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:

Unsurprisingly, HMRC has announced how they will be cracking down on incorrect self-employed Covid grant claims. Due to the speed and urgency that claims were made and issued, there are likely to be a number of innocently miscalculated grants.  Claims were made by individuals, often without any involvement from their accountants, or with little up to date financial information.

HMRC is requesting that businesses double-check their calculations and repay HMRC within 90 days of receiving any grants if they were claimed in error.  Keeping a grant that you knew at the time you should not have had, could result in a 100% penalty (ie repaying the full grant – and the same again in fines!)  However, if when you do your 20-21 tax return you then determine that you were not eligible for a grant, as long as the amount is repaid by 31 Jan 2022, no penalty should be due.

If you are self employed, then by now you could potentially have claimed 4 SEISS grants.  The amounts you received have to be separately identified on your tax return, and are included in the tax year in which the grant was received.

To claim the first 2 grants your business had to have been “adversely affected” by Covid in the relevant period.

It may be the case that your business was adversely affected earlier on, but then your trading patterns resumed as normal, so although you claimed the first or second grant you might not have been eligible for the third or fourth grant.

The third grant covered the period 1 November 2020 to 29 January 2021 and for this grant the conditions were different.

To qualify, your business had to have suffered reduced activity, capacity or demand AND as a result, you must have reasonably believed that you would have suffered a “significant reduction” in trading profits for the relevant basis period (this is generally your full financial year, not just this 3 month period.)

There was no requirement for trading profits to be reduced by a certain fixed amount or percentage, but the reduction must be ‘significant’. HMRC say you need to consider your individual and wider business circumstances to determine what is significant!

The conditions for the fourth grant are the same, but cover the period 1 February to 30 April 2021.

So if claimed a grant and then on review, you don’t think you should have – what should you do?

You need to let HMRC know and repay the grant within 90 days of receiving it.  You can do this online.

If you do not do this and you knew that you should have not received the grant at the time of receipt, then HMRC may charge you a penalty, potentially of 100% of the grant received.  However, if you did not realise until later that you should not have received the grant, as long as the grant is repaid by 31 Jan 2022, there should be no additionally penalty incurred.

In any situation it is always better to tell HMRC that you have made an error and the grant needs to be repaid, than let HMRC discover that you were not eligible and raise the assessment themselves.  In this situation, penalties will almost certainly be higher.  Find out more about potential penalties here.

For more information, please contact Rosie Forsyth at Wilkins & Co.

Tax doesn’t have to be taxing – remember HMRC telling you that?

That’s all well and good if you know what you are doing, but tax is pretty daunting when you are setting up on your own or running a small business and would much rather just be getting on with running your business!

However, you do need to at least have an understanding of what tax you will pay and when, so it doesn’t come as a total surprise when you or your accountant come to submit your tax return.

As a self employed person operating as a sole trader then you have to think about both income tax and National Insurance (NIC).

Most people know they have to pay tax at 20% (of something!)  but often the NIC comes as a bit of a shock when they realize this is due as well.

So what is due when you are self-employed?

Income Tax

Income tax is due at 20% of your profit for the year.  Profit is essentially your sales less your costs.  Everyone has a personal allowance of £12,570 in this tax year, so you will not pay tax on the first £12,570 of your income, but after that you pay tax at 20%, up to the basic rate tax threshold (this year £50,270.)  If your income goes over this amount, then your income tax rate goes up to 40%.

National Insurance

Being self employed you pay 2 types of NIC – class 2 and class 4.

Class 2 is a flat rate per week of £3.05 per week (£158.60 per year.)  Although this is calculated as a weekly amount, it is actually paid once a year along with your self-assessment tax bill.  Class 2 NIC gives you an entitlement to state benefits and a state pension when you retire.

If your profits are low (under £6,515 this year), you are exempt from paying class 2 NIC, but you have the option to pay it voluntarily.  This is often a good idea to do, given the entitlement to benefits that it gives you, for a relatively low cost.

