Choosing the right VAT scheme is an important step for small business owners and can have a considerable...
Did you know the UK tax system has almost 1,200 tax reliefs? These are all potential ways you can reduce your tax bill and save money.
In today's article, we're going to highlight 5 of the most generous UK tax reliefs that you may not have heard of.
The National Audit Office (NAO) recently reduced a report called The management of tax expenditures. This rather dry sounding title hides a multitude of interesting facts about potential ways to save money on taxes.
Structural v Non-Structural Tax Reliefs
The UK system has two types of tax relief. "Structural" reliefs are those built into the tax system and include the personal allowance for Income Tax and the nil rate band for Inheritance Tax.
Structural reliefs have a number of integral roles to play in the tax system:
- Define the scope of tax
- Calculate income and profits correctly
- Make the tax system progressive
- Reduce the compliance burden
Non-structural reliefs, by contrast, are there to help specific individuals or encourage specific activities. For example, R&D tax credits encourage spending and investment on new technologies.
Non-Structural Tax Reliefs You Need To Know
The interesting aspect of the NAO report was that it listed the most "expensive" non-structural tax reliefs in the current system.
"Expensive", of course, is from the government's perspective! For our purposes, an expensive tax relief is one with the biggest potential to save money.
Here are the top 5 most expensive (most generous) tax reliefs. Some of these you will already benefit from automatically, but make sure you're taking advantage of all five.
1. CGT main residence relief: (£26.7b)
Normally, when you sell a house (or part of a house or a garden) you have to pay Capital Gains Tax on any profits.
However, with a few caveats, if the house has been your "only" or "main" residence throughout your "period of ownership" you can claim 100% relief on any Capital Gains liability.
This can be complicated if you are married, live abroad for a period of time or sell your garden separately. Check out our page on Capital Gains Tax to learn more.
2. Employee contributions to pension schemes: (£20.4b)
When you pay into a pension, the government adds in some of the money that would have otherwise been paid as tax. The tax relief is available at the highest rate of Income Tax you pay (eg 20% for basic-rate payers).
So, for example. if you are a basic-rate payer and you contributed £100, it would only cost you £80 (the government would contribute the extra £20).
3. Zero rate VAT on food: (£18.3b)
VAT rules around food are actually surprising complicated. The VAT rate depends on whether the food is hot or cold, eaten in or taken away, and even whether it is a cake (zero-rated) or a biscuit (20%).
In fact, George Osborne had to back down in 2012 when he tried to apply standard-rate VAT to "hot takeaway food" in his notorious omnishambles budget.
Having said that, you are benefiting from a zero-rated sale every time you order food that is "cold and taken away".
4. Employer contributions to pension schemes: (£17.4b)
Tax reliefs around "employer" pension contributions (as opposed to "employee" contributions) are a little more complicated.
HMRC will typically allow the contributions to be considered an "expense". Anything that is an expense can be used to reduce profit (and thus reduce the corporation tax burden).
The government says that it would be "relatively rare" for this relief not to be available. However, it has issued guidance if you want to make absolutely sure.
5. Zero rate VAT on new homes: (£14.8b)
In order to encourage house-building, the government has determined that labour on brand new homes is zero-rated. You may even be able to claim back some or all of the VAT on materials.
There are also some tax reliefs available when you convert a building into a home. Here the rules are a little more complicated (most importantly, the building you're converting can't have been a residential property previously).
To make sure the work counts as zero-rated, check out the official HMRC page.
If you'd like to discuss how we help individuals and businesses reduce their tax burden, please get in touch.