How to Save Tax in the UK: Best Tax Planning Tips for 2024-25

How to Save Tax in the UK: Essential Tax Planning Tips for 2024-25

If you’re looking for ways to save tax in the UK for the 2024-25 tax year, now is the perfect time to review your options. Acting before 5 April 2025 can make a real difference to your tax bill.

We’ve put together this tax-saving checklist, plus some extra strategies to help you keep more of your hard-earned money.

Tax-Saving Checklist for 2024-25

Here are some of the most effective UK tax planning ideas to consider before the tax year ends:

Maximise Your Pension Contributions

Boosting your pension is a great way to save tax. Could you increase your contributions this year?

Use Your Full ISA Allowance

Make sure you’ve used your full £20,000 ISA limit to protect your savings from tax.

Capital Gains Tax (CGT) Planning

Have you used your £3,000 CGT tax-free allowance? Selling assets at the right time can help reduce your bill.

Explore Tax-Efficient Investments

Consider schemes like Enterprise Investment Scheme (EIS) or Venture Capital Trusts (VCT) for potential tax relief.

Inheritance Tax (IHT) Planning

Are you making use of tax-free gift allowances to reduce your future IHT bill?

Review Your Dividends

Managing how and when you take dividends can make a big impact on the amount of tax you pay.

Timing of Salary and Bonuses

Moving income between tax years could help lower your tax bill.

Make Charitable Donations

Gift Aid donations can reduce your taxable income, especially if you’re a higher-rate taxpayer.

Claim Tax-Free Childcare and Other Reliefs

Don’t forget to use all the tax reliefs available to you, like Tax-Free Childcare.

Please also see: https://www.gov.uk/apply-tax-free-interest-on-savings 

👉 Need help with any of these tax-saving ideas? Contact us to find out which strategies are right for you.

Avoid the £100,000 Income Trap

If your income is between £100,000 and £125,140 in the 2024-25 tax year, you could face a 60% tax rate. This happens because your personal allowance (£12,570 of tax-free income) is reduced the more you earn over £100,000.

How to reduce your tax if you’re near £100,000:

  • Delay bonuses or dividends until after 6 April 2025.
  • Make extra charitable donations before the end of the tax year.

These strategies can help lower the amount of income taxed at higher rates.

Employer Pension Contributions: A Smart Tax Move

If you’re a business owner, making pension contributions directly from your company into an employee’s pension pot is a tax-efficient option.

✅ No personal tax charge for the employee.
✅ Corporation tax relief for the company.

Always check with your pension adviser before making changes.

Beat the Employer NIC Increase from April 2025

From 6 April 2025, Employers’ National Insurance (NIC) rises to 15%, and the threshold for paying NIC drops from £9,100 to £5,000 per year.

What does this mean?

Businesses will start paying more NIC, but you might reduce costs by:

  • Hiring two part-time staff instead of one full-time employee.
  • Staying under the £10,500 NIC allowance if you’re a small business.

💡 Your payroll software should update for these changes automatically, but it’s worth checking.

Don’t Miss Out on Tax Savings

These are just a few of the many ways to save tax before 5 April 2025. The right tax planning could help you reduce your tax bill and keep more of your income.

Why act now?

Many tax-saving opportunities disappear once the tax year ends. Planning early means you won’t miss out.

📞 Get in touch today to book a tax planning review and see how we can help you save tax this year.

Please see another An Accounting Gem blog: https://www.aag-accountants.co.uk/small-company-dividend-strategies-2/

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Small Company Dividend Strategies

Maximise Tax Efficiency: Key Tips for Small Company Directors and Shareholders

As the tax year-end approaches, it’s the perfect time for small company directors and shareholders to take charge of their finances and reduce tax liabilities on dividend payments. With a few strategic moves, you can ensure your dividend income is managed in the most tax-efficient way possible.

Shrinking Tax-Free Dividend Allowance: Act Now

Starting April 2024, the tax-free dividend allowance will drop from £1,000 (2023/24) to just £500. This means only your first £500 of dividend income will escape taxation. Any amount above this will be taxed at standard rates:

– 8.75% for basic rate taxpayers

– 33.75% for higher rate taxpayers

– 39.35% for additional rate taxpayers

With this reduced allowance, it’s more important than ever to explore alternative tax-efficient strategies to safeguard your income. Learn more about dividend taxation on HMRC’s website https://www.gov.uk/tax-on-dividends

Stay Within the Right Tax Bands

One major tax-saving strategy is ensuring your total income stays within the most favourable tax bands. For example:

– Basic Rate Band: Income up to £50,270 is taxed at the lower 8.75% dividend rate.