Class 4 NIC is based on your profits for the year.  The rate is 9% and you pay this on your profits over £9,569 and up to £50,270.  If your profits are more than this, the rate then falls to 2% on the higher profits.

Class 4 NIC is the one that tends to be forgotten, but at 9% of profit, it can add up.  You could be in a position where you have class 4 NIC due, but not any income tax, if your profits are between £9,569 and £12,500)

SEISS Grants

Just a reminder as well that any SEISS grants received are taxable, and NICable (love that word!) and do need to be included on your tax returns.  The grants are taxable when they are received, so the 4^th grant due to be paid shortly will go on your 21/22 tax return, even though it related to Feb, March and April 21 (most of which is in the 20/21 tax year!)

There is a separate box on your tax return for 20/21 where you put the details of any SEISS grants received – presumably making it easier for HMRC to check your entitlement to it in the first place!

If you would like any further information or help with your tax return for 20/21, then please get in touch with Rosie Forsyth.

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.

Just a couple of weeks to go before we say goodbye to the 20/21 tax year.  Many allowances will roll over on 6 April 2021 and if you have not used them in this tax year, the opportunity will be lost.  Noted below are some of the key areas for you to review to ensure you have been tax efficient in the year. Taking action now will allow you to take advantage of any exemptions, remaining reliefs and allowances before they are lost for the year.

Income tax

Ensure if possible you have sufficient income to use your personal allowance. The allowance is £12,500 for 2020/21. If a family member has unused allowance consider if there are ways for this to be utilised.

If you have a limited company, ensure the £2,000 tax free dividend allowance has been utilised – assuming you have sufficient distributable profits to be able to declare a dividend.  Also remember that dividends are paid “per share” so have to be paid to everyone holding that class of share in accordance with their shareholding.

For married couples/civil partners that are eligible for the Married Couples Allowance, ensure this has been claimed.  If one partner has not used all their personal allowance, and the other is a basic rate taxpayer, then up to £1,250 of the personal allowance can be transferred, saving £250 as a couple.  This can also be backdated to tax years since 5 April 2016 if not claimed previously. The claim is simple and can be done here .

Consider ways to reduce your taxable income if you are within the £100,000 to £125,000 group to prevent a 60% effective charge. Pension contributions and charitable donations are two ways you can reduce your taxable income.

If your income will be over £50,000 also consider ways to reduce this if you have children and are claiming child benefit.  This is clawed back if the higher earning partner’s income is over £50,000, on a sliding scale, and all has to be paid back if your income is over £60,000 in a tax year.

Annual ISA subscriptions should be maximised. The limit for 2020/21 remains at £20,000. The investment return from ISAs is free from income tax and capital gains tax. Talk to an IFA to get advice on utilising your ISA allowance.

Pensions 

Most individuals can make contributions of up to 100% of their earnings, capped at £40,000 each tax year. Pension contributions are tax effective as tax relief is given at source for a personal contribution, but the contribution needs to be made before the end of the tax year for it to qualify.  Very high earners may be limited on the amount they can contribute and need to take individual advice.

If you do not use all your allowance in one year, you can carry it forward for up to three years. Any unused allowance for 2017/18 will be lost after 5 April 2021.

Even if you have no income, you can still make a net pension contribution of up to £2,880 and the government will add £720 basic rate tax relief, which can be a significant benefit.

Again take advice from an IFA as to your personal pension situation.

Inheritance Tax

Everyone has a £3,000 annual exemption to use each year. This is the amount individuals can give away without any inheritance tax implications.  Any unused exemption can be carried forward for one tax year only. This may be of use to the older generation wanting to help their families in these difficult times.

Small gifts of up to £250 made to an individual are also exempt each tax year.

If you would like any advice about your personal tax position then please do get in touch with Rosie Forsyth@wilkinsco.co.uk

The Budget announced that there would be 4^th and 5^th grants available to help the self-employed that have been impacted by Covid.

