Accounting & Tax
Updated 9 April 2017
Introduction from WFL
Anyone NOT in full time employment on a payroll has special responsibilities to manage their own Accounting and Tax matters – if operating on an independent basis. The format you choose is important – in terms of your own financial management, your tax obligations and adhering to relevant legal requirements. (Even if you are a full time employee on someone’s payroll, it is still important to be aware of accounting and tax matters but the scope to change anything is negligible.)
This section looks at this overall area; offers general and specific guidance and points/ links to other relevant sources of information.
This Section does not cover Personal Financial Planning, Raising Money/ Financing. Matters around Business Planning are not specifically covered but will be referred to when handling Accounting and Tax matters.
Working Free is pleased to introduce Colin Howe, a specialist in this area and a Principal with leading regional Chartered Accountants, Hillier Hopkins LLP as our Technical Topic Partner for Accounting & Tax. Colin would be happy to hear from you with your queries and issues – working on the basis that anything of a substantive nature might lead you to engaging Colin on a professional basis! If you think a topic could usefully be added to this section please email [email protected]
In practice, successful Independents learn as much as they can about handling their own accounting and tax matters, but lean on their professional advisors for tricky, structural, strategic matters. The more successful ones recognise that it works better to pay their professional advisors to handle some of the routine as well. Have a look at how Hillier Hopkins can help you here – www.hillierhopkins.co.uk/contractors
Note & Wealth Warning
Information contained in this section is necessarily generic and in a readable format which may not contain all details on the subject matter. In all matters accounting and tax the devil is in the detail and you should ensure you take individual advice specific to your circumstances before acting.
This Section is currently under revision. In the meantime, please contact [email protected]
The Lead contact here is Colin Howe. Colin Howe joined Hillier Hopkins in 1981 and has been a Principal since 1986. He provides broad commercial and taxation advice to business owners and their businesses.
If you would like to make a comment that others can read, see where marked TTC at the end of every Section. This where you can make your Contributor comment – which is emailed to [email protected] - and published after screening. Please include your name and contact details so that other readers can get back to you. The real value in this Section– for all Readers – will doubtless come from learning from other Independents’ experiences and knowledge – what works and what does not work – things to do and things to avoid.
To get started as a Technical Topic Contributor click here.
To start with…
…visit and absorb what HMRC says about Accounting, Tax and setting up in business. www.gov.uk/working-for-yourself/overview.
Quoting from their website, this includes:-
- If you start working for yourself, you’re classed as a sole trader – even if you haven’t yet told HM Revenue and Customs (HMRC).
- You’ll need to register as self-employed to make sure you pay the correct Income Tax and National Insurance.
- Check what counts as self-employed if you’re not sure about your status.
- You must follow certain rules on running and naming your business.
- There are other business structures apart from being a sole traderIf you set up a limited company, you’re not classed as self-employed but as both an owner and employee of your company. You’ll follow different rules on tax and National Insurance
Choose a legal structure for your business
This structure will define your legal responsibilities, such as:
- the paperwork you must fill in to get started
- the taxes you’ll have to manage and pay
- how you can personally take the profit your business makes
- your personal responsibilities if your business makes a loss
Colin Howe says:-
“Your first task is to discover as much relevant information as is publicly available – see links below – take guidance on what additional information is necessary – and then exercise judgement on what approach is best for you – both in your current circumstances and as regards the direction in which you plan to take your business. After that, you’ll need to keep on top of the continuing process – ensuring that it is always up to date, the accounting is accurate, it actually helps you run your business, is tax efficient and conforms to all relevant legal requirements.”
- To find out more,
- or visit www.hhllp.co.uk
- Hillier Hopkins LLP, Chancery House, 199 Silbury Boulevard, Milton Keynes, Bucks MK9 1JL.
“You may be interested in talking to us at Hillier Hopkins – www.hhllp.co.uk – about our proven expertise in providing an outsourced financial/accounting/ book-keeping service designed specifically for independent professional practitioners, contractors, small consultancy practices – run by you from your own PC. Our mission is to eliminate hassle and reduce your tax.
