It’s the start of the tax year – which means a few changes to tax rates and allowances.  Company owners will need to consider how these changes may affect their businesses during the year.

This blog focuses on the tax changes that affect limited companies and what directors need to be thinking about during the year.

1. Increase in National Insurance Rates and Thresholds

   The NIC rate has increased by 1.25% this year: employees NIC is now 13.25% and employers NIC 15.05%.  Companies, already facing upward pressure on wages, will see payroll costs increasing, and employees will see a reduction in their net pay.

   However, the point at which employees start to pay NIC is increasing to £12,570 from July to align with the personal allowance.  Lower paid employees may therefore be taken out of tax and NIC altogether.

   For companies with more than one employee, the employment allowance is available and has increased to £5,000 (from £4,000.)

2. Increase in dividend tax rates

   The dividend tax rate has also increased by 1.25% – to 8.75% for the basic rate taxpayer, and 33.75% for a higher rate taxpayer. Directors who extract funds from their business as dividends will therefore face increased personal tax bills.

3. Increase in corporation tax rates from April 23

   The current rate of corporation tax is 19%. This is increasing from next year for companies with profits over £50k.  For a company with profit over £250k, the rate of corporation tax is increasing to 25%.  For companies with profits between £50k and £250k, there will be a marginal rate of tax falling between the 2 rates.
   Whilst this increase is still a year off, directors will need to plan ahead and budget for the increase.

4. Super Deductions

   Whoohoo-sounds exciting!

   Super deductions are a new, more generous capital allowance for companies investing in assets. For qualifying assets (eg IT, office equipment) companies will get 130% deduction against profits for the cost of their investment.   For example, purchasing a £1,000 computer will give you a deduction against profit of £1,300.

   The super-deduction capital allowance is only available until 31 March 23 and directors should therefore consider bringing forward any expenditure on assets to benefit from the allowance.

Given the increases in NIC, dividend tax and corporation tax, directors need to carefully consider the best way to extract money from their companies to maximize tax efficiency.

Company pension contributions are tax efficient with no tax or NIC for the director, and an allowable cost for corporation tax.

Tax free benefits could also be considered, such as electric cars, company mobile phones and trivial benefits.

For directors who have lent money to their companies, consider charging interest on that loan to utilise available savings allowances.

For more information or advice on tax changes affecting companies this year, then please contact Rosie Forsyth.

It’s the start of a new tax year – and therefore time to do some number-crunching to work out the optimal salary for company directors.

The Office of Tax Simplification has come up trumps this year and changed the rate of NIC part way through a tax year – to er……. not simplify matters!

So where does this leave us for the company director who want to pay him/herself tax efficiently?

We need to look at 2 scenarios – the company which has only one director and therefore cannot claim the NIC Employment Allowance – and the company which has 2 directors, or a director and at least one employee and is able to benefit from the increased Employment Allowance.

Single Company Director -no other employees earning over the Lower Earnings Limit (LEL) for NIC

You have 3 choices!!

1. To qualify for NI benefits (state pension etc) you need to earn at least the LEL for NIC – which this year is £6,396 pa (£533 pm)
2. The employees NIC threshold has increased to £12,570 – but only from July 2022. Up to 5 July it is £9,880. Over the year, this gives an annual threshold of £11,908.However, the employer’s NIC threshold for the year is lower at £9,100, so if you want to avoid having to pay any NIC at all in the year, your optimal salary is £9100pa (£758pm)
3. As the rate of employers NIC is 15.05% this year, and the rate of corporation tax at least 19%, then you will be better off overall if you pay the higher salary of £11,908pa (£992pm) – as you will save more in corporation tax than you will pay in NIC.The saving though is only £191 over the year.  You will have to weigh up whether this tax saving is worth the hassle of having to remember to pay the employers NIC over to HMRC towards the end of the tax year.