– Exceeding this pushes you into the higher rate band, where dividend tax jumps to 33.75%.

– If your income exceeds £100,000, the personal allowance (£12,570) is gradually reduced, creating an effective marginal tax rate of 60% between £100,000 and £125,140.

Strategic dividend planning can help you avoid these higher-taxed income brackets. Check your income tax rates and bands https://www.gov.uk/income-tax-rates

Timing is Everything

When it comes to dividend payments, timing can significantly impact your tax bill. Dividends are taxed in the year they’re paid, giving directors flexibility:

– If you expect higher income next year, consider declaring dividends before 5 April 2025 to take advantage of current rates.

– Alternatively, if a lower-income year is on the horizon, deferring dividends may help reduce your overall tax liability.

Dividends vs Salary: Find the Perfect Balance

Balancing dividends and salary is a smart way to optimise tax efficiency:

– A low salary up to the National Insurance threshold (£12,570 for 2024/25) helps you use your personal allowance while minimising National Insurance.

– Supplement this with dividends to reduce your overall tax burden.

For directors needing to withdraw additional funds, employer pension contributions can be a game-changer. These contributions are corporation tax deductible and not subject to income tax or National Insurance, making them a highly tax-efficient alternative. Explore pension contributions and tax relief https://www.gov.uk/tax-on-your-private-pension

Avoid the Directors’ Loan Tax Trap

If you’ve borrowed money from your company, ensure it’s repaid within nine months of your company’s year-end. Otherwise, you risk a hefty 32.5% Section 455 tax charge. Conversely, if the company owes you money, consider repaying loans instead of taking dividends for a tax-free way to extract funds. Understand more about directors’ loans https://www.gov.uk/directors-loans

Make the Most of Your Spouse’s Tax Allowance

Another way to save on tax is by utilising a spouse’s unused allowances. If your spouse is in a lower tax bracket, dividends paid through separate shareholdings (e.g. alphabet shares) could reduce the family’s overall tax burden by shifting income to a lower-taxed individual. Learn about transferring assets to reduce tax  https://www.gov.uk/income-tax/income-tax-and-dividends

Let’s Plan Your Strategy Together

Every business has unique circumstances, and there’s no one-size-fits-all solution. With the tax year-end fast approaching, now is the time to act. Book an initial planning session with us to review your dividends vs salary options and ensure your finances are in top shape for 2024/25.  Don’t leave it to chance, call us today!

Please see another An Accounting Gem blog: https://www.aag-accountants.co.uk/understanding-the-new-tax-changes-for-pick-up-trucks-effective-april-2025/

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Understanding the New Tax Changes for Pick-Up Trucks Effective April 2025

As of April 2025, significant changes have been implemented in the taxation of double-cab pick-up trucks. These changes are crucial for businesses and individuals who rely on these vehicles for both commercial and personal use.

What’s Changing?

Previously, double-cab pick-up trucks were classified as commercial vehicles. This classification allowed businesses to benefit from favourable tax treatments, such as capital allowances and reduced benefit-in-kind (BIK) charges. However, from 6th April 2025, these vehicles will be reclassified and treated as passenger cars for tax purposes. This means they will no longer enjoy the same tax advantages as before.

Implications for Businesses

For businesses, this change means that double-cab pick-ups will now be subject to higher BIK charges, similar to those applied to company cars. This reclassification could impact the overall cost of ownership and operation for businesses that heavily rely on these vehicles.

Why the Change?

The reclassification aligns with the government’s broader strategy to streamline vehicle taxation and ensure consistency across different vehicle types. By treating double-cab pick-ups as passenger cars, the government aims to close tax loopholes and ensure a fairer tax system.

What Should You Do?

If your business relies on double-cab pick-ups it is essential to review your fleet strategy and consider the financial implications of these changes. You might want to explore alternative vehicle options or adjust your fleet management practices to mitigate the impact.

Please also see:  https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim23150

Get Expert Advice

Navigating these tax changes can be complex, and it’s crucial to ensure compliance while optimising your tax position. At An Accounting Gem Ltd, we specialise in providing tailored tax advice and support. Our team can help you understand the implications of these changes and develop strategies to manage the transition effectively.

