000 – £100,000).
Her personal allowance for 2019/20 is therefore £4,350.
Assuming her income remains the same for 2019/20 and she continues to make gross pension contributions of £5,000, she will receive a personal allowance of £5,000 for 2019/20.
When is the personal allowance lost?
With a personal allowance of £11,850 for 2018/19, individuals with income in excess of £123,700 do not receive a personal allowance for that year. For 2019/20, the personal allowance is £12,500, and the personal allowance is lost once adjusted net income exceeds £125,000.
Beware 60% tax in the abatement zone
Where adjusted net income falls within the zone in which the personal allowance is reducing – from £100,000 to £100,000 plus twice the personal allowance – the marginal rate of tax is 60%. This is the combined effect of the application of the higher rate of tax and the reduction in the personal allowance.
Reduce the 60% band and preserve the allowance
To reduce the income falling in the abatement zone (taxed at a marginal rate of 60%) and to preserve as much as the personal allowance as possible, it is necessary to reduce adjusted net income.
There are various ways in which this can be achieved.
The first point to consider is the timing of income – can income be deferred to the next tax year, or, if income for the current tax year is less than £100,000 but is expected to be above £100,000 in the following year, can income be brought forward to the current tax year. In a family company scenario, it may be possible to achieve this by adjusting the timing of dividends and bonuses.
Consideration could also be given to putting income earning assets into the name of a spouse or civil partner to reduce income and preserve the allowance.
Adjusted net income is income after pension contributions. Making pension contributions is tax effective, both in terms of benefitting from the relief available and reducing net income to preserve personal allowances.
Alternatively, a person can make charitable donations under gift aid to reduce their adjusted net income. Although they will lose the benefit of their income, the cost will be offset slightly by the preserved personal allowance, and their chosen charity will be benefit from the donation plus the associated gift aid.

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Does the marriage allowance apply to you?

The marriage allowance can be beneficial to married couples and civil partners on lower incomes. Claiming the marriage allowance is worth up to £238 in 2018/19 and £250 in 2019/20.
Nature of the allowance
The marriage allowance allows one spouse of civil partner to transfer 10% of their personal allowance (rounded up to the nearest £10) to their partner if they are unable to utilise the full allowance. However, it is only available where the recipient pays tax at the basic rate – couples where one party has no income and the other party is a higher or additional rate taxpayer cannot benefit from the allowance.
A personal can transfer 10% of their personal allowance to their spouse or civil partner if:
• they are married or in a civil partnership;
• they have not used up all of their personal allowance (set at £11,850 for 2018/19 and at £12,500 for 2019/20);
• and their partner pays tax at the basic rate.
For Scottish taxpayers, the marriage allowance is available if the recipient pays tax at the Scottish starter, basic or intermediate rates.
For 2018/19 the personal allowance is £11,850 and the marriage allowance is £1,190. For 2019/20, the personal allowance is £12,500 and the marriage allowance is £1,250.
Impact of the marriage allowance
Where the marriage allowance is claimed, the transferor’s personal allowance for the year is reduced by the amount of the allowance and the transferees personal allowance is increased by the amount of the allowance. Instead of that portion of the personal allowance being wasted, it is set against the transferee’s income, saving tax at the basic (or relevant Scottish) rate.
Example
Lauren is a stay-at-home mum. She has no income in either 2018/19 or 2019/20.
Her husband Joe works as an electrician earning £20,000 a year.
They claim the marriage allowance for both 2018/19 and 2019/20.
For 2018/19, the allowance is £1,190. By claiming the allowance, Lauren’s personal allowance is reduced to £10,660 (£11,850 – £1,190) and Joe’s personal allowance is increased to £13,040 (£11,850 + £1,190). Their combined personal allowances remain at £23,700, but utilising the marriage allowance to increase Joe’s allowance while reducing Lauren’s saves them £238 (£1,190 @ 20%) in tax.
If they claim the marriage allowance of £1,250 for 2019/20, Lauren’s personal allowance will fall to £11,250 (£12,500 – £1,250), while Joe’s personal allowance will increase to £13,750. Claiming the allowance will save them tax of £250 (£1,250 @ 20%) for 2019/20.
The allowance will still be effective where the partner with the lower income does not fully utilise the allowance, even if as a result, they have some tax to pay as a result of making the claim.
Example
In 2018/19, Max has income of £11,000 and his wife Amy has income of £17,000. Claiming the marriage allowance will reduce Max’s personal allowance to £10,660, meaning he will pay tax of £68 ((£11,000 – £10,660) @ 20%). However, Amy’s personal allowance will increase to £13,040, saving her tax of £238. As a couple they are £170 better off (£238 – £68).
How to claim
The marriage allowance can be claimed online: see www.gov.uk/apply-marriage-allowance. Once a claim is made it will apply automatically for subsequent tax years, unless cancelled or circumstances claim. A claim can be backdated to include any tax year since 5 April 2015 for which the qualifying conditions are met.
The allowance can also be claimed for the year in which one partner dies.
Impact on tax codes
Where the marriage allowance is claimed, both the transferor’s and transferee’s tax code are amended as a result. A code with a ‘M’ suffix denotes that the individual has received the marriage allowance, whereas a ‘N’ suffix denotes that the individual has transferred 10% of their personal allowance to their spouse or civil partner.
In the above example, Lauren would have a tax code of 1066N for 2018/19, while Joe’s tax code would be 1,304M. For 2019/20, Lauren’s tax code would be 1125N, while Joe’s tax code would be 1375M.

