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Tag: Class 4

Class 4

  • Autumn Statement 2023 – More Drip Than Waterfall

    This was very much about ‘making work pay’ and aiming to improve productivity. Important though national insurance tax reductions are to help sole traders and partnerships, they do nothing to help those caught by frozen thresholds or running small limited companies.

    Sole traders and partners

    With Class 2 national insurance abolished and Class 4 national insurance reduced by 1% from April 2024 but dividend tax unchanged, more businesses may decide to remain as sole traders rather than incorporate or even prefer to disincorporate.

    When you add in that the cash basis will become the default way to measure tax profits from April 2024 (for any size sole trader) together with the previously known companies house reforms requiring more company information to be made public, the government clearly wants small businesses to stay as sole traders unless they’re large enough to embrace being a limited company in full.

    To back this up, the cash basis for measuring tax profits from April 2024 will allow losses to be offset in the same way they are for the accruals basis (the one that accountants with use) and there won’t be an interest deduction cap of £500 with all trading interest becoming tax deductible.

    The cash basis may have been improved to also ease the introduction of Making Tax Digital – MTD – which will benefit from some simplifications from April 2026 (with over £50k turnover or rents) and from April 2027 (over £30k) where the quarterly submissions will now be cumulative and there won’t be an end of period statement (EOPS). MTD won’t yet be required for partnerships or jointly owned property. 

    NB For sole traders and partners with profits under £6,725, or tax losses, who want or need a state pension credit year, can still voluntarily pay Class 2 £3.45 a week, so Class 2 will still exist for many. 

    Owner-Directors

    With dividend tax at 8.75% between £12,570 and £50,270 but employee national insurance at 10% from January 2024, this differential is narrowed further, making it more likely than before that an owner-director should take a salary instead of a dividend. If you continue to take dividends, your income tax return will need to show your own company dividends separately from any others and your percentage share ownership, presumably to help HMRC track these back to your company.

    If you continue to embrace being a limited company, investing to save the higher corporation tax, but need funding to do so, you might benefit from an external EIS investor who will continue to benefit from tax breaks until 2035, which should encourage more investors to enter the small business scene.

    If, despite it being harder, you remain eligible for research and development tax credits, the R&D work you’ll need to do if you’re loss-making to maximise your cashback at 14.5% will fall from 40% to 30% from April 2024, meaning that you’re not expected to spend as much on R&D. Perhaps the 40% threshold was probably too high for many!

    Limited companies – 100% tax relief on new assets – ‘Full expensing’

    Much is said about full expensing but it has no value for most small limited companies who already benefit from 100% tax relief, called AIA, on most fixed asset spend of up to £1m per year. Full expensing only applies to new assets purchased by limited companies whereas AIA applies to sole traders and partners and second hand assets. 

    And don’t forget the same Chancellor increased corporation tax from 19% to 25%/26.5% meaning many companies won’t be better off overall. 

    After all the media interviews I was expecting a waterfall of tax improvements for small businesses, but we’ve  ended up with a dripping tap.

  • Health & Social Care Reform or Sticking Plaster?

    To set the scene,

    From April 2022, the following NICs will increase by 1.25% for one year only:

    • Employee NIC (over £9,568)
    • Employer NIC (over £8,840)
    • Benefit in Kind Class 1A (all levels)
    • Payroll Settlement Agreements Class 1B (all levels)
    • Class 4 NIC for sole trader and partners (over £9,568)
    • Employees of umbrellas companies (over £8,840, 2.5% over £9,568)
    • Limited companies within IR35 (over £8,840, 2.5% over £9,568)

    And the following income tax will increase by 1.25%:

    • Dividend tax (over £2,000)

    From April 2023, the NIC % will revert to current levels and the amounts above will be renamed a ‘Health and Social Care Levy’ showing up as such on payslips and start to apply to employed pensioners.

    It’s a common trick to call a new tax, a ‘levy’, but it’s a tax.

    What will you get for it? From October 2023, lifetime care home fees will be capped at £86k presumably hoping that the family home doesn’t need to be sold to pay for this level of fees.

    Employers may not pay the new tax:

    • If employers NIC is less than £4k
    • An employee is an apprentice
    • An employee is a veteran
    • The employer is in a freeport

    Apart from looking at these exceptions, how might you respond?

