Reduce your tax bill Year-End tax planning

As the end of the 2023/24 tax year approaches, it is prudent to review your tax affairs and consider whether you can reduce your tax bill by taking advantage of allowances and exemptions that would otherwise be wasted.

Key dates

For individuals, the 2023/24 tax year ends on 5 April 2024.You may be able to reduce your 2023/24 tax bill by utilising allowances and exemptions by this date.

This note highlights a few year-end tax planning opportunities.

Make use of the dividend allowance

All taxpayers, regardless of the rate at which they pay tax, receive a dividend allowance. This is in addition to any personal and savings allowances to which you might be entitled. For 2023/24, the dividend allowance is set at £1,000. It will fall to £500 for 2024/25.

If you have a personal or family company and you have sufficient retained profits, consider paying dividends before 6 April 2024 to use up shareholders’ dividend allowances. This will enable profits to be extracted from the company tax-free.

If cash flow is tight, you can credit the dividend to your director’s account, withdrawing it when you have the funds available.

Take advantage of the trivial benefits exemption

The trivial benefits exemptions allow employers to provide employees with certain tax-free benefits costing no more than £50 each, capped at £300 per tax year for directors of close companies. The benefits must not be in the form of cash or a cash voucher, nor can they be a reward for services or something to which the employee is contractually entitled. If your personal or family company has not yet made use of the trivial benefits exemption, consider providing trivial benefits up to the limit before the end of the tax year, The benefit can be of your choosing, such as a meal out, a bottle of wine, books, or an item of clothing, if the cost is £50 or less per benefit.

Repay company-provided petrol

If you have a company car and your employer pays for all your fuel for private travel, consider whether this is a worthwhile benefit. You will be charged for the benefit of free fuel. The taxable amount for 2023/24 is the appropriate percentage used to calculate your car benefit charge multiplied by £27,800. If the list price of your car is less than £27,800, you will pay more tax on the provision of fuel for private journeys than you do on the benefit of your company car.

The fuel benefit will not be worthwhile if the cost of your private fuel is less than the tax you pay on the benefit. Where this is the case, consider making good the cost of fuel provided for private use. This can be done by using the advisory fuel rates published by HMRC. To cancel out the fuel benefit, you must repay the private fuel cost by 6 July 2024 (for 2023-24) if the benefit is reported on your P11D, and on or before 31 May 2024 if it is payrolled.

There is no fuel benefit charge if your employer meets the cost of private journeys in an electric company car.

Claim business mileage

If you use your own car for business and your employer pays a mileage allowance, make sure you have submitted a claim for all business mileage in the tax year. There is no tax to pay if the amount paid by your employer does not exceed the approved amount. This is simply your business mileage in the tax year multiplied by the approved amount. For cars and vans, this is 45p per mile for the first 10,000 business miles in the tax year and 25p per mile for any subsequent business miles. If the amount paid by your employer is less than the approved amount or your employer does not pay mileage allowances, you can claim tax relief for the shortfall.

Use your personal allowance

If your income is below your personal allowance (£12,570 for 2023-24), consider making further payments (such as salary or bonus payments from your personal or family company) or advancing income (for example, bringing work forward if you are a sole trader) to ensure the allowance is not wasted.

If you are married or in a civil partnership and you will not use all your 2023/24 personal allowance, consider whether you can claim the marriage allowance to transfer £1,260 of your personal allowance to your spouse or civil partner. You will be eligible if your spouse or civil partner does not pay tax at the higher or additional rate. As a couple this will save you up to £252.

Consider making capital disposals

If you are planning on making a disposal that will realise a capital gain and you have yet to use your annual exempt amount for 2023/24, set at £6,000, consider making the disposal before 6 April 2024. You can also make use of the no gain/no loss rule to transfer an asset or a share in an asset to your spouse or civil partner and therefore use any unused amount of their annual exempt amount. Remember, the annual exempt amount falls to £3,000 for 2024/25, so waiting until after 5 April 2024 may increase the capital gains tax that is payable.

Make pension contributions

Consider whether it is advantageous to make pension contributions to use your annual allowance for 2023/24 and any unused allowances from 2020/21 and later years. If you have a personal or family company, making employer contributions can be tax-efficient.

Please call us today on 01473 744700 we will be delighted to help you with your accounting issues.

Please see another An Accounting Gem blog here: https://www.aag-accountants.co.uk/mileage-allowances-are-you-due-an-nic-refund/

 

 

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Extracting company profits – Options for 2023-24

If you run a family or personal company, you will need to consider how best to extract profits from your company. There are various ways in which you can do this. A traditional tax-efficient approach is to take a small salary and extract any further profits as dividends. However, you can also extract profits in other ways.

Salary

If you pay a salary that is at least equal to the lower earnings limit for National Insurance purposes (set at £6,396 for 2023/24), the year will count as a qualifying year for state pension and contributory benefit purposes. To be eligible for the full single-tier state pension when you reach state pension age, you will need 35 qualifying years. If you do not have 35 qualifying years when you reach state pension age, but you have at least 10 qualifying years, you will receive a reduced state pension.

For 2023/24 the primary threshold (the point at which employee National Insurance contributions become payable) is fully aligned with the personal allowance at £12,570. Both are to remain at this level until at least 6 April 2028.

The optimal salary level where the recipient receives the standard personal allowance with no deductions and the allowance has not been used elsewhere is equal to £12,570. At this level, the employee will not pay any tax or any National Insurance, but the year will count as a qualifying year for state pension and contributory benefit purposes.

If the employee’s personal allowance is not £12,570 or has been fully or partially used elsewhere, the optimal salary will depend on the employee’s circumstances. There is no substitute for doing the sums.

