Skip to main content Skip to search

Archives for Advice

The National Insurance increase – how will it affect you?

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!

 

Read more

Self-employed or landlord with gross income over £10k? Are you ready for what lies ahead?

If you are self-employed or a landlord with gross income over £10k, then the way you report your results to HMRC is signifcantly changing from April 23.

This seems ages away but it is something that you need to be aware of, and need to plan for.

Making Tax Digital for Income Tax will apply from 6 April 2023 and under this, the self-assessment tax return will be replaced by 5 (yes 5!) new reports a year.  You will need to submit quarterly updates of your income to HMRC and then a final year end declaration.

Your first return is due in the 4th month of your accounting period and then every 3 months after that.

So if you have a 5 April year end you will have to file the following:

Return to 5 July 23 – due in Aug 23

Return to 5 Oct 23 – due in Nov 23

Return to 5 Jan 24– due Feb 24

Return to 5 April 24– due May 24

Final year end return, including any year-end adjustments to 5 April 24– due 31 Jan 25

And don’t forget – your tax return under the old system for 22/23 will also be due by 31 Jan 24!

To submit the information you will either need to use MTD compliant accounting software, or have a decent spreadsheet set up that you can link to bridging software to enable you to submit.

Initially your tax is still only due to be paid in one go, in January, as now – though the logical next step is for tax payments to be made throughout the year based on the information being supplied!

The one bit of good news is that there won’t be any late filing penalties for the first year – while we all get used to the new system!!

So without totally panicking – what can you do now?

  • Work out if this will apply to you.  Do you have gross income (not profit) from your self employment, or rental income of over £10K.  If you have both, you need to look at the combined total ( eg self employment income of £6k and rental income of £6k – total £12k) to see if you are caught.
  • Review your accounting system and consider making any required changes from the start of the next tax year (6 April 22.) This will give you a year to work out how to use it properly and be confident in your bookkeeping before all the changes come in the year after.
  • If you are using a spreadsheet, give serious consideration to using an online accounting package. All of the main suppliers have basic packages and will be working hard to ensure they are MTD compliant by April 23.
  • Don’t panic! The changes are still some way off, and there is time to plan.  At least having an awareness of what lies ahead means you can plan effectively for the changes and ensure your business is ready to meet the challenge.

There will be lots more information coming out about MTD in the next year, and there is still lots to be confirmed about the new regime.  We will keep you updated with information as it becomes available.

Read more

Taxes Made Easy Guide 21/22- your essential Summer reading!

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:

Read more

What should you do if you’ve claimed a SEISS grant and you’re not sure you should have?

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.

Read more

What tax do I pay if I am self-employed?

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 4th 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.

Read more

What salary should a director have in 2021-22 to be tax efficient?

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.

Read more

Tax year end – use or lose your allowances!

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

Read more

The 4th SEISS grant – look out for pre-verification checks

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

The 4th 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.

Read more

The Budget 2021

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.

Read more

5 ways to make your bookkeeping easier

The new tax year starts soon and although keeping your accounts in order may not be your favourite job, it needs to be done.  So what can you do next year to make your job easier?

Here are my top tips to help with your bookkeeping:

  1. Use accounting software – unless you only have a handful of transactions a month, I would recommend investing in some kind of software.  There are so many online options available, some of which are free (but these may have limited functionality) but otherwise costs start from around £10 per month.  The time and stress saved by using an online package such as Xero or Freeagent will be well worth the money!
  2. Open a separate bank account for your business – although strictly only necessary for a limited company, having a bank account which you only use for your business will make your record keeping so much easier!  For a sole trader, just open another account in your name and only use it for your business.  Having business and personal transactions all mixed up together in one account will mean your accounts take much longer to sort out, and you may miss some transactions from your records.  Missing costs from your accounts results in a higher tax bill.
  3. Transfer money out of your business account for personal use once a month – although it is not treated in your accounts as a salary – think of it like one.  An employer does not pay you 2 or 3 times a week or “sub” you for your weekly shop, so don’t keep dipping into your business bank account to pay for small personal items.
  4. Keep a separate spreadsheet during the year of other costs that you incur partly for your business, but that are paid from a different bank account.  This could be, for example, because you already have the DD set up there such as your mobile phone bill, internet costs or annual subscriptions, possibly even your Amazon purchases.  I spend a lot of time asking clients what amounts paid to Amazon relate to, and whether they are for business and personal expenditure!
  5. Update your records regularly!  Book out 30 minutes a week in your diary to send your invoices out, chase payments, reconcile your bank account in your online accounting package, or update your manual spreadsheet.  It’s like many things – little and often pays off!!
    .

    Treat yourself to coffee and cake either while you do it, or once it’s done  – and you never know you may start looking forward to your weekly accounts session!

    For help with setting up an accounting system that works for you, contact Rosie Forsyth at Wilkins & Co.

 

 

Read more