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Tag: NIC

NIC

  • Spring Into The New Tax Year

    1. Frozen Income Tax Allowances

    Frozen allowances mean that more people are getting caught by a 40%, 60% or 45% tax rates and the dividend tax equivalents. As a business owner, you have more options than a regular employee.

    Some sole traders work less to keep their profits under the 40% higher rate band of £50k. Shareholder-directors should review their mix of dividends-salary to ensure they are optimised.

    A sole trader could add another person such as a spouse and set up a general partnership to even out the use of their income tax bands. A shareholder-director may ask a spouse to take on some shareholder responsibilities and receive some dividends to use their basic rate tax bands or to keep your income under £100k.

    2. Employer’s National Insurance 

    As a director-shareholder, in the light of the increase in rate from 13.8% to 15% and lower starting point from £9,100 to £5,000, alongside an increase in the annual allowance from £5,000 to £10,500, consider whether you need to change your dividends-salary mix from this month.

    For example, if your company suffers the 26.5%/25% tax rate and some or all of the increased £10,500 national insurance employer annual allowance is available to you, you’re likely to find that a director salary higher than £12,570 is more tax efficient for you.

    If you’re a sole shareholder-director without staff but with a budget for some services, consider a part time employee who can be a family member so the £10,500 annual allowance available to you. This might even save you money overall.

    As an employer facing increased national insurance costs, consider approaching employee remuneration differently. For example, bonus schemes might be replaced by a more tax efficient share option scheme or introduce a salary sacrifice scheme to replace salary or bonuses with employer pension contributions. 

    3. Pensions

    Plan, plan, plan.

    With corporation tax at 25%/26.5% for many company owners, you may wish to re-visit your company pension contributions paid into your own pension to save corporation tax. Contributions must be paid before your company year end so make sure you don’t miss that.

    4. Annual Investment Allowance and Electric Cars Allowance – 100%

    The Annual Investment Allowance rewards investment of up to £1m on plant and equipment or eligible commercial property refurbishment with 100% tax relief. Similarly, new electric cars purchased benefit from 100% tax relief with no limit.

    If you plan to incur these costs near to your year end, such as 30 June 2025, ensure you meet the conditions for a claim in this year, so you don’t have to wait a year to get the cashflow tax saving.

    Remember hire purchase contracts work, so you don’t need to have bought the assets outright to get full tax relief, assuming the hire purchase contract is good value overall.

    5. Entrepreneurs Relief (BADR)

    If you’re thinking of selling your business or liquidating and your business is eligible for BADR, ensure you exchange or receive your liquidation distribution by next 5 April 2026 so you don’t pay the higher 18% (currently 14%) applying in the next tax year.

    6. Director Small Wins

    With too many tax increases around at the moment, remember use what is still available to you. Maximise your director treats for the tax year ended 5 April 2026; trivial benefits under £50 each, totalling an annual £300 each, annual parties expenditure up to £300 each including guest or have a private health care check.

    7. Furnished Holiday Lets (FHLs) Cessation

    FHLs now have the same tax treatment as assured longer term lettings.

    Tax losses from your FHLs can be brought forward and offset against future property profits. However, tax reliefs such as capital allowances are more restricted and the split of profits between joint spouse owners require a formalised approach.

    Review your property ownerships, who should own what percentage and your repair and refurbishment plans,  ensuring you implement your requirements correctly and in good time. For example, HMRC needs to be notified promptly if you want rental profits to be allocated between you and your spouse in certain way, otherwise your will each be taxed 50:50 which may not be optimal.

    8. Non-Domiciled Tax Changes

    The changes are the biggest for many years. If you are UK tax resident but not a UK domicile, known as a ‘Non-Dom’, take specialist advice on the implications for you. Your income tax, capital gains and inheritance tax may all be affected.

    9. Tax Returns Additional Information

    Sole traders will be required to include the date you started or ceased your business. Understand the implications of the dates you use, because these dates affect your registration date with HMRC and your loss reliefs or capital allowances claims, but the date can be debateable. For example, when did you really start your business? During a marketing phase, when you contacted potential clients or when you raised your first invoice? It depends on the whole picture.

    Shareholder-directors now need to provide details of your shareholding in your company such as percentage shareholding, company name and registered number. Make sure your dividends always agree with the amount in your company accounts.

    10. Interest Charged By HMRC Increased To 8.5%

    Be careful about underpaying your tax bills. The interest rate HMRC will charge you on underpaying your tax such as self assessment payments on account or your corporation tax is now 8.5%, which is pretty expensive. If you overpay tax, HMRC will pay you 3.5% which is better than most business accounts, but a 5% difference against the 8.5% charged on underpaid tax.

    Therefore, where there is some doubt about your final tax bill, you may wish to err on the side of overpaying rather than underpaying your tax.

     

    Each taxpayer is different and you should only act after being advised about all the financial impacts of your actions. 

  • Dear HMRC…Why We Need To Talk

    Dear HMRC

    Why we need to talk to you…..

    As an unrepresented taxpayer with apparently very simple tax affairs, I find myself needing to call you. I really don’t want to. I have better things to do, but I like to know I’m not going to upset you.

    Over the last few years, I’ve needed to talk to you about:

    Incorrect PAYE code – In common with the mightiest Finance Directors, I don’t like surprises. If this code is wrong and you send me a demand after the end of the tax year, it’s a worry. I don’t have spare resources to conjure up extra cash.

