This month (November 2016) the Office of Tax Simplification published their Final Report on Lookthrough Taxation.
The proposal was that for Small Companies instead of charging the company tax (corporation tax), tax (income tax and national insurance) would be charged directly on the stakeholders based on their share of the profits. The end result being that Small Companies are treated in the same way as Sole Traders.
Back in July the OTS asked this key question Overall would lookthrough deliver simplification? and the answer was NO
Many suggested that it would discourage entrepreneurs and reduce funds retained in the business.
There are also complications such as Directors Loan Accounts and Salaries (including to family members).
Introducing lookthrough tax would have meant shareholders would be subject to Income Tax and Class 4 NI on company profits.
This could be the for runner to a longer study comparing Employees to Sole Traders to Companies.
For now common sense has prevailed.
The OTS report states Our conclusion is that lookthrough does not offer sufficient simplification to justify its introduction. On balance we feel that it would be more complicated than the current tax system, given the additional rules that would be needed
Skill is more important than location in many business sectors – we live in world where the internet can allow you to work with anyone at anytime, you can now track down the best person to work with even if they live thousands of miles away
Lower fixed costs – Using Freelancers will lower your fixed costs (in similar way to Zero Hours Contracts), you employ them for a specific project and only pay for what you need so there isn’t any surplus capacity
Tax advantages – Freelancers run their own business and that means they pay less tax than employees. Employers save tax too, such as Employers NI.
Competitive Advantage – You can put together a team for a contract rather than finding contracts that fit your workforce, this means you can hire the best.
110% Commitment – A Freelancers success and future work depends on them performing to the highest level on every contract, failure is not an option for a successful contractor.
There have been several tax changes in the Budget:
Changes to Personal Allowances –
The Personal Allowance is the amount of income you can earn before you start paying Income Tax. This is currently £10,600 – it will already rise to £11,000 in 2016, and will now increase further to £11,500 in April 2017.
The point at which you pay the higher rate of Income Tax will increase from £42,385 to £43,000 in 2016 and to £45,000 in April 2017.
Employment Allowance – The employment allowance is £3,000 but there is a restriction on it being used by single person companies.
Dividend Tax -From April 2016 you’ll pay tax on any dividends you receive over £5,000 at the following rates:
7.5% on dividend income within the basic rate band
32.5% on dividend income within the higher rate band
38.1% on dividend income within the additional rate band
This simpler system will mean that only those with significant dividend income will pay more tax.
The Dividend Allowance will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £5,000 of dividend income you receive.
Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance.
These changes also make it more complicated in deciding whether to incorporate, so I have added a new calculator to help you decide http://stevejbicknell.com/tax-calculators/
The £5,000 dividend allowance is a bit confusing because its an allowance and not an exemption, so it becomes part of your overall income.
Basically, most small business owners will either choose £8,060 as a salary (free of tax an NI) or £11,000 (tax free)
Because your salary is tax deductible in companies the difference £11,000 – £8,060 = £2,940 plus 13.8% NI = £3,345.72 which saves 20% corporation tax = £669.14
There will be NI to pay 12% employee and 13.8% employer = 25.8% x £2,940 = £758.52 – £669.14 = £89.38 net tax
Beyond this you will pay income tax at 20%.
So in summary, I think the optimum salary is £11,000.
Above this you should take dividends.
This is a simplification and you should speak to your accountant about your specific tax affairs.
In the Budget 2016 George Osborne announced that as from April 2017 it will be the duty of the Public Sector to make sure Personal Service Companies and Intermediaries pay the correct tax.
The government announced at Budget 2016 that it will reform the intermediaries legislation (known as IR35) for public sector engagements. It will do this by moving the liability to pay the correct employment taxes from the worker’s own company to the public sector body or agency / third party paying the company. In partnership with stakeholders, HM Revenue and Customs will develop a new tool that will make the decision on whether or not the rules should apply as simple as possible and provide certainty. A formal consultation will be published later. [Technical Note]
The organisations checking intermediaries will include:
Government departments, legislative bodies, armed forces
Local government
NHS
Schools and further and higher education institutions
Police
The British Museum, BBC, Channel 4
Transport for London
Publically owned bodies
It will be the engagers duty calculate the deemed employment income.