    Shareholder-directors – use your normal dividend tax threshold in full before April 2022

    If you tend to keep your dividends in the basic rate band paying 7.5% dividend tax on total income up to £50,270, ensure you use this band in full before 5 April 2022, before the increase to 8.75% from 6 April 2022. 

    Ditto for higher rate band dividends from £50,270 up to,say, £100k to pay as many dividends at the current 32.5% rather than the increased 33.75%. 

    You’ll need enough after-tax profits to pay the dividends, as usual, and check the effect of your other taxable income such as property rents.

    Sole traders and partners –  ensure you use accruals accounting, rather than cash accounting

    Unrepresented taxpayers tend to report cash income (and costs), not allowing for unpaid invoices or work-in-progress.

    You may wish to revisit this, to ensure as much net profit as possible is taxed at 9% NIC rather than the increased 10.25% on profits between £9,568 and £50,270 or 3.25% in the higher rate band on profits above £50,270.

    All businesses – revisit other ways to take money out of your company/business from April 2022

    The new tax increases the value of tax efficient alternatives, such as replacing existing dividends with a new electric car or employer pension contributions. Sole traders and partners will benefit from investing in plant and equipment including a new electric car or van for use by the business.

    Increase prices?

    Prepare or update your business plan, checking your margins, to see how you might recoup this additional cost to you and your business.

    Sell up or retire? 

    This may be another reason, after the pressures of the pandemic, to sell up or retire from your business, possibly paying 10% capital gains tax on its value.

    Interesting that this announcment, well before the budget on 27 October, leaves the Chancellor clear space to focus on his other tax and spending plans. What will we see then? 

    Further details as always can be obtained from your On The Spot Accountant. 

  • New Year’s Resolution? – Make Tax Understandable

    1. Training Costs – Allow all relevant business training costs paid by a sole trader to be tax deductible, as they are for limited companies. Surely training is a good thing?
    2. Class 4 National Insurance – Link Class 4 NICs paid by the self employed to benefits. Currently they are the most expensive NICs paid by the self employed but they provide no state pension credit or any link to benefits or the NHS. They are really no different from charging a further 9% of income tax, except they start to be paid at income levels £3.5k lower. 
    3. Gift Aid Carry Back – Allow charitable donations to be carried back to the prior year even if that earlier tax return has already been submitted to HMRC. Why should someone who has delayed sending in a return be treated more favourably?
    4. Corporate Gifts – Apply the same rules for VAT and corporation tax. Corporation tax rules require the presence of a logo and the gift can’t be food or alcohol, but there are no such restrictions for VAT. With a merged tax department surely this can be aligned?
    5. Property Partnerships – Similarly, treat jointly-owned property as a partnership for both income tax and VAT purposes. Currently, only the VAT department will automatically describe this as a partnership.
    6. S/EIS – Be more reasonable with the practical operation of S/EIS. If a taxpayer only needs to claim capital gains tax relief why insist that dummy income tax relief is claimed in a tax return? The investment is either eligible or not. And surely it doesn’t matter if the wrong form is completed by mistake, as long as adequate, relevant details have been provided?
    7. Making Tax Digital – Ensure MPs aren’t exempt from the biggest change to tax reporting for years. If MPs aren’t subject to the same rules, there is no incentive to make them understandable, relevant and proportionate. Is it right that a sole trader preparing perfectly good handwritten tax figures all his working life and filing returns online with HMRC, is now forced to adopt new software because MPs have said so? Whereas well paid supported MPs don’t even need to think about this for themselves?
    8. Personal and Tax Free Allowances – The interaction of these is so complicated even HMRC hasn’t yet managed to code everything correctly into their software. KISS!

    It’s these and many other strange rules which don’t help the public’s perception of HMRC and paying tax, which also adds to the feeling that the system is set up against them. This New Year and decade could be the time to tackle this properly. 

    Thank you. 

    Yours faithfully

    Accountant explaining tax to people every day…

  • Uber reaction – How should businesses react to recent employment law cases?

    Why does it matter?

    As a business owner, HMRC may decide that your longstanding sub-contractors are actually your workers or employees for tax purposes and should be subject to higher rates of national insurance. This is in addition to providing workers’ rights under employment law.

