Tax Archives - Nimbus Accounting

Did the Summer Budget mark the end of the small incorporated business?

Those businesses that are run through a limited company structure had the advantage of avoiding National Insurance, by structuring the extraction of funds using a low salary and extracting additional funds as dividends. The chancellor announced that from April 2016 dividends for basic rate tax payers would increase from an (effective) 0% to 7.5%. He also announced that the old notional tax credit of 10% would be abolished. So while the rates of taxation for higher rate and additional rate payers are nearly identical at 32.5% and 37.5%, once the tax credit is taken into account the 7.5% is seen to be levied across the spectrum.

The rationale behind this change is to close the tax gap between operating under the corporate structure and the self employed sole trader. Thankfully there is also a new £5,000 tax free dividend allowance for all tax payers, to stop the majority of ordinary investors, with modest dividend income, from having to complete a tax return.

So looking at the changes in monetary terms, the additional cost from next April of someone making a net profit of £28,000, after deducting their salary [equal to their personal allowance] as a directors remuneration, will be approximately £1,700. However, this still leaves them roughly £1,200 better off than someone that runs their business as a sole trader.

The company structure is still optimal, but the decision to incorporate is now more marginal. But lets not lose sight of the other benefits of having a limited company, such as the limited liability status of a company, separation of business and personal assets, slightly different and more generous rules relating to the expenses you can claim, better tax planning opportunities with dividend timing and the status of being a company. In our opinion these benefits are still worth having, despite the additional administrative burden and slightly higher costs.

In preparation for these changes we would suggest making sure that you have paid yourself the optimal amount of dividends in the current year before they become 7.5% more expensive to receive. If you would like any further information on this or any other aspects of your taxation affairs, please don’t hesitate to get in touch with one of our qualified accountants.

New VAT rules for digital services

There are new rules being implemented on 1 January 2015 concerning VAT on the supply of digital services within the EU. Digital services includes broadcasting, telecommunications and e-services that are electronically supplied. The VAT registration threshold has been reduced to zero for any digital services supplied to domestic and non-VAT registered business consumers in any country other than the one in which you are based.  Therefore, if you only make one supply of a digital service in another EU country and do not register for the Mini One Stop Shop (MOSS), you are required to register for VAT in the country of your customer and account for local VAT accordingly. If you would like more information or assistance registering for MOSS please contact one of our team.

Income Tax Allowance for Children

Clients are always keen to save tax and we often get asked if their children can work for them. Children are entitled to the same income tax personal allowance, just like their parents. Some might conclude that there is an opportunity to gift a share to their children and shift income to take advantage of this personal allowance. Sadly HMRC have seen this happen a few times before and where gifts from a parent produce income in excess of £100 in a year, that income is taxed as though it was received by the parents. This £100 rule applies until a child gets married or turns 18, whichever occurs first.

Tax Return Deadline

The first of the deadlines for the 2013/14 Tax Return is the 31 October 2014. This deadline is for those that submit their return on paper.  If you are one of the reducing number that still files on paper and you haven’t made a start yet, it might be time to consider filing online. Registering with HMRC to file online can take up to six weeks, so we recommend that you register immediately to avoid missing the final deadline of 31 January 2015.

The next deadline on the horizon is 31 December 2014. This deadline is for those that owe less than £3,000 of tax and wish to have their tax collected on a monthly basis during the 2015/16 tax year through the PAYE system.

The final filing deadline is the 31 January 2015, for online Tax Returns. There is a fixed penalty of £100 for failing to file a return on or before the filing date. If you file after 1 May 2015, or 1 February 2015 in the case of a paper return, this fine will apply in addition to a penalty of £10 a day for every day the return remains outstanding, up to a maximum of £900.

The 31 January 2015 is also the deadline for paying any tax due, if you haven’t taken advantage of the arrangement above. Late payment of tax will incur interest at an annual rate of 3%, on top of this there is also a surcharge of 5% on any outstanding tax due that hasn’t been paid by 28 February 2015.

At Nimbus we make sure all our clients have plenty of notice of upcoming deadlines. If you would like to work with an accountant that takes care of the deadlines then get in touch.

Directors salary and Dividends for 2014/15

Another tax year is drawing to a close and it is time to give yourself a pay rise. Last year you were probably receiving £641 a month from your company, but this year you can pay yourself £833.

