I often get asked this by clients -and in typical accountants style – “it depends!”

As as sole trader you do not need to have a bank account set up in the business name.  You should always use a different bank account for your business transactions to your personal ones though, as it makes your bookkeeping much more simple, and much easier to deal with any HMRC queries.

It’s really hard for both you and your accountant at the year end to trawl through your personal account working out what was for business and what wasn’t, even if you have all the receipts – and should you be unlucky enough to be subject to an HMRC enquiry they will want sight of your business bank account.  If you have to send them your personal one, with business transactions included, they will have sight of all your transactions and that could open a real can of worms!

So for a sole trader – open a separate account in your name, and just use this for business transactions.  It is also a good idea to have a savings account where you can put away a bit each month towards your tax bill ( out of sight is out of mind!!)  You can transfer an amount each month from the nominated business account to your personal account to live, but do try to keep the two as separate as possible.

For a limited company, (although there is actually no legal requirement to have a separate business account,) HMRC would always expect you to have a business account.  This means setting up an account in the limited company name, and after the best free banking period you can find, you will have to pay a monthly fee to use the account.  For this account, even more so than for a sole trader you cannot treat it as your own money – it’s not, it belongs to the company, so don’t dip in and out of it when you need cash.  Any money you take out of the limited company account is either salary, dividends, reimbursement of expenses or a loan -and all have different tax consequences.

So – do you need a business bank account?

Well, you should always have an account that is just for your business transactions: for a sole trader this can be another account just in your name, but for a limited company, yes -it needs to be an account in the name of your company.

If you have any questions, then please contact Rosie Forsyth.

Can you be both, and how do you deal with the tax and NI?

It’s pretty common these days for people to have more than one job.  It may be that you are starting a new business, but still need a regular income until things take off, or you want to earn a bit extra than your current employment gives you.

So how do you deal with the tax side of it all?

First of all, are you actually self-employed or just earning a bit of extra cash from a hobby.  Check out my early blog to help you decide (http://wilkinsco.co.uk/when-is-a-hobby-not-a-hobby).  If you are running a business, then read on……………………

Income Tax

Income tax is always paid on your total income for the year, so you need to add together all your sources of income and work out the tax due.

You will do this on your tax return, so as soon as you have any self-employed income you need to the let HMRC know.  They will then expect you to complete a tax return each year.

You pay tax on any income over your personal allowance (£11,500 in this tax year).  The rate is 20% on the next £33,500 of income and then 40% on income over this.  Depending on your income from your PAYE job, your self-employed profit could therefore be taxed at 20% or 40%.

For example:

Income from PAYE job                   £35,000

Profit from self-employment         £15,000

Personal allowance                         £11,500

The personal allowance is deducted from your PAYE job via your tax code, so during the year you will have tax deducted each month from your salary at 20% (on £23,500)

Your self-employment profit will be taxed at:

20% x £10,000 (£33,500-£23,500) =            £2,000

40% x £5,000                                                      £2,000

Total                                                                      £4,000

It may be that you only have a part time job and may earn less than your personal allowance.  In this case, you will be able to allocate the unused part of your personal allowance against your self-employed profit and only pay tax on the excess.

For example:

Income from PAYE job                                   £8,500

Profit from self-employment                     £15,000

In this case, you have £3,000 on personal allowance to set against your self-employment so the tax due on your self-employment will be:

20% x £12,000                                                    £2,400

What about NI?

The employed and self-employed pay different classes of NI – see my earlier blog about the NI that the self-employed pay.

The NI you pay on your employed income won’t change, and you might then pay class 2 NI and class 4 NI on your self-employed profit if it is above the relevant thresholds.

The NI due for your self-employment is now collected via your tax return at the end of the year.

What if I make a loss from my self-employment?

A new business may well make a loss in its early years.  The good news is that if your calculations show that you have made a loss, you can offset that loss against employed income, reducing the amount overall that you have to pay tax on.  You may in this instance get a refund of tax paid already via PAYE, and again you would do this via your self-assessment tax return.

For more information, please contact Rosie Forsyth.

The new tax year arrives on April 6 and with it the new tax rates and bands.  So how will your income be taxed in the 17/18 tax year.

The Personal Allowance for 17/18 will be £11,500.  This is the amount of income you can earn before you start paying tax.

The basic rate threshold has increased to £33,500, and the tax rate remains at 20%.  So on the next £33,500 of income, after the £11,500, you will pay tax at 20%.

The higher rate threshold remains at £150,000, and income falling in this bracket will be taxed at 40%.

Savers also benefit from the Personal Savings Allowance.  This means that on the first £1,000 of savings income (eg bank interest) you will not pay any tax if you are a basic rate tax payer, and on the first £500 of bank interest for a higher rate taxpayer.  (Yes, I know – bank interest, what’s that?)

