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Tax Planning for the Self-Employed 22/23

Having looked at companies in my last blog, now we turn our attention to what you need to be thinking about in 22/23 to ensure you are running your self-employed business tax efficiently?

Ensure your profit is accurate

This may sound obvious – but be sure that you are keeping an accurate record of all your business costs to offset against your income.  Use one bank account for all your business transactions, otherwise you will forget that you spent £6 on parking last week, and you bought some printer Ink from Amazon, along with the other personal items.  These small amounts add up and if your profits are overstated, you will pay more tax than necessary.

Claim all relevant costs

Are you including in your accounts a charge for working from home, and for using your car for work?  You can look back at my previous blogs to see how to calculate these costs.

Marriage Allowance

If your profits are low, and you haven’t utilized all your Personal Allowance for the year, then if you are married you may be able to transfer part of your allowance to your partner and save tax overall as a couple. You can apply online and backdate your application to previous years if relevant. www.gov.uk/marriage-allowance

What rate of tax are you paying?

If you are a higher rate taxpayer then you could consider these measures to reduce your tax bill:

Pension contributions – you will receive a further 20% tax relief for making a pension contribution which you claim on your tax return.  You can contribute up to £40k a tax year, and use up to 3 years previously unused contributions.

Charitable donations – by donating to a charity under Gift Aid, you can claim 20% tax relief on your donation through your tax return.

Your business structure – if all your income is coming from your self-employment and you are paying higher rate tax, it may be time to think about transferring your business to a limited company, where you have more tax planning options available to you.

Payments on account

If your tax bill is over £1,000 in a year, then you need to make payments on account of your next year’s tax bill during the year.  These are based on the profit of your business last year.  If current year profits are lower, then consider making a claim to reduce your payment on account to avoid overpaying tax during the year.  Better still, get your tax return done quickly (your 21/22 tax return can be done now) so you have accurate figures and know what your tax bill in July 22 and Jan 23 will be.

If you require any further information or advice, then please contact Rosie Forsyth.

 

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Tax Planning for Companies 22/23

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

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

  1. Increase in National Insurance Rates and Thresholds

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

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

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

  2. Increase in dividend tax rates

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

  3. Increase in corporation tax rates from April 23

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

  4. Super Deductions

    Whoohoo-sounds exciting!

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

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

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

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

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

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

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

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What is the optimal salary level for a director in 22/23?

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

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

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

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

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

You have 3 choices!!

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

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

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

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

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

For more information and advice, please contact Rosie Forsyth.

 

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Including SEISS Grants on your tax return

This the first year that SEISS income has to be declared on your tax return, so if you are completing your own return, you need to know which grants to include and where to put the information on your return.

If your accounting year ends to 5 April 21 then there are no issues, and any grants that you have received in the tax year will align with your accounting year.

However, if your accounting year is not 5 April 21 then you need to be careful about which grants you include on your 20/21 tax return.

SEISS grants are treated differently to normal trading income and are taxed in the year of receipt, rather than in your normal accounting year.  For example, if your year end is 31 December, your 20/21 tax return would include your accounting profits for the year ended 31 December 2020.  But for SEISS grants, you would need to include all those received up to 5 April 21, even though if received after 1 Jan 2021 they will be in the following year’s accounts.

For most people, this will mean that SEISS grants 1-3 will need to be declared on this year’s tax return.

The grant income is reported in a separate box from your normal trading income.  If it is not separated out, then HMRC will add in the grant income again to your tax calculation, as they will think that you have not declared it.

You also need to tick the section that confirms that you have received SEISS income in the year.

If you did receive SEISS income, and in hindsight do not think that you should have done, you can include the amount that you received “in error” on your return and HMRC will include the overpayment in your tax calculation for the year.

The addition of the grant income in the year could actually mean that your overall income for 20/21 was higher than normal.  This will have knock on effects for any payments on account that you will need to make in January and July 22 as these are based on the previous year’s income.  If your income for 21/22 will be lower, then you can make a claim to reduce your payments on account to avoid overpaying tax and then claiming a refund!

 

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What Information do you need for your Tax Return?

Autumn is here -which means Strictly, Bake off, (MAFSUK – guilty pleasure!)………………… and the start of tax return season!

Although the filing deadline is still 4 months away, many accountants require the information in the next month or so to be able to guarantee getting your return filed on time.  Believe it or not – yours is not the only return we have to get done!

Whether you are going to do your return yourself, or ask an accountant to help – there are certain key documents that you are going to need.  Starting to get this information together now will make completing your return easy when you come to do it.  You may need to request some of the information from third parties if you don’t have them to hand, so this needs to be done sooner rather than later.