You might ask “why am I paying myself an annual salary of £10,000? That’s the personal allowance limit and I normally only pay myself the national insurance threshold?” Ordinarily any pay over the national insurance threshold would trigger the payment of 12% employees national insurance and 13.8% employers national insurance. However, for 2014/15 HMRC are giving employers £2,000 towards their employers national insurance contributions. So for the time being it is more tax efficient to pay yourself a £10,000 salary (which will attract £245.28 of employees national insurance contributions). The net tax saving is £163, the difference between the employees national insurance and the corporation tax. Therefore as a company director, it is more tax efficient to pay yourself a monthly salary of £833 and declare a dividend on top.

While the personal allowance has increased, the point at which higher rate tax becomes payable has reduced.  If you are declaring dividends on a monthly basis and keeping them within the basic rate thresholds, the net dividends will fall to £2,389. So your net payments from the company will total £3,222. If you want to take more dividends, you can, but you will be taxed personally at 25% on the net payment.  It might be better to reinvest the money into the business or consider a pension scheme.

Remember these allowances are for each director/shareholder.

If you want more information on extracting money from your company in a tax efficient manner we are your local Brighton & Hove based accountants.

£2,000 cash back from HMRC?

We usually hear the term cash back from mortgage companies or in the supermarket, however, for 2014/15 HMRC are giving £2,000 back to employers. This is great news for employers and will really benefit their small businesses – a real reward for creating more jobs in the economy.

“How does this work” we hear you say and “what’s the catch”?  Amazingly there a no catches. You save the first the £2,000 of your Employers National Insurance due after 6 April 2014.  This will be deducted from the Employer National Insurance payable when you or your accountant runs your monthly RTI return in the payroll software. The amount is not spread throughout the year, it is available from April onwards and any unused balance in the first month will be rolled forward until it is all used or 5 April 2015, whichever is sooner.

As with all offers there are terms and conditions to stop abuse, but they are limited. If you are caught by IR35 you won’t be eligible and if you have more than one company in your business structure you cannot claim more than once.

If you want to know more about this great offer, contact your accountant. If they have not mentioned this to you then it is probably time to find another accountant. We can make a good suggestion in the Brighton & Hove area….

What dividend and salary to pay yourself in 2013/14?

 
As the 2012/13 tax year comes to an end, there is another change in your personal allowance and tax thresholds to be aware of, coming into effect from 5 April 2013. The question this raises is “How should you extract profits from your business is the most tax efficient manner for 2013/14?”

As always the extraction of funds needs to be a mixture of dividends and salaries, but what is the best solution to utilise all of your allowances while minimising your personal tax liability? We have two methods below, one taking a salary within the national insurance threshold and the other taking a salary within the personal allowance threshold, which will give rise to a small national insurance bill.

Option 1 – Taking a salary within the national insurance threshold

The national insurance threshold for 2013/14 is £148 per week, therefore you can pay yourself an annual salary of £7,696 (£641 per month).

The basic rate tax band has fallen from £34,370 to £32,010 (any amount over this figure would attract personal tax on dividends), taking into account the above salary and the tax credits on dividends you could take £30,379 of net dividends in 2013/14 before paying any personal tax.

Option 2 – Taking a salary that utilises your personal tax free allowance

The personal tax free allowance for 2013/14 has increased from £8,105 to £9,440, which would be a monthly salary of £786. However, with an annual salary of £9,440 you will incur an employee national insurance bill of £203.04 and an employer’s national insurance liability of £240.67.

Based on the above salary of £9,440 you would be able to take dividends of £28,809.

With this option, due to the increase in salary and the additional employer’s national insurance contribution, there will be a corporation tax saving of £396.94. If we compare the two options we can see the difference in net take home pay.

As you can see, by extracting the funds by option 2 you are £29 worse off personally, due to incurring national insurance (£38,075 vs £38,046).  When you consider the overall wealth, including the company, you are worse off by a further £17, so £46 in total. Option two also requires paying PAYE deductions every quarter, so increased administration on top of the cost.

 You may want to take more money out of your company, more options to consider include:

• Additional shareholders
• Pension contributions
• Gift Aid

If these are not an option then the higher rate of tax on dividends ranges from 25% (of the net dividends, up to a total gross income from all sources of £150,000) to 30.5%.

The above calculations are based on an individual under 65 years old and not receiving any other income. They are also for illustration purposes only and do not constitute tax advice. We would recommend that you seek professional advice before planning your own tax strategies.

At Nimbus Accounting, our aim is to make sure all of our clients minimise their tax liability, to help them grow and develop their businesses in these tough economic times.