Please contact us today to discuss how these changes might affect your business and explore how we can assist you in navigating this new landscape.

Please see another An Accounting Gem blog: https://www.aag-accountants.co.uk/small-company-dividend-strategies/

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Tax Planning Dividend Strategies

Tax planning points to consider before 6 April 2025.

As the end of the tax year approaches, small company directors and shareholders should take proactive steps to minimise their tax liabilities on dividend payments. Careful planning is essential to ensure that dividends are taken in the most efficient manner.

Tax-free dividend allowance

The dividend allowance was reduced to just £500 from April 2024, down from the previous £1,000 in 2023/24. This means that only the first £500 of dividend income will be tax-free, with the remainder taxed at the standard dividend tax rates. These rates remain unchanged at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. This reduction in the dividend allowance makes it even more important to consider alternative tax-efficient strategies.

Please also see: https://www.gov.uk/tax-on-dividends

The impact of income tax bands

A key consideration is ensuring that total income remains within the most beneficial tax bands. The basic rate band extends up to £50,270 and dividends taken within this band will be taxed at the lowest rate of 8.75%. However, exceeding this threshold will push dividend income into the higher rate of 33.75%, significantly increasing the tax burden. Moreover, for individuals earning over £100,000, the personal allowance of £12,570 is gradually withdrawn resulting in an effective marginal tax rate of 60% between £100,000 and £125,140. Careful dividend planning can help avoid this highly taxed income band.

Timing of dividend payments

Dividends should also be timed strategically. Because dividends are taxed in the year they are paid, company directors have flexibility over when they declare and withdraw them. If a higher income is expected in the following tax year, it may be wise to take dividends before 5 April 2025 to use the lower rates while available. On the other hand, if a lower-income year is anticipated, deferring dividends may be beneficial.

Dividends or salary?

Balancing dividends with salary is another crucial aspect of tax-efficient planning. A common strategy is for directors to take a low salary up to the National Insurance threshold, which for 2024/25 remains at £12,570 and supplement income with dividends. This ensures that the personal allowance is used while minimising National Insurance contributions. For those wanting to extract additional funds from their company, employer pension contributions offer a tax-efficient alternative, as these are deductible for corporation tax purposes and not subject to income tax or National Insurance.

Avoiding directors’ loan tax charge

Company directors should also be mindful of their Director’s Loan Account. If money has been borrowed from the company, it must be repaid within nine months of the company’s year-end to avoid a 32.5% Section 455 tax charge. Alternatively, if the company owes the director money, repaying loans instead of taking dividends can be a tax-free way to extract funds.

Making use of spouse’s lower tax rates

Another key tax-saving strategy is to possibly make use of a spouse’s tax allowances. If a spouse has a lower income or unused personal allowance, it may be possible to pay dividends through separate shareholdings (e.g., alphabet shares). This may reduce the family’s overall tax liability by shifting income into a lower tax band.

Set up an initial planning session now

Every company is subject to its own set of circumstances that will determine planning options for 2024-25. While there is still time to act, please call so we can review your dividends v salary options before the end of the current tax year.

Please see another An Accounting Gem blog:  https://www.aag-accountants.co.uk/celebrating-20-years-of-excellence-an-accounting-gem-ltds-journey-and-vision/

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Celebrating 20 Years of Excellence: An Accounting Gem Ltd’s Journey and Vision

An Accounting Gem Ltd is thrilled to celebrate its 20th anniversary, marking two decades of dedicated service and growth. From its humble beginnings as Gem Bookkeeping, founded by Eunice and her son Jeremy, the firm has evolved into a fully-fledged accountancy firm, renowned for its personalised service and commitment to local businesses.

On 31 January 2005, the directors of Gem Bookkeeping made the pivotal decision to expand their operations beyond bookkeeping, establishing An Accounting Gem Ltd. Since then, under Jeremy’s leadership, the firm has grown organically, earning the trust and respect of the local business community. With a team of 10 dedicated professionals, including Operations Director Nicola Goldsmith, who joined in 2008, An Accounting Gem Ltd has become a cornerstone of financial expertise in Ipswich.

In 2024, the firm was proud to be recognised as the Accountancy Firm of the Year by Business Awards UK, a testament to its unwavering dedication to excellence. As we look to the future, we anticipate expanding our team by four additional members by the end of 2025, further enhancing our ability to support our clients’ ambitions.