Our specialist accountants have been working with contractors for more than 20 years. In most cases, they can find you tax saving opportunities that have previously been missed. We always provide ongoing personal attention to make sure you continue to minimise your tax no matter how your circumstances change.
We remove the hassle from running your own business by taking care of the form filling, filing and deadlines. We can do your books for you, or you can do it yourself via our simple spreadsheet system. If you are constantly on the move, you might prefer one of our cloud accounting platforms. Within this, we can run your payroll for you – particularly useful if you employ staff. It’s up to you.
We offer a fixed fee and a number of options so you can choose the solution that’s best for you. Our fee includes access to your own accountant, who is on hand to answer.”
How do you choose?
This will be based on 3 main factors:-
- Risk and personal liability
- The ‘rules’ of the industry you operate in
- Taxation considerations
Risk and Personal Liability
As a sole trader you will be personally liable for any debt or claim made against you. This means that your house or other property may be at risk. As a partner in a partnership you will have ‘joint and several’ liability for partnership debts and claims. This means that you could be liable for 100% (not just your proportion) of any claim if your partner(s) cannot afford to pay their share.
You should consider taking out insurances to give protection against claims.
Rules of the Industry
If you are acting as a subcontractor in certain industries or for certain clients they may insist that you operate through a Limited Company. If you subcontract as an individual your client bears the risk of a challenge by HMRC as to your ‘status’ – if HMRC successfully challenge that you are in fact an employee and not self employed then your client will incur unexpected taxation and national insurance charges.
Sole Traders, partnerships and Limited Liability partnerships are taxed in a similar way.
You are liable to Income Tax on your share of the taxable profit on an ‘arising’ basis. This means that you pay tax on your whole profit share regardless of how much of that profit you actually draw from the business. National Insurance rates are also different compared to a Limited Company.
A Limited Company pays corporation tax on its taxable profits (currently 20% but due to reduce) . The rate of income tax and national insurance you pay is then determined by your ‘distribution policy’ i.e how you extract monies from the Company.
A Limited Company allows you to control the timing of your income tax liabilities and in some cases reduce the marginal rate of tax you pay by efficient use of personal allowances and basic rate bands of tax. You can also involve family members to make use of their allowances.
If you incur a taxation loss there are different rules on how that loss can be relieved, dependant on the trading vehicle and your other circumstances.
It is not possible to give a generic answer as to which method of operation is the best for you, this will depend on many different factors, including the level of profitability and your personal and family circumstances.
- Employing staff for the first time
- Running a business partnership
- Set up a private limited company
- Set up as a sole trader
- Set up and run a limited liability partnership (LLP)
- Set up and run a limited partnership
- Setting up a social enterprise
- Business support on the phone and online
NOTE from Working Free
There is much mention of “self-employed” and “self-employment”, probably much more currently that in the past. This is a complex area from many perspectives, some covered elsewhere in this website. Care needs to be taken in choosing the right trading format. Mainly this is a business decision but, in recent years, it has become a Government/Political matter and also an HMRC one.
You do need a general understanding of the overall area, differentiating between those things you can handle yourself, those where you need guidance/ confirmation and those where you need to get someone one else to do it for you.
If you are OK with Spreadsheets – and your transactions are low in number (Ie; one fee invoice per month and half a dozen or less cost invoices) you can probably do it all yourself – as long as you can run a payroll – and account to HMRC for monthly PAYE and NI. If registered for VAT – and you ought to aim for this in terms of the size – now or in the future – of your professional Practice – you will need to complete and return your quarterly VAT Return. However, you might prefer to have this done for you – including your annual accounts and tax return – or, certainly, get your approach checked.
