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Tax efficient pay for directors 2019-20

The personal allowance for 2019/20 has increased to £12,500 and the basic rate threshold to £50,000.  This means you start paying higher rate tax only on income up over £50,000.

The dividend allowance remains at £2,000.

So for a limited company director, what is the most tax efficient pay strategy this year and why?

Most owner managed businesses take a low salary and a higher dividend to be tax efficient.  Why is this the case?  (Prepare for some number crunching!)

  • You take a salary from the company because this triggers a national insurance record for your state pension. To trigger this for the year, you need to pay yourself a minimum of £6,136 in salary.  You can pay up to £8,632 and still pay no NI for the year
  • Your company can claim the cost of your salary when it calculates its corporation tax.  As a result it will save corporation tax at 19% on any salary taken.
  • You take any further money from the company as dividends.  Dividends are paid out of post tax profits from the company so you don’t save corporation tax on this payment. But NI is not paid on dividends and the rate of personal tax you pay on dividends is only 7.5% up to the £50k basic rate threshold.

So what amounts should you pay yourself to minimise your tax liabilities?

There are 2 options:

1. Paying a basic salary at the NI threshold.

This option is simplest and means you pay no NI for the year (but it does still count as a qualifying year for your state pension)

  • Basic pay of £8,632 per year – or £719.33 per month.
  • You then utilise the rest of your personal allowance and pay this in dividends ( £12500-£8632) = £3868
  • You then utilise all your basic rate band and pay this in dividends – £37500
  • Total dividends for the year are therefore £41,368.
  • At this level, you will not pay any higher rate tax on your dividends. You will pay personal tax of £2,663 on these dividends which you will pay via self assessment.  (7.5% x (41,368-3,868-2,000) for those who like the maths!!)
  • The company will save corporation tax on the salary paid of £1,640.

Note that you will need to set up a payroll for the company and file RTI returns paying this salary, and you will need to file a personal tax return.

2. Paying salary up the personal allowance threshold

This is more tax effective if you have more than one person on the payroll and can claim the NIC Employment Allowance. If you are a sole director, you cannot claim this and should stick to option 1.

  • Basic pay of £12,500 per year – or £1041.66 per month.
  • You then utilise all your basic rate band and pay this in dividends – £37500
  • Total dividends for the year are therefore £37,500.
  • At this level, as before you will pay personal tax of £2663 on these dividends
  • However, you also pay employees NIC of £464 on your salary. This is deducted at source when you run the payroll and the company will pay it over to HMRC for you.  Your net pay in the months when NIC is due will therefore be lower.
  • The company will save corporation tax on the higher salary paid of £2,375.

So which option?

Keeping it simple or for sole directors with no-one else on the payroll – option 1.  There is no NI to pay and you have a fixed salary each month of the year.

If you have more than one person on the payroll, can benefit from the Employers Allowance, and will remember to pay over the NIC when it is due, then option 2 will save you £271 overall in tax for the year and is therefore more tax-efficient.

Do remember that to pay these salaries from your limited company, you need to have an official payroll set up with HMRC and to file RTI returns.  The above illustrations are also for general guidance only, and are based on a UK taxpayer with no other income for the year. For help with this, or further advice on tax efficient pay, please contact Rosie Forsyth of Wilkins & Co

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Not Claiming Child Benefit could affect your State Pension

Back in 2013 the rules around child benefit changed, so that if one partner earns more than £60k then child benefit is not due – and if it has been claimed, it has to be repaid.  Often this means the mother claims it, and the father has to repay it!!

As a result, many couples who know their income is above this level, see this as a waste of time, and don’t bother to register for child benefit on the birth of their child.

But claiming child benefit, whether it is actually paid or not, is important as it ensures that the claimant (usually the mother) receives a National Insurance Credit for the year.

Why does this matter?

To get the full state pension, you need to have paid NIC or have received NIC credits for 35 years.  To get any state pension at all, you need to have a payment record for 10 years.  The NIC credits you receive while you stay at home to bring up your children, are therefore important in building up your NI record.

It is possible to claim child benefit, but then to elect for it not to be actually paid to you, and this gets round the hassle of having it paid to you, only to have to pay it back again via self-assessment.

New child benefit claims can only be backdated 3 months, so if you do realise you have a gap in your NI record, it can’t be corrected retrospectively.

Once registered though, if your income for a previous year changes, (eg if you are self-employed and you have a loss one year, this can be carried back to the year before and reduce your income for the previous year) this may mean that you would then qualify for child benefit that year.  As long as you are registered, it would then be paid to you.  If you had never registered, this would not be possible.

It’s really important to check your NIC record with HMRC – not only to see how many qualifying years you have, but also because HMRC very often get it wrong and you need to correct it.  To check your record, you need to set up and log on to your Personal Tax Account – https://www.gov.uk/personal-tax-account

So if you are in a position where either you or your partner earn over £60k, you should still register for child benefit, even if you then opt not to actually receive it, and protect your entitlement to a state pension!

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

 

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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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If I hide – do I still need to file a tax return?

Do you need to file a tax return this year?