Here are 3 examples…
Will this lead to higher taxes for contractors? will they be converted to employees?
most pensions, including state pensions, company and personal pensions and retirement annuities
interest on savings and pensioner bonds
rental income (unless you’re a live-in landlord and get £4,250 (£7,500 from April 2016) or less)
benefits you get from your job
income from a trust
dividends from company shares
So how can you pay less income tax?
Here are 10 suggestions…
Pension
When you pay into a pension you get income tax relief on your contributions .
Lets say you invest £10,000 per year of earned gross income, increasing each year by 3% for inflation and see the effect of tax relief at 40% and 20%, assuming a return on the investment of 7% (which you should get with Commercial Property Investment)
40% Tax Rate
20% Tax Rate
Year
Pension
No Pension
% Diff
Year
Pension
No Pension
% Diff
1
£10,700
£6,252
71%
1
£10,700
£8,336
28%
2
£22,470
£12,954
73%
2
£22,470
£17,272
30%
3
£35,395
£20,131
76%
3
£35,395
£26,841
32%
4
£49,564
£27,808
78%
4
£49,564
£37,078
34%
5
£65,077
£36,013
81%
5
£65,077
£48,017
36%
6
£82,036
£44,773
83%
6
£82,036
£59,698
37%
7
£100,555
£54,119
86%
7
£100,555
£72,158
39%
8
£120,754
£64,081
88%
8
£120,754
£85,441
41%
9
£142,761
£74,692
91%
9
£142,761
£99,590
43%
10
£166,715
£85,987
94%
10
£166,715
£114,649
45%
11
£192,765
£98,000
97%
11
£192,765
£130,667
48%
12
£221,070
£110,771
100%
12
£221,070
£147,694
50%
13
£251,801
£124,337
103%
13
£251,801
£165,782
52%
14
£285,140
£138,740
106%
14
£285,140
£184,987
54%
15
£321,285
£154,024
109%
15
£321,285
£205,365
56%
16
£360,445
£170,233
112%
16
£360,445
£226,978
59%
17
£402,846
£187,416
115%
17
£402,846
£249,888
61%
18
£448,731
£205,621
118%
18
£448,731
£274,161
64%
19
£498,358
£224,901
122%
19
£498,358
£299,868
66%
20
£552,006
£245,309
125%
20
£552,006
£327,079
69%
Even when you consider:
Your money is locked up till you are 55
You pay tax when you take money out of the pension
You can get 25% out of the pension tax free
The difference in growth is massive
If you do salary sacrifice you can increase the tax effect by saving national insurance too.
2. ISA
Individual Savings Accounts have been around for a few years and very soon the Help to Buy ISA will be launched
Top 10 facts and rules…
Its only available to ‘First Time Buyers’
‘First Time Buyers’ can only have one Help to Buy ISA with one provider
You can pay in £1,000 when you open the account and then save a maximum of £200 per month
The maximum government bonus is £3,000 (but you can lower amounts of bonus if you have less than £12,000)
The scheme will run for 4 years from the date it opens (Autumn 2015)
Couples can have a Help to Buy ISA each which means if they don’t want to wait 4 years could save £12,000 in 25 months where as a single saver would need 55 months
Unlike ISA’s where you open one per year, the Help to Buy ISA will continue for 4 years
You can withdraw funds but if its not to buy a home then you won’t get the bonus
More than 100,000 homes have now been bought with government backed schemes
You will be able to get them at banks and building societies
3. Salary Sacrifice
Salary Sacrifice is a very tax efficient way to give your employees benefits and the most popular benefits are Pensions and Childcare. I wrote a blog back in 2011 which explained how it can save 45.8% in tax and NI
HMRC decided on 9th April 2013 that it was time to “clarify” in their Manuals what are successful and unsuccessful salary sacrifice schemes and have added some further guidance. Their Staff are instructed not to approve schemes (Employment Income Manual EIM42772)….