Anything beyond this, then you might outsource accounting support (for example see Sublime Accounting www.sublimeaccounting.co.uk ) or acquire some SME accounting software – see list aside
Some of the most popular SME accounting software systems are:-
Surveys available from:-
If your business is the right size and if you are knowledgeable enough, you can do the research, selection and implementation yourself – and if, of course, you can afford to sacrifice valuable charge out time to your clients……………… who may well not be there when you’ve got your new IT system up and running. Alternatively, you can pay someone to do it for you!
The links above to HMRC relate to start-ups and – usually – one person businesses. Many businesses expand beyond this point and, whilst most of the principles stay the same, some don’t and, certainly, the ways in which things work in practice can and do change.
Following this, is a comprehensive list of the areas that come into play or are likely to feature in managing the financial and accounting affairs of your professional practice/ small business. Some of them link to additional information. Those that don’t either don’t need to or, conversely, need to be approached through professional support.
You need to be careful in making judgements about what to do. Many decisions needing to be made will be on the fringes of your own knowledge and/or skill-sets or beyond.
Below is some guidance on specific areas, which if clicked expand to show further information. Some of these sections have further references and sources of information.
This section will cover the basic rules for income tax and corporation tax. Capital gains tax and Inheritance Tax are dealt with separately.
Is charged on taxable profits of Limited Companies currently at a rate of 19% (effective 1 April 2017).
This is an attractive rate compared to Income Tax and National insurance rates for individuals and to Capital Gains Tax rates. Tax planning for OMBs is therefore largely based around Distribution Policy. If you don’t have to draw money from the company then don’t…the income is then sheltered at 19%.
Monies you do draw should be done in as tax effective manner as possible utilizing family members’ personal allowances and basic rate bands of tax.
Is charged on
- Dividends and salaries drawn from Limited Companies
- Profits earned by a sole trader
- Profit shares from either an LLP or partnership
- Interest received
- Rents received net of allowable expenses
Every individual (with certain exceptions) is entitled to earn income of £11,500 without paying any tax . There are also some limited exemptions for small levels of savings income.
For income above the personal allowance (other than dividends)
the next £33,500 is taxed at 20%
£33,501 to £150,000 40%
over £150,000 45%
Dividends (because they are received out of income from Companies which has already been subject to Corporation Tax ) are subject to lower rates of Income tax as follows:
£0 to £5000 0%
£5,001 to £33,500 7.5%
£33,501 to £150,000 32.5%
Over £150,000 38.1%
Dividend income is NOT subject to national insurance; salaries and fees from a Limited Company are subject to National Insurance on both the employer and employee.
Dividend income is paid on shareholdings (ownership) of the company which may be (and often is) different from the directors / employees actually doing the work (who receive salaries).
Dividends are taxed as the ‘top slice’ of income where there are multiple sources.
Benefits in Kind
In the ‘good old days’ it was possible to reduce tax and national insurance liabilities by taking remuneration in non cash form as a benefit in kind.
HMRC have largely eliminated the tax benefits of this other than for a relatively small number of tax advantaged benefits.
The basic rule is that all benefits in kind provided by a limited company to an employee are charged to income tax.
If the benefit is readily convertible to cash then it is also liable to National Insurance charges . The contract must be directly with the company not the individual and should not be a salary sacrifice arrangement,
Examples of Benefits which do not attract a tax or NI charge are:
- Pension contributions paid by a company to an employees pension scheme
- Life Insurance using a ‘Relevant Life Policy’ #Insurances
- Workplace car parking
- Mobile phone
- Staff Parties (up to £150)
- Childcare Vouchers
- Relocation Costs
- Business mileage payments at approved rates
A car provided by a company will attract both income tax and national insurance at quite penal rates UNLESS it is a zero or low emission vehicle. The definition of what constitutes low emissions becomes tighter and tighter with every budget!
Whether it is better to have a company car or just to claim a mileage allowance for business miles done will depend on a number of factors , principally:
- The type of car and its CO2 emissions
- Its list price (not the price you paid for it!)
- Your annual business miles
- Your annual personal miles
Bear in mind also that there is a separate BIK scale charge over and above the Car benefit if any fuel is provided by the company.