Company with more than one director, or one director and at least one employee earning more than the Lower Earnings Limit for NIC

1. With more than one employee the company should be able to claim the NIC Employment Allowance. This has increased in the year to £5,000 and gives a company a credit against the first £5,000 of employers NIC due – often resulting in a small company not actually physically paying over any employers NIC to HMRC.
   In this situation paying the higher salary of £11,908 would be the optimal level, as the employers NIC due is covered by the allowance.  The additional corporation tax saving from paying £11,908 as opposed to £9,100 is £533.

Both these levels of salary are below the personal allowance of £12,570, so assuming no other income in the year, there would be no income tax due.  Additional income could be drawn from the company as dividends.  The first £2,000 of salary remains tax free.  Tax rates of dividends this year have also increased and are 8.75% for basic rate taxpayers, and 33.75% for higher rate taxpayers.

The above rates are illustrative only and assume no other income from other sources in the year.  You should always take personal tax advice as to the optimal level of salary for you, given you own personal circumstance.

For more information and advice, please contact Rosie Forsyth.

Spurred on by the recent queues for fuel, more and more people are looking at switching to electric cars when they next change their car.  Here we look at how tax efficient this can be when the car is purchased through your limited company.

Benefit in Kind Tax

As most company car drivers are aware, if you use a car owned by your company for private use, then each year you have a personal tax charge (known as a benefit-in-kind.) The more expensive the car and the higher its CO2 footprint, the higher the tax charge, as the BIK is calculated by multiplying a given percentage for each CO2 level by the list price of the car.

So a car with a list price of £30k and average CO2 emissions of 120g/km has a percentage of 28% and therefore a BIK value of 28% x 30,000 = £8400.  The employee is treated as having additional income in the year of £8400 and taxed on this accordingly (£1680 for basic rate taxpayers, and £3360 for higher rate).  The employer pays employers NIC on this amount as well – a total of £1160 (which will increase when the 1.25% increase to NIC comes in next year.)  Company cars are generally therefore expensive!

To encourage the switch to electric, the BIK on electric cars was initially set at 0%.  This has increased to 1% for fully electric cars for this tax year and will increase to 2% for 22/23.  The same car above, if it were fully electric would only have a BIK of £300, and a £60 tax charge for a basic rate taxpayer.

For hybrids, with Co2 emissions under 50g/km the BIK percentage depends on its electric range, but is still between 1 and 13% in this tax year.

Capital Allowances

Capital allowances are like a tax-deductible expense, so you can write off the cost of the car against your profits over a period of time. Without getting too technical, generally for a company car, it takes many years to write off the cost against your profit.

A brand new fully electric car qualifies for a first year allowance which means you can write off the full cost in the year you buy the car, reducing your company profit for that year and saving corporation tax.  Nearly new, or hybrids don’t qualify for the first year allowance and will be written off over a period of time.

VAT

For VAT, electric cars are sill cars and follow the general vat rules that the vat on the purchase price cannot be reclaimed by the business, unless the car is genuinely only used for business purposes (almost impossible to prove!)

Charging

The cost of installing a charging point at work (potentially AKA – home!) will also be fully tax deductible in the year, and there is no BIK on the employee for the cost of the electricity if the company allows employees to recharge at work.

Road tax and Congestion Charge

A fully electric car is exempt from the both the above.

The Downside!

There is always one – the cost of purchase – and the current lack of supply!

Electric cars are still an expensive option to purchase – I know – I’ve been looking! The initial outlay is higher than for a fuel or diesel car.  Also demand is high at the moment so you will need to be patient if you decide to make the switch.

Buying any car for your business is an investment and needs careful consideration of your own circumstances.  If you need any further information or guidance then please get in touch with us.

2 increases were announced yesterday -NIC and dividend taxes are both increasing by 1.25% from April 2022.

For the first year, this will be collected as an increase in National Insurance.

But from April 2023, National Insurance will return to its current rate, and the extra tax will be collected as a new Health and Social Care Levy.

How will this affect you if you are self employed, an employee– or a limited company owner?