Our vision remains steadfast: to empower local businesses to overcome challenges and achieve their full potential. We pride ourselves on being more than just an outsourced accountancy firm; we are an integral part of our clients’ businesses, offering guidance and support every step of the way. Our entire team is locally based and works from our Ipswich office, ensuring that we remain accessible and engaged with our community.

The majority of our clients are local to Ipswich and the surrounding area, although we proudly serve a few international clients. Our primary focus is on our team, making them a top priority in all business decisions. We are committed to their professional growth, supporting them with certifications and ongoing CPD to navigate the complexities of the business world.

We encourage a vibrant work environment, balancing fun and work through activities like race days, quiz nights, breakfast meetings and happiness surveys. Our flexible working arrangements, suggestion box and weekly huddles ensure that every team member has a voice in how the business is run. This collaborative approach has cultivated a sense of belonging, with many team members viewing this as a job for life.

Team member’s testimonial:

“I started working at Accounting Gem almost a year ago and felt like part of the team from day one. The team are hardworking and willing to help each other. I have honestly never been part of such a positive working environment. I always feel that my opinions and skills are valued and I am able to ask for support when needed. An Accounting Gem Ltd is a wonderful place to work and I hope to be here for many years to come”.

Our team’s happiness and commitment translate into exceptional service for our clients, reflected in nearly 100 5* Google reviews and glowing testimonials. We are proud to be an amazing set of accountants who truly care for our staff, clients and community.

Community involvement is a core value for us. During the lockdown we supported local food banks and helped combat loneliness among senior citizens by hosting a Christmas Day event, complete with meals and presents. We continue to support local charities, reinforcing our commitment to making a positive impact.

As we celebrate this milestone, we reflect on the values that have guided us for the past 20 years: integrity, innovation and a commitment to our clients’ success. We look forward to continuing our journey and contributing to the prosperity of the businesses we serve.

Please see another An Accounting Gem blog: https://www.aag-accountants.co.uk/nic-increases-from-april-2025/

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NIC increases from April 2025

Strategies to consider before 6 April 2025

The Autumn Budget 2024 introduced significant updates to employer National Insurance contributions (NICs) and the Employment Allowance, effective from 6 April 2025.

In this short alert we have highlighted these changes and pointed to strategies that you may wish to consider in future to reduce the impact on your payment of employer’s NIC.

Key Changes

Reduction in the NICs secondary threshold: Employers will start paying NICs on employee earnings above £5,000 a year (down from £9,100).

Increase in NICs rates: Secondary Class 1 NICs, as well as Class 1A and 1B rates for expenses and benefits will rise from 13.8% to 15%.

Enhanced Employment Allowance: The allowance will increase from £5,000 to £10,500.

Removal of the £100,000 eligibility threshold: Employers of all sizes can now claim Employment Allowance.

Impact for smaller businesses

For the 2025-26 tax year, employers’ National Insurance Contributions (NICs) up to £10,500 will be considered free of Employers’ NIC due to the increased Employment Allowance. This allows eligible employers to deduct this amount from their NIC liability, effectively making the first £10,500 of their employer’s NICs tax-free.

Strategies to mitigate this Employer’s NIC increase

Every business will have a unique set of factors that influence how it can adapt to reduce tax and NIC costs. The ideas listed below may or may not be beneficial to your circumstances which is why you should seek professional advice before implementation.

You could consider:

  • Create or extend salary sacrifice schemes.
  • Make sure you take full advantage of the NIC free Employment Allowance (worth £10,500 a year from April 2025).
  • Explore adapting AI to optimise (reduce) staffing levels.
  • Review existing Benefit in Kind packages to reduce the annual Class 1A NIC cost. For example, by switching to lower CO2 rated company cars.
  • Where possible, use legitimate self-employed contractors rather than additional employed persons.
  • Rather than employ one person full-time, would it be possible to employ two or three part-time employees?
  • Create business plans that will enable you to “What If” the various options and settle on strategies that produce the lowest cost impact.

Please also see:  https://www.gov.uk/government/publications/changes-to-the-class-1-national-insurance-contributions-secondary-threshold-the-secondary-class-1-national-insurance-contributions-rate-and-the-empl/changes-to-the-class-1-national-insurance-contributions-secondary-threshold-the-secondary-class-1-national-insurance-contributions-rate-and-the-empl

If you have concerns about the effect that the NIC increase will have on your business, please pick up the phone. 

Please see another An Accounting Gem blog:  https://www.aag-accountants.co.uk/vat-register-or-de-register/

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VAT – register or de-register?