Content to be added
Whether you trade as a Limited Company or not the basic rules are the same. Your accounts will show a profit or loss (hopefully a profit!) but this is then adjusted to arrive at a ‘taxable profit’ on which your liability is based. These adjustments may be permanent (certain expenses not allowable for tax) or timing differences (where the tax legislation allows for relief on expenditure on a different basis than accounting rules).For example Capital Allowances.
A typical computation might look like this:
|Profit per accounts||£55,000|
|Legal expenses re Capital item||£1,750|
The general rule is that expenses must be ‘wholly and exclusively’ for the purpose of the trade to be allowable. Superimposed above this are specific statutory rules (for example expenditure on client entertaining event though for the business is never allowable.)
Depreciation (which is a bookkeeping entry reflecting the estimated usage of a fixed asset) is always added back but in its place you can claim capital allowances (which is HMRCs version of depreciation).
There are other statutory reliefs which can reduce the rate of taxation such as R&D Relief and Patent Box claims which require specialist advice.
Capital Allowances are HMRC’s version of depreciation. This allows you to claim tax relief on capital expenditure (Fixed assets) which would otherwise not be allowed. Different rates of Capital Allowances can be claimed dependant on the type of expenditure and when it is incurred. The government is currently keen to promote investment by businesses so Capital allowances are relatively generous and will normally be higher than the accounting rate of depreciation, a good thing as tax relief is accelerated.
Businesses are currently able to claim a 100% deduction against profits for qualifying capital expenditure up to a maximum of £200,000 (for the 12 months from 1 January 2016). Successive governments have ‘played around’ with this limit to encourage investment so higher or lower levels apply in different years, your accountant will confirm the applicable rate dependant on when expenditure is made.You can’t claim this on cars (unless its an Electric Car through a Limited Company)! You can’t claim it on buildings as a whole but there may be ‘integral assets’ within the building which qualify.
If capital expenditure doesn’t qualify for AIA then it may qualify for an annual writing down allowance. The ‘main rate’ of allowance is 18% calculated on a reducing balance and applies to most capital expenditure.
However a lower rate of 8% applies to ‘special’ items such as:
- Integral features within a building
- Cars with CO2 emissions of more than 130 g/km.
The subsequent sale of an asset may create an additional tax charge (or additional tax relief) dependant on the type of asset sold and whether AIA or writing down allowances have previously been claimed. As such capital allowances should be considered a tax deferral and not an absolute relief.
Capital Gains Tax
Is payable on capital gains made in a tax year; in the context of a Limited Company this applies to both the sales of shares in a company and to a distribution made on a liquidation.
It is also possible under certain circumstances for a company to ‘buy back’ shares from a shareholder who will receive capital gains tax treatment if specified conditions are met.
Capital gains tax treatment is generally preferable to Income Tax due to lower tax rates. This is particularly true for any gains which qualify for Entrepreneurs Relief.
The ‘normal’ rates of tax for CGT are (non residential property)
First £11300 0%
Thereafter the gain is added to income in the year
Anything falling within basic rate band is taxed at 10%
Higher rate band 20%
For residential property (other than the principal private residence) the equivalent rates are:
Anything falling within basic rate band is taxed at 18%
Higher rate band 28%
Any gain qualifying for Entrepreneurs relief will be taxed at 10% throughout (up to £10 million of qualifying gains).
The basic conditions for Entrepreneurs relief are that (for the 12 months prior to the disposal):
- you must have worked in or been an officer of the company
- you must have held at least 5% of the shares
This is a very valuable relief , please take professional advice to ensure you qualify!
There is now anti avoidance legislation in place to prevent ‘serial’ entrepreneurs forming a succession of companies, liquidating and investing in a new one carrying out the same activity.
If you buy a car through the business how it is treated depends on which trading vehicle you employ. If you are NOT a limited company then the allowances claimed will be restricted based on a business use / private use proportion. As a Limited Company the full allowance can be claimed BUT there is be a Benefit in Kind for any personal use of the vehicle.
