Category Archives: tax

Keeping the taxman at bay

Today marks the end of the UK financial year. And it’s the first year in which I’ve earned sufficient to pay higher-rate tax whilst on PAYE, which denies me the opportunity for small-company tax breaks I used with WebThing.

So for the first time, I’ve resorted to ‘regular’ tax-saving measures:

  • A SIPP (self-invested pension). In my youth I avoided paying into a pension, because it was clear that the regime then in operation would collapse before my retirement (it has largely collapsed already, and the current crisis is putting the boot in further). The SIPP is a more recent innovation, and much more transparent, as well as tax-efficient. Oh, and it’s good for the economy: my money is invested in productive companies, rather than the government’s bailouts and lame ducks.
  • Venture Capital. This is even more tax-efficient than a pension, but higher-risk: the money is invested in small, unquoted companies. The optimistic scenario is that it supports the brightest and best startups in the economy, while generating a nice tax-free income stream for me.
  • Charitable donations. I don’t benefit from them, but at least it keeps a few quid away from the thieving government, and benefits someone more deserving. For the first time I’ve asked for a receipt I can keep for the taxman.

Evaluating the SIPP, I find its value is 65% up on what I’ve put in. But that good figure is entirely due to the tax breaks: the portfolio is 1% down on a hypothetical pension invested in pure cash and benefiting from the same tax breaks. On the plus side, most of the equities are paying dividends at a better rate than is available on cash savings. On the minus side, nothing is keeping up with inflation.

I just rounded off the financial year with an additional SIPP payment. I’ve also suspended regular payments: I don’t want to commit any money next year, until we’ve at least heard what nasties in the forthcoming budget may affect it. If, for example, they were to bugger about with the tax breaks on pensions (as one politician advocates), there would be no reason to put any money in, and they could effectively kill off the UK pensions market – and with it, both equities and bonds, and hence UK plc!

Saving tax, the environment, and the economy!

Traditionally in the UK, one of the biggest aids to starting or growing a business is to own your own house. That’s because in our upside-down economy, you can borrow money on much more favourable terms for an unproductive mortgage than to invest in productive business. So you would use that to finance your startup, or be at a disadvantage.

With house prices crashing and mortgage lending turned suddenly more cautious, that’s no longer the case.  Indeed, if you want to finance a business, you might (almost) just as well tell the bank manager the truth and present a business plan.  Or maybe not the bank manager at all: there are other sources of funding.  With unfair competition[1] from the banks taking a knock, suddenly there’s a whole new niche for venture capital and other such investors.

In the UK, that include Venture Capital Trusts (VCTs), which offer significant tax advantages to investors, in return for investing in unlisted smaller businesses.  The tax breaks reflect the fact that they’re traditionally higher-risk than big PLCs, and that they have low liquidity.  But a VCT, like a unit trust, serves to spread the risk.  I decided some time ago to invest some money in VCTs, towards the end of the tax year.

For those of us who care about “green” issues, a VCT that stands out is Foresight, which specialises in environmental businesses.  I just wrote the cheque to subscribe to their current offer.  That’s three boxes ticked: save tax, save the environment, help small business.  And hopefully a fourth: make good money for me.

I expect I shall subscribe to one more VCT within the current tax year, but I have yet to decide which amongst those with current offers open.

[1] Fractional reserve banking – the bank lends money that doesn’t actually exist, on the premise that it comes into existence as repayments are made.  Works until bad money drives out good and it becomes a pyramid.

Online tax returns^Werrors

Having recently struggled through my personal tax return, it appears the situation for small business tax returns is worse.  John went through the business of submitting WebThing’s return (for 2007), only to receive email a day later.  Anyone else seen this or similar, or have a clue about it?

This message has been generated in response to the company details
submitted to the Companies House Web-Filing Service on 21/10/2008.