    How can you be self-employed, a worker or an employee?

    It used to be simpler to know whether you’re taking on an employee or a self-employed sub-contractor or supplier. The EU introduced a new definition of worker, a sort of hybrid between the two, which has caused some confusion. 

    What’s the point of being a worker?

    A worker enjoys many rights, just not quite as many as an employee. For example: 

    • Statutory maternity pay but NOT statutory maternity leave
    • Statutory paid holiday but NOT the right to time off for emergencies
    • Protection against unlawful discrimination but NOT protection against unfair dismissal

    So my self employed sub-contractors could win an employment law case, be classed as a worker, enjoy all the benefits but not necessarily pay any additional national insurance?

    Yes. In addition, you’d be required to include workers in pensions auto-enrolment paying up to 3% employer pensions contributions.

    HMRC might also require me to pay employer’s national insurance (13.8%) and deduct employee national insurance (12%) and income tax from the payments I make? 

    Yes.

    Does this additional national insurance buy the worker any more benefits?

    Not much. Assuming the worker already paid self employed Class 2 national insurance, the additional benefit is an enhanced job seeker’s allowance, if he needs it.

    That doesn’t make much sense.  I thought national insurance was a system you paid into to buy extra benefits.

    The state pension will usually be the most valuable benefit, but this is currently available anyway by paying £153.40 per year self employed Class 2 national insurance. 

    What should I do?

    1. Review all your contracts and practices with your self employed sub-contractors and suppliers to establish whether in the light of these recent tax cases they may be seen as workers or employees. 
    2. Use HMRC’s new Employment Status Tool to see whether HMRC agrees that your sub-contractors are self employed or not.
    3. If not, don’t necessarily rely on HMRC’s conclusion which ignores a vital Mutuality of Obligations (MOO) test. 
    4. Decide whether your contracts need to be amended to reflect your business arrangements more accurately or if you need to set up new employment contracts. 

    How does this apply to my limited company which provides services to my clients?

    If, through similar tests, you were found to be an employee of your client and caught within the ‘IR35’ rules, your company is obliged to pay PAYE and Class 1 employee and employer national insurance. As this wouldn’t have been factored into your pricing, this will make a big dent in your profits. 

    What should limited company contractors do?

    You can follow similar advice to above checking the details of your contracts and practices with your clients, as the points at issue are the essentially the same.

    This is a developing area of tax and employment law, so please check with your advisers before making any decisions. 

     

  • Budget 2017 – So will the Chancellor be sacked?

    The thing about national insurance

    It’s complicated.

    The Chancellor referred to the lack of payment for public services but the national insurance of £6,170 due on a salary of £32,000 includes £3,297 paid by the employer, not the individual. Plus the employer receives corporation tax relief reducing the net amount paid to the Treasury by £659 to £2,638 from the employer.

    If you look at what the individual pays, the correct comparison is £2,873 from the employee versus £2,300 from the self-employed, a reduced differential of £573. On a salary or profit of £32,000, this gap will drop to about £240 from April 2019. 

    This £240 is effectively the price of no holiday pay, sick pay, maternity pay, having to pay all your own pension contributions etc. 

    Hopefully, the announced review of benefits available to all will improve these comparisons. 

    15 MARCH 2017 UPDATE – THIS CLASS 4 NATIONAL INSURANCE INCREASE HAS BEEN SCRAPPED. 

    Making tax digital

    On top of this a 1 year delay to ‘making tax digital’ quarterly reporting where your turnover is less than £83k won’t reduce this new self-employed burden by much and the self-employed may start to feel a bit hard done by today.

    Dividend tax 

    The 0% tax rate on £5,000 of dividends will from April 2018 be available on only £2,000 of dividends. This will adversely affect small owner-managed businesses but it’s still likely to be beneficial to run many businesses through a limited company, if only to be able to control the timing of your personal taxable income.

    Perhaps when HMRC was told that its example of the interaction of the £5,000 and the tax free personal allowance was wrong, the Treasury had to re-run its numbers and discovered that £5,000 would cost more than they realised!

    Research & Development 

    As part of the Chancellor’s determination to tackle our poor productivity, he seems willing to be more lenient about the details required when making an R&D claim. This needs to be an instruction to HMRC, as the most lengthy information requests are made by inspectors after submission, sometimes for relatively small claims. 