The extent to which employer National Insurance contributions are payable on an optimal salary of £12,570 will depend on whether the employment allowance is available and also whether one of the upper secondary thresholds (applying where the employee is under 21, an apprentice under the age of 25, an armed forces veteran in the first year of their first civilian employment since leaving the armed forces or a new Freeport employee) is available.

If the employment allowance is not available (as is the case for a personal company where the sole employee is a director) and none of the upper secondary thresholds applies, a small amount of the employer’s National Insurance will be payable on earnings between the secondary threshold of £9,100 and the annual primary threshold of £12,570 at the rate of 13.8%. However, as this is deductible for corporation tax purposes, paying a salary equal to the higher primary threshold rather than one equal to the secondary threshold (so no National Insurance liability arises) is worthwhile. The rate of relief will depend on the rate at which the company pays corporation tax which from 1 April 2023 onwards will be between 19% and 25% depending on the level of the company’s profits.

Where the employment allowance is available, for example, if your company is a family company with more than one employee, no employer contributions will be payable on the optimal salary of £12,570. This will also be the case if one of the upper secondary thresholds applies.

Dividends

Once you have paid yourself the optimal salary, it is tax-efficient to extract further profits in the form of dividends rather than paying yourself a higher salary. However, you can only pay dividends out of retained profits; therefore, you must have sufficient retained profits to cover the dividends you wish to pay.

Dividends are paid out of post-tax profits and the profits from which they are paid will have already suffered corporation tax. From 1 April 2023, the rate of corporation tax depends on the level of the company’s profits, ranging from 19% to 25%. Where profits exceed the lower profits limit (set at £50,000 for a standalone company), the company will pay corporation tax at a higher rate from 1 April 2023, reducing the profits available for distribution.

Dividends must be paid in proportion to shareholdings. However, if you use an alphabet share structure whereby each shareholder has their class of share (e.g., A ordinary shares, B ordinary shares, etc.) you can tailor dividend payments by declaring different dividends for different classes of shares.

All taxpayers, regardless of the rate at which they pay tax, have a dividend allowance. Dividends covered by the allowance are tax-free. This provides the opportunity to extract profits tax-free by paying dividends to family shareholders to utilise their available dividend allowance.

The dividend allowance has been reduced to £1,000 for 2023/24, down from £2,000 for 2022/23. It is to be further reduced to £500 from 6 April 2024. The reduction in the dividend allowance reduces the profits that can be extracted tax-free by paying dividends to family members to mop up their dividend allowances.

Once the dividend allowance has been used up, dividends (which are taxed as the top slice of income) are taxed at 8.75% where they fall within the basic rate band, at 33.75% where they fall within the higher rate band, and at 39.35% where they fall within the additional rate band. As dividends are paid out of retained profits, they have already suffered corporation tax.

Rent

If you run your company from home, you can consider renting your home office to the company. The rent, which should be at a commercial rate, is deductible in computing the company’s taxable profits. However, you must pay income tax on it and declare it on your self-assessment tax return. On the plus side, there is no National Insurance to pay.

Benefits in kind

There are several tax exemptions for benefits in kind, such as those for mobile phones and trivial benefits, which enable you to extract profits as a benefit in kind without an associated tax or National Insurance liability,

Pension contributions

You can also extract profits in the form of pension contributions as your company can pay contributions into a pension plan for you (if your available annual allowance has not been used up).

Directors’ loans

If you need money for a short time, taking a director’s loan can be tax efficient. You can borrow up to £10,000 for up to 21 months tax-free. However, there are tax consequences if the balance exceeds £10,000 at any point in the tax year, or if you do not repay the loan within nine months and one day of the end of your accounting period.

Leave profits in your company

Extracting profits from your company may trigger tax and National Insurance charges. If you do not need the profits for personal use, consider leaving them in the company to extract later when this can be done more tax efficiently.

We can help

We can help you formulate a tax-efficient strategy for extracting profits from your personal or family company. Please call us today on 01473 744700 or if  you need any further help with your accounting issues.

You may find the following link helpful: https://www.gov.uk/running-a-limited-company/taking-money-out-of-a-limited-company

Please see another An Accounting Gem blog here: https://www.aag-accountants.co.uk/when-to-incorporate-your-business

 

 

 

 

 

 

 

 

 

 

 

 

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Mileage allowances – Are you due an NIC refund?

Mileage payments may be made to employees who use their cars for business travel. The payments can be paid free of tax and National Insurance up to certain limits. However, the tax and National Insurance rules work in different ways. Following a recent decision, fixed-sum car allowances may now benefit from the National Insurance disregard, and where National Insurance contributions have been paid on qualifying mileage allowances, a refund may be due.

Key dates

The tax-free amount is calculated by reference to business mileage and mileage payments made for the tax year as a whole. The National Insurance disregard is calculated separately for each earnings period.

This note explains the rules and when a National Insurance refund may be due.

Tax rules

For tax purposes, mileage allowance payments may be made tax-free to an employee who uses their own car for business journeys up to the approved amount. The approved amount is simply the total business mileage driven by the employee in their own car in the tax year multiplied by the tax-free rates. For cars and vans, the tax-free amount is 45p per mile for the first 10,000 business miles in the tax year and 25p per mile for any subsequent business miles. So, if an employee drives 12,000 business miles in the tax year, the approved amount is £5,000 ((10,000 miles @ 45p) + (2,000 miles @ 25p)). If the total amount paid in the tax year exceeds the approved amount, the excess is taxable. If the amount paid is less than the approved amount (or if mileage payments are not made), the employee can claim tax relief for the shortfall.

