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5 things to check before the tax year end

The tax year end is rapidly approaching so it’s a good time to check your finances and make sure you have minimised any tax liabilities.  What should you be looking at?

Here are 5 things that may apply to you to help you save some tax before 5 April.

Dividend Allowance

If you run your business through a limited company, then you can extract funds via dividends, as long as the business has the reserves to be able to do so.  The dividend allowance for 18/19 is £2,000, so you will be able to extract this amount tax-free per shareholder.

Timing of Expenses

If your company or business year end is 31 March 19, then think about expenditure around the year end.  Money spent before 31 March 19 will be included in this year’s accounts, and reduce your profit this year, whereas delaying until April 19 will move those costs into next year (generally).  If your business is on the cusp of paying higher rate tax, then bringing forward planned expenditure could be tax efficient.

Pension Contributions

Pensions remain one of the most tax efficient ways to save. You receive a 20% top-up from the government on any contributions you make personally and you also extend your basic rate band for income tax purposes. Depending on your income, this can reduce the amount of tax you pay at higher rates.

Paying a pension contribution from your limited company is also tax efficient and is an allowable deduction for corporation tax.  Speak to an IFA if you are interested in contributing to your later years!

Child Benefit

If you or your partner’s adjusted taxable income is above £50,000 then you start to lose your child benefit for the year.  This is reduced on a sliding scale up to £60,000 when it is lost in full, and if you have received it in the year it will need to be repaid.  Consider making pension contributions, or gift aid donations to reduce your adjusted taxable income, and to keep your child benefit.

Marriage Allowance

So many people who are entitled to this are still not claiming it!

The Marriage allowance lets you transfer 10% of your personal allowance to your spouse/civil partner if you have not used it.  This can save you £237 as a couple.  To qualify your spouse must be a basic rate taxpayer, and your income under £11,850.

For any more information, please contact Rosie Forsyth atWilkins & Co

 

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How to Budget for your personal tax bill

Was your tax bill in January a shock?  Were you scrabbling around to find the money to pay it – or not able to pay it all in one go?  This blog sets out how to budget for your personal tax bill so you are prepared next January.

The best way to budget is to pretend that you are employed. One of the big advantages of employment is that your income tax is taken out of your pay via PAYE before you receive it. You don’t have to worry about putting money aside, as it is done for you.

Putting a chunk of money aside each month from your self employment income is important to save for your tax bill.

The big questions is how much do you need to put aside? This will depend on your personal circumstances but there are some general steps to follow to work out how much to save:

 

1: Allocate your Personal Allowance

We all have a Personal Allowance – this is the amount we can earn before we pay income tax.  In 18/19, this amount is £11,850 and for 19/20 it will be £12,500.  If you are employed as well as being self-employed, your personal allowance is used against this income first, and anything left is used against your self-employment.  So, if you have employed income of £8,000 per year, you won’t pay tax on this, as you have used £8,000 of your personal allowance against it, leaving £3,850 this year to set against your self-employment.

If you are only self-employed, then you have the whole personal allowance to use against business profit.

 

2: Estimate your profit

You pay tax on your business profit – not your sales.  So you need to have an idea what your profit is, to be able to estimate your tax bill.  This is one of the reasons cloud-based accounting packages are useful, as you can see at any time the profitability of your business in real time.

If you not using an accounting package, then you need to estimate your profit by taking into account the costs of the business.  It doesn’t need to be 100% accurate at this stage, as you are only using it for guidance.

 

3: How much to put aside?

You have 2 amounts to pay on your profit.

  1. Income tax – currently at 20%
  2. National insurance. Being self employed you pay a flat rate of £146 for this year (class 2 NIC), but then you also pay class 4 NIC of 9% of your profit over £8060.  This often gets forgotten and can be a reason why your tax bill is higher than expected at the year end.

So in broad terms, you pay 29% in tax and NI of your business profit, after fully utilising your personal allowance.  For some, putting aside 30% of estimated profit is a good way of ensuring their tax bill is covered.

 

If this is your first year of self-employment, or you have earned more profit this year than last,  then you do need to think about payments on account of tax.

I have explained these in more detail in another blog (https://wilkinsco.co.uk/payments-account-tax) but in basic terms, self-assessment works on a system where we pay tax during the tax year on account of the current tax year.  We make payments in January and July on account of the tax year we are in.  If your first year of self-employment is coming to an end at 5 April 2019, you will calculate your profit and pay the tax due on that profit at 31 Jan 2020.

BUT at that time, you will also pay your first payment on account of your 19/20 tax bill, and that is calculated as half your tax bill for 18/19.  So at 31 Jan 2020, you have a double whammy and pay 150% of the tax you thought you were going to pay.   This is where you can be caught out if you haven’t budgeted as you go along!