    Conclusion

    The Chancellor’s error in the national insurance comparison and HMRC’s error in calculating the effect of the £5,000 tax free dividend, show how complicated the tax system has become. Even those legislating and running it don’t always understand the interactions across different parts of the system. There has to be more inroads into simplifying the tax system so taxpayers have more certainty over the tax they’ll have to pay.

    On the basis the Chancellor is waiting for the Autumn to deliver a more comprehensive budget, and will check with practitioners before making comparisons, perhaps he won’t be sacked this time. And perhaps we’d like to hear a few more jokes yet. 

  • Budget2016 – Restoring Localism Within A Global Economy

    Small businesses

    Corporation tax rate reduction from 20% to 17% in 2020/21

    This helps restore the balance from the new dividend tax although you’d need to earn £57k more annual taxable profit to recover the additional £1,700 annual dividend tax many are paying from this April.

    It might make other low tax jurisdictions look less attractive, such as Ireland, and encourage international companies to have more valuable taxable activity in the UK.

    Increased higher rate tax threshold to £45k from April 2017

    This has other implications such as on capital gains tax and the dividend tax rate, so is another way to offset the higher dividend tax you’re paying from April 2016.

    Increased tax if you borrow from your company from 25% to 32.5% from April 2016

    It may be worth considering whether you should take more dividends from your company before 6 April 2016 to clear any loans from your company. Paying 25% tax may be preferable to suffering 32.5% later until you do repay the loan. This is an area which has seen many recent changes and is a source of constant irritation to HMRC. With more tax at stake, it makes it more worthwhile for an Inspector to look into this area.

    IR35 changes for the public sector

    If you’re a service provider on longer term contracts with few clients, such as an IT contractor, the plan is to ask public sector clients to decide if you’re an employee in disguise. If they do, you might decide you prefer to work for the private sector. Surely this runs the risk of encouraging good suppliers to no longer work for the public sector. 

    Abolition of Class 2 national insurance from April 2018

    However, no mention of Class 4 national insurance, the real cost of being a sole trader or partner, so we’ll wait and see whether that needs to increase from 9%.

    Business rates and commercial SDLT reduction  

    This helps small retailers compete with the internet, although more so in the Northern and Midlands ‘power houses’ than in the South East.

    Encouraging investment from external investors

    An extension to entrepreneurs relief where new money is invested from tomorrow in an unquoted company and the shares are owned for at least 3 years from 6 April 2016, capital gains tax of only 10% will be due, as it is for many officers and employees.  

    Pensioners

    Reduced capital gains tax to 20% and 10% from April 2016 (except residential property)

    This may be the group most likely to benefit from the reduced capital gains tax. if you own shares in quoted companies or unquoted companies where you’re ineligible for entrepreneurs relief, you may now wish to consider selling these investments after this April.  

    Parents

    Sugar tax

    When children are mentioned Chancellors can get away with a lot but increased prices do also affect adults on low incomes. Introducing a sugar tax on drinks and keeping duty on beer the same may have the unintended consequence of making alcoholic drinks look relatively more attractive! 

    Lifetime ISAs

    A possible alternative or complement to normal pension savings. Together with pensions auto enrolment, ‘putting the next generation first’ may turn out to be true.

    For those on low incomes benefiting more proportionately from tax free personal allowances, combined with saving (possibly with parents’ cash) in a lifetime ISA which receives a 25% uplift from the government, may be a very welcome mix of valuable government subsidy.

     

    This trend of appealing to the many rather than the few, may turn out to be a successful strategy for the Chancellor. It may also help grow the economy as long as the new dividend tax doesn’t increase any further.

     

     

  • New Dividend Tax – How Will You React?

    £5,000 For Free?

    Everyone will receive £5k of dividend income at a zero rate. Your basic rate band or tax free personal allowance still gets used, but you pay £Nil tax on dividends up to £5k. Your final tax bill varies after this with the introduction of a 7.5% tax charge for a basic rate taxpayer, and a 32.5% tax charge for a higher rate taxpayer.