If you or your spouse/partner claim child benefit you need to be aware that there will be a recovery of this (through your tax bill) if either of you earn above £50,000.
The child benefit is fully recovered if either of you earn £60,000 or more.
This is done through the Child Benefit Tax charge and often comes as a nasty shock as an extra tax payment for the self employed.
The income figure looked at for this purpose is adjusted net income : your total taxable income before any personal allowances and less things like Gift Aid.
The below link gives a calculator for ease of reference
If both of you earn above £50,000 the higher earner is responsible for making the entry on their tax return.
If you are consistently earning above £60,000 it may be sensible to stop claiming the benefit.
Corporation tax is assessed on the taxable profits of a Limited Company currently at a rate of 19%. This is assessed on profits before dividend payments to shareholders (but after directors’ remuneration). Reductions in this rate have already been announced as follows: From 1 April 2020 18%. Who knows what BREXIT and the need to compete with Europe may bring…. Rates as low as 15% have been ‘flagged’.
Planning Top Tip
The most underused reliefs and exemptions in practice are Research and Development Relief, Patent Box Relief and Capital allowances claims on integral assets within buildings.
How to extract your money from your Limited Company
As noted elsewhere monies earned by your company and not paid out are taxed at the relatively low rate of 19%.
At some point however you will want to extract some of this money for personal use.
The basic options are:
- Pay salary
- Provide tax efficient BIK (see BIK section)
- Pay dividend
- Pay pension contribution
- Lend money from the company to you
- Leave surplus money in and extract at the end of the company life as a capital gain
Salary is relatively tax inefficient due to the incidence of National Insurance however it is important to ensure that you maintain a national insurance record to maintain entitlement to state benefits (pension etc).
Curiously it is possible to maintain a contribution record without actually paying contributions by setting your salary above £112 per week but below £155 per week. That is a maximum of £8060 per annum. This is a common level of salary for OMB owners.
You may prefer to set the salary at a higher rate to satisfy minimum wage requirements and incur a small NI liability.
Dividends are more tax efficient throughout all levels of income because:
- they have a 0% band of £5000
- they are liable to income tax at a lower rate than salaries throughout (to reflect corporation tax already paid)
- they can legitimately be spread amongst adult family members (eg spouse) as owners of the company thereby utilising personal allowances and basic rate bands of tax.
As an example if shares are held 50:50 between husband and wife and each is paid a salary of £8060 then each could receive dividends of £36740 before higher rates of income tax are incurred.
The tax on the dividends would be
£3240 @ 0% £0 (balance of personal allowance in excess of salary)
£5000 @ 0% £0 (dividend tax free band)
£[email protected] 7.5% £ 2137.50
So for 2 people total tax of £4275 to extract income of £89,600 (plus the 19% Corporation Tax already suffered in the company)
Should not be overlooked as a method of distribution and in some circumstances can be more efficient than dividends, particularly for those nearing or over age 55.
This is because:
- the pension contribution qualifies for tax relief reducing the net cost
- once over 55 a quarter of the fund can be draw tax free
- depending on your circumstances the rest of the fund can be drawn under your control, for example to keep you within the basic rate band after retirement each tax year.
- for more details on pension advantages see pension section.
Company Lends you money
In the ‘old days’ this could be done (subject to Company Law restrictions) to defer paying tax on dividends.
Currently however if you lend yourself money you must also ‘lend’ HMRC the equivalent to higher rate tax on a dividend (32.5%).
This applies to any money owing at the company’s year end not repaid within 9 months of the year end. There are anti avoidance rules to prevent you ‘window dressing at the year end (eg pay it back in just before and draw it out again immediately after).
When you repay the money to the company HMRC repays the tax loan (9 months after the year end)
In addition if you do not pay interest (or pay below market rate) to the company on the loan you will be liable to Income Tax and NI on the benefit to you of that beneficial rate.
Leave it in to the end (see section on CGT)
Often the most tax effective way to extract money (if you can live without it in the meantime) is to liquidate the company at the end of its life.
