Tax Q & A’s – Debbie’s monthly editorial for Grapevine readers

Every month Debbie Story answers your questions in the local Grapevine magazine.

Q:  Do I need to run a payroll, even if I only have one employee who doesn’t earn enough to pay tax?

A: If you employ someone – even if it’s only yourself, as a director – you’ll usually need to register as an employer with HM Revenue & Customs (HMRC).  You will need to register as an employer with HMRC if one or more of the following is true:

  • you’re paying them at or above the National Insurance Lower Earnings Limit (currently £107 per week)
  • the employee already has another job
  • they are receiving a state or company pension
  • you’re providing them with employee benefits

Q: My wife and I are about to purchase a rental property.  I am a higher rate tax payer, whilst my wife is a basic rate tax payer.  Will my spouse and I be treated as holding the rental property in equal shares?

A: If you and your spouse (or civil partner) hold a property jointly, the rental income and expenditure is automatically split 50:50 for tax purposes, irrespective of the proportions in which the property is actually held.

You should review whether it would be beneficial to have a declaration of trust drawn up by a solicitor. It is a statement that makes it clear how much property is owned by whom. You can then elect with HMRC to have the rental income taxed in the same proportions as the property is legally held.  This could mean that a higher proportion of the rental income is taxed on the spouse (civil partner) paying the lower rate.

Q:  I run a successful limited company and I now want to set up and own two further limited companies.  What tax implications do I need to consider?

A:  My first concern would be the impact on the amount of profits on which your businesses are able to pay the lower ‘Small Profits Rate’ of corporation tax.

Companies earning profits below £300,000 pay the Small Profits Rate, which is currently 20%. Above this level companies pay at least 24%.  Companies owned by the same director will be classed as ‘Associated Companies’ and the limit of £300,000 is divided by the number of associated companies, regardless of their profitability.  Therefore each company will only be able to pay the lower Small Profits Rate on profits up to £100,000 each.

If, for example, your main business profits were £200,000 and the other two business profits were £50k each (total £300,000). As one combined business, corporation tax would have been charged at 20%, but as separate businesses the main business pays a higher rate on £100,000 of the profits.

Q: Is it true I lose my tax free allowance if I earn more than £100k?!!!!

A: Your Personal Allowance reduces where your income is above £100,000 by £1 for every £2 of income above the £100,000 limit.  Therefore, for the average person with a personal allowance of £8,105, it is reduced to nil when your income reaches £116,210.