The approved amount is the maximum amount that can be paid tax-free, even if the actual costs are higher.

National Insurance rules

The rules applying for National Insurance purposes are similar but not identical to the tax rules. This is because, unlike tax, National Insurance is calculated separately for each earnings period rather than on a cumulative basis.

Under the National Insurance rules, payments of ‘relevant motoring expenditure’ are disregarded in calculating earnings for National Insurance purposes up to the qualifying amount. This is simply the business mileage in the earnings period multiplied by the NIC-free rate. For cars and vans, this is 45p per mile, regardless of the number of business miles undertaken in the tax year.

Wider definition of ‘relevant motoring expenditure’

Payments can only be made free of National Insurance if they count as ‘relevant motoring expenditure’ (RME).

In a recent decision, the Upper Tribunal found that the type of payments that can fall within the definition of RME was wider than the definition applied by HMRC. More specifically, the tribunal found that the definition of RME was not limited to payments for the actual use of the car; it also applied to payments related to the potential and anticipated use of the employee’s car for business purposes.

This decision means that where an employee has been paid a car allowance, the allowance can be disregarded up to the level of the qualifying amount. For example, if an employee received a monthly car allowance of £200 and undertook 320 business miles in that month, £144 of that allowance (320 miles @ 45p per mile) would be excluded from earnings in calculating National Insurance.

Prior to the decision, HMRC’s view was that a car allowance was not RME, with the result that National Insurance contributions were due on the full amount of the allowance.

Refund claims

Where National Insurance has been paid on the full amount of a car allowance, a refund may be due on the qualifying amount of that allowance.

Employers may be able to correct the position via Real Time Information (RTI). Claims must be substantiated on a pay-by-pay period basis and HMRC will require the following evidence:

  • a list of employees included in the claim, together with their National Insurance numbers.
  • evidence of the business mileage undertaken by each employee.
  • details of any other RME payments received by the employees (such as mileage payments).
  • the primary and secondary Class 1 National Insurance contributions that are being reclaimed.

Where it is not possible to correct an overpayment through RTI, claims can be made in writing to HMRC using the reference ‘Relevant Motoring Expenditure’. The claim must include the details listed above, together with an explanation of why a correction cannot be made through RTI.

Employers paying car allowances to employees who use their own cars for business should review their records to see if they are entitled to a refund.

You may find the following link helpful https://www.gov.uk/expenses-and-benefits-business-travel-mileage/rules-for-national-insurance

Please call us today on 01473 744700 if you need any help with your accounting issues.

Please see another An Accounting Gem blog here: https://www.aag-accountants.co.uk/upcoming-deadlines-key-dates-january-2024/

 

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Extracting profits from your company

If you operate your business as a personal or family company, you will need to extract profits if you want to use them to meet personal expenditures. This update considers some of the various ways in which this can be done. If you need to extract more than £50,270 in 2023/24, is it worth taking a higher salary to avoid a tax of 33.75% on dividends received above the £50,270 limit?

Key dates

The 2023/24 tax year ends on the 5th of April 2024. To take advantage of 2023/24 allowances, profits must be extracted by this date.

This note explains the tax implications of taking profits from your company in the form of salary and dividends.

Small salary plus dividends

A popular tax-efficient profit extraction strategy is to take a small salary and to take extract any further profits needed outside the company in the form of dividends. However, this is not a one-size-fits-all strategy, and whether it is right for you will depend on the level of your profits and your personal circumstances.

Optimal salary level

For many directors, it makes sense to take a small salary from their company, particularly if they do not yet have the 35 qualifying years needed to secure a full state pension. Where this is the case, paying a salary at least equal to the lower earnings limit for National Insurance purposes will secure a qualifying year for state pension purposes.

If the director has the full personal allowance available to shelter the salary, the optimal salary level for 2023/24 is equal to the personal allowance of £12,570. As this is also the level of the primary National Insurance threshold, the director will not pay primary Class 1 National Insurance on their salary but will benefit from a qualifying year for state pension purposes.

If the employment allowance is available, there will be no employer’s National Insurance to pay either. However, remember, personal companies where the sole employee is also a director are not eligible to claim the allowance. Where the company cannot benefit from the employment allowance, the employer’s National Insurance is payable on earnings over £9,100 at the rate of 13.8%. Consequently, where a salary of £12,570 is paid, the employer’s National Insurance hit is £478.86.

However, as the rate of the employer’s National Insurance is less than the corporation tax rate and both salary payments and the employer’s National Insurance are deductible in calculating profits for corporation tax purposes, this is worthwhile.

If the personal allowance available to the director to shelter his or her salary is not £12,570, it is a question of doing the sums, to ascertain their optimal salary for 2023/24.

Implication of taking a higher salary

Once the personal allowance has been used up, is it worth taking a higher salary, and what are the tax and National Insurance implications?

The first point to note is that the employer’s National Insurance of 13.8% is payable on all earnings more than £9,100. However, as this is deductible for corporation tax purposes, the effective rate depends on the rate at which you pay corporation tax. If your corporation tax is 19%, the effective rate is 11.178%, whereas, if you pay corporation tax at 25%, the effective rate is 10.35%.

Once the personal allowance has been used up, further salary payments are taxable at the rate of 20% to the extent that they fall within the basic rate band. Once the salary level reaches £50,270, tax is payable at the higher rate of 40%.

At a higher level, the marginal rate rises to 60% where the salary is between £100,000 and £125,140 because of the abatement of the personal allowance, falling to 45% on income more than £125,140.