You and your spouse will each have a tax free CGT allowance of £11300 and , provided that you both qualify for Entrepeneurs relief the balance is taxed at 10% .
So for example if there is £50000 left in the company when you cease the total tax payable will be £2740 (an effective marginal rate of just over 5%)
WEALTH WARNING – there are numerous anti-avoidance provisions and conditions to satisfy to obtain this relief but provided it is a genuine business cessation of a trading company it is possible to achieve this.
Income tax is charged on all worldwide personal income for UK Tax Residents.
If you live or work overseas or have a non UK domicile then there may be exemptions or reliefs available (Tax residency and domicile).
Different sources of income have different rules and in some cases different rates, in particular dividend income is taxed at a lower rate than earned income.
Every individual is entitled to a tax free personal allowance currently £11,500 (2017/18).
After this all income from different sources is added together and taxed at increasing marginal rates of tax. The tax rates for 2017/18 are shown here: #BasicTaxRules
In allocating these rates you consider ‘other income’ first, then savings income, then dividends as the top slice.
In certain very narrow circumstances
- the personal allowance can be transferred between married couples
- the first £5000 of savings income can be tax free
- Persons born before 1938 qualify for a higher personal allowance
- Blind personas qualify for a higher allowance
Planning Top Tip
In 2 specific circumstances the marginal rate of tax can be higher than those quoted above, in fact as high as 60%. Where you have taxable income above £100,000 your personal allowance is REDUCED by £1 or every £2 of income above that level (up to a maximum of £122,000.
If you claim Child benefit and either partners income exceeds £50,000 then Child Benefit is recovered through the tax system by £1 for every £2 of income until the full amount of Child Benefit is recovered.
Try and ensure your income does not fall into these ‘brackets’ . This is more readily achievable if you are in control of the timing of dividend income from a Limited Company or can make pension contributions or charitable donations to take income out of charge.
If you pay pension contributions as a limited company they are paid gross and Corporation Tax relief is claimed as a deduction against profit. If you pay pension contributions personally then contributions are paid NET of basic rate income tax and higher rate tax relief is claimed through your personal tax return.
Once the taxable profit is calculated it is then assessable to either Corporation Tax – for a limited company or Income Tax and National Insurance – for sole traders, partnerships or LLPs. In all these cases, it is best to get professional advice – either to be sure that you ar doing the right thing – or to get an expert to do it for you.
Inheritance Tax is charged on both lifetime and death transfers of assets where the estate exceeds £325,000 .
There is in addition a new ‘Residence NIL Rate band which gives a further £100,000 tax free for the deceased’s private residence (only for estates worth less than £2 million)
Transfers between husband and wife are IHT free and any unused allowance can be transferred to the surviving spouse.
The tax rate after the allowance is 20% for certain lifetime gifts (particularly into Trust) and 40% on death.
Most lifetime gifts to individuals will be regarded as Potentially Exempt Transfer (PETs) and will only fall back into the estate and be taxed if death occurs within 7 years. Tax is then charged on a reducing scale (the longer the donor survives the lower the tax bill).
There are exemptions for
- Gifts on marriage (varies dependant on who gives it)
- Annual Gifts (£3000)
- Gifts out of income.
Business Property Relief
In the context of OMBs the most valuable IHT relief is BPR.
This gives 100% relief from IHT for business assets which includes shares in a trading company.
Assets owned outside the company and used in its trade may qualify for 50% relief.
The rules for what qualifies, particularly as a ‘qualifying business’ are quire complex and professional advice should be taken.
Property investment or letting businesses will generally not qualify for BPR (unless its a furnished holiday let which may)
- Annual amounts up to £3000
You should consider the following insurances :
Employee and Public Liability Insurance (Essential)
You must get Employers’ Liability (EL) insurance as soon as you become an employer – your policy must cover you for at least £5 million and come from an authorised insurer.
Buildings and Contents Insurance
If you have a building on the ‘books’. Obvious for a freehold building, if you are leasehold check the terms of the lease as you will probably have an insuring obligation.