Company number: 03427454

The annual accounts for the above company was rejected for the following reason(s):

An attached XBRL account document contains pre-validation errors.
The accounts were originally received in Companies House within the period allowed.  The Registrar will not collect a civil penalty if the amended accounts arereceived in Companies House no later than 05/11/2008 and they are accepted for filing.

Examiner contact details – 029 2038 0929

The filing reference number is ******. Please quote this reference in any communication with Companies House concerning this transaction.

Thank you for visiting the Companies House Web site.

Service desk tel: 0870 333 3636 or e-mail:

Yeah, right.  I´m techie enough to know what an .XSD is likely to be, and guess that it means something is malformed.  And that the error is internal to their system.  But what could be triggering it, in the context of a PDF where all John did was to fill some numbers and very simple text fields, I have no idea.  Neither, I suspect, has your typical small business beancounter submitting accounts online (as the government strongly encourage us to do).

I can speculate over possible causes of an error.  For example:

  • Does their system rely on some Windows quirk or bug, and choke on something like non-Windows line-ends?  Can´t see how that would arise in PDF, though, even if they have something dumb like bogus homebrew preprocessing.
  • Maybe it´s an error introduced by VAT?  Since I joined Sun in February, it´s clear that WebThing´s turnover for 2008 and the forseeable future will fall far below the VAT threshold, so we deregistered to save red tape.  But of course we were registered in 2007, so the tax return included it.  Could it be triggering inclusion of inconsistent templates?
  • Nothing so subtle – the system is just plain broken.
  • …. ?

No matter what the problem is, there´s absolutely no excuse to expose end-users to this kind of development error message beyond, at the worst, a beta test programme.  I wonder what bunch of overpaid incompetents were responsible for this one?  The Usual Culprits for public sector fuckups (EDS,  Accenture, …)?  AN Other?  WebThing could of course have done a better job for them, if contracts were awarded on technical competence rather than sharp suits and bullshit.

Hard work gets tax refund!

It’s that time of year again, and I’ve been struggling with HMRC’s idea of a website to fill my tax return.  Actually I first went there and did the easy bits several weeks ago, and have returned a couple of times, but doing it out of office hours just left me unable to chase missing information.  So today I returned at a time when I expected them to be at work.

In previous years, I’ve found it fairly straightforward.  At least, to the extent that everything I had to tell them fell neatly into their defined categories.  This year, things were different.  Having had a couple of royalty payments from a foreign publisher, I ticked the box for having foreign income.  Then I looked around the foreign income section of the tax return, which is where it got difficult.  Nothing for royalties!  I selected “other” from the box, and it duly displayed a page for “other” foreign income.  But that was just some fixed ideas about payments from a foreign trust – nothing remotely relevant there either.

To make it worse, there was no means to contact them.  The “ask a question” facility just tells me the service is unavailable – even today during working hours.  Some of their help documents are just plain illegible: I guess they’re using some obscure font I don’t have.  And finally, the “Contact us” menu option doesn’t get me any contact details, it just logs me out of the service.  Aaargh!!!

Finally I found a feedback option, and used it to have a moan and ask the question.  I submitted that, and it appeared to work.  More usefully, the “thank you, we’ll reply within 48 hours” page actually gave me a phone number.  So I phoned it.

The second person I spoke to was able to help.  The royalties should be entered under the heading of foreign pensions and benefits(!), and I could just deduct the costs of it (notary’s fee and travel to the US embassy) from the sum I entered.  It’s even OK to enter the actual £ sums from my bank statement, rather than give the US$ amounts.  Result!

Just waiting to confirm one of the figures before submitting.  But it won’t affect the amount payable, since it’s only a savings account with tax paid at source.  And here’s the good news.  Unlike last year when they decided I owed them a trivial amount, this year I’m due a substantial four-figure tax refund! I was aware there could be a significant adjustment: both WebThing and Sun had overpaid PAYE (my fault, not theirs – stemming from the transition between the two), but I thought tax due on the royalty would offset much of that.  So I’m happy to see it’s substantially in my favour.  I wonder if they pay interest on it?