The director will also pay the employee’s National Insurance on earnings between the primary threshold of £12,570 and the upper earnings limit of £50,270. Directors have an annual earnings period for National Insurance, and because of the reduction in the main primary Class 1 rate from 12% to 10% for 2023/24, they pay Class 1 National Insurance contributions at a rate of 11.5% for 2023/24 on earnings between the primary threshold and the upper earnings limit and at the rate of 2% on earnings over the upper earnings limit.

The company can deduct salary payments and the employer’s National Insurance in calculating their taxable profits.

Dividends

The dividend tax rates are lower than the income tax rates, making them an attractive proposition for extracting profits from a company. However, when comparing the tax rates, it is important to remember that as dividends are paid from post-tax profits, those profits have already suffered corporation tax at between 19% and 25% depending on the rate at which you pay corporation tax.

There are also restrictions governing the payment of dividends. Firstly, they can only be paid if you have sufficient post-tax profits from which to pay them, and secondly, they must be paid in proportion to shareholdings (although having an alphabet share structure overcomes this restriction).

All shareholders have a tax-free dividend allowance, and for 2034/24 this is £1,000 (but is to fall to £500 for 2024/25), Where profits are available, it makes sense to pay dividends to use shareholders’ dividends allowances.

Once the allowance (which acts as a zero-rate band) has been used up, dividends, which are taxed as the top slice of income, are taxed at 8.75% where they fall in the basic rate band, 33.75% where they fall in the higher rate band and at 39.35% where they fall in the additional rate band.

Dividends or more salary

It will generally be preferable to take dividends rather than an additional salary if profits permit once the personal allowance has been used up, but there is no substitute for doing the sums for your situation.

You may find the following link helpful: https://www.gov.uk/tax-on-dividends

To see another An Accounting Gem blog check out this link:https://www.aag-accountants.co.uk/file-your-2022-23-self-assessment-tax-return/

Please call us today on 01473 744700 if you would like to revisit your profit extraction strategy for the new tax year, 2024-25.

 

 

 

 

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File your 2022/23 Self-Assessment Tax Return

31st January 2024 deadline looming

If you need to file a Self-Assessment tax return for 2022/23 and you have not already done so, you will need to file your return online by midnight on 31st January 2024 to avoid an automatic late filing penalty. Any tax owing for 2022/23 must be paid by the same date, together with the first payment on account for 2023/24, where applicable.

Key dates

The deadline for filing the 2022/23 Self-Assessment tax return online is midnight on 31st January 2024. Any tax and Class 2 and Class 4 National Insurance due for 2022/23 must be paid by the same date. The first payment on account for 2023/24 is also due by 31st January 2024. If you received a notice to file a return after 31st October 2023, you have until three months from the date of the notice to file your return.

Do I need to file a tax return?

You will also need to complete a Self-Assessment tax return if you have capital gains for 2022/23 to report.

If you are filing a tax return online for the first time, or you have filed a return online in the past but did not file one for 2021/22, you will need to register for Self-Assessment on the Gov.uk website to enable you to file your return online. If you need to register, make sure that you allow sufficient time to do this and still meet the deadline.

Missed deadline

If you fail to file your return by the deadline you will receive an automatic penalty of £100. If you have a reasonable excuse for filing late, you can appeal against the penalty. However, HMRC set the bar high as regards what they accept as a `reasonable excuse’.

Paying tax

You will need to pay any remaining tax and Class 4 National Insurance for 2022/23 by midnight on 31 January 2024. If you are self-employed, you will also need to pay your 2022/23 Class 2 National Insurance by this date.

Payments on account

You may need to make payments on account of your 2023/24 liability. This will be the case if your total tax and Class 4 National Insurance bill for 2022/23 was £1,000 or more and you did not pay at least 80% of your tax liability for that year by deduction at source, for example, under PAYE.

Where you need to make payments on account, each payment for 2023/24 is 50% of your tax and Class 4 National Insurance bill for 2022/23. Class 2 National Insurance is not considered in calculating the payments on account. The first payment on account for 2023/24 is due by midnight on 31st January 2024, along with any balance due for 2022/23. The second payment on account is due by 31st July 2024. Any balance owing must be paid by 31st January 2025.

If you think your liability will be less in 2023/24 than in 2022/23, you can elect to reduce your payments on account. However, you will be charged interest if you reduce the payments to below 50% of the eventual liability. You do not need to increase your payments on account if you think you will owe more in 2023/24 than in 2022/23.

Struggling to pay

If you are struggling to pay your tax bill in full by 31st January 2024, you may be able to set up a Time to Pay arrangement to pay what you owe in instalments. You may be able to do this online if the amount that you owe is less than £30,000, you have filed your return, you are within 60 days from the payment deadline and you do not have any other payment plans with HMRC (see www.gov.uk/difficulties-paying-hmrc). If you are unable to set an instalment plan up online, you may be able to do so by calling HMRC on 0300 200 3820.

You may find the following link helpful https://www.gov.uk/self-assessment-tax-returns/deadlines

Please call us today on 01473 744700 if you need any help with your accounting issues.

Please see another An Accounting Gem blog here: https://www.aag-accountants.co.uk/upcoming-deadlines-key-dates-january-2024/

 

 

 

 

 

 

 

 

 

 

 

 

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Upcoming deadlines – Key dates January 2024

Taxpayers must undertake various tasks, such as filing returns and paying tax, by certain dates. If these deadlines are missed, HMRC may charge late filing and late payment penalties. Interest is also charged on tax paid late.