 

Top Tips for Budgeting for your tax bill

  1. Get into the mind set that even though it’s in your bank account, it’s not all your money.
  2. Have a separate bank account for your every day business transactions (a good idea for SO many reasons!)
  3. Have a separate bank account where you save for your tax bill (any bank account will do)
  4. Put something aside each month – putting 25-30% aside is generally sufficient,but think about payments on account in your first year of business. Remember- putting anything aside is better than nothing!
  5. Once you have put it aside – forget about it. Don’t dip into just because it’s there – you won’t thank yourself in January!
  6. Use cloud accounting – not only will this help you estimate your tax bill, it makes your bookkeeping during the year so much easier
  7. Get your tax return done early. Doing it as soon as you can after the end of the tax year (5 April) will mean you know what you are going to owe the following January.  And your accountant will love you!

For more information, or for help with your sole trader accounts and your tax return, contact Rosie Forsyth at Wilkins & Co.

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Last Minute tax return – don’t forget to claim for working from home

One of the most common questions I get from sole traders is about allocating a cost to the business for working from home. If you are in a panic trying to get your tax return done before the end of the month, you might forget to include a cost for this in your accounts, but this would result in you paying more tax than necessary – so take 5 minutes and think about what you might be able to claim.

If you are self-employed and work at least partly from home then you are entitled to include part of the running costs of your home in your accounts.  But how much is a reasonable amount?

You have 2 options as to how to work out how much you can claim.

1  Flat Rate Method

If your sales are under the VAT threshold (currently £85,000) and you are self-employed then you can use this method. You simply work out how many hours a month you spend on average running your business from home and then include a fixed amount in your accounts, as follows:

25-50 hours: £10 per month

51-100 hours: £18 per month

101 hours or more: £26 per month

The flat rate covers the running costs of your home; you can also claim a proportion of the fixed costs and your phone/broadband as per option 2.

2  Actual Costs

 This method requires a little more effort, but it may give you a higher figure and therefore save you more tax.  Under this method, you need to apportion the running costs of your home on a “fair and reasonable” basis between those that are personal and those that relate to the business.

This is usually done by reference to the number of rooms you have in your house and the amount of time you use them for business.  There is no laid out formula though and therefore how you allocate costs will vary from business to business.  Keep any workings you have done so you can back up your figures to HMRC if necessary.

The costs you can actually claim can be spilt into fixed costs, running costs and phone/broadband.

Fixed Costs

  • Mortgage interest (not capital) or rent
  • Council tax
  • Insurance
  • Water rates

Running costs

  • Electricity
  • Gas
  • Repairs and maintenance
  • Cleaning

For example, assume you work from your sitting room 8 hours per day 4 days per week.  Your total fixed costs are £6,600 per year and your running costs £1,500.  You have 6 rooms in your house. A reasonable allocation of the fixed costs would be £6600 x 1/6 x 4/7 x 8/24 = £210.

An allocation of the running costs could be £1500 x 1/6 x 4/7 x 8/12 (as gas etc not used during the night) = £96

The phone and broadband is claimed on a usage basis only, so if you use your internet 50% business, 50% private you can claim 50% of the cost, including line rental.

If a property repair works solely to the area that you use for business, you can include the full cost in your accounts – for example, your office roof needs repairing.  If the repair is to the whole house – then claim in proportion as above.

So claiming costs of working from home is not as simple as it sounds.  The flat rate method will give you a quick answer, but the actual costs option may give you a higher figure.  If you need any further help then please contact Rosie Forsyth at Wilkins & Co.

Note – these rules only apply to the self-employed and not to owners of limited companies.

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Allowable business travel – or commuting?

There are 2 ways for the self-employed to reclaim the costs of using their own car for work – the first is to charge 45p per business mile (up to 10,000 miles) and the second is to tot up the total costs of running your car, and then allocate a percentage to the business based on business usage of your vehicle.

But which journeys can you actually claim for, especially if you work from home?

The general rules are pretty obvious.

  1. Commuting is not an allowable expense – so if you travel everyday to an office, then you cannot claim the costs of getting to work as a business cost.
  2. You can claim for business travel – so if you go from your office to see a client or perform a work task, and come back to the office – you can claim the cost of getting there and back as an expense.

But what if you do some work from home – as so many of us do?

The rules here are not so clear cut and you need to establish your “permanent place of work” or your “business base”.

If you genuinely run your business from home, then the cost of visiting clients from your home is allowable.  I have an office at home, all my files are here, and I work here every day- so for me, I can claim the cost of travelling to see a client.

My client however is a marketing consultant.  She does her admin at home, and an hour or so in the evening sometimes, but she generally works 2 days per week at one client and 2 days per week at another.  Her permanent place of work is really at those clients, not her home, even though she is self-employed, so she should not be claiming the costs of getting from home to those 2 offices.