    Assuming a tax free personal allowance of £11k and a higher rate tax band of £43k for comparisons:

    • If you earn a salary of £43k and receive £6k of grossed up dividends (net cash received of £5.4k), your tax bill this year would be £1,350.
    • Happily, in the next tax year, £5k of the net cash dividends of £5.4k will be tax free and your tax bill will only be 32.5% of £400, or £130.
    • A fall of over £1.2k.
    • However, if you are an owner director taking a small £11k salary and grossed up dividends of £32k (net cash received of £29K), a total £43k of taxable income, your personal income tax bill this year would be £Nil.
    • Unhappily, in the next tax year your income tax bill based on the net cash dividend of £29k, after taking off £5k of tax free dividend, will be 7.5% of £24k, or £1.8k.
    • An increase of £1.8k. 

    On a £43k salary, employees are paying high national insurance, of course, which shareholders don’t pay, and this helps close that difference.

    It’s interesting to note that pensioners may also receive taxable pensions at this level, but as they don’t pay national insurance either, they receive a benefit without the national insurance downside of being an employee. 

    High Income Child Benefit Charge – £50k to £60k Taxable Income

    As the HICBC will now only refer to the net cash received without any ‘grossing up’ of dividends, those near to £50k of gross income may find their child benefit increased.

    Shareholder-directors taking a salary of £11k and net cash dividends of £40k receive a reduced child benefit in this tax year based on gross income of over £55k. Fortunately, in the next tax year, their gross income for this purpose will only be £51k. 

    Loss of Personal Allowances – £100k to £122k Taxable Income

    Similarly, the Taxable Income where the tax free personal allowance is taken away will also be based on the net cash dividend received and not the grossed up version, saving some tax for people near to these thresholds.

    How Might Shareholder-Directors Respond to this New Dividend Tax?

    Having seen how shareholder-directors are adversely affected, how might you react to this new tax?

    1. Sell your business sooner? You’re likely to pay only 10% capital gains on a lump sum, rather than be burdened with 7.5% and 32.5% on your dividends every year.
    2. Pay employer pension contributions? These save 20% corporation tax and aren’t taxed on you. Beware the limits, but they may have a place in your financial strategy.
    3. Give some shares to your spouse to at least use the £5k tax free amount, if it’s not used elsewhere.
    4. Pay more dividends in this tax year, even some higher rate ones, if you’re likely to need that level of cash for the foreseeable future, and if your company has sufficient profits after tax.
    5. Invest in more ISAs if their returns and charges warrant it, keeping as much of the £5k tax free dividends available for your own company dividends.
    6. Disincorporate and revert to a sole trader or partnership? You may find at profits of £30k to £40k the additional administration isn’t worth the reduced tax savings. The current Class 4 national insurance is 9%, but you might want to wait to see what the new Class 4 rate will be when Class 2 national insurance is abolished. And remember that at least with a company you can choose when you pay your personal income tax whereas sole traders and partners are taxed at higher tax levels in the year the profits are earnt.
    7. Revisit any home office rent charge to see whether you may still have a net £Nil profit after a rent increase. Or use up your tax free personal allowance fully, if it’s not used by salary or other income such as buy to let profits.
    8. Use your directors loans account more often? Despite both temporary and permanent tax charges, these may be a cost effective tool if you need some cash temporarily so you don’t suffer a permanent dividend tax charge.

    Conclusion

    Odd that the Office for Tax Simplification was made permanent in the same Summer Budget, when the need for accountants to work through this complexity and advise on the specific response for each client, has never been stronger.

     

     

     

     

     

     

     

     

     

     

  • #Tax Myth 13 – Your Income Is The Same For All #HMRC Purposes

    #Tax law is set up by different politicians at different times to achieve different aims, so we often end up with a strange mix of outcomes.

    You may know what your Income is for income tax & national insurance purposes, but what about pension purposes? Child benefit high income charge? Childcare vouchers?