When will you need to register for VAT or consider de-registration.

As a trader, navigating VAT obligations can be a challenge, particularly when understanding when to register or de-register. Keeping an eye on specific goalposts is essential to ensure compliance with HMRC rules and avoid unnecessary penalties or financial inefficiencies. Below is a reminder of the key indicators to watch.

Crossing the registration threshold

The primary trigger for VAT registration is your taxable turnover. From April 2024, the VAT registration threshold is £90,000 in a rolling 12-month period. Key points to consider:

  • Rolling Calculation: It’s not a calendar or financial year but a continuous 12-month period. Regularly review turnover to identify when you’re close to or exceed this limit.
  • Anticipation: If you expect your turnover to exceed £90,000 within the next 30 days, you must register immediately.

Voluntary registration

Even if your turnover is below the threshold, voluntary VAT registration could be beneficial if:

  • You sell to VAT-registered businesses: If this is the case if you registered you could claim back input VAT paid on your expenses and other VAT inclusive purchases. This recovery of VAT could make your business more profitable. If you sell to businesses that are not VAT registered, the VAT you add to your sales would make your sales more expensive and this may reduce your turnover or force you to drop your prices. In both cases this would likely reduce your profits.
  • You plan to grow quickly: Being VAT-registered can project credibility and help avoid last-minute compliance headaches.

Taking over a VAT registered business

If you acquire or inherit a VAT-registered business, you may need to register regardless of your personal turnover. Check HMRC guidelines to confirm.

Non-UK and Distance Selling

If you sell goods or services into the UK and meet thresholds for cross-border sales, VAT registration may be necessary under the rules for non-UK businesses.

When to de-register

While VAT registration is obligatory for some, it’s not always a permanent requirement. Watch for these indicators:

  1. Taxable Turnover Falls Below the De-registration Threshold

If your taxable turnover drops below £88,000 (the de-registration threshold from April 2024), you can apply to de-register. This is particularly relevant for businesses experiencing:

  • Temporary Downturns: Reduced customer demand or economic challenges may lower turnover.
  • Restructuring: Downsizing operations to focus on non-taxable or exempt supplies could qualify you for de-registration.
  1. Ceasing to Trade

If you stop trading or intend to make only VAT-exempt supplies in future, you should de-register to avoid ongoing VAT obligations.

  1. Voluntary De-registration

Even if turnover remains above the de-registration threshold, businesses can apply if future taxable supplies are expected to be nil for a sustained period.

Practical tips for monitoring VAT indicators

  1. Maintain Accurate Records: Regularly review your income and forecast sales to stay on top of VAT thresholds. Use accounting software for automated alerts.
  2. Monitor Business Growth: Scaling quickly or launching new revenue streams may push you above the registration threshold faster than anticipated.
  3. Plan for Changes: If you foresee a decline in turnover or significant changes to your business model, assess whether de-registration might benefit you.

Key dates and reporting

  • Registration: Notify HMRC within 30 days of crossing the threshold or anticipating it. Delays can result in penalties and backdated VAT.
  • Deregistration: Once approved, ensure all VAT on remaining stock or assets is accounted for.

Please also see:  https://www.gov.uk/register-for-vat

By staying vigilant traders can efficiently manage their VAT obligations and minimise risks.

Please see another An Accounting Gem blog: https://www.aag-accountants.co.uk/need-time-to-pay-your-january-25-tax-bill/

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Need time to pay your January 25 tax bill?

Applying for HMRC Time to Pay arrangement

Options for Self-Assessment Taxpayers Struggling with Payments Due 31 January 2025

If you’re a self-assessment taxpayer and concerned about finding the funds to pay your tax bill due by 31 January 2025, you’re not alone. Many people face financial challenges at this time of year. The good news is that HM Revenue and Customs (HMRC) offers support through a Time to Pay arrangement. This allows you to spread your tax payments into manageable instalments, helping you avoid immediate financial strain.

Here’s how you can set up a Time to Pay arrangement, what it involves and key points to consider before applying.

Please also see: https://www.gov.uk/difficulties-paying-hmrc

What is a Time to Pay arrangement?

A Time to Pay arrangement is an agreement with HMRC that allows you to pay your self-assessment tax liabilities in instalments rather than in a single lump sum. These agreements are generally available to taxpayers who:

  1. Owe less than £30,000 in tax.
  2. Have no other outstanding tax debts or ongoing payment plans.
  3. Can pay off the amount owed within 12 months.