Next year I should be due a bigger credit again.  But that’s because I’m actively optimising my tax this year.

Drop the “10p” rate

Right now there’s a media and political storm about dropping the so-called 10p[1] bottom rate of income tax.

There is merit in the central complaint: that it penalises people on low incomes (though not the lowest, who pay no income tax). There is little merit in the government’s response that many of those who lose will gain in other ways from the same budget, because those who gain are the same groups who have consistently gained from Brown’s budgets over the past ten years, and yet again there’s nothing for those who work hard for low pay but are childless. Indeed, the emphasis on ever more money for families may well be pushing us back to something like a 1970s “get pregnant to get housed” ethos.

But all that is of little relevance to the opportunistic humbug that’s filling the meeja. Politicians (on all sides) and others who are now screaming about it would be more credible if they’d taken it up a year ago when it was first announced. And the simplification is the Right Thing to do, insofar as simplification really happened. The obvious thing to do would have been to raise tax thresholds at the same time, though that does nothing about the poverty trap, where means-testing leaves people paying effective tax rates of over 100% on some of the very lowest incomes.

The point noone seems to have made is that the government must be able to change the burden of taxation over time, and that change cannot always be in one direction. The fuss about penalising some low-paid people is an argument that you can only ever adjust taxation in one direction. That leaves perpetual losers, and they won’t be happy.

Having said all that, in this instance I think the government should have done the obvious thing, and upped tax thresholds. And paid for it with less waste (like all those wars, and paying off the whole wunch of bankers) and/or a much-needed shift of taxation away from incomes and towards activities that pollute. A plague on all their houses!

For the record, most people are now taxed at 44%, while incomes over £43000/year are taxed at 54% on earned income[2]. Unearned income is taxed at much lower rates, and often not at all. And I’m not one of the losers from this budget: I think I’m marginally better off, though mostly for the wrong reasons.

[1] Actually a rate of up to 34%[2].

[2] That’s including the employment tax called “national insurance”, paid by both employers and employees.

Taxing times

A big downside to working for Sun is that it puts me onto bog-standard PAYE for all my main income. So I lose the tax-efficiencies I’ve hitherto used, and pay income tax in a country where taxes on earned income dwarf all other taxes, so that hard workers get to pay for the idle rich (grrr) as well as for government waste and folly (grrr) and for more deserving causes.

Today i invested the annual maximum (now £3600) in a cash ISA. That’s something I’ve been doing each year since my income from WebThing grew sufficient to support it. And I’m looking at what seems to be the only other way left to avoid Very High Tax: putting a very large amount of my income into a pension.

Now a pension is only any use if it is significantly above the government’s means-tested benefits. If I’m still renting a home when I retire that’s a non-starter, because means-tested benefits that include housing costs will leave a good deal more net income than I’m accustomed to or could save for. So to save tax, I also have to buy a house. Fortunately I can combine the two, as a pension can (in part) be used to buy a house. That is, if house prices continue downwards long enough …

The other thought that someone at Apachecon mentioned … what about moving about so much that I’m not resident in any country for tax purposes? That means living in three countries, each for clearly under 6 months a year. Or something like that. For the tax saved, I could rent somewhere adequate in each of three European countries (or indeed elsewhere, though permission to live&work outside Europe would presumably be a nightmare of red tape). Sounds like a lot more faff than I want to deal with, but it’s an interesting thought …

thinking about catching up …

Can one, these days, get a mortgage on something like the following terms?  Since I’ve lost the tax-flexibility of self-employment, I need to find some way to avoid getting the worst of all worlds.

  • Regular payments of interest only.
  • Tax-efficient saving to repay, using a self-invested personal pension (augmented by my company pension if necessary).
  • Repayment on taking my pension, using the tax-free lump sum.
  • Offset account to enable early partial payments on a flexible basis.
  • Offset amount to include, or at least account for, existing ISA savings.
  • Flexible final repayment date.