Some of the key documents you will need are:

Employment Income

  • P60 (or P45 if left an employment in the year)
  • P11d if you had any benefits in kind (medical insurance, company car, director’s loan)

Self- employment

  • Accounts for the year. You will generally need an accountant to prepare these for you from your bank statement, sales and purchase invoices

Bank Interest

  • Details of interest earned on each bank account that is not an ISA account (however small, bank interest does need to be included on your return.) Your bank statement from May or June should show the total interest earned in the year – or you can get an interest certificate from your online account

Dividend Income

  • If you have shares that have paid a dividend in the year, you will have received a tax voucher from the company. If you can’t find this and you know how many shares you have, you can look online to find the dividend history of the company.

Rental Property

  • If managed by an agent, copies of your agents statements for the year
  • Details of the mortgage interest paid in the year.  Your monthly mortgage payment may include both interest and capital payments so you may need to ask your bank for a statement of the interest paid in the year.
  • Details of money spent on maintenance or refurbishment of the property as well as any other associated costs (insurance, service charges etc)

Pension Payments, Gift Aid and Child Benefit

  • If you are a higher rate taxpayer, then you will need to include on your return details of:
    • Any payments made personally to a pension scheme
    • Any payments or donations made to charities
    • Details of any child benefit received in the year

Obviously everyone’s situation is different and there may be additional information you need for your return, but the above checklist covers the more common elements that are likely to need to find in order to complete your return.

If you require help with your return this year, then please do not hesitate to get in touch (soon!) with Rosie at Wilkins & Co.

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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!

 

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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.

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How much should you put aside for your tax bill each month?

If you are self- employed then no-one is deducting tax from your income every month as they would be if you were employed, so you need to discipline yourself to put money aside yourself for your tax bill.

But how much should that be?

The general rule is that as the basic rate of income tax is 20%, and the NI that the self-employed pay (class 4 NIC) is 9%, then putting aside 25-30% of your income to cover your tax bill makes sense.  And in a lot of cases this is true.  If you end up having put too much aside, then happy days – you have some unexpected cash!

But in some situations the 30% guide may not work:

If your income isn’t that high:

Everyone has a personal allowance which is the amount of income that you can earn before you start to pay tax.  This year the personal allowance is £12,570 so if your total earnings are around this amount, then you will only have a small amount of national insurance to pay and putting 30% aside would be excessive.  It might mean that your business has been short of cash during the year as you have been frantically saving more than you needed to and you could have put the money to good use in your business.

If you have other income outside your self-employment:

If you have other income of around £50k in the year, then any profit from your self-employment is going to be taxed at 40% rather than 20%.  You may also need to make a payment on account of your tax bill during the year- so you should probably be putting aside 50-60% of your earnings each month to cover your tax bill.

If you have just started trading:

If you have just started trading and your business is generating decent profits from the start, then you could be straight into payments on account (see other blogs for more details about these.)  This could mean that your first tax bill in January is increased by 50% to cover your first payment on account, and you also need to put an additional amount aside to cover this.

 

So in general it is definitely sensibly to put money aside each month to cover your tax bill.  Don’t think that you can cover your tax bill from money that you will earn in the future – this last 18 months has definitely shown that we never know what the future will bring!

Also remember that you pay tax on your profits and not your sales figure.  So having an idea of what your profit is each month will help in determining how much you should be setting aside.  Using accounting software will give you this information and help you manage your cashflow and save for tax.

These figures are for general guidance only and it is always best to get personal tailored advice.
For any further information or help with your personal tax returns, then please contact Rosie Forsyth.

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The 5th and Final SEISS Grant for the self-employed can now be claimed

Self-employed taxpayers can now apply for the 5th and final SEISS grant.  Everyone who is eligible should by now have been contacted by HMRC giving them their personal date when they can submit their claim.  Claims have to be made before the deadline of Sept 30.

You can claim this grant if:

  • you traded in 19/20 and submitted your 19/20 tax return by 2 March 2021
  • you have traded in 20/21 and intend to continue trading
  •  you can make a declaration that you reasonably believe that there will be a significant reduction in your trading profits due to reduced business activity, capacity, demand or inability to trade due to coronavirus from May 21 to September 21.  Useful examples of what this means in practise are give here https://www.gov.uk/guidance/how-your-trading-conditions-affect-your-eligibility-for-the-self-employment-income-support-scheme
  • you earn at least 50% of your total income from your self-employment
  • you had average trading profit of under £50k per year – initially based on your 19/20 tax return. If you don’t qualify in 19/20 HMRC will look back over the last 4 years returns to work out your average profit over those years.

The criteria for claiming this grant is based on a turnover test, so it is important to have your numbers to hand to work out how much you can claim.

If your turnover has fallen by more than 30%  you will be able to claim the full grant worth 80% of three months’ average trading profits, capped at £7,500. 

However, if your turnover has fallen by less than 30%, you will only claim 30% of three months’ average trading profits, capped at £2,850.

“Turnover” is gross turnover for April 20 – April 21, (not profit) and excludes all Covid-related grants received.

As with the previous grants, the grant is taxable and will need to be declared on your 21/22 tax return.

If you need more information or help with your self-employed accounts and tax, then please get in touch with Rosie Forsyth at Wilkins & C0.

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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:

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