Using Capital Allowances To Reduce Your Employment Income (PAYE)


Simon Misiewicz

5th December 2015

By Simon Misiewicz

Are you paying tax on your employment?

Are you going to be paying even more tax once your property is rented?


The problem — paying tax on your employment income

Before you have bought and rented out a property you would have already paid tax on your employment. If you are buying a property that requires £50,000 for the deposit and refurbishment you would have needed to earn £73,350, meaning that you would have paid tax and national insurance of £23,350 before you have even started.

Would you like this tax back?

Can you see that you are actually paying more on your property portfolio because of the tax you have already paid?

If you have answered yes to these questions then this article will be an interesting read.

A real life client example — paying tax on employment income

For the purpose of this article we are going to name my client John to protect his identify.

John is a higher rate taxpayer and is planning to invest £50,000 per year into property. He spends on himself and his family about £60,000 per year. As such he needs to earn £110,000 net income.

John therefore needs to earn a gross salary of £187,680.07. If you look at the above calculator you will see that John has paid £77,680.07 in tax and national insurance. That is a whopping 41% of his gross salary.

So any property that he invests in (worst case) he will be paying 41% more. As an example John sees a property that requires £50,000 to buy and undertake a light refurbishment on. In actual fact the property has cost him an additional 41%, so £70,500. As you can see it would take a lot to buy a property that is below market value.

Next steps — buy HMOs or commercial properties to reclaim tax on your refurbishment

A better solution is to buy a HMO/commercial property and the refurbishment costs may in part be offset against his PAYE income. As such HMRC will then issue a cheque for the tax that has been overpaid.

To get this done you will need a special RICS report once the refurbishment works have been completed and then tax calculations to work out what tax may be claimed back from HMRC on your self assessment. This is another good reason for you to get your tax return done nice and early.

If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar:

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