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Update on the new tax free childcare scheme

The new Tax -free childcare scheme began in 2017 and is now available to the employed and self-employed where both parents are in paid work for more than 16 hours per week and neither parent earns more than £100,000.

The scheme is run via an online account and the government tops up 20p for every 80p you pay into the scheme up to a maximum of £2,000 per child up to the age of 12 (and therefore an £8,000 contribution by parents).  Grandparents or employers could contribute instead of parents.

The scheme replaces the employer childcare vouchers.  These schemes were due to close to new entrants at 5 April 18 but will now remain open for an extra six months until October 2018. Parents already registered at that time can continue to receive vouchers for as long as their employer offers them, or switch to tax-free childcare instead.

If you already receive childcare vouchers from your employer, then you have to decide whether you want to continue with this scheme, or move to the new scheme.  The website https://www.childcarechoices.gov.uk can help you decide which is better for you.

In general, the new scheme is better for the self employed and those with more than one child and high childcare costs, as the vouchers are per child.  The old scheme, if offered, favours couples where one parent does not work and high earners – but it worth doing the sums in your particular case.

If you want to leave your employer’s voucher scheme you must provide them with a Childcare Account Notice (CAN). This can be sent by email and states that you wish to leave the voucher scheme and use tax-free childcare instead.

There were lots of teething problems when the online accounts were set up, so much so that ‘Childcare Service compensation‘ is now available from HMRC  – www.gov.uk/government/publications/childcare-service-compensation

It offers parents compensation if they have been subjected to various technical difficulties in relation to its online Tax-free Childcare account. Problems with the service include technical issues, mistakes and unreasonable delays.

Parents affected by technical issues may be able to ask the government for a top-up as a one-off payment for Tax-Free Childcare or apply for reimbursement of any reasonable costs directly caused by the service not working properly.

You may be eligible if you have:

  • been unable to complete your application for Tax-Free Childcare
  • been unable to access your childcare accounts
  • not received a decision about if you’re eligible, without explanation, for more than 20 days

If you require any further information then please get in touch.

 

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What tax planning should you be doing before 5 April?

With the tax year ending soon have you been as tax efficient as you could have been this tax year?

What can you do before the year end to maximise your tax efficiency?

Here are a few of my tips for tax efficiency:

If you have a limited company – make sure you have paid £5,000 in dividends if profits allows.  The tax free allowance for dividends is reducing to £2,000 after 6 April 2018

Transfer income-producing assets to a spouse if you pay tax at different rates.  If you have a limited company, should your spouse also have shares to get their tax free dividend allowance and potentially pay tax a lower rate on additional dividends?

Check your total income for the year if you receive child benefit payments.  If you have the ability to determine your income for the year, by varying the level of dividend paid, keeping your income below £50,000 will ensure you retain your child benefit.

Trivial Benefits – limited company directors can get £300 a year tax free using these.  If you have not used your full allowance yet, get down to John Lewis and stock up on vouchers.  Conditions do apply so check my early blog for full details

If you are considering buying capital equipment for your business, doing if before the end of the tax year will give you the tax deduction this year rather than next

Pension contributions – very tax efficient for the company to contribute to your personal pension.  Review any payments made in the year and take advice from an IFA.

If you have taxable income over £100,000, you will lose your personal allowance on a sliding scale, so your marginal tax rate may be as high as 60% on part of your income.  Consider making additional pension contributions or gift aid donations which may restore your personal tax allowance.

Use your allowance for tax free ISA saving; that’s up to £20,000 in this tax year. Under 18s can save £4,128 in a Junior ISA.  Also consider LISA’s to help your children get on the housing ladder.

Inheritance tax – often forgotten, but if you have spare cash available, consider making gifts to take the funds outside of your estate.  If you don’t have the cash, bring this up with grandparents over Sunday lunch!  Up to £3,000 per tax year can be gifted as one off capital sums and will be exempt from inheritance tax. Any unused part of this allowance can be carried forward 1 year.

Often simple steps can be taken to minimise your tax bill, so hopefully the above list has added one or two items to your “to do “list.

Please contact me for any further information.

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Tax efficient Xmas Gifts and Parties

‘Tis the season to be jolly and you might be wanting to thank some of your clients for their business during the year.  Whilst tax may not be top of your agenda right now – can you do this tax efficiently?