Not, of course, that I want a mortgage in a falling market.  Except … property available to rent in the UK leaves something to be desired, and I’m not getting any younger.

(I expect the “M” word will collect spambots to this article, like flies to a corpse.  So any comment that shows no sign of having read my words will not be given the benefit of the doubt).

Taxing times

Once upon a time, when I was a young student, my then-girlfriend and I suffered the worst service I’ve ever encountered, lunching at a Cambridge restaurant. Instead of leaving a normal tip (shudder) or no tip, we left a tip of one halfpenny. We thought this gave entirely the right message. The other couple at the table (which we shared because the place was busy) fully agreed.

This year’s tax bill reminded me of that. Most tax in the UK is PAYE (pay as you earn), which means that your income, both earned and unearned, comes net of tax. In previous years I’ve had nothing to pay, but rather a small adjustment in my favour. This time, they decided I owed them 10p (that’s ten pence, not pounds). I just availed myself of their online payment facility to pay it by debit card.

I don’t know how much the government’s payment processor charges them per debit card transaction. But as a datapoint, my company gets charged a flat rate of 95p each time we accept a debitcard payment online (that’s different from creditcards, where we get charged a percentage). Big businesses get a much better rate than small ones, but I feel sure HMRC must be making a net loss on a payment as low as 10p.

Heh heh.

Minimum pension == £95155 salary

As the budget comes round again, there are constant cries amongst the chattering classes, about council tax being unfair on poor pensioners in big houses.

Now, these pensioners probably own their houses (if they didn’t, they’d have no option but to move somewhere smaller). So they’re getting the benefits of ownership.

Question: how much does a hard-working person with no assets have to earn to keep up with the poorest pensioner?

OK, we need some working assumptions here. The level of means-tested benefit for pensioners is £114.05 per week (£5947/year) with no tax due, so we’ll take that as the income to compare against. Actually it’s worth quite a lot more, because that figure excludes a range of additional benefits. And since it’s pensioners in bigger houses who are said to be hard done by, let’s put them in an average house worth £200000.

Keeping the equivalent as close as possible, how much does the working person need to keep up? Let’s put the worker in a similar average house. But since the latter owns nothing, he has to rent it at about £800 per month. And he doesn’t get the benefit of house price rises: since the mid-1990s, that is doubling every five years.

So to keep pace (not catch up – he still doesn’t own a house at the end of it and hasn’t closed that £200000 gap), the worker needs to make £200000 in those five years. Plus the £6000 to live on and the £9600 rent each year. We can discount things like council tax because they both pay it (though in fact the pensioner will get a rebate, so in reality the worker needs even more than we’re calculating).

Anyway, that leaves our worker needing to earn £278000 over five years, just to avoid widening the gap. At a constant rate, that’s £55600 per year net. But that comes from taxed income. A quick tax calculation (including the component called “national insurance”, which is compulsory and non-negotiable) reveals that this implies a headline salary of £95155, putting you in the top 1% of earners.

The cost to the employer is even more: there’s an employment tax under the “national insurance” label. At 12.8% on everything over £5058, that adds £11532 to the cost. So just to prevent that wealth gap widening implies a total cost of £106667!

Now if we change our working assumptions a little, and shift from house prices doubling in five years to the long-term average of 7 years, these figures are reduced by £11429 per year (net), 19371 (gross), 21850 (cost). But £75784 is still an extremely high headline salary.

Of course that’s not the whole story, and if you earn £95000 you can get a mortgage to buy that house and enjoy the benefits. But that still leaves the possibility of earning £40000 without ever being rich enough to buy a house. And that leaves you paying tax at the maximum rate, for the benefit of people far richer than you will ever be!

Yet most of the pressure is to kill off all taxes on property, and move to yet more income tax! Moral: if you have old (typically family) wealth, noone questions your right to be rich. But if you work hard you get no help, and no sympathy from the taxman!