For limited company owners, and those who owns shares, the dividend allowance for this year remains the same at £5,000.  The reduction to £2,000 announced in the Budget comes into effect from 18/19.  That means the first £5,000 you receive in dividends in the year is tax free.  After that you will pay at 7.5% for a basic rate taxpayer and 32.5% for a higher rate taxpayer.

Then there’s National Insurance to think about.  The thresholds for NI are different to those for income tax (obviously!)

For a sole trader, for 17/18 you will still pay class 2 NIC and class 4 NIC.

Class 2 NIC is a flat rate of £2.85 per week and is collected once a year when you submit your tax return.  If your profits are less than £6,025 then you will be exempt from paying class 2.  The exemption is automatic – it does not need to be claimed.

Class 4 NIC is payable on your profits.  You will pay class 4 NIC on profits over £8,164 and up to £45,000 at a rate of 9%.  Over £45,000 the rate is reduced to 2%.

This means that if your profit for 17/18 is between £8,164 and £11,000, you won’t pay income tax but you will pay National Insurance.

For employees, including directors of limited companies, you pay class 1 NIC on your salary.  For a director, you only pay NIC once your salary for the year is over £8,164; hence this being the rate at which may directors chose to pay themselves! Over this amount the rate of class 1 NIC is 12%.  The company will also pay class 1 NIC at a rate of 13.8% on salary over this level.

So – so much for tax simplification!  This blog covers the main tax bands for the year, but there are other exceptions etc and rates for certain types of income that are not covered here.

For more information or help please contact Rosie Forsyth.

The vast majority of small limited company owners will take money out of their company through a mixture of salary and dividends.  But the dividend rules changed from 6 April 2016 so as we approach the end of the tax year, here’s a reminder on the current rules and how you will now be taxed on your dividend income.

Under the new rules, the first £5,000 of dividends received in a tax year are tax free.

After that the following rates of tax are due:

• Dividends falling within basic rate tax – tax at 7.5% of the dividend received
• Dividends falling within higher rate tax – tax at 32.5% of the dividend received
• Dividends falling within the additional rate of tax – tax at 38.1% of the dividend received

So it is no longer the case that you can extract dividends from the company up to your basic rate threshold “free of personal tax” and you need to think about the personal tax that will be due, when considering your company dividend policy.

The tax on these dividends will be declared on your 16/17 tax return – due to be filed by 31 Jan 2018 and the tax is payable then too.  But you do need to remember that if you have a personal tax bill due at that time of over £1,000, then you will also have to make a payment on account of your 17/18 tax, equal to 50% of your current year’s bill.

An individual who has traditionally taken salary of £11,000 and dividends up to their basic rate limit  (approx £32,000) will be £2,025 worse off under the new rules for the current tax year, so you need to make sure this money is put aside in preparation for your bill at 31 January.

Getting your tax return done early in the tax year will mean the tax due can be calculated and you will know precisely what your bill at 31 January is going to be!

For more information or help estimating the personal tax due on your dividend income, please contact Rosie Forsyth.

Its tax return season and I am currently up to my eyes in “last minute.com” self –assessment returns.

Most self-employed know that (and have budgeted for) tax is due at 20% (or 40%) on their profits, but National Insurance is often forgotten about, leading to confusion over the amounts due at 31 January. The first thing to get to grips with is the fact that if you are employed, your National Insurance position is very different from that of a sole trader.

As an employee you have Class 1 NIC’s deducted from your pay.  But if you are self-employed you currently pay two classes of NICs: Class 2 and Class 4.

Class 2 NIC

Class 2 NIC’s are flat rate contributions (£2.80 per week in 2015/16).  Class 2 NI is liable to be paid for every week of self-employment in a tax year, if the profits for that tax year are greater than the Small Profits Threshold (£5,965 in 2015/16).

Class 2 NI used to be paid monthly by direct debit but is now calculated and paid via your tax return.

These contributions provide you with the opportunity to build up entitlement to the state pension and other benefit. A full state pension is paid only to those who have an adequate record of NI contributions – currently 30 years of contributions.
If your profit is under the Small Profits Threshold then you will be exempt from paying Class 2 NIC – this exemption is now automatically given when you submit your tax return.  In previous year’s you had to separately claim the exemption.

Class 4 NIC

Class 4 NIC’s are paid on the net profits that are subject to income tax and are payable at the same time as your income tax.   Class 4 contributions are payable at a rate of 9% on profits over £8,060 up to £42,385, and 2% on profits above this level.

This means that you could be paying Class 4 NIC’s but not income tax if your profit for the year is between £8,060 and £10,600.  It’s also a big number to forget about when budgeting for the amounts due at 31 January!