You (HMRC) may get requests for advice:
on how to set up a salary sacrifice arrangement, or
on whether draft documentation will achieve a successful salary sacrifice.
You (HMRC) should not comment on either of these areas. Salary sacrifice is a matter of employment law, not tax law. The nature of an employee’s contract of employment is a matter for the employer and employee.
The specific updates are:
EIM42750 – Salary Sacrifice – updated – this contains the examples of schemes
EIM42777 – Contractual arrangements – this has interesting comments on childcare and pensions
4. Employment Expenses
As an employee you can claim tax relief for expenses incurred in doing your job, for example business mileage, cycling on business, hotels, meals, business phone calls, in fact anything as long as its business related
If your claim is less than £2500 you can make your claim using Form P87 http://www.hmrc.gov.uk/forms/p87.pdf if its more than £2500 you will need to complete a Self Assessment Return (you need to phone HMRC to request a Self Assessment Return – contact details below), if you know your UTR number you can register and file your Self Assessment Return on line.
5. Dividends
When you take dividends has never been more critical due to changes in the Summer Budget 2015, so if you have distributable reserves you might want to take more dividends this tax year, try the Dividend Calculator above to see how much difference it could make.
6. Tax break for Couples
A new tax break as launched this week from 6 April 2015, which will be eligible to more than 4 million married couples and 15,000 civil partnerships.
The Allowance means a spouse or civil partner who doesn’t pay tax – therefore is not earning at all or is earning below the basic rate threshold (£10,600) – can transfer up to £1,060 of their personal tax-free allowance to a spouse or civil partner – as long as the recipient of the transfer doesn’t pay more than the basic rate of income tax.
7. Tax Free Benefits
Getting tax free benefits will save you lots of tax, here some ideas…
Pensions – Up to £40k can be paid in to you pension scheme by your employer (2015/16) and you can use carry forward to pay in even more
Childcare – Up to £55 per week but check the rules to makesure your childcare complies (HMRC Leaflet IR115) – these rules are changing soon.
Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £121,200 or above.
9. Green Company Car
A calculator is available here: http://www.hmrc.gov.uk/calcs/cars.htm and rates are shown in the table below for zero emission vehicles and some of the lower CO2 vehicles.
10. Check your P800
The P800’s are likely to contain errors because:
Large amounts of data are manually input
Estimates especially for Bank Interest and Investment Income
So check the following carefully:
P60 – you get this at the end of each tax year
P45 – you get this when you leave a job
PAYE Coding Notice
P11D Expenses and benefits
P9D Expenses payments and income from which tax cannot be deducted
Bank and Building society statements
Pension Tax Deductions
Its expected that around 3 million people will be asked to pay more tax and around 2 million people will have overpaid.
The UK saw the fastest growth in self-employment in Western Europe in 2014, according to the Institute for Public Policy Research (IPPR).
The number of self-employed workers rose by 8%, faster than any other Western European economy, and outpaced by only a handful of countries in Southern and Eastern Europe.
The IPPR’s analysis shows that the UK – which had low levels of self-employment for many years – has caught up with the EU average. If this growth continues, it says, the UK will look more like Southern and Eastern European countries which tend to have much larger shares of self-employed workers.
You must include your own name and business name (if you have one) on any official paperwork, like invoices and letters.
When should you get help from an Accountant?
Often business owners wait too long before they realise that they need help from an accountant.
Key reasons are:
– not understanding the difference between a book keeper and an accountant
– thinking that an accountant will just be an extra cost – the reality is that most accountants will save the business many times their cost
– thinking that accountants are just bean counters.
But if you choose a qualified and experienced accountant they can bring huge benefits: management tools to improve profitability, cost controls, tax savings, growth strategies, business planning, business structures and much more. So don’t wait too long – getting an accountant should be a priority for all businesses!