The Self-employed:

You currently pay 2 types of NIC – class 2 and class 4 NIC.

Class 2 NIC is a flat rate, currently £3.05 a week, or £158.60 a year.  This is paid via self-assessment when you do your tax return, and is not affected by the new measures.

Class 4 NIC is charged on your profit and is currently 9% of profits over £9,568. If you have profits over £50,270 then you only pay 2% class 4 NIC on amounts over this.  This is the rate that will go up to 10.25%, and then 3.25% from April 22.

Employees

 Employees have NIC deducted from their salaries each month through their pay packet.  There is no NIC due on the first £184 per week (£9,568 pa) and then NIC is payable at 12% on income between £184 and £967 per week (£9,568 – £50,284).  Over this amount the rate reduces to 2%.

This rate will increase from 12% to 13.25% from April 22.

Currently you stop paying NIC once you reach state pension age.  When this new amount of 1.25% moves from being called NIC and becomes the Health and Social Care Levy in April 23, this will be paid by state pensioners who are still working.

Employers

Employers pay employers NIC on employee’s salary.  Currently there is no employers NIC on the first £170 per week (£8,840 pa).  After this, employers NIC is paid at the rate of 13.8%, with no upper limit.  This rate will increase to 15.05% from April 22.

If a company has more than one employee on their payroll earning over the NI threshold, they can currently claim the NIC Employment Allowance.  This gives them a credit of up to £4,000 against their employers NIC bill and is claimed via the payroll each month.

Nothing has been said about the employment allowance in connection with the increase in NIC – presumably a company will still be able to claim the allowance while the increase is called NIC – but when it changes to the Health and Social Care Levy………………….?

Many small business owners choose to set their own salaries at £8,840 pa so that there is no NIC payable by either the employee or the employer, and their salaries will therefore not be affected by the increase in NIC.  This is why the dividend tax has been increased as well!

Dividend Tax

Dividends are paid to shareholders of limited companies and are often the way that company directors will take money out of their companies.  There is no NIC on a dividend, and hence it is an efficient way to pay yourself from your company.

Dividend tax is currently 7.5% for basic rate taxpayers, and 32.5% for higher rate taxpayers.

These rates will rise to 8.75% and 33.75% respectively from April 22.

As there is no NIC on a dividend, it is argued that increasing the tax on dividends at the same rate brings about some equality in the increases between the employed and the self-employed.  Company directors I am sure will be asking where the equality was in the covid help given out by the government in the last 18 months!

The dividend allowance of £2,000 remains, and any investments held in ISA’s are tax free so will also not be affected by this increase in dividend tax.

As this has just been announced there is limited information available at the moment so the above is produced on what we now know.  We will of course be updating you with new information as we get it!

In these difficult economic times, it is important to ensure that you are not paying more tax than you need to.

I am delighted to offer you the chance to download a copy of my tax planning guide for 2021/22.

This guide suggests many ways in which you can save money on your tax bill by taking full advantage of the tax system. It highlights tax planning opportunities as well as some of the pitfalls you should avoid.

The booklet is a clear and concise guide to the taxes that you, your business and your family may pay.  I hope that it will give you practical tips on how you can save tax – or at least areas where there may be scope for action and that you will contact me for help and advice.

You can download your copy by clicking on the link below:

For most limited company directors, the optimal solution is to pay a low salary and then to pay dividends.

Why is this the case?

• If you pay yourself a salary no higher than the personal allowance, there is no personal tax to pay on it
• You should however ensure that the salary is high enough for national insurance purposes to count as a “qualifying year” – towards your state pension and other benefits
• Then pay additional amounts as dividends – as there is no national insurance payable on dividends.  Ideally keep total income under £50,270 to avoid paying higher rate tax
• The salary paid is an expense of the business and therefore reduces your profit, and your corporation tax

Obviously, every person has a different personal tax situation and this is only intended to be general guidance for salary levels. We have assumed:

• You are a UK resident
• You have no student loan
• You have no other income other than salary and dividends from your company
• You are not working inside of IR35
• You have a standard personal allowance
• Your company has sufficient post tax profits to legally pay these dividends

So what salary should you pay yourself this year?