Key dates

The key dates in January 2024 are 1st January for corporation tax payments, 7th January for filing VAT returns and paying VAT, 19th January for payment of PAYE and NIC by cheque, 22nd January for payment of PAYE and NIC electronically, 31st January for filing 2022/23 tax returns, for filing corporation tax returns and accounts at Companies House and paying Self-Assessment tax due for 2022/23 plus any first payment on account for 2023/24.

This note explains some important tax deadlines which must be met in January 2024.

1st January 2024

Corporation tax for accounting periods ending on 31st March 2023 must be paid by 1st January 2024. However, a company has 12 months from the end of the accounting period to file its company tax return, so while the corporation tax for the year to 31st March 2023 must be paid by 1st January 2024, the company has until 31st March 2024 to file its Company Tax Return.

5th January 2024

PAYE tax month 9 comes to an end on 5th January 2024.

6th January 2024

The main primary rate of Class 1 National Insurance contributions falls from 12% to 10% from 6th January 2024. You will need to update your payroll software to reflect this change before making month 10 payments to employees.

7th January 2024

VAT-registered businesses must file their VAT return for the quarter to 30th November online by 7th January 2024 and pay any associated VAT by the same date.

19th January 2024

If you pay your PAYE and NIC by cheque, you must ensure that your payment for month 9 (to 5th January 2024) reaches the Accounts Office by 19th January 2024.

While HMRC does operate three days of grace for payments received within three days of the due date, it is prudent to post the cheque in sufficient time for it to reach HMRC by 19th January 2024, allowing for Christmas post.

22nd January 2024

If you pay your PAYE and NIC electronically, you enjoy a later deadline than those who pay by cheque. The deadline for electronic payments is the 22nd of the month. If you have paid electronically, you will need to ensure that your payment of PAYE and NIC for month 9 clears HMRC’s account by 22nd January 2024.

31st January 2024

You must file your 2022/23 Self-Assessment tax return by 31st January 2024, and pay any remaining tax and Class 4 National Insurance, plus your Class 2 National Insurance, for 2023/24 by this date. If you need to make payments on account for your 2023/24 tax bill (which will be the case if your tax and Class 4 National Insurance bill for 2022/23 is at least £1,000 and you do not pay at least 80% of your tax by deduction at source (for example, under PAYE)), you must also make your first payment on account for 2023/24 by 31st January 2024.

You may find the following link helpful https://www.gov.uk/self-assessment-tax-returns/deadlines

Companies with a 31st January 2023 year-end must ensure that they have filed their company tax return by 31st January 2024.

If your company prepared its accounts to 30th April 2023, you would need to ensure that your accounts are filed at Companies House by 31st January 2024.

Please call us today on 01473 744700 if you need any help with your accounting issues.

Please see another An Accounting Gem blog here: https://www.aag-accountants.co.uk/why-tax-planning-is-a-worthwhile-investment-2023-24/

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.

 

 

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When to incorporate your business

If you are thinking of setting up a business, or if you already operate as a sole trader, you may be considering whether to incorporate your business and if so, when to incorporate.

This decision will affect how you run your business and ultimately, what taxes you pay, and when you pay them.

Operating as a sole trader

If you run your business as a sole trader, there is no distinction for tax purposes between you and your business. Any profits that you make from running your business are taken into account in working out your overall tax liability for the tax year. The rate at which you pay tax depends on your total taxable income for the year, not just on the level of your business profits.

If you make a loss, relief may be available for that loss. The reliefs that are available for that loss will depend on when in the business cycle the loss is made and whether you use the cash basis or the traditional accruals basis to work out your profit or loss.

If your profits from all sources of self-employment are £1,000 or less, you benefit from the trading allowance and do not need to tell HMRC or pay any tax on them. Above this level, you can deduct the £1,000 allowance instead of actual expenses to arrive at your taxable profit where this is beneficial.

For 2022/23 and previous tax years, once the business is up and running, you are taxed on the profits for the accounting period that ends in the tax year. For example, if you prepare your accounts for 30 June each year, for 2023/24, you will be taxed on your profits for the year to 30 June 2023.

However, this is changing and from 2024/25 onwards you will be taxed on the profits for the tax year, with 2023/24 being a transitional year.

If you start your business in 2023/24, it will be advantageous to pick a 31 March or 5 April year-end to make life easier under the tax year basis and remove the need to apportion the profits from two accounting periods to arrive at the taxable profit for the tax year. If you currently do not have a 31 March or 5 April accounting date, you may wish to consider changing your accounting date.

For 2023/24, the basic personal allowance is £12,570. Income tax is charged on taxable income as follows:

Rate % Taxable income
Basic rate 20% £0 to £37,700
Higher rate 40% £37,701 to £125,140
Additional rate 45% Above £125,140

 

Scottish taxpayers pay income tax at the Scottish income tax rates.

You will also pay Class 4 National Insurance if your profits are above £12,570. For 2023/24, Class 4 National Insurance is payable at the rate of 9% on profits between £12,570 and £50,270 and at the rate of 2% on profits in excess of £50,270.

If your profits are more than £12,570, you will also need to pay Class 2 National Insurance of £3.45 per week. If your profits are between £6,725 and £12,570, you are treated as if you have paid Class 2 contributions at a zero rate, providing a qualifying year without having to pay Class 2 contributions. If you have profits of below £6,725, you can opt to pay Class 2 contributions voluntarily to preserve your contributions record.

Operating as a limited company

If you choose to operate your business as a limited company, the first point to note is that the company has a separate legal identity and pays tax in its own right.

The company must pay corporation tax on its profits. Unlike an individual, there is no tax-free allowance for a company; corporation tax is payable from the first pound of taxable profit.