A good rule of thumb is that if your journey is “regular and predictable”, then it’s effectively commuting, and not allowable.

If you are an “itinerant” trader, and your base of operations is at home, then you can claim the costs of travel between home and the places you work.  This is someone who travels to a number of different locations for the purely temporary purpose of completing a job there – such as a mobile hairdresser, or a plumber.   The fact they go to different places every day make the costs business travel.  However, if the plumber rented a separate business premises and went there first every morning to pick up tools and print out his schedule for the day, this first cost would become commuting and should not be claimed.

So you need to think about where you genuinely run your business from, and if this is not at home, then be careful about the amount of travel you are treating as allowable in your business.

For more information contact Rosie Forsyth at Wilkins & Co

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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 – “plus ones” can also be invited)

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 ( and your plus one) to a Xmas do.

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

 

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Christmas Giving

‘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 for a piss up, 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 for you and a bottle of cheap plonk.

 

Have a good one!

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Do I need to keep petrol receipts as a sole trader?

Petrol receipts are notorious for getting lost on the floor of the car, at the bottom of your bag or anywhere other than in your filing system!  But do you actually need to keep them if you use your car for business?

Like working from home, there are 2 main methods of claiming motor expenses – one more complicated than the other.

 

The Mileage Method (simple!)

This is simple to work out and generally used if you are not doing lots of business mileage in your car.  If you use the family car occasionally for work, then this method would be the one for you to use.

You simply keep a record of the number of business miles you do and then calculate a flat rate of 45p per mile (for the first 10,000 miles) and then 25p per mile on anything over this.

You then do not charge the business for any other car related costs such as insurance, servicing, petrol etc.  These should all be paid for privately, and therefore you don’t need to keep the petrol receipts.  The actual cost of buying the car is not separately reflected in your accounts either under this method.

You can claim for extra journey costs such as parking, congestion charge and toll roads in addition to the 45p per mile.

Obviously you need good record keeping for this method – most people keep a note in their diary or in a notebook in the car of business miles done.

You can only use this method if your turnover is below the VAT registration threshold (currently £83,000) and once you have started using it, you can only change methods if you change your car – you can’t chop and change methods each year.

The Actual Cost Method

This is more complicated to work out, but generally beneficial is you use your car predominantly for work, with little private usage – or you have high repair bills!

Under this method, the business pays for all your motor costs.  You can include fuel, repairs, MOT, servicing, insurance, tax and breakdown cover, and therefore you do need receipts to back up your expenditure.  You then work out the percentage of your costs that relates to private use and disallow the private element in your accounts.  So if you use your car 80% for business, and 20% privately, then the business can pay for 80% of the cost.  In reality, what usually happens is you pay for all the costs from the business and then your accountant will make the adjustment in your accounts at the year end to reflect the private usage of the car.

You will need to keep records to be able to estimate the percentages – HMRC would really like to see records for about 3 months to give you an idea of the business usage.

The cost of the car can also recorded in the accounts under the actual cost method, and tax relief given via capital allowances but that’s for another blog!!

Under both methods, parking, speeding fines and driving awareness courses are never a business expense so don’t try to claim them!!

If you have any queries, then please contact Rosie Forsyth at Wilkins & Co.

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What can I claim for working from home?

If you are self-employed and work at least partly from home then you are entitled to include part of the running costs of your home in your accounts.  But how much?

You have 2 options as to how to work out how much you can claim.

  1. Flat Rate Method

    If your sales are under the VAT threshold (currently £83,000) and you are self-employed then you can use this method. You simply work out how many hours a month you spend on average running your business from home and then include a fixed amount in your accounts, as follows:

25-50 hours: £10 per month

51-100 hours: £18 per month

101 hours or more: £26 per month

The flat rate covers the running costs of your home; you can also claim a proportion of the fixed costs and your phone/broadband as per option 2.

 

  1. Actual Costs

This method requires a little more effort, but it may give you a higher figure and therefore save you more tax.  Under this method, you need to apportion the running costs of your home on a “fair and reasonable” basis between those that are personal and those that relate to the business.

This is usually done by reference to the number of rooms you have in your house and the amount of time you use them for business.  There is no laid out formula though and therefore how you allocate costs will vary from business to business.  Keep any workings you have done so you can back up your figures to HMRC if necessary.

The costs you can actually claim can be spilt into fixed costs, running costs and phone/broadband.

Fixed Costs

  • Mortgage interest (not capital) or rent
  • Council tax
  • Insurance
  • Water rates

Running costs

  • Electricity
  • Gas
  • Repairs and maintenance
  • Cleaning

For example, assume you work from your sitting room 8 hours per day 4 days per week.  Your total fixed costs are £6,600 per year and your running costs £1,500.  You have 6 rooms in your house. A reasonable allocation of the fixed costs would be £6600 x 1/6 x 4/7 x 8/24 = £210.