Common Mistakes
First off – not having a separate bank accounts. Many start ups try mixing business and personal transactions in their personal bank accounts, its a total nightmare, don’t do it, get a business bank account. Mixing things up will almost certainly have tax implications.
Not registering for tax or filing returns is another one. Getting things right at the beginning is extremely important and a CIMA Accountant can make sure that you choose the right business structure and will help you register for VAT, PAYE, CIS and other taxes. Choosing the right VAT scheme will save you tax. Not registering and filing returns will have severe consequences and lead to fines and penalties.
Also – contract mistakes. Ask your Accountant to review your contracts, they will be able to give you lots of useful tips.
Running out of cash: draw up a Budget and Cashflow and forecast how much cash you will need to run the business, looking at your cash cycle and managing it will be vital. If you need funding ask your Accountant for help, they will be able to look at all the options and help you choose the option that’s best for your business.
Accounting – many start ups fail to keep control of their accounting, by working with an accountant and using Debitoor or Sage One you can avoid this problem.
The current dividend tax credit system is a bit confusing and works as follows
You want to pay a dividend of £900. Divide £900 by 9, which gives you a dividend tax credit of £100. Pay £900 to the shareholder – but add the £100 tax credit and record a total of £1,000 on the dividend voucher. The dividend is then shown gross on the tax return and then the 10% tax credit is deducted rates of tax are then applied as noted below.
Dividend tax rates before April 2016
Tax band
Effective dividend tax rate
Basic rate (20%) (and non-taxpayers)
0%
Higher rate (40%)
25%
Additional rate (45%)
30.56%
This will change from April 2016, see the table below
Dividend tax rates after April 2016
Tax band
Effective dividend tax rate
Tax Free £5,000
0%
Basic Rate Tax Payers (20%)
7.5%
Higher Rate Tax Payers (40%)
32.5%
Additional Rate Tax Payers (45%)
38.1%
But be warned!
While these rates remain below the main rates of income tax, those who receive significant dividend income – for example due to very large shareholdings (typically more than £140,000) or as a result of receiving significant dividends through a closed company – will pay more.
These changes will also start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities. This will reduce the cost to the Exchequer of future tax motivated incorporation (TMI) by £500 million a year from 2019‑20. The tax system will continue to encourage entrepreneurship and investment, including through lower rates of Corporation Tax. (HM Treasury Summer Budget 2015)
Determining whether a worker is Employed or Self Employed isn’t always easy.
HMRC updated and improved their tool in April 2015.
The Employment Status Indicator (ESI) tool enables you to check the employment status of an individual or group of workers – that is whether they are employed or self-employed for tax, National Insurance contributions (NICs) or VAT purposes.
The ESI tool is essential for anyone who takes on workers, such as employers and contractors. (The tool refers to anyone in this position as an engager.) Individual workers can also use the tool to check their own employment status.
The tool cannot, however, be used to check the employment status of certain workers:
company directors or other individuals who hold office
agency workers
anyone providing services through an intermediary (sometimes referred to as IR35 arrangements)
The ESI tool is completely anonymous, so no personal details about the worker or engager are requested.
People who have filed late tax returns have been let off paying a £100 fine for missing the deadline, HM Revenue and Customs has confirmed.
But the penalty has only been waived for individuals who provide a “reasonable” excuse for being late.
According to the BBC HMRC will not be checking the excuses as in previous years, they will simply accept them without questioning them.
So what are reasonable excuses?
Here are some excuses that HMRC have accepted
a failure in the HMRC computer system
your computer breaks down just before or during the preparation of your online return
a serious illness, disability or serious mental health condition has made you incapable of filing your tax return
you registered for HMRC Online Services but didn’t get your Activation Code in time
it was lost in the post HMD Response International v’s HMRC 2011 The accountant produced a contemporaneous note in his office diary for 16 May showing that he had filed the return.