From 1 April 2023, the rate at which corporation tax is payable depends on your profits.

If profits are less than the lower profits limit, set at £50,000 for a standalone company, the corporation tax rate is 19%.

However, if your taxable profits are more than the upper profits limit, set at £250,000 for a standalone company, you will pay tax at 25%. Between these limits, the tax charge is initially calculated at 25% but is reduced for marginal relief, so that the effective rate is between 19% and 25%.

The limits of £50,000 and £250,000 are proportionately reduced if you have associated companies or prepare accounts for less than 12 months.

If you operate your business as a company and you want to use your profits outside of the company, for example, to meet your living expenses, you will need to take the profits out of the company, and depending on the route chosen, this may incur additional tax and possibly National Insurance liabilities.

A popular and tax-efficient strategy is to pay a salary at the personal allowance and primary threshold for Class 1 National Insurance purposes (set at £12,570 for 2023/24). Any further profits can be extracted as dividends.

Taking profits as dividends has the advantage that no National Insurance is payable on dividends and that the dividend tax rates are lower than the rates of income tax. For 2023/24, the first £1,000 of dividend income is tax-free.

Thereafter, dividends (which are treated as the top slice of income) are taxed at:

  • 75% to the extent that they fall within the basic rate band,
  • 75% to the extent that they fall within the higher rate band, and
  • 35% to the extent that they fall within the additional rate band.

Dividends are paid out of the company’s retained profits that have already suffered corporation tax. Consequently, companies that have exhausted their reserves of retained profits can no longer make dividend payments to shareholders.

Should you incorporate?

At first sight, it may seem beneficial to operate as a limited company if the company will pay corporation tax at the rate of 19% lower than even the basic rate of income tax. Incorporation may also be beneficial if the company is paying corporation tax at 25% as this is considerably lower than the additional rate of income tax at 45%.

However, this is not the full picture – a company has no tax-free allowance, and further tax and National Insurance may be payable if you extract the profits from the company for personal use.

The increase in the corporation tax rates from April 2023, the increase in the dividend tax rates from 6 April 2022, and the reduction in the dividend allowance from 6 April 2023 mean incorporation is less attractive than it once was. Depending on personal circumstances and the level of profits, these changes may have the effect of swinging the pendulum away from incorporation.

The most tax-efficient option will depend on personal circumstances and will be affected by the level of profits that your business makes and any other income that you may have.

There is no substitute for crunching the numbers; this is essential to assess which is the most tax-efficient option for you.

It is also important to plan. While incorporation relief is available if you incorporate your business in exchange for shares, there is currently no relief if you disincorporate, and moving between structures can trigger tax bills.

Limiting liability

Aside from the tax and National Insurance issues in the previous sections of this update, business owners should consider their personal liability should their business fail.

In a nutshell, if you are self-employed (whether sole trader or in a regular partnership structure) if your business becomes insolvent you may become personally liable for business debts not covered by business assets.

It is possible to cover this risk by converting to a Limited Liability Partnership, but this will not change your tax status.

Incorporation as a Private Limited Company is probably your best option if commercial risks are a significant factor. This may be so even if the tax benefits are marginal.

https://www.gov.uk/set-up-limited-company

We can help.

The shift towards a higher company tax regime combined with less generous dividend allowances and higher tax rates for dividends complicates the issues to be considered when deciding on a self-employed or incorporated business structure.

We can help you work out what is the most tax-efficient, and risk-averse structure for your business.

Please call us today on 01473 744700 so we can help you consider your options.

Please see another An Accounting Gem blog here: https://www.aag-accountants.co.uk/why-tax-planning-is-a-worthwhile-investment-2023-24/

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.

 

 

 

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Why tax planning is a worthwhile investment 2023-24

Most of us would rather avoid the word “tax” and yet tax planning offers a unique opportunity to reduce the amount of tax you pay and positively contribute to your efforts to outpace the current economic downturn and emerge financially more secure.

The rest of this blog sketches out some of the opportunities for individuals and businesses to save tax, more importantly, it also sets out the case for investing in an appropriate level of tax planning; for you or your business.

What our tax planning services do not offer

We are all entitled to use the present tax legislation to minimise our tax payments. What we are not entitled to do is evade tax by adopting strategies that stretch the credibility of laws set by parliament beyond those originally intended.

Penalties for engaging in tax schemes that would be challenged by HMRC as tax evasion can be punitive and in some cases are treated as fraud.

What does tax planning achieve?

Tax planning achieves two major outcomes:

  • It reveals one-off tax saving opportunities, but it also reveals ongoing tax savings; savings that you will reap for many years with no further investment in professional advice.
  • Without straying into tax evasion, tax planning will also ensure you pay the minimum tax applicable to your circumstances, and no more…

HMRC are tax collectors. They are obliged to publish details of any tax savings options open to you, but under no obligation to tell you. A review of your personal and business circumstances is required to achieve this, and this is what tax planning advice will provide.

In the following three sections, we outline some of the areas that we could cover as part of an annual tax planning review. However, these are just the tip of the tax planning iceberg.

Much will depend on consideration of your personal and business circumstances.

Personal tax planning objectives

  • Take advantage of all allowances and reliefs to which you are entitled.
  • Direct your income into tax-free forms – for example, tax-free benefits in kind.
  • Consider pension payments to reduce taxes, particularly higher rates of income tax as well as providing for income when you retire.
  • Share income-producing assets with family members.
  • Company tax planning objectives
  • Choosing the best tax structure for your company if incorporating a self-employed business.
  • Maximise tax relief for investment in new or used vehicles, plant, or other equipment.
  • Formulating the best mix of profit extraction choices: salary, dividends, pension contributions, rents, or interest.
  • Choosing the best tax strategy when you dispose of your business.

