What you want to know is whether you should set up as a sole trader or a limited company. On most occasions, we recommend a limited company.

And in this article, we’re going to explore why. Setting up a limited company doesn’t offer all the advantages it did ten years ago. However, for us, the benefits that incorporation brings are still worth it if you want to take home as pay between £20,000 and £100,000 – but only just. If you earn more than

Let’s look at the arguments on both sides. First, we’ll consider how you’re taxed on £50,000 worth of profit in your first financial year.

What about taxes on profits when you are a sole trader?

When you’re a sole trader, you pay tax on any profits you make. Without wishing to state the obvious, your profit is the difference between the sales you’ve made and the money you’ve spent. The taxman considers your profit as your income.

If you have £50,000 worth of income or profit in your first year of trading, you’ll pay 20% on any amount between £11,500 and £45,000 (£43,000 in Scotland). Above £45,000 (£43,000 in Scotland), you’ll pay 40%. The first £11,500 is not subject to income tax – this is your annual personal allowance.

There are also two different types of National Insurance to pay – Class 2 and Class 4.

WiseAccountant tip – Class 2 NI will disappear from tax year 2018/2019 to be replaced by a newer version of Class 4. Details aren’t through for this yet so keep an eye on our blog.

For your Class 2 insurance, you’ll pay £148.20 over the year.

You’re also taxed with Class 4 and that’s based upon your profit/income. You’ll pay 9% on your profits between £8,164 and £44,999 this tax year and 2% on any amount over that.

So, out of your £50,000, what do you have left?

You’ll pay £8,700 in income tax, £148.20 in Class 2 National Insurance, and £3,415.24 in Class 4 National Insurance.

You’ll pay a total of £12,263.44 in tax, leaving you with £37,736.56.

If you set up as a limited company, how would the situation differ?

What about a Limited Company?

When you operate a limited company, you extract cash differently. There are two “incomes” which are taxed – the income the business makes (in corporation tax) and the income you make (in income tax, national insurance, and dividend tax).

For this article, we’re going to assume that the business makes £50,000 in its first year and the shareholder/director of the business has no income from other sources.

Most shareholding directors pay income tax. They also have a personal tax allowance every year of £11,500.

Limited company shareholding directors do not pay Class 2 or Class 4 National Insurance. They are classed as company employees so they pay Class 1 National Insurance.

For many shareholding directors, the majority of their pay is made up from a “dividend”. A dividend is a payment related to their shareholding in the business and the profit that business has made.

Working with your accountant, we devise the best “split” of income tax, Class 1 National Insurance, and dividends to ensure the tax both you and your company pay come to less than what a sole trader pays.

So, back to your limited company which has made £50,000 profit in its first trading year.

We would recommend that you pay yourself £8,164 in salary. This is the maximum amount of salary you can take home without paying any income tax or National Insurance.

WiseAccountant note – as you’re an employee, your limited company is liable to pay National Insurance Employers’ Contribution on your salary. However, by paying yourself £8,164, your Employers’ Contribution bill will be £0.

Your salary is considered a business cost so you can take the £8,164 you’re paid in salary from your profits. You’ll pay 19% corporation tax on what’s left. So, on the remaining £41,836 (£50,000 minus £8,164), your company tax bill will be £7,948.84.

Minus your salary and minus corporation tax, you’re left with £33,887.16.

You still have £3,336 of your personal allowance left for the year (that’s the £11,500 personal allowance you have minus the £8,164 you’ve taken in salary) which you can take off the £33,887.16, leaving you with £30,551.16.

You can pay yourself this £30,551.16 as a dividend. Your first £5,000 of dividends are tax free and, given the size of your salary and dividend in this example, you’ll pay 7.5% tax on the £25,551.16 not covered by your annual dividend allowance.

Your dividend tax bill for the year will be £1,916.

WiseAccountant note – the dividend allowance goes down to £2,000 a year from 2018/2019 which would raise your dividend bill from £1,916 to £2,141 in this example.

WiseAccountant 2 – anything you pay yourself in salary reduces your profits. Anything you pay yourself in dividends does not affect your profits.

So, what’s remaining?

From your £50,000, you paid £7,948.84 in corporation tax and £1,916 in dividend tax, leaving you with take-home pay of £40,135.

In this example a limited company wins.

A sole trader would keep £37,736.56 of his or her £50,000 income/profit. A shareholding director would take home £40,135. That’s a difference of £2,398.60 that stays in the shareholding director’s bank account and the taxman doesn’t get a claim.

From purely a taxation point of view, in most cases, it’s better, even for small, one-person companies, to run as a limited company than be a sole trader. But, the higher you earn, the picture flips the other way.

Let’s look at some other examples – £10,000, £40,000, £70,000, £100,000, £200,000, and £300,000.