Your gifts will only get tax relief, and you can only reclaim the VAT if they are:

  • NOT food, drink, tobacco or a voucher AND
  • Carry a conspicuous advert for your business AND
  • The cost of that gift, and any other to that person in the year is under £50

(That’s why your gift may be an embossed diary/mug!)

If you want to give your staff a Christmas gift, it may well be covered by the “trivial benefit” rules I have covered in a previous blog.  Here if it is classed as “staff entertaining” you may well be able to reclaim the vat.

What about the Xmas party?

Most people are aware about the rules for the staff Xmas party.  For a limited company, the cost for the annual party is allowable for tax as long as it is under £150 per head (all staff have to be invited but the cost is per head – so that includes their “plus ones”)

But a lot of us work for ourselves and don’t have staff – we employ subcontractors.  What are the rules if we want to take them out at Xmas as a thank you.

These guys are not your employees so they are not covered by the above rule.  Any money spent on entertaining them is deemed customer entertaining and therefore won’t be allowable for tax in your accounts, (but – you should probably still take them out!!)

So what about you, the business owner?

If you are a director, then you are classed as an employee and you can treat yourself to a Xmas do.

If you are a sole trader, then Im sorry, it’s the final of Strictly and a bottle of cheap plonk for you!

 

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Dividends – new rules mean higher personal tax bills at Jan 18

How dividends are taxed changed dramatically at 6 April 16 and its impact is just being felt by shareholders completing their 16/17 tax returns.  The tax on those dividends is due for payment at 31 Jan 18 and is coming as a shock for those unprepared!

In the good old days before 5 April 16, the 10% dividend credit meant that basic rate taxpayers paid no further tax on dividend income as the 10% tax on dividends was covered by the 10% tax credit.  Higher rate tax payers had additional tax due of 25% on any dividends taken.

Since April 16, all that changed.  The notional tax credit was scrapped, and instead everyone was given a £5,000 dividend allowance.  That means that you don’t pay tax on your first £5,000 of dividend received in a tax year.  But after that, basic rate taxpayers will pay 7.5% on any dividend received, and higher rate payers 32.5%.

So for example, a higher rate taxpayer receiving £30,000 of dividends this year, will face a tax bill of £8,125 (as opposed to £7,500 before)

The further sting is that under self-assessment, if you chose to pay your tax in one go at 31 January rather than have it collected via your tax code, then you need to make a payment on account of your 17/18 tax at the same time.  This is calculated at 50% of this year’s tax – so actually at 31 Jan 18 you will need to fork out £12,187 based on the example above.

Basic rate taxpayers with a dividend of £30,000 will face a tax bill of £1,875 (or £2,812 with the payment on account) at 31 January.  Prior to April 16 there would have been no additional personal tax on this dividend at all.

With the dividend allowance reducing from £5,000 to £2,000 from April 18, personal tax bills for limited company shareholders are only going in one direction!

For further information please contact Rosie Forsyth at Wilkins & Co.

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Who has to file a personal tax return?

This is a commonly asked question – and people often do not realise that they have to register for self-assessment and file a personal tax return .

If you fell into any one of the categories below between 6 April 2016 and 5 April 2017, then yes you do need to file a personal tax return:

  1. You were self employed
  2. You were a company director – SEE BELOW
  3. HMRC have sent you notification to complete a return
  4. You had more than £2500 in untaxed income, eg from renting out a property
  5. You received dividends, savings or investment income before tax of more than £10,000
  6. You have a Capital Gain – ie you made profit from selling shares, a second home, a business or other chargeable assets
  7. You or your partner’s income was over £50,000 and one of you claimed Child Benefit in the year
  8. You had income from abroad that you need to pay tax on
  9. You lived abroad and had a UK income
  10. Your income was over £100,000
  11. You had a form P800 send from HMRC saying you didn’t pay enough tax last year and you haven’t either sent them a cheque or arranged to pay it via your tax code

The company director question is an interesting one and one that has been subject of an HMRC tribunal in the year.

HMRC’s guidance on their website will tell you that all company directors need to complete a tax return – but that is to put it kindly, misleading (as the tribunal concluded!)