The tax year runs from 6 April to 5 April, and tax returns for last year (that’s 6 April 2017 to 5 April 2018) are due to be filed by 31 January 2019.

If you meet any of the following criteria – then YES you do need to file a tax return.

  • You were self-employed at any point between 6 April 2017 and 5 April 2018 and your income from this was more than £1,000
  • you received more than £2,500 from renting out property
  • you received more than £2,500 in other untaxed income, for example from tips or commission
  • your income from savings or investments was £10,000 or more before tax
  • your income from dividends from shares was over £2,000
  • you made profits from selling assets eg shares or a second home
  • you were a company director and received income that needs to be declared
  • your income (or your partner’s) was over £50,000 and one of you claimed child benefit
  • your taxable income was over £100,000

You also need to send a tax return if you:

  • need to prove you’re self-employed, for example to claim Tax-Free Childcare or claim Maternity Allowance
  • want to make voluntary Class 2 National Insurance payments to help you qualify for state benefits

To file a tax return, you need to have first registered with HMRC.  You should have done this by 5 October 2018, but if you haven’t, then you need to get on with this ASAP, by following the link here if you are self-employed:

https://www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-self-employed

HMRC will then send you your UTR (unique taxpayer reference) number.  Without this, your tax return cannot be filed, either by yourself or by an accountant.  The reference can take a few weeks to come through, so do not leave this until January!!

If you are going to file your tax return yourself, you will need your government gateway ID and password.  If you are using an accountant, they can generally file your return using their own software and government gateway log-ins, but will also need time to set themselves up as your agent.

It is your responsibility to let HMRC know if you have to file a return – so if you have a new source of income in the year, or a one-off capital gain (eg if you have sold a rental property) then don’t wait for HMRC to ask for the information!

Penalties for late filing are an automatic £100.  Even if there is not any tax actually due, if you are required for file a return, and this is not with HMRC by midnight on 31 Jan- you will get a fine!

The tax is also due to be paid by 31 January.  When you file your return, you will get a calculation of the tax due as part of the submission process, or your accountant will tell you when they send you your return for approval and signing, so the sooner you do this – the sooner you will know the amount you have to pay.

For any more information, or help with your personal tax return, please contact Rosie Forsyth at Wilkins & Co

 

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My Payment on Account is due – what is it?

Statements are arriving in the post and payments on account of 18/19 tax are due at 31 July.  What are they and how are they calculated?

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

An example is the easiest way to explain the calculation:

You started your business in May 2016, prepared your accounts and calculated your tax bill for 16/17 to be £3,000. This was due for payment at 31 Jan 2018.  But you also had to pay a payment on account of your next year’s (17/18) tax bill – and this was automatically calculated at 50% of the previous year – so £1,500.  So actually at 31 Jan 18 you had to pay £4500.  You may have just paid this at the time, thought it was a lot, but not really grasped what it was for.

The second payment on account for 17/18 is due by the end of July and again is 50% of last year’s bill – so another £,1500.

So by now – you have paid £3,000 on account of your 17/18 tax bill – even though, if you have not yet filed your tax return, you don’t actually know how much your final bill will be.

If your profits in Year 2 have gone up – and when you do your accounts and file your tax return, your tax bill for 17/18 is worked out to be £5,000, then you have already paid £3,000 of it during the year – so you only owe a further £2,000 at 31 January 2019.  But, the process is repeated – so at 31 January 19 you will owe £2,000 for this year – and your first payment on account of 18/19, calculated as before at 50% of the current year bill (£2,500) – so £4,500 in total.  You then owe at 31 July 2019 your second payment on account of 17/18 – another £2,500.

This is all fine if your profits have gone up.  If you are in the scenario where profits are lower than the year before, then you will have overpaid in the year with your 2 payments on account and you will be due a refund for that year.

In the example above, if your tax bill for 17/18 worked out to be £2,400, then because you have paid £3,000 during the year, then you have overpaid £600.  But, taking into account your first payment on account for 18/19 which will be 50% of £2400 = £1200, you still owe £1200 – £600 = £600 at 31 Jan 19!

Confused??  Who said tax wasn’t taxing!

If you know your profits are going to be lower in the next year, perhaps because you are doing less hours or lost a key client, then you can apply to reduce the payments on account that are going to make – to avoid overpaying in the first place.  Cashflow is crucial to a small business, so you don’t want to give the taxman anything that is not really his!

Getting on with your tax return for the year now will also give you certainty about your tax bill and how much you should be paying.  Why wait til January if you think you have overpaid and may be due a refund?

For more information or help with your tax return for the year, please contact Rosie Forsyth.

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Taxes Made Easy for 2018/19

Hot of the press is my new tax planning brochure for this tax year.

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

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

Please download a copy with my compliments – and let me know if I can help you with any issues raised.

Download Your Free Copy Now

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Update on the new tax free childcare scheme

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

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

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

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

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

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

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

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

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

You may be eligible if you have:

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

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

 

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What tax planning should you be doing before 5 April?

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

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

Here are a few of my tips for tax efficiency:

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

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

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

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

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

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

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

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

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

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

Please contact me for any further information.

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