The 4^th grant enables the newly self-employed to potentially claim the grant, as long as they had filed their 19/20 tax return by 2 March 2021.

Other than this the criteria remains the same as for the previous grants:

• You must have traded in 19/20 and 20/21 and intend to continue to trade. You cannot claim if you plan to close your business
• Your business must have suffered “a significant reduction in profits” in this claim period ( February to April 2021) and you need to make a declaration that this is the case.
• More than 50% of your income must come from self employment
• Average trading profit must be under £50,000
  For these 2 criteria, HMRC will look at your 19/20 return first to see if you qualify. If you don’t meet the criteria in this year, then they will look back at your average income from 16/17 – 19/20 to see if you then qualify

To make the declaration that your business has suffered, you need to be able to prove that you have had a significant reduction in profit in this claim period due to:

1. Reduced demand, activity or capacity – this could be fewer customers or activity due to covid restrictions, contracts being cancelled or a supply chain shortage
   or
2. Being unable to trade – either because you have had to close due to lockdown, have tested positive and been unable to work, or parental responsibilities have meant that you could not work

You are not able to claim it if the only reason your profits have fallen is due to increased costs ( eg additional PPE costs) – you need to be able to show that one of the two reasons above apply as well – and keep evidence of the fact.

The fall in profit must been in this claim period – if your business suffered last year but has not been impacted in this 3 month time frame then you can’t claim this time round.

As usual HMRC will contact you if they believe you may be able to claim -applications cannot be made until late April which has annoyed many, but as HMRC are including the 19/20 tax return info this time, they do need time to process the information they have been sent.

Pre-Verification Checks for the Newly -self employed:

This time, to protect the scheme from fraud, HMRC are writing to some taxpayers who became newly self-employed in 2019/20, asking them to complete pre-verification checks.

This will be a letter from HMRC, notifying you that HMRC will be calling you within 10 working days.  On that call HMRC will ask you to provide an email address and for you to agree to them sending you a link to a secure dropbox.  You then have 2 days to upload ID and 3 months worth of bank statements to confirm your business activities.  You need to be quick – the link will expire after 2 days.

They will try 3 times to call you, and then send a further letter if they cannot contact you.

If you receive the letter but do not complete the checks, you won’t be able to claim the grant!

You must therefore make sure that HMRC have the right phone number for you, and not just your agent’s number!  If you think this may need updating, contact HMRC on 0800 024 1222 ( this number is just for updating phone numbers!)

There is obvious concern that people may think this call is a scam, especially if the letter forewarning you of the call has been delayed in the post.  If you need to call HMRC only use the official numbers listed on their website, and take the necessary precautions about giving out any personal information over the phone.

For any further information then please get in touch with Rosie Forsyth.

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.

So here we go again.

News of the latest lockdown will only have increased people’s money worries.

Self-assessment tax bills are due at the end of the month, and although in an ideal world, you have put the money to one side for this- as we know, we are in far from an ideal world at the moment.

In addition to the January 2021 normal payment, many people deferred their July 2020 payment so this is also now falling due to be paid.

So what can you do if you are concerned about paying your tax bill by the end of the month?

1. Review your payments on account.

   Payments on account are payments due at 31 Jan 21 and 31 July 21 on account of your 20/21 tax bill, and are automatically calculated at 50% of your 19/20 tax, based on the assumption that your profit for 2021 will be similar.

   Obviously the period since April 2020 has been a very different year for many businesses, and profits may well be much lower. It could therefore be possible to reduce your payment on accounts and base them on these lower figures.

   If you can provide your accountant with an estimate of your figures for the current tax year, they will be able to advise if you can reduce your payment on account and ask HMRC to do this for you.  If you do your own tax return, you can ask HMRC to reduce your payment on account by logging into your online account.

   You do need to include any SEISS income received when reviewing your 20/21 income levels, as this income is fully taxable.