If your situation is more complex or the debt exceeds £30,000, you may still be eligible but you will need to contact HMRC directly for tailored advice.

How to apply online

HMRC has streamlined the process allowing most taxpayers to set up a Time to Pay arrangement online without the need for a phone call. Here’s how:

  1. Log in to your Government Gateway account – You’ll need your user ID and password. If you don’t have an account, you can create one on the HMRC website.
  2. Check your latest self-assessment tax bill – Ensure you know the exact amount due, including any payments on account.
  3. Visit HMRC’s Payment Plan Tool – Search “Time to Pay Self-Assessment HMRC” or go directly to the payment plan page via your online account.
  4. Answer a series of eligibility questions – HMRC will assess whether you meet the criteria for an online arrangement.
  5. Propose a payment plan – Provide details of how much you can pay upfront and over how many months you’d like to spread the remaining balance.
  6. Confirm the arrangement – Once approved, you’ll receive confirmation of your plan and payment schedule.

The process is straightforward and can often be completed in minutes.

Important considerations

  1. Interest Will Apply
    While setting up a Time to Pay arrangement avoids immediate penalties, HMRC will charge interest on the outstanding balance. As of now, the interest rate is 7% so it’s worth factoring this into your budgeting. The longer the repayment period, the more interest you’ll pay overall.
  2. No Late Payment Penalties
    If you set up a Time to Pay arrangement before the tax deadline, you won’t incur late payment penalties. These penalties typically start at 5% of the unpaid tax after 30 days so acting promptly is key to avoiding additional costs.
  3. Stick to the Plan
    It’s vital to keep up with your agreed payments. Missing instalments or failing to meet the terms of the plan could result in HMRC cancelling the arrangement, leading to penalties and enforcement action.

Act now

If you’re struggling to pay your self-assessment bill, don’t wait until the deadline passes. Proactively setting up a Time to Pay arrangement can save you stress, protect your finances and keep you on good terms with HMRC.

Visit the HMRC website today to explore your options and set up a payment plan. If your circumstances are more complex or you’re unsure about the process, contact HMRC’s Self-Assessment Helpline for personalised assistance.

By addressing the situation early, you can take control of your tax obligations while managing your cash flow effectively.

Please see another An Accounting Gem blog: https://www.aag-accountants.co.uk/tax-free-vehicle-fuel-and-running-cost-reimbursements/

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Tax-free vehicle fuel and running cost reimbursements

HMRC has updated the Advisory Fuel Rates (AFRs) for company cars, effective from 1 December 2024. These rates are reviewed quarterly—in March, June, September and December—to reflect current fuel prices and vehicle efficiencies. The latest adjustment sees a reduction of 1p per mile across various categories, aiming to align reimbursement rates more closely with actual fuel costs.

Updated Advisory Fuel Rates from 1 December 2024

  • Petrol Cars:
    • Up to 1,400cc: 12p per mile
    • 1,401cc to 2,000cc: 14p per mile
    • Over 2,000cc: 23p per mile
  • Diesel Cars:
    • Up to 1,600cc: 11p per mile
    • 1,601cc to 2,000cc: 13p per mile
    • Over 2,000cc: 17p per mile
  • LPG Cars:
    • Up to 1,400cc: 11p per mile
    • 1,401cc to 2,000cc: 13p per mile
    • Over 2,000cc: 21p per mile
  • Fully Electric Cars:
    • All engine sizes: 7p per mile

These rates can be used when reimbursing employees for the fuel costs they have paid for business travel in company cars or when employees repay the cost of fuel used for private travel paid by their employer. Employers can use these rates to ensure that reimbursements are tax-free and that there’s no additional National Insurance to pay.

Please also see: https://www.gov.uk/government/publications/rates-and-allowances-travel-mileage-and-fuel-allowances/travel-mileage-and-fuel-rates-and-allowances

Using AFRs to repay private fuel and avoid the Car Fuel Scale Charge

The car fuel scale charge is a taxable benefit arising when an employer provides fuel for an employee’s private use in a company car. To avoid this charge, employees must reimburse the employer for the full cost of the private fuel provided. AFRs serve as a guideline for calculating the amount to be repaid.

For instance, if an employee drives 100 miles privately in a petrol car with an engine size of 1,600cc, the AFR is 14p per mile. Therefore, the employee should repay the employer £14 (100 miles x 14p) to cover the private fuel cost. Accurate records of private mileage and timely repayments are essential to ensure compliance and to prevent the car fuel scale charge from being applied.