These would be what a sole trader takes home at these levels –

Self-employed	£10,000	£40,000	£70,000	£100,000	£200,000	£300,000
Income tax	£0	£5,700	£16,700	£28,700	£75,800	£120,800
Class 2 NICs	£148.20	£148.20	£148.20	£148.20	£148.20	£148.20
Class 4 NICs	£165.24	£2,865.24	£3,815.24	£4,415.24	£6,415.24	£8,415.24
Take-home	£9,686.56	£31,286.56	£49,335.56	£66,736,56	£117,636.56	£170,636.56

For a shareholding director, this is how we’d split the same figures…

Ltd profit	£10,000	£40,000	£70,000	£100,000	£200,000	£300,000
Salary	£8,164	£8,164	£8,164	£8,164	£8,164	£8,164
Taxable Profit	£1,836	£31,836	£61,836	£91,836	£191,836	£291,836
Corporation Tax	£367.20	£6,367.20	£12,367.20	£18,367.20	£38,367.20	£58,367.20
Gross Dividend	£1,468	£25,468.80	£49,468.80	£73,468.80	£153,468.80	£233,468.80
Tax on Dividend	£0	£1,284.96	£6,243.16	£14,043.16	£43,819.80	£74,299.80
Take-home	£9,632.80	£32,347.84	£51,389.64	£67,589.64	£116,180.20	£165,700.20

So, how do they compare?

	£10,000	£40,000	£70,000	£100,000	£200,000	£300,000
Sole trader	£9,686.56	£31,286.56	£49,335.56	£66,736,56	£117,636.56	£170,636.56
Shareholding director	£9,632.80	£32,347.84	£51,389.64	£67,589.64	£116,180.20	£165,700.20
WINNER	S/T	LTD	LTD	LTD	S/T	S/T
Better off by	£53.76	£1,061.28	£2,054.08	£853.08	£1,456.36	£4,936.36

If the figure is around £70,000, being a shareholding director is better than a shareholder.

As income rises into six figures, there’s a cigarette paper between the two but still in favour of incorporation. When we get to £200,000, being a sole trader is pulling out into the lead again. At £300,000, you’re £4,936.36 better off as a sole trader than a shareholding director.

But, business is more than about taxes.

Are you giving up any benefits being incorporated?

If you’re a sole trader, your income and profit are considered essentially one and the same thing.

If you’re a shareholding director, profit is what your company makes and income is what you personally make.

Taking out money

For sole traders, extracting cash from the business is easy. You can take money out of the business and incur no additional tax for taking it. All you need to do is make sure you have the money for HMRC when it becomes due.

With a limited company, any money you draw you have to take out as either salary or dividends. There is paperwork and process behind both. You can only withdraw dividends from retained profit. If you’re not showing a profit, you can’t take out dividends.

Borrowing from the business

As a sole trader, you can borrow money from your business with no tax consequences. If your personal borrowing takes your business account into overdraft, you can even claim tax relief on the bank charges and interest you incur.

If you borrow money from your limited company and don’t pay it back within 9 months, you have to pay a tax charge of 32.5% to HMRC – more if the loan is interest-free. Getting it back can take up to 9 months after the end of the tax year in which the loan is made – so you’ll be waiting a long time before you see it again.

Accounting

For most sole traders, accounting is very easy. If your turnover is less than the VAT threshold (currently £85,000), you can do a simple three-line set of accounts. Sole traders often work on cash accounts too – much easier and cash flow friendly than accrual accounting.

If you run a limited company, you must complete annual accounts and submit them to Companies House and HMRC. Your accounts must be prepared to generally accepted accounting standards – that’s going to be more expensive for you than if you were a sole trader.

Treatment of losses

As a sole trader, you can offset your trading losses against any other income streams you have (subject to a cap of £50,000 a year or 25% of your adjusted income if you’re earning £200,000 a year or more, whichever is the greater).

A limited company can only offset its trading losses against other company income but not against your income as a shareholding director.

Running a limited company is more complicated and expensive than being a sole trader, but being a sole trader also has some big downsides.

What benefits are open to limited companies that aren’t open to sole traders?

Other than taking home more money as a limited company shareholding director, a benefit which increases as the amount you make goes higher, why should you incorporate?

If the business fails

If you’re a sole trader and you become insolvent, you’re personally liable for all debts and you will be chased for them, maybe even into bankruptcy.

For limited companies, the situation is different. Your liability is limited to the amount of unpaid share capital in your business (which could be as low as £1). Unless you have traded while insolvent, you are protected personally against all claims.

WiseAccountant caveat – this is true in theory but rarely true in fact. Firms that extend credit to your limited company (like a loan or finance on an asset like plant or machinery) may require you to sign a personal or director’s guarantee. Some landlords may require you to do the same. Basically, if it doesn’t work out and the company becomes insolvent, you’ll be chased for the money as if you were a sole trader.

WiseAccountant caveat 2 – if you have borrowed money from your company and have not paid it back, this is what’s known as an overdrawn director’s account. An insolvency practitioner will, in most cases, attempt to force you to pay back the overdrawn director’s account in full to pay back to the creditors of the company.