If you are going to have a tax liability based on your income, then yes, you need to notify HMRC and complete a return – but if you have no further tax liability, then there is no requirement to register for self-assessment, director or not!

Unfortunately due to the change in dividends rules in 16/17, many directors will be having to file a tax return this year for the first time, as personal tax payments become due on dividends over £5,000.

If you do fall into one of the categories above, and have not filed self-assessment returns before, you have to notify HMRC by 5 October 2017 that you have a tax liability for the year.  You then have until 31 January 2018 to file your return online.

We act for many small businesses completing tax returns for the first time – and we get that its daunting!  We can help you through the process and make it as stress free as possible– do get in touch for more information.

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Taxes Made Easy 2017/18 – Free to Download

Hot of the press is my new tax planning brochure for 2017/18.

This easy to read guide provides you with key tax planning points for the current year.

Covering personal tax and matters affecting both your business and your family, my guide suggests many ways in which you can save money on your tax bill by taking full advantage of the current tax system, as well as highlighting some of the pitfalls you should avoid.

Chose your donut to download with my compliments!

 

If I can help you with any issues covered in my guide, then please get in touch.

Do let me know if it’s been of help!

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Making Tax Digital – All Change Again!

The government has announced major changes to the Making Tax Digital proposals- again!

Put on hold while we had the election, the changes now announced mean that MTD will affect far fewer people in the next couple of years than the initial plans.

MTD will initially now only apply for VAT.

Self-employed individuals who are VAT registered will have to file under MTD from 2019 – so they will need to file quarterly returns from MTD compatible software.

Other self-employed individuals and landlords will now not have to keep digital records, or update HMRC quarterly until at least 2020.

There is no news on the timetable for companies, but it will be at least 2020 before they need to comply.

This delay will give small business more time to make the transition to digital and is welcome news to many.

Having said that 2020 is not that far off, and clients who are switching to cloud accounting are benefiting from the real time information it brings them about their business – and the time savings made from being able to scan receipts on the go, and no longer living in dread of “accounts day!”

For more information please contact Rosie Forsyth.

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What are Payments on Account of Tax?

Payments on account of 17/18 tax are due by 31 July, and you may have received a statement in the post telling you how much you need to pay.

What are they and how are they calculated?

If you pay your tax under self assessment – you will probably have to make “payments on account” of your tax bill at 2 stages during the year -31 Jan and 31 July.  They are just that – a “part payment” of your anticipated tax bill for the year.

How these are calculated is easiest explained with an example.

You started your business in May 2015, prepared your accounts and calculated your tax bill for 15/16 to be £3,000. This was due for payment at 31 Jan 2017.  But you also had to pay a payment on account of your next year’s (16/17) tax bill – and this was automatically calculated at 50% of the previous year – so £1,500.  So actually at 31 Jan 17 you had to pay £4500.  You may have just paid this at the time and not really grasped what it was for.

The second payment on account for 16/17 is due by the end of July and again is 50% of last year’s bill – so another £,1500.

So by now – you have paid £3,000 on account of your 16/17 tax bill – even though, if you have not yet filed your tax return, you don’t actually know how much your final bill will be.

If your profits in Year 2 have gone up – and when you do your accounts and file your tax return, your tax bill for 16/17 is worked out to be £5,000, then you have already paid £3,000 of it during the year – so you only owe a further £2,000 at 31 January 2018.  But, the process is repeated – so at 31 January 18 you will owe £2,000 for this year – and your first payment on account of 17/18, calculated as before at 50% of the current year bill (£2,500) – so £4,500 in total.  You then owe at 31 July 2018 your second payment on account of 17/18 – another £2,500.

If you are in the scenario where profits are lower than the year before, then you will have overpaid in the year with your 2 payments on account and you will be due a refund for that year.  In the example above, if your tax bill for 16/17 worked out to be £2,400, then because you have paid £3,000 during the year, then you have overpaid £600.  But, taking into account your first payment on account for 17/18 which will be 50% of £2400 = £1200, you still owe £1200 – £600 = £600 at 31 Jan 18!

Confused??  Who said tax wasn’t taxing!

If you know your profits are going to be lower in the next year, perhaps because you are doing less hours or lost a key client, then you can apply to reduce the payments on account that are going to make – to avoid overpaying in the first place.  Don’t overestimate the reduction though, as HMRC will charge you interest if you get it wrong and reduce the payments too much.