2. Set up a payment plan with HMRC
   
   Self-employed taxpayers can apply to pay their tax bill in instalments. HMRC are allowing you to pay your January bill over 12 months using the Time to Pay service. This can be set up online without the need to speak to HMRC.

   You need to have submitted your tax return for year before you apply, and have no other outstanding returns, tax debts or payment plans in place with HMRC.Your debt needs to be under £30,000 and you can decide how much you want to pay now and how much you want to spread over the year.  HMRC will still add interest to the amount outstanding but this does allow to manage your cashflow over the next 12 months.

   Click here to set up your time to pay.

If you don’t agree time to pay arrangements with HMRC and fail to pay your tax on time, interest and penalties will be charged.

The first penalty is 5% of the tax due is your payment is more than 30 days late, with a further 5% if the tax is still not paid after 6 months.  HMRC have not waived penalties due to COVID-19 or provided any extension to the filing deadline as yet.

Whatever you do, don’t bury your head in the sand and do nothing.  As long as your return is filed, setting up a payment plan is simple and will enable you to manage your finances over the next 12 months.

For more information please contact rosieforsyth@wilkinsco.co.uk

The 3rd grant for the self-employed covers the 3 months from 1 November 20 to 31 January 2021.

Originally this was to be 20% of average profits, then it was increased to 40% in early October and now to assist with lockdown, it will be 80% for November, and then 40% for December and January  – this gives you the average of 55% for the 3 months being mentioned in the press.

The grant will be paid out in a single instalment and is capped at a maximum amount of £5,160.

The claim date has been brought forward to 30 November from the middle of December, so money will be paid out sooner than originally planned.  As before HMRC will contact you if they believe you may be eligible to claim.

The criteria for claiming has not changed from that set out for the first 2 grants – so if you were not eligible then, then unfortunately you will still not be able to claim this time.

For this grant you must also declare that you intend to continue to trade and either:

• you are currently actively trading but are impacted by reduced demand due to coronavirus
• you were previously trading but are temporarily unable to do so due to coronavirus

For previous grants the criteria was that you had to have been “adversely impacted” by the virus, so the change of words is interesting!

The 4th, and final grant (at the moment) will cover the period 1 Feb 21 to 30 April 21 and the level of this will be announced nearer the time.

For those who can claim, this is obviously positive news; but for those that missed out last time, either for being newly self employed, or for having other sources of income, they will still feel that they have been overlooked by the government.

The headlines last week were all about the Job Support Scheme that is replacing the furlough scheme, but an extension to the grant scheme for the self employed was also announced, along with a couple of other changes to help businesses.

What new help was announced?

The self-employed have been able to claim 2 payments from the Government so far.

This new extension provides for 2 more claims to be made, each covering a 3 month period, and in total covering November 2020 to April 2021.

The criteria is the same as before, which is disappointing for those who did not qualify previously, as they still do not qualify.  You do not however have to made a claim before to be able to make a claim this time.

You will have to declare that you are currently trading, and that you intend to continue to trade, and also that your business has suffered as a result of Covid-19 in this claim period.

The support offered this time is also significantly reduced, in line with the support being offered to employees and in line with the stated aim of only supporting viable businesses during the Winter months.

The first grant will be paid in a single instalment and will be up to 20% of average trading profits, capped at £1,875.  This will cover November to January.  No details have yet been announced as to the level of the second grant.

What other help was announced?

The self-employed and others who submit self-assessment tax returns had already been given more time to pay taxes due, with the amount that was due by 31 July 2020 deferred until 31 January 2021.

Now the Government has extended that further and will allow the amount due in January 2021 to be paid over 12 months, (including the amount already deferred from June 2020,) meaning the bill won’t be paid in full until January 2022.

A similar scheme has been set up for VAT.  Businesses were able to defer vat due between March and June 2020 until March 2021.  They may now opt-in to a scheme which allows this bill to be paid in smaller amounts up the end of March 2022 interest free.

If you would like any more information or assistance with submitting your tax return before the deadline, then do get in touch with Rosie Forsyth at Wilkins & Co.