Professional Indemnity / Directors and Officers Insurance
Whether you need this depends on the risks attached top the work you do and whether your contract specifies any form of potential liability. You should consult a specialist broker top assess the need.
Becoming increasingly popular as the risk of data loss and downtime through cyber crime increases.
Keyman Insurance and Critical Illness Cover
Keyman Insurance should be considered if you have a business partner / shareholder, the proceed of this policy could be used fro him/her to buy out your business interest in the event of your death.
This is typically accompanied by a cross option agreement which ‘forces’ the proceeds to be used in this way.
Critical illness cover will provide an income to a specified level if you are too sick to work. If you take the majority of your income as dividends ensure that the definition of ‘income’ used in the policy encompasses dividend income or you may find the benefit is limited to a figure based on your (low) salary.
Life Insurance (using a Relevant Life Policy)
It is not commonly know that the company can pay for life insurance for director / shareholders without creating a taxable benefit in kind #BenefitsinKind.
A Relevant Life Plan is designed to be written in a discretionary trust (Legal & General’s Relevant Life Plan Trust) at outset, with the employee’s family and dependants as beneficiaries. If the plan is not placed in trust at outset, your client should seek expert legal and tax advice on the consequences of this.
A knowledgeable / FCA registered broker should be able to guide you through all off these requirements.
Getting the Family Involved
As outlined in the distribution policy section it is common to involve your spouse as an officer / shareholder of the company to utilise basic rate bands and personal allowances.
Children can get involved as well.
Salary can be paid for work done to use up their own personal allowance of £11,300 – it must be justifiable by reference to work actually done (for example holiday employment)
Shares can be held by adult children at a low level to pay a dividend to them to cover , for example , university costs – much better than paying it out of your own taxed income?
Wealth Warning 1 – be careful how you get the shares to your children it could trigger an unexpected CGT liability if not dealt with properly and a holdover election may be required
Wealth warning 2 – passing shares to minor children and paying dividends is NOT effective as that income fall back on the parent who provided the shares. This can be overcome by grandparents funding the shares and is also efficient for IHT purposes
Trading through a limited company can bring tax benefits if structured correctly.
HMRC over the years have tried to attack some limited company arrangements in different ways. One such attack is the IR35 legislation.
This is complicated in its structure and even more difficult to interpret and to form a judgement as to whether your arrangements are caught.
The basic idea is that if an individual works for a client through a limited company but (apart from that Ltd company being there) it looks and feels like an employment relationship then it should effectively be taxed as an employment.
In essence if caught by the legislation any salary and dividends paid will be ignored and the contract sum will be charged to income tax and NI.
In our experience provided the contract between the company and the final client is drawn up correctly (and the reality matches the contract) then IR35 rarely applies. Its important to get it right from the outset to ensure you are not caught.
If you are obliged to work normal office hours on a client premises for a weekly or monthly ‘wage’, using their equipment, their email system and to all appearance acting like an employee with no real financial risk then BEWARE IR35.
New Rules for Companies working with Public Sector Clients
If you have clients in the public sector then the rules are changing.
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.
The employer, agency or third party will have to decide if the rules apply to a contract and if so, account for and pay the liabilities through the Real Time Information (RTI) system and deduct the relevant tax and NICs.
This legislation was proposed in the 2016 budget and included originally in the 2017 Finance Bill but has been delayed by the recent General Election
Effectively another form of taxation and not to be ignored when tax planning, particularly when looking at the distribution policy for Limited Companies. #DistributionPolicy
The rates of national insurance dependant on whether you are Employed or Self Employed (which includes partnership or membership of an LLP)
If you run your business through a limited company and pay yourself a salary then this section applies.
What you should not overlook is that both the employee and the employer pay contributions (you may not be aware of this if you are employed by someone else).
In the current tax year the rates (Class 1) are as follows:
Contributions start once your income is above £157 per week.
Employee contributions are capped at 2% for income over £866 per week
Employer contributions are uncapped.
