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Those who fail to review their personal expense claims may lose out on tax allowances as well as directly increasing their taxable income – pushing up their overall tax bill.
For a number of years we have been advising GPs whose taxable income is close to the level at which they start to lose their personal allowance on how to maximise their expenses. With the introduction of the tapering rules from 2016/17 for pension Annual Allowance purposes there may now be an even greater benefit of ensuring you make complete claims of your business expenses incurred personally.
Each year an individual is entitled to a tax-free personal allowance. However, where the individual’s taxable income exceeds £100,000, the allowance starts to be reduced by £1 for every £2 over £100,000. The interaction of the tax rates means that in the 2018/19 tax year for income falling between £100,000 and £123,700 there is an effective rate of 60% of tax.
Separately, each individual also has an annual allowance for pension contribution purposes of £40,000. However, if your income exceeds £110,000, then your annual allowance may be at risk being reduced – it can go as low as £10,000 in some cases.
As the £110,000 threshold is a ‘cliff-edge’, it is vital to know where you stand in relation to this; being just £1 over the threshold can result in significantly higher tax liabilities for pension savings tax charges. In the most exceptional of cases, this could cost a taxpayer £13,500 in tax for being £1 over the threshold. While the pension rules may be changing for 2019/20 and later years, the rules for 2018/19 will not, so maximising your expense claim is essential.
Two common areas where GPs fail to maximise claims are:
Use of home – Often GPs will claim a basic rate for use of home but could instead benefit from preparing a detailed claim based on their household costs. We can provide a proforma to assist you improve the claim without creating pitfalls. For example, it is important not to claim that you use any part of your home solely for business purposes so that you do not miss out on beneficial tax reliefs that apply on the sale of your home.
Electric cars – While these can attract generous tax reliefs in the year of purchase, it is important to remember that any claim you make will be restricted to the business use of the vehicle which should be supported by a mileage log. But remember that in subsequent years there will be no further claims on the cost of that vehicle as the full tax relief is given on purchase.
We have considerable experience in advising GPs how they can justifiably maximise their expenses to manage their tax exposure arising from lost or tapered allowances. Now is the time to review your claims and ensure you do not get caught by these punitive tax thresholds.
For help and advice on your tax position please get in touch with our team.