A word of warning – the changes to the dividend rules means that many more people will owe tax under self assessment. You are only excluded from making payments on account if the amount you owe in tax is less than £1,000, so many small business owners will be facing payments on account in the future.

For more information please contact Rosie Forsyth.

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Getting your Bookkeeping in Shape

We are now well into the new tax year and if you have a new business, or your bookkeeping system leaves a little to be required – it’s time to get it into shape!  Leave it too long and the mountain of receipts just keeps growing!

If you have set up a new sole trader business this tax year – there are couple of things you must do straight away:

  1. Register with HMRC – you can click here to do so.  This tells HMRC you are self-employed and means they will ask you to complete a tax return.  You need to do this within 3 months of starting your business.
  2. Set up a separate bank account.  This can just be another current account but it’s really important to keep your business income and costs separate from your personal money.  You might want to set up another account as well where you can put money aside for your tax bill.
  3. Buy a couple of folders (and keep the receipt!)

What Records do I need to keep?

You need to keep records of your sales and costs.  You won’t need to send these to HMRC but you need to keep them so you can work out your profit or loss for your tax return, and show them to HMRC if asked.

There are many ways you can keep your records, ranging from pen and paper to accounting software and the key is to choose one that suits you.  If you don’t get it – you aren’t going to keep it up to date!  The way we report our figures to HMRC will be changing – Making Tax Digital is on hold for now, but it is expected to be back on the agenda when the Government has sorted itself out, so before long we will need to be keeping digital records.

There are some great Apps out there now for scanning receipts and recording your data for you, so if you are just starting up your business, I would go straight for the digital option.  Take a photo of your receipt when you get it, upload it, put it into the relevant category, and then bin it – job done! You will save far more than the monthly subscription fee in regained time.

Even if you just go for an App to record your expenses (Receiptbank is the one I use) then the rest of your record keeping is pretty straightforward.

For your Sales:

Keep a copy of every invoice that you send out (paper or electronic).

Keep a record on a spreadsheet of all invoices raised – noting the date it was issued, the number (keep these sequential), who it was to and the amount.  Have a final column where you note the date the invoice is paid – perhaps in a different colour so it stands out!  You can then easily see who owes you money and how long the invoice has been outstanding – so you can get chasing!

Expenses:

It’s really important to keep track of what you are spending.  Try to pay for everything related to your business directly from your business bank account – this will make recording expenses so much easier.  Some things you will have to pay in cash (parking etc) but wherever possible use your business account debit card.  Even in Tesco if you are buying bits of stationery, pay for this separately to your weekly shop, or you will probably forget you bought it and you won’t claim it against the business.

If you haven’t gone for the App then keep a spreadsheet of your expenses.  It’s a good idea to have one spreadsheet or tab for all costs that you have paid for from the business account and another one for cash payments.  Your spreadsheet should note the date, the supplier name and the total.  It should then break down the amount into categories so you can keep track of what you are spending – the categories can be whatever you like and what will be useful for you – but might include post, stationery, travel, parking, website, networking, subscriptions etc. Don’t forget to include a category for money that you have taken out of the business for yourself, as you will need to “pay” yourself at some point!

Keep the actual receipts for your expenditure in a folder if you haven’t zapped them on your phone – filing them by month is a good idea and for the super organised, number them and cross reference them to your expenses summary spreadsheet, so when your accountant queries something you can find the receipt quickly!

Other Costs

If you use your car for business then the simplest way to charge the business for this is to recharge the mileage.  The business can pay you 45p per business mile – so you need to keep a record of the business mileage that you do.  You might chose to keep a notebook/diary in the car to keep a log, or to keep a spreadsheet but somewhere you need to keep a record of the business miles you have done.  Every month, or quarter, total this up and repay the amount due to you from the business account – not forgetting to note it on your expenses summary!

Keep a record of your mobile phone bill and internet costs as you can also reclaim a percentage of these from your business.

Bank Accounts

Print out your statement when you get it and file it in your folder.  Check the items on your bank statement to the income and costs on your summary and make sure you have everything recorded.