First we need to understand the impact that National Insurance has on your salary choice, as you start paying NI at a lower level of income than you start paying income tax.

There are 3 NI thresholds to consider:

• Lower Earnings Limit – If your salary is above this limit, you’ll keep your future entitlement to state pension and benefits. However, you don’t actually pay any NI contributions. For the 2021/22 tax year the threshold is £520 per month or £6,240 per annum 
• Primary Threshold– Once you earnings start exceeding this threshold you will pay employee’s national insurance. The limits are £797 per month or £9,568 per annum for the 2021/22 tax year
• Secondary Threshold– When you earn above this threshold, your company is required to pay employer’s national insurance. The threshold for 2021/22 is £736 per month or £8,840 per annum.

Salary Option 1:

The first strategy is to pay yourself a salary up to the Employer’s National Insurance Threshold – £736 a month or £8,840 per annum. This is the most that you can pay yourself without you or your company paying any income tax or national insurance on your salary.

You can then pay dividends of £41,430 without paying any higher rate tax, and your basic rate tax bill for the year would be £2,678.

The company would save corporation tax of £1680 (19% x £8,840)

Salary Option 2:

The second strategy is to pay yourself a salary up to the Personal Allowance threshold of £12,570 or £1,047.50 per month.

This level of income is above the NIC thresholds, so you will pay employees NIC of £360 on your salary over the course of the year, resulting in net pay of £12,210.

Technically the company will also pay employers NIC, but if you have more than one employee earning over the LEL, then you can claim the NIC employment allowance. This is currently up to £4,000, and is offset against the employers NIC due, resulting in none actually being paid!

Note that a sole director cannot claim this allowance, so the company would then pay £514 in employers NIC on this salary.

If you pay a salary of £12,570, you can then pay dividends of up to £37,700 without paying higher rate tax. Your personal income tax bill would be £3,038 and the company would save £2,388 in corporation tax.

Option 1 or 2?

If you have more than one employee and can benefit from the employers NIC employment allowance, then taking the corporation tax and personal tax into account, you would be better off by £348 going with Option 2.

Option 1 would be better for a sole director.

For both these options, the company needs to have a proper payroll set up and be reporting monthly to HMRC under RTI. If you want to pay any salary at all from your company then you need to speak to an accountant to ensure this is being done properly as there are penalties for getting it wrong!

If you would like more information or help in respect of your personal position then please get in touch.

The Budget yesterday was full of announcements and there was a lot to take in.

The furlough scheme was extended and Restart Grants announced for retail businesses as well as hospitality, leisure and personal care businesses.

Although the self employed support scheme was extended to include those newly self-employed who filed a 19/20 tax return, there are still large groups of people who are not able to benefit from the scheme, and there was no help announced for limited company directors who pay themselves predominantly in dividends.

Freezing the personal allowances until 2025/26 will bring many more people into the tax paying regime over time, and more people will start to pay tax at the higher rate of 40%.

The hike in corporation tax to 25% from 1 April 2023 will hit companies with profits over £250,000.  The rate remains at 19% for small companies with profits under £50,000, and companies with profits in between the 2 thresholds will gain marginal relief so will end up with a tax rate somewhere in between 19% and 25%.

The temporary extension for loss relief may be a slightly technical point but means that for businesses that have made a loss, there is more scope to get a tax rebate on tax paid in the past.

So in conclusion – a real mixed bag!

For a detailed summary of what was announced please read my Budget report here:

Budget Summary 2021

As ever if you would like more detailed advice on any of the issues raised in the Budget then please do get in touch with Rosie Forsyth.

