If you pay your taxes through PAYE you’re probably not familiar with the anguish that comes with handing over thousands of your hard earned cash to HMRC twice a year, but for millions of small businesses up and down the country it’s an all too common feeling.

Of the 5 million plus small and medium sized businesses in the UK and estimated 62% are sole traders, and for many, tax is likely to be the single highest cost of doing business. Worse still, it comes out of the owners own pocket. Yet by using the right credit card you could get cash back on paying your tax which should go someway to easing the pain of handing it over in the first place.

Why now?

Until recently credit card payments were a nice little earner for HRMC. In fact, over the last five years HRMC charged £50m in credit card fees, and £12m in 2014-15 alone.

For the start of the 2016-2017 year HMRC upped its card charges from 1.4% to a rip off 1.5% That’s 0.7% above the interchange fee (the amount the retailer pays the card company), and a total of £150 on a £10,000 tax bill.

At these rates it just didn’t make sense to use a cashback credit card, as any earnings would be wiped out by the fees involved. But the rules changed in response to new EU regulation capping the interchange fee, reducing it from 0.8% to 0.3%.

As a result, HMRC has now revised its fee structure with fees for personal cards now 0.4%. Unfortunately, dedicated business cards aren’t covered by this regulation, and fees remain between 1.5%-2.4%. The reduction in personal credit card fees means that sole traders (for whom tax is a personal expense), stand to make a pretty penny if using the right card.

Choosing the right card

American Express cards offer the best cashback rates at the moment, but unfortunately HRMC only accept VISA and Mastercard. There are ways around that like using the Curve Card, but we won’t go into that here. Technically it’s a business card and so charged at the higher 1.5% rate, but when linked to the right Amex card you can get 5% cash back up to £200.

A knock-on effect of reducing interchange fees is that credit card companies are now reducing their cashback. Interchange fees were a nice little earner for them, and the reduction now means that they will try to claw back that money from their customers. Capital One was one of the first to announce a total scrapping of cashback following the change in regulation.

The best cashback credit cards at the moment are offering around 0.5% which admittedly isn’t great, still, it offers a small return on a partial tax bill payment. On a spend of £10,000 HMRC would charge £40, but you’d stand to earn £50 cash back. Those on legacy cards are more likely to gain as some older cards still offer up to 1% cashback.

Of course, rewards aren’t limited to cashback, many cards pay in Avios or Nectar points. These can often be used on flights, hotels, car hire, and days out. And while paltry rates mean that they are unlikely to pay for themselves outright, it’s worth keeping an eye out for deals and special offers that can boost rates. Again legacy card holders here are more likely to be quids in, with cards such as the old BMI Platinum MasterCard paying 2.5 Avios points per £1 spent. Note 4,000 Avios gets you a BA flight from London to Paris.

Isn’t cashback taxable income?

The taxman rarely misses a trick, and many accountants will point out that cashback could be classed as taxable income especially if it’s seen as a way to increase your income. This all stems from a decision taken by HMRC back in May 2013. Then HMRC stated that it intended to start taxing loyalty bonuses paid on investment funds.

Hargreaves Lansdown, the UK’s largest fund supermarket, claimed that the decision would not just affect funds but other incentives such as cashback credit cards and websites. However, HRMC has dismissed this as nonsense stating:

“There is no question of tax becoming payable on cashbacks received from credit, debit and loyalty cards or any other kind of cashback payment.”

Rather than being seen as income, cashback is merely considered a discount on the goods/services purchased, albeit a belated one. As such it isn’t subject to tax. Hurray!

Beware the pitfalls

There are a number of pitfalls to be aware of before spending to earn cash back. There are the same whether it’s a payment for tax, or anything else.

·      Set up a direct debit and always pay off the balance in full – Otherwise interest on lending will wipe out any gains

·      Check the credit card fee – fees vary, and higher fees for using the card could negate any cashback

·      If making use of an introductory offer, be sure to check and double check the terms and dates of the offer

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