An allocation of the running costs could be £1500 x 1/6 x 4/7 x 8/12 (as gas etc not used during the night) = £96

The phone and broadband is claimed on a usage basis only, so if you use your internet 50% business, 50% private you can claim 50% of the cost, including line rental.

If a property repair works solely to the area that you use for business, you can include the full cost in your accounts – for example, your office roof needs repairing.  If the repair is to the whole house – then claim in proportion as above.

So claiming costs of working from home is not as simple as it sounds.  The flat rate method will give you a quick answer, but the actual costs option may give you a higher figure.  If you need any further help then please contact Rosie Forsyth at Wilkins & Co.

Note – these rules only apply to the self-employed and not to owners of limited companies.

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Staff perks – new rules mean you should be treating your staff more often!

How often do you treat your staff?

Being a lovely employer and giving your staff little treats before April 16 often ended up with accountants telling you that your gift has landed your staff an unwanted tax charge.

From April 16 there is a new exemption which everyone should be taking advantage of!

The exemption covers “trivial benefits”.

At its most simple, the new rules state that gifts to employees, their family or household members by their employer are not taxable so long as:

  • The cost is under £50
  • The benefit is not cash or a cash voucher
  • The benefit is not contractual or habitual (ie done every month)
  • The benefit is not linked to performance or in recognition of a particular service provided by the employee, so no bottles of champagne for reaching a target or clinching a deal

There is no limit to the number of gifts that can be given to staff members in a year – but if the cost of a gift is over £50, the whole lot is taxable not just the excess.

That sounds great – but before you get carried away – there is a limit imposed on close companies (that is a company controlled by less than 5 people – so in reality – most family companies.)   For these companies there is an annual cap of £300 per director, which is still generous.  Gifts to any family member, who is not themselves an employee would be included in the director’s limit.

There are lots of examples provided by HMRC as to what qualifies – but things such as birthday presents, flowers on special occasions, Xmas gifts for staff, theatre tickets, would all potentially qualify.  So up to the limit, for family companies, these should all be going through the company from now on!

You do need to note that the exemption is only on the tax the employee would have suffered – there is no change to the tax in the company.  For example if you pay for a birthday meal out – it may still count as entertaining which would not be allowable for corporation tax in the company.

So what are you waiting for – go ahead and treat your staff (and directors) every now and again!

Im off to enjoy the chilled bottle of wine the company has just very kindly treated me to – what a lovely employer I have!!

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Working from home – how much can you claim from your business?

If you are self-employed and work at least partly from home then you are entitled to include part of the running costs of your home in your accounts.  But how much?

You have 2 options as to how to work out how much you can claim.

  1. Flat Rate Method

    If your sales are under the VAT threshold (currently £83,000) and you are self-employed then you can use this method. You simply work out how many hours a month you spend on average running your business from home and then include a fixed amount in your accounts, as follows:

25-50 hours: £10 per month

51-100 hours: £18 per month

101 hours or more: £26 per month

The flat rate covers the running costs of your home; you can also claim a proportion of the fixed costs and your phone/broadband as per option 2.

 

  1. Actual Costs

This method requires a little more effort, but it may give you a higher figure and therefore save you more tax.  Under this method, you need to apportion the running costs of your home on a “fair and reasonable” basis between those that are personal and those that relate to the business.

This is usually done by reference to the number of rooms you have in your house and the amount of time you use them for business.  There is no laid out formula though and therefore how you allocate costs will vary from business to business.  Keep any workings you have done so you can back up your figures to HMRC if necessary.

The costs you can actually claim can be spilt into fixed costs, running costs and phone/broadband.

Fixed Costs

Mortgage interest (not capital) or rent

Council tax

Insurance

Water rates

Running costs

 

Electricity

Gas

Repairs and maintenance

Cleaning
For example, assume you work from your sitting room 8 hours per day 4 days per week.  Your total fixed costs are £6,600 per year and your running costs £1,500.  You have 6 rooms in your house. A reasonable allocation of the fixed costs would be £6600 x 1/6 x 4/7 x 8/24 = £210.

An allocation of the running costs could be £1500 x 1/6 x 4/7 x 8/12 (as gas etc not used during the night) = £96

The phone and broadband is claimed on a usage basis only, so if you use your internet 50% business, 50% private you can claim 50% of the cost, including line rental.

If a property repair works solely to the area that you use for business, you can include the full cost in your accounts – for example, your office roof needs repairing.  If the repair is to the whole house – then claim in proportion as above.

So claiming costs of working from home is not as simple as it sounds.  The flat rate method will give you a quick answer, but the actual costs option may give you a higher figure.  If you need any further help then please contact Rosie Forsyth at Wilkins & Co.

Note – these rules only apply to the self-employed and not to owners of limited companies.

Read more