    No matter how hard I try, I don’t understand my code. If you change it, I won’t know why and I need to ask you. I need someone to say it’s OK, no need to worry.

    High Income Child Benefit Charge – A couple of times, I’ve earnt over £50,000, and you came back to me a few years later and asked me to repay some child benefit. This is a confusing rule. You saw my income, but child benefit continued to be paid. You told me this is on the website for me to see clearly.

    Sorry, but I don’t hang out on HMRC’s website just in case something applies to me. You know the jargon because you see and hear it every day. I don’t, so occasionally I need a human to explain things to me.

    Pensions – Full Tax Relief – When I earn over £50,270 (different to the £50,000 for child benefit) I’m told I can claim an additional 20% income tax on some of the gross pension payment made to my employer’s pension scheme. I have only the vaguest idea what this means and suspect there are a lot of us missing out on full tax relief.

    I’d quite like you to explain this to me. HMRC’s site assumes a certain level of starter knowledge eg what ‘relief at source’ means.

    Self Employed Class 2 NICs – My side hustle self employed income is sometimes very low and you refunded me the Class 2 NICs I’d asked to pay voluntarily. On enquiry a person explained that voluntary contributions aren’t accepted unless a certain form has been completed.

    For years, I’ve reported a small self employed business on the side. This isn’t enough to earn me a state pension credit should I ever need to pay Class 2 NICs voluntarily. How confusing is that? I couldn’t have worked this out on my own.

    Self Employed Tax Payments Due – In my busier years, no matter how hard I try I don’t understand any statement I see. I pay the figure at the bottom and hope for the best. You tell me the payment on account system is explained online.

    You’re the only organisation I deal with that has a twice a year payment system with half of it in advance and the other half after the end of a period. Unless someone takes me through how that works, I’m not going to understand it.

    It seems the people sitting in rooms talking familiar language make rules that suit their ends. The rest of us get on board as best we can.

    Or are you saying we now all need to pay an accountant?

    Yours confused

    Unrepresented Customer (who can’t choose another ‘supplier’)

  • 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. 

  • #Budget2018 – IR35 – What yesterday’s press release should have said

    If your clients are medium or large businesses, they’ll be deciding whether you’re self employed or an employee for tax deduction purposes only. Or put it another way, if they are a small company, the rules don’t apply and you may be able to continue as normal.

    If your client decides that you’re effectively an employee, then your client (or its agency) will need to deduct income tax, employee NIC and pay employer NIC without any associated employment rights.

    This means:

    1. Consultants, you are likely to suffer the employer’s NIC because your clients won’t be willing to pay it. If they’d needed and budgeted for a permanent employee you or someone else would presumably be on an employment contract, with all the benefits of that.
    2. This leads us on to the very uncomfortable outcome that a Consultant may pay full PAYE income tax and NIC, but without any employment rights at all.
    3. The mechanics of this are predictably complicated and involve a payslip being issued to your limited company, although your company’s accounts will show it has paid you dividends.
    4. Issuing invoices and being VAT registered makes no difference. Your clients work with the net of VAT invoiced amount and deduct tax from that, regardless of how you’ve taken the money out of your company.
    5. Regarding whether your client is a small business, if the usual Companies Act definition is used, your client should be under at least two of the following:
      • Turnover < £10.2m
      • Gross assets < £5.1m
      • Number of employees < 50
    6. How will you be able to check if a prospective client is small or not? You could look at filed accounts at Companies House, but these don’t have to be filed until 9 months after the year end.
    7. Will you have to trust your prospective client to get this right? Will procurement managers have this information? What if it changes mid-contract? Who will pass on this information to you, the procurement department or an agency? Does the definition of small also apply to the agency?

    What can you do about this?

    1. You may decide to work only for small companies! You’ll need to ask for written confirmation that your clients are small and are therefore not applying these rules. Try to have contract terms that your clients will pay any tax due if they make an incorrect assessment. Commercially, however, this may be unlikely!
    2. On the other hand, if your clients are medium or large, you’ll need reassurance they still regard you as self employed. HMRC has a ‘CEST’ tool (Check Employment Status for Tax) but it has its limitations.
    3. Your clients are expected to use the CEST tool to determine whether you are self employed or an employee. If they get a favourable result, ask for a copy and keep it on file in case of a future enquiry. If they get an unfavourable result, ask to look at it in case it’s been used incorrectly.
    4. HMRC recently admitted that the tool isn’t required if there’s no Mutuality of Obligation (‘MOO’) to offer and accept work. Tribunal cases have confirmed this point. If this stands, then being self employed might simply be determined by that point, if it’s clear.
    5. If your clients insist they need to apply these rules and they have assessed you as an employee, have contractual terms that mean they pay the employer’s NI if, commercially, this is available to you.
    6. Consider whether you can increase your fees to offset the increased tax burden. Again, commercially, this may not be available to you.
    7. If you do have one longstanding client, you may decide that now is the time to end your contract and apply for a different employment with them or another business. We’ve seen this to some extent with the public sector version. At least you won’t pay employer’s NI and you’ll get employment rights in return for paying PAYE.

    There is a consultation period and we expect many comments will be given resulting in clarifications or even improvements to the above! 

     

  • 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.