Employers contributions are also payable at 13.8% on any Benefits in Kind provided (Class 1A)
For fuller detail of the rates applying see
Dividends are currently NOT liable to National Insurance and this forms a key part of any tax planning strategy.
The self employed operate under a different scale .
They currently pay a flat rate of £2.85 per week (Class 2) for income above £6,025 per annum plus
- 9% on any profits between £8164 and £45,000
- 2% on profits above £45,000
Both contributions are normally collected through your self assessment tax statement.
As touched on under BIK pension contributions are not taxable on an individual when paid by a company.
A company making the contribution will generally be more tax and NI efficient and will allow larger contributions to be made.
Contributions made personally will be out of taxed income and will probably have suffered a national insurance charge, they are also limited to the lower of £40,000 per annum and the employees pensionable emoluments (salary and BIK).
Where you control your company and decide to take most of your drawings as dividend this will restrict the level of pension contributions which can be paid personally (dividends are not pensionable emoluments).
By contrast a company contribution (which can be to an employees personal SIP)
- is only limited by the £40,000 annual limit
- qualifies for a full Corporation Tax deduction if it satisfies the normal ‘wholly and exclusively rules – (e.g. does your contribution to the company justify being paid the salary and pension package).
- has not suffered income tax and NI.
If you have not used up the annual allowance for the three previous years contributions for the current year can be increased to use that capacity.
There is an overriding life time limit of £1 million in your pension pot .. you can go above this but it will incur extra tax charges.
A recap of the current advantages of Pensions:
- contributions qualify for tax relief
- once in the scheme the funds grow tax free
- once you reach age 55 there is now flexibility on how you draw down from that pot
- the first 25% of the pot is available tax free (either as a lump sum or the first portion of any annual drawing)
- if you die the pension falls outside your estate for IHT purposes.
- your named beneficiary will take over your pension pot and be able to draw down from it tax free (subject to certain conditions)
Pensions are now much more attractive and flexible than the ‘old days’ when you had to buy an annuity at what were very poor rates and should form an integral part of your retirement planning.
Its a very complicated area and specialist advice should be taken.
Tax Residency and Domicile – Individuals
This is a complex area and probably has more incorrect ‘my friend in the pub’ advice than any other area of taxation.
Your taxation position will be determined by whether you are TAX RESIDENT in the UK and also if you are TAX DOMICILED.
If you are UK Tax RESIDENT
- you are taxed on worldwide income regardless of where it is earned
- Unless you are NON DOMICILED when you can elect to only be taxed on non UK income if you remit it into the UK. (remittance basis)
- If you are UK resident for 7 out of 9 tax years then you have to pay the ‘remittance basis charge’ (RBC) of £30,000 to continue to claim the remittance basis
- This RBC increases the longer you are resident
- £60,000 for at least 12 of the previous 14 tax years
- £90,000 for at least 17 of the previous 20 tax years
If you are not UK tax resident
- You still have to pay UK tax on UK source income
- If it is then taxed elsewhere (where you are tax resident) you should get Double Taxation relief to ensure you are not taxed twice.
If you are UK Tax resident and Non Domiciled you may get an exemption from UK tax for any Non UK work days.
This is a highly complex area and the consequences can be expensive if you get it wrong!
The rules for CGT IHT and National Insurance are also different and need to be considered.
How do I know if I’m Tax Resident?
This is clearer than it used to be as there is now a statutory residence test.
If you are in the UK for 183 days in a tax year you will automatically be UK tax resident.
If you are in the UK for period les than this then you may still be UK tax resident dependant on history and your ‘ties’ to the UK.
HMRC Guidance Booklet RDR 3 on the Statutory Residence Test is actually reasonably well written and covers most eventualities
How do I know where I am tax Domiciled?
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Managing the financial and accounting affairs of your own businesses is a bit like being a conductor of an orchestra – who do not need to play or be able to play every instrument in the band – but they do need to know what each bit does, when and how. One bum note spoils the whole tune!