When you are paid by a client, it’s a good idea to put a percentage of this aside into your “tax” bank account to save for you tax bill – the amount you need to put aside will vary depending on your personal circumstance, but between 20 and 30% as a guide.

If you follow these basic steps then you are well on the way to having a good bookkeeping system.  Try to keep this up to date – there is nothing worse than sitting down to catch up the last 6 months!

Using your phone to zap your receipts is strangely satisfying (and the kids love it!) so I would really recommend going down the digital route to keep your records – contact me for prices.

If you are happier sticking to spreadsheets for now then do contact me by email for a template that can be used.

 

 

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Sole Trader v Limited Company – which is right for you?

Making the right decision as to the structure of your business can be crucial, whether it be in terms of tax savings, simplicity, perception to the outside world or future plans.

The choice is generally between setting up as a sole trader or a limited company, though other options may be partnerships or LLP’s.

This blog sets out some of the key differences between the 2 structures.  We have not covered all the differences here and have assumed for simplicity that there is no other income in the year to consider (PAYE income, rental property etc)

TAX

A sole trader will pay tax on all the profits of the business over and above their personal allowance (£11,500 in this tax year.)  Profit is then taxed at 20% up to the basic rate threshold of £45,000 and then at 40% on the next £105,000.

The sole trader also pays class 2 and class 4 NIC.  Class 2 NIC is a flat rate of £2.85 per week and class 4 NIC is calculated on the profit of the business, with 9% NIC being paid on profit between £8,164 and £45,000 and 2% on profit over £45,000.  Both types of NIC are collected via self-assessment and the tax return.

A limited company on the other hand pays corporation tax on its profit.  Corporation is currently paid at 19%.  One of the key difference though between being a sole trader and a limited company is that you have to remember that the limited company’s money is NOT your money, as it is for a sole trader – it belongs to the limited company and you have to take it out of the business for it to be “yours”.

To take the money out of the business, you either pay yourself a salary or a dividend.  This is where tax savings can be made and is one of the advantages of being a limited company.  Taking a salary out of the business is an allowable expense of the business, and therefore it reduces the profit of the company, and saves corporation tax.  Usually a limited company director will take a salary equal to their personal allowance from the company, and therefore pays no personal tax on it.

Further withdrawals from the company are then usually taken as dividends.  The dividend rules changed about a year ago, so the tax savings are not as great as they used to be, but as there is no national insurance payable on the dividend, this method of paying yourself is still more tax efficient than paying further salary.

There is no requirement for the owner to withdraw all the profit from the business and as you are only taxed personally on the amounts you withdraw, this gives you more flexibility than the sole trader if you don’t need to take all the money out of the company each year, and can lead to tax efficiencies.

To request a comparison between the tax you would pay under each structure for a given profit level, please ask!

ADMIN

The sole trader has the advantage of simplicity.  To set up as a sole trader, you need to register with HMRC and then file your tax return once a year (at the moment!)

Trading as a limited company is more complicated.  You need to register your company name with Companies House, set up a business bank account and appoint directors and shareholders.  The directors have legal duties to comply with in terms of keeping proper accounting records, filing accounts and ensuring the company complies with the relevant tax and employment law.

The company must file accounts with Companies House and these must be in a set format, and also file a corporation tax return with HMRC.  The directors will also usually need to file a personal tax return if they have received dividends from the company.  If you are paying yourself a salary, then you need to set up and operate a PAYE scheme.

You won’t therefore be surprised that accountancy costs for a limited company are going to be considerably more than for a sole trader!

LIMITED LIABILITY AND PERCEPTION

This is often a reason why start-ups go for the limited company option.  As a limited company your liability is limited to the amount of the assets owned in the company name.

For a sole trader, there is no such distinction between personal and business assets and therefore your home could be at risk.  If you operate in a high risk or litigious sector this would be an important consideration, though insurance policies can be taken out.  Limited company directors may also be asked for personal guarantees for bank loans etc.

Some people prefer to operate as limited companies as there is perception of the status being more “grown up” or being taken more seriously, and in some sectors that may be true.  Clients in some situations (especially for contractors) will only deal with limited companies so you will have no choice!

 

There are many other differences not covered above, but these 3 are the main considerations to take into account.  You should always take advice from an accountant when deciding which structure is best for you.  If I can help you further then please contact me.

 

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