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What can be done with business losses?

Providing a business is being undertaken on a commercial basis with a view to making a profit, it is generally possible to claim relief for trading losses.

Relief for trading losses may be obtained in a variety of ways, including:

  • set-off against other income in the same or preceding tax year, for example against employment or pension income;
  • carry-forward against subsequent profits of the same trade;
  • carry-back in the early years of a trade;
  • set-off against capital gains of the same or preceding tax year; or
  • carry-back of a terminal loss.

It is worth noting here that anti-avoidance rules mean that loss relief will be restricted for individuals who carry on a trade but spend an average of less than ten hours a week on commercial activities.

Cap on relief

Trade loss relief against general income, and early trade losses relief are two areas where claimable relief is capped. The cap is set at £50,000 or 25% of income (as defined in the legislation), whichever is greater.

The cap applies to the year of the claim and any earlier or later year in which the relief claimed is allocated against total income. The limit does not apply to relief that is offset against profits from the same trade or property business.

Early years of trade

Where a loss is incurred in any of the first four tax years of a new business, the loss can be carried back against total income of the three previous tax years, starting with the earliest year.

This relief often helps new businesses in the first few years of trading. If tax has been paid in any of the previous three years, for example from a previous employment, the taxpayer should be entitled to a repayment of tax.

Set against total income

Relief for the trading loss of a tax year can be claimed against the taxpayer’s total income of that tax year and/or the preceding tax year, in any order. This gives a certain amount of scope to maximise loss relief in the most beneficial way.

Where a claim is made to relieve profits in one basis period by losses of both the same basis period and a subsequent period, the claim for the loss in the same period takes precedence.

Where basis periods overlap, and a loss would otherwise fall to be included in the computations for two successive tax years (e.g. in the opening years of a business), it is taken into account only in the first of those years.

Relief is not normally available for farming and market gardening losses, where losses were also incurred in the previous five years (calculated before capital allowances).

Carry forward of losses

Where a trader makes a loss in a year, but does not have any other income against which the loss can be set, he or she can carry it forward indefinitely and use it to reduce the first available profits of the same business in subsequent years.

Setting losses against capital gains

A taxpayer can also set any losses arising from a business against any chargeable capital gains. The relief can be claimed for the tax year of the loss and/or the previous tax year. However, the trading loss first has to be used against any other income the taxpayer may have for the year of the claim (for example, against earnings from employment) in priority to any capital gains.

Incorporation

Where incorporation is being considered, it is usually permissible to carry forward any unused losses of the pre-incorporation business and set them off against the first available income derived from the new company.

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