    Here’s a list of the main sources of income and when they’re applicable when dealing with #HMRC:

    Salary, Bonuses & Benefits

    • Income tax
    • National insurance – Class 1
    • Employee pension contributions
    • Childcare vouchers
    • High income child benefit charge
    • Working tax credits

    Sole Trader/Self Employed Profits

    • Income tax
    • National insurance – Class 2
    • National insurance – Class 4
    • High income child benefit charge
    • Pension contributions
    • Working tax credits

    Dividends – Gross

    • Income tax
    • High income child benefit charge
    • Working tax credits (over £300)

    Interest Income – Gross

    • Income tax
    • High income child benefit charge
    • Working tax credits (over £300)

    Property Profits

    • Income tax
    • High income child benefit charge
    • Working tax credits (over £300)

    Pensions Received, Including State Pensions

    • Income tax
    • High income child benefit charge
    • Working tax credits

    Points To Note

    1. The gross dividend is the amount you received plus the tax credit of 1/9. So for a £100 dividend, you use the higher non-cash figure of £111.11.
    2. The £300 is deducted only once from this income added together.
    3. The tax free personal allowance is not deducted when considering thresholds such as the £50k-£60k adjusted net income for the high income child benefit charge.

    Strange Mix Of Outcomes

    1. When calculating your/your partner’s adjusted net income for the high income child benefit charge, or your working tax credit income, remember to deduct self employed losses, gross gift aid and gross pension contributions (a net £100 gift or contribution becomes £125 gross), but not most property losses! And not in the same way as for income tax purposes!
    2. The childcare voucher thresholds ignore dividends, so you may be able to pay more tax free childcare vouchers from your own company than you thought.
    3. Pension contributions paid by employees are restricted according to salary, bonuses and benefits, but employer contributions don’t have the same limitations (there are others). Your own company may therefore prefer to pay employer pension contributions (after seeing an IFA).
    4. With the new simplified cash accounting for unrepresented self employed sole traders effective from April 2013, these cash based profits are presumably the ones to use for working tax credits and other #HMRC purposes? They will probably be the same for the new universal credit system as we already know that requires monthly reporting of cash based profits.
    #taxisfun

  • Sole Traders – Six #Tax Numbers You Must Know

    1. 4 Years – If you are in the first 4 years of your business and make a loss, you can use this loss to reduce your tax bill in the previous 3 years, such as from the job you had before you set up your business. You will receive a tax refund.

    2. £5,725 – If your profits are lower than £5,725, you don’t have to pay the annual £140 Class 2 NI, unless you need a credit towards your state pension. Ask for a repayment for earlier years.

    3. £7,755 – If your profits are higher than £7,755, you will pay 9% Class 4 NI. This gets you no state benefits and effectively increases your tax rate from the 20% income tax rate to a total 29% tax rate.

    4. £25,000 – Because of the Class 4 NI mentioned in 3. above, this is roughly the level of profits you need where it is likely you should consider becoming a limited company. This is penalty wonderland and more complicated than a sole trader, so use a good accountant. At this profit level, their fees shouldn’t outweigh the Class 4 NI saving.

    5. £79,000 – If your TURNOVER in the last 12 MONTHS, reaches £79,000, most businesses must register for VAT. You might be making a loss but it’s irrelevant.

    6. £150,000 – If your turnover has exceeded £79,000, but lower than £150,000, you might benefit from being in the VAT Flat Rate Scheme. This saves administration but can also be very profitable. Even if your turnover is £Nil, you can register for VAT voluntarily and enter the Flat Rate Scheme.

  • Tax Relief For Losses

    The short answer is ‘Very Likely’!

    The longer answer involves considering:

    1. Your prior years income and profits
    2. Any other income received in the same year
    3. Your anticipated future income and profit levels

    This will enable you to maximise your tax repayment or reduce your future tax payments. Where different tax rates apply, this will affect your optimum claim.

    Maximum flexibility is available to sole traders/partners, particularly those in the first 4 years of  trading, or when a partner joins a partnership. Tax paid on past salary, redundancy, or rental profits, for example, may be refunded.

    You may arrange the use of your losses to ensure you don’t waste your personal allowance, currently £7,475, and may even be able to offset them against a personal capital gain, such as a property disposal.

    As a sole trader/partner, regardless of your claims for income tax and capital gains tax purposes, your loss will reduce your future Class 4 national insurance contributions. And you may use the same loss to reduce your income for Working Tax Credit purposes potentially increasing the payments made to you.

    If repayment of past tax isn’t available, your loss may always be carried forward indefinitely to reduce the tax you pay in later years, for when those profits return.