VAT

  • Deciding when to register or deregister.
  • Choosing the most beneficial scheme if available.
  • Dealing with complications if part of your business turnover is partially exempt.

There is no one-fits-all approach.

Every person and company, to some extent, is unique. Good advice for one would be bad advice for another. This is why listening to banter shared may not be the best place to pick up advice.

There is no substitute for discussing tax planning options with a qualified tax practitioner.

How much does tax planning cost?

Cost may not be the most appropriate word to use. This blog illustrates that tax planning is a sound investment. Accordingly, we will always strive to ensure that you secure a return on your investment.

This will not always result in the tax savings we achieve immediately exceeding the cost of our services.

For example, changes in legislation may require changes in the way you organise your financial affairs for the current tax year and in future tax years. In this case, it is necessary to consider the long-term tax savings with any short-term fees payable to make a true comparison.

One thing is clear. We will always determine the positive benefits of our advice whether this be a reduction in taxes payable or the avoidance of penalties and interest charges that may arise if no advice is taken. We will also provide you with a quote for our fees before undertaking any planning work on your behalf.

When should you seek advice?

Change should be the motivating factor; has tax legislation or have your personal or business circumstances changed?

Ideally, we should discuss these changes – whenever possible – BEFORE the change occurs.

Waiting until after the event, for example, after your business year end, may be too late to take appropriate action.

Tax planning requires a comprehensive and strategic approach, as it entails more than simply following a standardised procedure. At its best, it is reshaping the existing strategy to minimise the tax effects of change on existing planning.

And so, the quick answer to this question is to talk to us. If you are going to:

  • buy or sell a property,
  • experience a change in your personal circumstances,
  • want to buy or sell a business, or
  • consider any other options that impact your personal finances or business affairs.

If your personal or business financial affairs warrant a periodic review, we would suggest that this is considered annually to ring-fence any changes in legislation or any other circumstances.

Call An Accounting Gem on 01473 744700 today to discuss your options.

Please see another An Accounting Gem blog here: https://www.aag-accountants.co.uk/christmas-parties-and-gifts

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.

 

 

 

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Christmas parties and gifts

Christmas parties and gifts – How to keep them tax-free

Many employers hold a staff Christmas party and/or give their staff a Christmas gift. By taking advantage of the available exemptions, it is possible to prevent an unwanted tax liability from arising.

Key dates

Where the exemptions do not apply and a taxable benefit arises in respect of a 2023 Christmas party or gift, this must be reported on the employee’s P11D by 6 July 2024 unless you are payrolling the benefit. If you opt to meet the liability on your employees’ behalf by including the benefit within a PAYE Settlement Agreement (PSA), you must agree to this with HMRC by 5 July 2024.

This note explains how to take advantage of the tax exemptions for annual parties and trivial benefits, and the conditions that must be met for the exemptions to apply.

Annual parties and functions

If you hold a Christmas party every year, you may be able to take advantage of the tax exemption for annual parties and functions. To keep the event tax-free and avoid a tax charge as a benefit in kind, the event must be available to all your employees or those at a particular location. Departmental events will qualify if all members of the department are invited. However, those for staff of a particular grade, such as a function for managers only, will fall outside the scope of the exemption.

The exemption only applies to annual events. Consequently, if you do not normally have a Christmas party for your employees, but decide to hold one this year, the event will not qualify for this exemption (although it may be possible to benefit from the trivial benefit exemption described below).

The exemption for annual parties and functions only applies if the cost per head is not more than £150. This is the total cost of the event, including any transport or accommodation provided, and including VAT even if this is subsequently recovered, divided by the number of people attending (employees plus any guests). If the cost per head is more than £150, the total amount is taxable, not just the excess over £150.

If you hold more than one annual event each tax year and the total cost per head is more than £150 per head, you can utilise the exemption to give the best overall result. However, the £150 per head figure is not an allowance, you can only use it to shelter whole events. For example, if you have three annual events for employees costing, respectively, £80 per head, £60 per head, and £30 per head, you can use the exemption for the events costing £80 and £60 per head (a total of £140). The £30 per head event would be taxable in full – you cannot use the unused £10 of the £150 per head exemption to reduce the taxable amount to £20.

Where an event is taxable, the taxable amount is the cost per head. If an employee brings a guest, they are also taxed on their attendance.

To prevent your employees from being taxed on their attendance at a Christmas party outside the scope of the exemption, you may wish to include the benefit in a PSA and meet the associated liability on your employees’ behalf.

Gifts and the Trivial Benefits exemption

The trivial benefits exemption allows you to provide modest Christmas gifts, such as a bottle of wine or a turkey, to your employees without triggering a tax charge under the benefits-in-kind legislation.

The exemption will apply to gifts that cost you £50 or less to provide and which are not in the form of cash or a cash voucher. However, gifts made as a reward for work or performance do not qualify, nor do gifts to which the employee is contractually entitled. A cap of £300 a year applies to gifts made to a director of a close company or a member of their family or household.

If you provide a gift to several employees and it is not practicable to work put the cost of the benefit given to each employee, you can use the average cost instead.

There are some traps to be aware of, particularly if you use a gift card or app to provide gifts to employees. In this case, the cost is the total cost for the tax year, not the cost each time the app or gift card is used. Consequently, if the annual cost exceeds £50 the exemption will not apply. For example, if you provide your employees with access to an app that allows them to choose a treat to the value of £30 per month, the exemption will not apply as the annual cost, at £360, is more than £50, even though each treat costs less than £50.