Class 2 is going be abolished from April 2018 to simplify things for the self employed but you should still remember to take NI into account when budgeting for your tax bill to avoid any nasty surprises!

For more information please contact Rosie at Wilkins & Co.

Question 1:  My what?

Your Personal tax account contains key info that HMRC has about you.  Almost everyone can access it, but only 3m of use have done so far.  I joined this merry club over the weekend and accessed mine – and I have to say – it was almost interesting! (Note to self – get out more!)

For now, it contains limited information, but under Making Tax Digital, it will become the platform for declaring all your info to HMRC.

Question 2:  Why do I need to?

Apart from being able to update admin info here with HMRC rather than hanging on the phone for hours – like a change of address – your personal account has details of your NI contributions record, and also shows you your state pension forecast (bit depressing!)

The stats on incorrect NI records are frightening – so it is well worth just looking over yours and seeing if it looks right as it could affect your state pension.  Mine was wrong as I had no record of contributions for a couple of years so I am going to have to look into it further.

I’ve also got to keep going until Im 67 to claim any sort of state pension!

If you are employed you can check your tax code here as well, which again can often be incorrect and mean you pay the wrong amount of tax each month.

Question 3:  How do I get into it?

Here is the link to start you off:

https://www.gov.uk/personal-tax-account

You will need your passport handy and your NI number.  You then receive a Government Gateway number that you need to keep.  A few days later you will receive a password in the post and once you have these, you are in!

There are a lot of negatives about Making Tax Digital, but personal tax accounts are a good idea and give you access to information that HMRC have, so you can check whether its right!

I would encourage you to set yours up and just take a look and see what’s there.  If you don’t like what you see, get in touch for help sorting it out.

This week I’m on a rant about Making Tax Digital – because it is a humongeous change to accounts and tax as we know it- and most of those people it’s going to affect – haven’t cottoned on!

The MTD change is starting with the little guys – that’s you and me, which seems unfair to us, but from HMRC’s stand point is logical, as they need to get it right with people with relatively simple tax affairs, before moving onto the Amazon’s and Starbucks of this world!

At the moment, it’s all change from April 2018 for the self-employed and landlords with turnover of over £10,000 – that’s really not that much.  There is an outcry about this and everyone is lobbying HMRC to increase the threshold to slightly larger businesses with turnover equal to the vat threshold – as at least they are used to doing some kind of digital return already.  But at the moment we are stuck with the £10k cut off.

So if you have turnover or rental income of £10k very soon you are into reporting your results quarterly – and digitally – to HMRC.  Sending your receipts in a carrier bag to your accountant once a year (probably 7-8 months after your year-end) is just no longer an option.  Even sending then nicely analysed on a spreadsheet looks like it won’t do anymore.

So how are we going to do cope with MTD? The truth is – we just don’t know – as information from HMRC is so limited.

As an accountant I’m really busy dealing with my clients at the moment and I have plenty of “carrier bag” clients – whom I love dearly.  They don’t get accounts – why would they?  I don’t get plumbing! (no offence plumbers – but I really cant read a receipt when its been through the wash)

Do I have time to do their accounts 4 times a year rather than 1, and within a one month deadline?  Probably not.

Can I do it for the same fee?  Definitely not!

I am in the process of educating my clients and moving them onto cloud accounting packages and most of them making the switch do like them.  Most get that once they know what they are doing, it will save lots of time and give them up to date figures which they can use to make real time business decisions.

After all, what real use is a set of accounts 9 months after the end of your year, apart from telling you how much tax you owe?  With real time information, accountants can really add value to a business.

But most decent accounting packages come with a monthly subscription.  For some clients, the annual fee of that alone is about what they pay now for their annual accounts, so their costs are really going to increase.  Research shows the annual cost of MTD to a small business will be £1,250.

So whilst I get the logic, and it all sounds lovely in theory, HMRC need to step into the real world and consider the thousands of small businesses this is really going to affect.  We need the turnover limit increased and the start date delayed to give clients time to adapt to digital systems.

You can give HMRC your views before Nov 7 here  https://www.gov.uk/government/collections/making-tax-digital-consultations

Rant over.

Guest Blog – The reality of self-assessment!

Oct 9, 2016

This week’s post is a guest blog by Helen Watson of Helen Watson Social Media.  Helen decided that as her busines was new and her accounts straightforward, she’d tackle her tax return herself.

Read how she got on!

“I’ve recently become self employed – which has loads of benefits; I love my job, my clients are great, I’m the master of my own destiny.

Then, this utopia is rudely interrupted by the spectre of SELF ASSESSMENT. My first time doing a tax return, I have a good think about this. I’m an intelligent person, I have maths GCSE, my tax affairs are pretty straightforward. This is the process I will follow:

1. Log onto HMRC website
2. Put some numbers in
3. Celebrate with smug face and accompanying G&T

I decided to do my self assessment in October, to get it out of the way. This was a good move, I may even have it completed by the Jan 31^st deadline – assuming the HMRC gods are in a benevolent mood.