While the Christmas party debate rumbles on, we still want to tell our staff and clients that we are thinking of them at Christmas.  Tax shouldn’t be the main reason you chose your gift, but in these tough times, getting tax relief on the cost will help!

Your gifts will only get tax relief for your business, and you can only reclaim the VAT if the gift is:

• 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

A “conspicuous advert” means that your logo etc should be on the gift itself and not just on the packaging, which also makes it harder!

Whether you can get the tax relief or not on your Christmas gifts, why not support a local business this year that really needs your help. It has been a tough year and many local businesses rely on Xmas trade to keep them going throughout the rest of the year.  Rather than a generic voucher for someone who is hard to buy for, buy one from a local business or venue and show your support. Local facebook groups are full of small businesses advertising some lovely festive gifts.

You could also consider a donation to a local charity or business supporting those who are really going to struggle over the festive period. Charity donations through your limited company are tax efficient and another way to help those in need this Christmas.

What about the Xmas party?

If you do want to have a night out with your staff, a reminder of the tax rules surrounding Xmas parties.  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 – “plus ones” can also be invited.)  Staff means those on the payroll – freelancers, sub-contractors etc unfortunately don’t qualify!

Whatever you end up doing for Xmas with your colleagues, you’ve made it through the year – well done, and have a good break!

The “Revamped” Job Support Scheme

So here we go again – another scheme to get our heads around!

The changes announced last week are far more generous than the first Job Support Scheme, which was of little use to many of my clients.

This one – the” Job Support Scheme Open” may well be of relevance to many small businesses and works as follows:

The JSS Open Scheme

• The employee must work at least 20% of their usual hours
• For the hours not worked, the employee will still earn 67% of their normal pay – this is funded 61.67% by the government (up to a max of £1541.75 per month), and only 5% by the employer.  The max salary you can base the calculations on per month is £3125.
• The employee therefore will earn at least 73% of their normal wages (see the worked example below for the maths!!)
• Employers claiming the JSS Open may still claim for the Job Retention Bonus (the £1,000 due in February for retaining furloughed staff) and the grant claimed under the JSS Open scheme can be used to help meet the minimum wage criteria for the bones scheme

Which Employers Can Claim?

• Any employer, still trading, but continuing to face reduced demand for their services, with a PAYE scheme and a UK bank account

Which Employees Can You Claim for?

• An employee had to be on the payroll between 6 April and 31 Aug (technically the RTI had to be submitted by 23 Sept) and still employed on 23 Sept
• Employees do not need to have been furloughed before to be eligible
• Employees must be working at least 20% of their usual hours
• You must reach written agreement with your employee that they have been offered a temporary working agreement, which must cover at least 7 consecutive days

How do you claim?

Further details are to be announced soon but we do know the following:

• The scheme starts on 1 November and runs until 30 April 2021
• Money is paid in arrears once your claim has been approved
• First claims can be made from 8 December
• Your accountant can make your claim for you (“phew” I hear your cry!!)

A Worked Example

Helen works full time usually – and earns £1,000 a month.  She works 5 days per week

Under the JSS Open scheme, she agrees with her employer to work 1 day per week – this is 20% of her usual working hours.

Her pay:

Normal pay for 1 day per week – 20% x £1000 = £200

Time not worked – 80%

Of the time not worked – Helen will receive 66.67 of her normal pay – 66.67% x £800 = £533.36.

Helen’s total pay is therefore £733.36 in total – or 73% of her usual pay – for working only 20% of her usual hours!

The employer contribution is 100% for the day she worked – £200, plus 5% of the pay that she received for not working – 5% x £800 = £40.  Total cost of the employer £240.
The employer is also responsible for NI and pension contributions.

The government contribute 61.67% of the pay for the time she did not work – 61.67% x £800 = £493.36

The calculation for employees who are not on fixed salaries or fixed hours is hideous – and requires a spreadsheet setting up!

Is it for me?

The new scheme is far more generous than the one originally announced, which required employees to work 1/3 of their usual hours and for employers to cover 1/3 of their wages for the period not worked.

