As the director and shareholder of your own company you can decide how much salary to pay yourself each month, in order to use your personal allowance in the most tax efficient way. As a director of your personal company you do not have to pay yourself the national minimum wage unless you have an employment contract with your company.
From 6 April 2012 the tax free personal allowance is £675 per month (£8,105 per year), so you could take a salary at that level and pay no income tax. However, the monthly thresholds for paying class 1 national insurance (NI) are: £634 for employees and £624 for employers. If your salary is £675 gross per month, your company needs to deduct NI of £4.92 and pay employer's NI of £7.04 on top.
If you take a lower salary of just over the NI lower earnings threshold of £464 per month you will get the NI credit, so your wages count towards your state pension entitlement, but you don't pay any tax or NI and neither does the company. However, at that annual salary level (£5,568) you will be 'wasting' £2,537 of your tax free personal allowance. At £624 per month there will be no NI to pay and you only have £617 of unused personal allowance, so this is likely to be more beneficial.
As a director's salary is an allowable expense for Corporation Tax purposes it is always beneficial to pay yourself a salary but talk to us first about the best salary level for you. The correct procedures also need to be in place when paying a salary and we will also need to take into account your other sources of income, as you may be using your personal allowance elsewhere.
If you are self-employed your business may well be based at your home address, although you perform the majority of your work at your customers' sites. This can apply to a range of trades from plumbers to computer consultants, and even medical professionals.
In order to claim the costs of travelling to your customers' sites against your taxable profits, you need to show that your trading activity does not cease when you arrive home. The following records should help prove this:
You can also make a claim for the cost of running your business from home, so speak to us to see what can and cannot be claimed as a business expense.
There has been a certain amount of panic in the contractor community about a statement buried deep in the Budget documents about the reform of IR35. It says:
"The Government is bringing forward a package of measures to tighten up on avoidance through the use of personal service companies and to make the existing IR35 legislation easier to understand. This will include HMRC strengthening specialist compliance teams, simplifying the way IR35 is administered, and consulting on proposals which would require office holders/controlling persons who are integral to the running of an organisation, to have PAYE and NICs deducted at source."
This does not mean that everyone who is an office-holder (ie director or company secretary) of their own personal service company will have to be paid via PAYE. The proposed law change is aimed at the following situation:
A is an office-holder of PLC, such that he personally holds a position on the board of PLC, or has a controlling role within PLC. Instead of being paid a salary by PLC, A has agreed that his own personal service company (L Ltd), will send PLC an invoice for the time he spends on PLC business. PLC may be a large company, or a public department, or a local authority. In this case PLC will have to pay A through its payroll. PLC will not be permitted to pay A through L Ltd.
This change in the law will not affect genuine freelance workers or contractors who do not take up positions on the boards of their customers.
Get in touch if you need any advice on operating a personal services company.
The Government has decided to tidy up some of the areas of VAT law where a different rate of VAT may be charged on very similar goods or services.
All food eaten on the premises of the supplier; 'eat-in' purchases, are subject to standard rate VAT (20%). However, the consumption area for the food may be a communal area shared with other retailers, or tables and chairs on the pavement, neither of which are technically on the retailer's premises. In these cases the rules are to be redefined so that such areas adjacent to the retailer's premises will count as 'eat-in' areas, and the food sold to be eaten there will be standard rated.
Take-away food is subject to zero-rate VAT, unless it is hot food designed to be eaten straight away such as fish and chips. Some retailers argue that the food is only hot because is has been freshly baked, so charge zero-rate VAT. The law is to be clarified so that all hot food to take-away, other than freshly baked bread, will be subject to standard rate VAT.
Soft drinks designed to rehydrate, slake thirst or give enjoyment, are subject to standard rate VAT. However, some sports drinks are claimed to have nutritional values (e.g. protein enhancers), rather than the usual thirst-quenching properties of a soft drink. Hence the manufacturers have zero-rated those drinks. The law will be changed to ensure that all sports drinks are standard rated just like other soft drinks.
The letting of a discrete area of land can be exempt from VAT, if the owner has opted to exempt the land or building. Self-storage lock-ups can fall into this exemption. However, other storage facilities where the customer does not have right of entry to a discrete area cannot be exempt from VAT. The law is to be changed to ensure that self-storage facilities are subject to standard rate VAT, whether or not the owner of the facilities has opted to exempt the whole building from VAT.
Rental of hairdressers' chairs have previously been exempt from VAT in certain cases, but will now always be subject to standard rate VAT.
Sales of caravans will be subject to standard rate VAT, but residential caravans designed and constructed for year-round living will be zero-rated for VAT.
Approved changes to listed buildings are zero-rated for VAT, but repairs to those buildings are standard rated. This encourages the building owners to alter their protected buildings rather than repair them. The law will be changed so all building materials and building services supplied for alterations of listed buildings will be standard rated.
These changes will generally take effect from 1 October 2012, but where the contract for work on a listed building had been signed by 21 March 2012, the zero rate will continue to apply.
If your business is involved in any of the above areas, please talk to us about how to apply the correct rate of VAT on all your sales.
Q. I am about to move abroad, for what I hope will be a permanent relocation. Can I continue to contribute to my tax-free ISAs in the UK?
A. To open an ISA you must be resident and ordinarily resident in the UK for tax purposes. This broadly means that you normally live in the UK. There are exceptions for members of the military and government employees who are sent to work abroad. Once you have emigrated, you will not be permitted to open a new ISA, or contribute to ISAs already held. Also the interest paid on the ISAs you already hold may be taxable in the country you live in.
Q. If a company pays for private medical insurance for its employees and the contract is between the employer and the insurance company, is there a tax charge on the employees? Can the company deduct the cost of the insurance from its profits?
A. Where the employees earn £8,500 or more a year, or are directors, there is a tax charge for the individuals based on the cost to the company of the insurance. There are exceptions to this tax charge for eye-tests required by health and safety legislation, annual medical checks or health screenings. The company can deduct the cost of the insurance from its profits, as it is part of the cost of employing staff.
Q. I bought an investment property about 6 years ago and after expenses I have a surplus of about £250 per month. I have never declared this income or paid tax on it. How do I go about putting this right?
A. The Taxman is running a series of campaigns to encourage people to come clean about unpaid tax, the latest of which is aimed at people who sell through online markets. Although this is not your situation, you can make a disclosure of your rental profits. You will have to work out how much tax you owe and the interest due on that late paid tax, but we can help you with this. There will also be a penalty to pay, but as you are volunteering the information without being asked, the penalty should be minimal. The penalty could possibly be about 10% of the tax due.
5 - End of 2011/12 tax year. Last day to use up your annual exemptions for capital gains tax, inheritance tax and ISA's.
14 - Return and payment of CT61 tax due for quarter to 31 March 2012
19 - PAYE/NIC and CIS deductions due for month to 5/4/2012 or quarter 4 of 2011/12 for small employers.
30 - Additional daily penalties start of £10 per day up to a maximum of £900 for failing to file self assessment tax return due on 31 January 2012 (2010/11 tax return)