A brief summary of my actual process:

1. Log onto HMRC website. I’ve already registered so all I need is my user ID, my unique tax payer reference number, my password (god knows), an access code, my mothers grandma’s shoe size, the cat’s date of birth and my first G&T.
2. Put some numbers in. Am I using the ‘cash basis’ for my accounts? I don’t know, how am I supposed to know? Do I have any capital allowances? Not a clue.  Do I need to change my class 4 NIC? Am I exempt from class 2 NIC?  Where are my dividend certificates?
   Why don’t I know any of this stuff? Someone, somewhere should surely have warned me about this.
3. Give up, resolve to complete another day, have G&T.

If you have a tax return to complete this year, I have some advice –

START NOW!

It will take about 83 times longer than you anticipate. There will be:

• Swearing
• Drinking
• Searching for documents but finding only receipts for your child’s shoes that you bought in 2013 (not tax deductible)
• Wondering if HMRC has a plan to send you back to employment by tempting you with PAYE

In the end though, there will be success. You can manage it, HMRC do have lots of hints and tips to help you through the process. You just might have to read some of them 96 times to work out what they actually mean!

So to avoid feeling “ruff” on January 31st, don’t delay any longer, and make a start!

If it’s all too daunting, and you aren’t sure where to start, then get some help from an expert – contact Rosie Forsyth at Wilkins & Co.

So the heating’s on, the sequins are back, and Lord Sugar is firing people. It can only mean one thing……….

Oct 3, 2016

TAX RETURN TIME!

C’mon, you’ve had since April to do it and you’ve put it off for 6 months so far.  There are 4 months to go before the final deadline, so just get it out the way now, before winter really sets in and the “C” word gets mentioned.

All my October blog’s are dedicated to personal tax and helping you get your returns in this side of Xmas.

So let’s look at the basics – what are the deadlines?

• 31 Jan – most people know that 31 January is the filing deadline for tax returns.  This is for your 2015/16 tax return which covers your income from 6 April 2015 – 5 April 2016.  Any tax not already paid for the year is also due for payment then, plus any payment on account you need to make for your 2016/17 tax.
• 31 October -if you want to send a paper tax return then this has to be in by 31 October.
• 5 October – if you have a new source of income in the year, or need to register for the first time for self-assessment – then this has to be done by 5 October (like now!!)
• 31 December – if you owe tax for the year and you want this to be collected via your tax code in 2016/17, rather than sending them a cheque at 31 January, then you need to get your return in by 31 December, not 31 January.

If it’s your first year of self-assessment and you are going to do it yourself, you will first need to register to file online and get the passwords sent to you in the post.  This can take a few weeks to come through, so you really can’t afford to leave this until January as not being organised won’t be an excuse for not filing on time!

By doing your return now, rather than in the New Year, you will know what your tax bill is going to be and you can budget for any tax due over the next few months.  You’ll also have that warm inner smugness that its done, and that you won’t be joining the January panic this year.

The Highs and Lows of working for yourself

Sep 26, 2016

As weeks go, last week was not the best.

I found myself wondering what on earth I was doing working for myself.

My computer got hacked – where was my IT department?

My printer poured ink from its backside all over my desk and carpet, and then refused to print anything – where were the office cleaners, and the IT department again?

Clients with very tight deadlines were very late sending information over, but the work needed to be finished – where was my extensive accounts team?

My son had a major wobbly about life in general – where was my husband? (oh yes – on a boys jolly sailing trip with no phone signal! Typical!!)

And I had a stinking cold.

So by Wednesday I was tearing my hair out!

But….one slightly hysterical call to my computer chappie later, he had logged into my computer, done all sorts of clever things and assured me it was all OK. There was still money in my bank account and the world had not ended.

Staples was open til 9pm and the assistant got that I didn’t really care whether it could scan upside down, fax straight from my phone and make the tea at the same time, or that I could order it online and save £10 if I could wait 3 days, I just needed something that would print NOW!

My 2 subcontractors said yes they’d love a few extra hours and we got everything out in time.

A good night’s sleep seemed to work wonders for my son, and hubby eventually reappeared from his trip (and obviously decided it would be a good idea to sort the washing himself!)

So although it was a tough week, I am still so grateful I work for myself.  I DO have a great team to support me, I LOVE the flexibility it gives me, I CAN go to all those school events, and the dog and I have very intelligent conversations about complex tax issues!

It’s not always plain sailing, it can be a bit of a rollercoaster, but it’s fun and I wouldn’t have it any other way.