It is therefore well worth looking into and if you require any further information or advice in connection with the scheme, please do get in touch with Rosie Forsyth.

NB: There is also the “Job Support Scheme Closed” which is for businesses legally required to close, and is not covered in this blog.

This second blog looks at how you can close down your limited company if you have decided that trading is no longer viable.

There are 2 ways you can close your company if the company is solvent (ie is able to pay its debts).

• Applying to have the company struck off at Companies House
• Member’s Voluntary Liquidation (MVL)
  

The preferred option will depend on how much money there is to extract from the company and whether from a tax perspective you want that money taxed as dividends or capital.

Lots of jargon there to get your head around so let’s try to explain the difference.

Dividend or Capital Treatment?

When you take money out of your limited company – you pay tax on it.  You could take the money out as dividends, as you probably have done over the years you have had a limited company, and if you do this you will be taxed as normal as having received dividends from your company.  Dividends are taxed at your highest marginal tax rate, so either at 7.5% or 32.5% depending on your other income in the year.

When you close the company though – the final payment to you can be treated as you selling your shares in the company and this is the “capital” option.  This money is still taxed, but it is taxed under capital gains tax rules rather than income tax rules and you are treated as having made a capital gain on your shares. You may have bought your 100 shares in your company when you set it up for £100, and now you are selling them for £x.  The difference is a capital gain.

You may prefer to take this treatment for 2 reasons:

1. Everyone has a capital gain annual exemption (currently £12,300) so you will not pay tax on the first £12,300 of your gain. If there are 2 shareholders in the company, then each will have their own exempt amount.
2. If your gain is more than your annual exemption, it is possibly that you will only pay tax at 10% on the rest of the gain, due to another tax break called Business Asset Disposal Relief (AKA entrepreneur’s relief)

The “capital” route is often therefore the preferred option as potentially being more tax efficient.

Striking off or MVL?

So what is the difference between the 2 options and why would I choose one over the other?

Striking off is the simplest option.

However, this option is only available if:

• The company has not traded in the last 3 months
• The company has not been threatened with liquidation
• It has no formal agreements with its creditors – eg a creditors voluntary arrangement

The company will also only be able to get the “capital” treatment above, where it wants to extract funds of less than £25,000.

The striking off process itself is fairly simple – you apply to Companies House who will then publish a notice that you applied to be struck off.  After 2 months, if there have been no objections then the company will cease to exist.

You also have to inform anyone who maybe affected by the company’s closure (employees, debtors etc) within 7 days of sending the notice in.

It should also be noted that the directors can be held personally liable if they apply to strike off a company without paying off all its debts.

Members Voluntary Liquidation:

A MVL can be used where it is beneficial to have capital treatment, but you need to extract more than £25,000 on closure.

You need to appoint a formal liquidator to complete this process for you which will incur costs.  However, it may well be that the tax benefits outweigh the costs.

To complete a MVL, the directors must make a declaration of solvency, stating that the company is able to pay all its debts.

The liquidator takes control of the winding up of the company, at which point the directors cease being able to act on behalf of the company.

What if the company is Insolvent?

If the company is insolvent (eg it cannot pay all its bills) – then you cannot use the 2 options above.

You will need to appoint a liquidator to assist with closing down the company and put it into liquidation.  In this situation the interests of the creditor rank above those of the directors and shareholders – eg any money that is available will go to pay HMRC and your other creditors before repaying you any money you have put into the company.

Liquidating a company is a complex process and as such, generally is not a cheap option either, which is incredibly hard when the reason you are closing the company is that it is struggling.

It is always a good idea to take professional advice before you get to this position, who will be able to help you with any other options that may be available.

Closing a limited company is therefore more complicated and more expensive than closing a sole trader business. This blog only aims to give you an overview of the options available to you.

You need to take professional advice if you are thinking about closing your company to ensure it is done properly and in the best way to suit your individual needs.