Tax-free compensation when employees use their own vehicles

Employees who use their personal vehicles for business travel are entitled to tax-free mileage allowances, known as Approved Mileage Allowance Payments (AMAPs). These rates differ from AFRs and are designed to cover both fuel and other vehicle-related costs.

The current AMAP rates are:

  • Cars and Vans:
    • First 10,000 business miles per tax year: 45p per mile
    • Each mile over 10,000 miles: 25p per mile
  • Motorcycles:
    • All business miles: 24p per mile
  • Bicycles:
    • All business miles: 20p per mile

Employers can reimburse employees at these rates without any tax implications. If the reimbursement exceeds these rates, the excess amount is taxable. Conversely, if the reimbursement is less than these rates, employees can claim Mileage Allowance Relief on the difference.

Key considerations

  • Record-Keeping: Maintaining detailed records of business and private mileage is crucial. This includes dates, distances travelled, destinations and the purpose of each journey.
  • Timely Reimbursement: Employees should repay the cost of private fuel promptly to avoid the car fuel scale charge.
  • Rate Reviews: AFRs are reviewed quarterly. Employers should stay updated with the latest rates to ensure accurate reimbursements.
  • Electric Vehicles (EVs): The advisory rate for fully electric cars is 7p per mile. Hybrid cars are treated as either petrol or diesel cars for AFR purposes, depending on their fuel type.

By adhering to these guidelines, both employers and employees can manage fuel reimbursements effectively, ensuring compliance with HMRC regulations and optimising tax efficiency.

Please see another An Accounting Gem blog: https://www.aag-accountants.co.uk/payroll-reporting-december-24-are-you-paying-staff-early-this-month/

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Payroll reporting December 24. Are you paying staff early this month?

As the festive season approaches, many businesses consider adjusting payroll schedules to accommodate holiday closures or to provide employees with early payments. While this gesture is thoughtful, it’s crucial to adhere to HM Revenue and Customs (HMRC) guidelines on Real Time Information (RTI) reporting to prevent unintended consequences for your employees, particularly concerning their eligibility for income-based benefits like Universal Credit.

Understanding RTI reporting obligations

Under the UK’s RTI system, employers are required to submit a Full Payment Submission (FPS) to HMRC on or before the date employees are paid. This submission includes details such as the payment date, amounts paid and deductions made. Accurate reporting ensures that HMRC has up-to-date information which is essential for the correct calculation of tax liabilities and the administration of benefits.

Impact of early December payroll payments

Paying employees earlier than usual in December can inadvertently affect their benefit entitlements. For instance, if an employee typically receives their wages on the 31st of each month but is paid on the 20th in December, reporting the actual payment date as the 20th could result in two payments being recorded within a single Universal Credit assessment period. This could reduce or eliminate the employee’s benefit entitlement for that period, as the system may interpret it as increased income.

HMRC’s reporting guidance for early payments

To mitigate such issues, HMRC has provided specific guidance:

  • Report the Regular Payment Date: If you pay employees earlier than usual over the Christmas period, you must report the normal or contractual payment date on the FPS, not the actual early payment date. For example, if the regular payday is 31st December but payment is made on 20th December, you should still report the payment date as 31st December.
  • Timing of FPS Submission: Ensure that the FPS is submitted on or before the reported payment date. In the example above, the FPS should be sent on or before 31st December, even though the actual payment was made on 20th December.

Adhering to this guidance helps protect your employees’ eligibility for income-based benefits by ensuring that payments are recorded in the correct assessment periods.

Please also see: https://www.gov.uk/running-payroll/reporting-to-hmrc 

Practical steps for employers

  1. Review Payroll Schedules: Assess your planned payroll dates for December and determine if they differ from the usual schedule.
  2. Communicate with Payroll Providers: If you use external payroll services, ensure they are aware of HMRC’s guidance and will report the regular payment dates, not the early payment dates.
  3. Inform Employees: Notify your staff about the reporting practices to alleviate any concerns regarding their benefit entitlements.
  4. Maintain Accurate Records: Keep detailed records of actual payment dates and the corresponding reported dates to ensure compliance and for reference in case of any discrepancies.

Please see another An Accounting Gem blog: https://www.aag-accountants.co.uk/tax-free-christmas-celebration/ 

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