The trivial benefits exemption could also be used to keep a Christmas party that does not benefit from the annual function’s exemption tax-free, as long as the cost per head is not more than £50.

https://www.gov.uk/expenses-benefits-social-functions-parties/whats-exempt

To see another An Accounting Gem blog check out this link: https://www.aag-accountants.co.uk/child-trust-funds-unclaimed-accounts/

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.

Please call An Accounting Gem on 01473 744700 if you need help with any of the issues raised in this alert.

 

 

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Check your state pension today

Check your state pension entitlement today

 

Are your National Insurance contributions up to date?

Entitlement to the state pension and other contributory benefits depends on your National Insurance record. If you do not have sufficient qualifying years, you will not receive the full state pension. However, you can make voluntary contributions to top up your record.

Key dates

Voluntary (Class 3) National Insurance contributions must be paid no later than six years from the end of the tax year to which they relate (so by 6 April 2030 for contributions for 2023/24). An extended deadline applies in certain circumstances.

This note explains how to check your state pension record, what counts as a qualifying year, and how to make up for any shortfalls.

Checking your state pension record

To receive a full single-tier state pension (available to individuals reaching state pension age on or after 6 April 2016), you need 35 qualifying years. If you have at least 10 qualifying years but not the full 35, you will receive a reduced state pension. However, if you have fewer than 10 qualifying years, you are not entitled to a state pension. Only your contributions count.

You can check your state pension record online at www.gov.uk/check-national-insurance-record

Qualifying years

A year is a qualifying year if sufficient National Insurance contributions have been paid for that year or sufficient National Insurance credits have been awarded.

Employees

If you are an employee, you build up your entitlement to the state pension via the payment of primary (employee’s Class 1) National Insurance contributions. A year will be a qualifying year if you have earnings for National Insurance purposes equal to 52 times the lower earnings limit. For 2023/24, you need earnings of at least £6,396 (12 x £123). If your earnings are between the lower earnings limit (£123 per week, £533 per month) and the primary threshold (£242 per week; £1,048 per month), you do not pay any Class 1 National Insurance contributions, but you are treated as if you have paid them at a notional zero rate, giving you a qualifying year for free.

If you have more than one job, you must earn at least £6,396 in one of those jobs for the year to be a qualifying year as the earnings from different unrelated jobs are not added together.

Self-employed

If you are self-employed, you build up your state pension entitlement by the payment of Class 2 National Insurance contributions. The payment of Class 4 contributions does not secure state pension or benefit entitlement.

For a year to be a qualifying year, you must pay (or be treated as having paid) 52 weeks’ worth of Class 2 National Insurance contributions. You are only liable for Class 2 National Insurance contributions if your profits from self-employment are more than the small profits threshold, set at £6,725 for 2023/24. However, if your profits are between the small profits threshold and the lower profits threshold (set at £12,570 for 2023/24), you do not have to pay the contributions as you are treated as having paid them at a zero rate, giving you a free qualifying year.

If your profits from self-employment are more than the lower profits threshold, you must pay Class 2 contributions at the rate of £3.45 per week for 2023/24. These are payable via self-assessment and are due by 31 January after the end of the tax year (i.e., by 31 January 2025 for 2023/24 contributions).

You can pay Class 2 contributions voluntarily to maintain your contributions record if your profits are below the small profit threshold. This is a cheaper option than paying Class 3 contributions.

National Insurance credits

National Insurance credits are awarded in certain circumstances and can fill in gaps in your National Insurance record if you are not working. This may be because you are caring for someone or receiving certain state benefits. In some cases, the credits are awarded automatically, in other instances, they must be claimed.

You will receive National Insurance credits if you are registered for child benefit for a child under 12. It is therefore important to register for child benefits, even if you elect not to receive it because of the impact of the High-Income Child Benefit Charge.

You can find out more about National Insurance credits on the Gov.UK website at www.gov.uk/national-insurance-credits.

Voluntary National Insurance

If you already have 35 qualifying years or will do by the time you reach state pension age, there is no need to make voluntary contributions, even if a year falls short of being a qualifying year. However, if you do not have the full 35 years, you may wish to consider paying voluntary Class 3 contributions to boost your state pension entitlement. This will only be worthwhile if doing so means that you have at least 10 qualifying years. Class 3 contributions are payable at the rate of £17.45 per week for 2023/24. You have until 5 April 2030 to make the contributions. However, if payment is made after 5 April 2025, you may have to pay at a higher rate. You can find out how to pay Class 3 contributions by visiting the Gov. UK website at www.gov.uk/pay-voluntary-class-3-national-insurance.

If you are self-employed and your profits for 2023/24 are less than £6,725, you can pay Class 2 contributions voluntarily. At £3.45 per week, this is a much cheaper option.

If you reached state pension age before 6 April 2016 and have gaps in your record for any of the years in the period from 2005/06 to 2015/16 inclusive, you can pay Class 3 contributions at 2022/23 of £15.85 to fill in the gaps. Payment must be made by 5 April 2025.

To see another An Accounting Gem blog check out this link: https://www.aag-accountants.co.uk/electric-vehicles-tax-breaks-2023-24/

Disclaimer: This blog is not intended to provide legal or financial advice. This blog is for informational purposes only. The information provided on this blog is not intended to be a substitute for professional advice. Before taking any action, you should seek advice from a qualified professional. The author of this blog is not liable for any losses, damages, or expenses incurred as a result of using the information provided on this blog.

Please call An Accounting Gem on 01473 744700 if you need help with any of the issues raised in this alert.

 

 

 

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