More control over money

As a sole trader, all of your income is taxed up to 45% – end of story. You can’t go back to the taxman and ask him if it’s OK to pay 45% on one amount of money but nothing on another because you might want to invest it in something later.

With a limited company though, you can leave money in the company bank account to accumulate, once your corporation tax of 19% has been applied. You can effectively shield the cash that is left after corporation tax and take it as dividends at a later time (when it could potentially be more tax efficient to do so). You would also have the option to reinvest the funds into your business at a later time.

Pensions

This flexibility on how to use money out of a limited company extends into pensions too.

As a sole trader, you can only have a personal pension. Over time, the amount placed into your pension pot is likely to be much smaller than for a limited company shareholding director. The tax reliefs you can benefit from aren’t that substantial.

That’s because with a limited company pension scheme, both the director and the company contribute to a pension pot. You have a yearly pension limit of £40,000 and your limited company could make a substantial contribution to that figure. Better still, any contribution your company does make can be taken from your profit figure to reduce your corporation tax bill.

Also, limited companies can have access to more complex but customisable pension plans like SIPPS and SAAS. However, this is not really a consideration until your business achieves a certain size.

Tax perks

As a sole trader, you can claim against mobile phones and computers but only partially. If registered to a limited company, you can deduct the cost of mobile phones and computers from your business profits and pay no personal tax on them.

And for limited companies, the list of tax-free benefits goes on – car parking charges, childcare, home phones, public transport (including up to 60 taxis a year under certain conditions), medical check-ups, school fees, and travel. You can even claim £150 on personal entertainment every year and take up to £1,000 for yourself after 20 years as a long-service award.

Rent

As a sole trader, you can’t charge yourself rent but a limited company can rent space in your home for you to work in to offset your mortgage interest and council tax! However, you will have to declare the rent your company is paying you on your Self Assessment.

If you are a sole trader, you can deduct a portion of your house costs including mortgage interest, council tax, utilities, and so on. Check with your accountant before making these deductions though as they can be challenged.

So which direction do I take?

Every business’s needs are as different as the needs of the men and women who own and run them.

It’s best to speak with an accountant as soon as possible. Talk us through your business and how it will run. Tell us what you want from it. Using all the information you give us, we can then give you what we believe to be the very best advice.

If you want to know how to register for VAT, this is the article for you. It’s a straightforward process so let’s go through the steps together.

What is VAT?

VAT is something you need to register for if your business is already or is expecting to be turning over more than £85,000 (around £1,635 a week).

This is how VAT works.

There are two types of VAT. Input VAT is the VAT your business pays to its suppliers when you’re buying in goods and services. Output VAT is what you charge your customers in VAT when you’re making a sale.

Most businesses pay VAT every quarter. At the end of a quarter, you have one months and seven days to file your VAT return with HMRC and make payment.

To work out the level of VAT you need to pay, add up all the VAT on invoices you’ve issued throughout the quarter. Then, add up all the VAT that are on your suppliers’ invoices to you. The difference between the two is the VAT bill you pay.

What are the rates of VAT?

You charge or are charged VAT at three different rates. The main rate is 20%. There is a reduced rate of 5% on items like utilities, mobility aids for the over 60s and children’s car seats. Finally, there is a zero rate of VAT on products like food, books, children’s clothes, children’s shoes, newspapers, and motorcycle helmets.

HMRC produce a list of the different levels of VAT on different items – click here.

Is cash-accounting VAT better for you?

Under normal VAT rules, VAT becomes payable when you issue an invoice. But, if your business issues invoices giving the customer 30, 60, or even 90 days to pay, you may find that you’re paying VAT on money months before you actually receive it. That could create cash flow problems.

You can use the cash accounting system instead. That’s available for businesses whose turnover is less than £1,350,000. With cash accounting, you only pay VAT on money you’ve actually received. You don’t need to tell the taxman that you’re using cash accounting either.

What is flat rate VAT?

Flat rate VAT was designed by HMRC to make working out VAT easier for smaller businesses.

With flat rate VAT, you don’t claim back input VAT. Instead, you set aside a pre-determined percentage of your VAT inclusive turnover every month.

If you run a travel agency, your flat rate of VAT is 10.5%. Let’s say you sell a no-expense-spared two-week honeymoon to a couple about to be married for £6,000. Excluding VAT, the holiday actually costs £5,000.

Under flat VAT, you put 10.5% of the £6,000 invoice aside – £660. It’s that figure that you put onto your quarterly flat rate VAT return.

At the end of the quarter, add up all the invoices you’ve issued, work out 10.5% of the total, and that’s what you’ll pay in VAT.

To find out the level of flat rate VAT covering your business activity, click here.

Annual accounting VAT

Many businesses are highly seasonal with the vast majority of their cash flow focused into a few weeks or months during the year. This can make keeping enough cash aside to make VAT payments difficult to manage.

HMRC offer an annual accounting scheme which is based upon your previous year’s turnover (or, if you’re a new business, your predicted 12 months’ turnover). Under this system, you submit one VAT return and make four equal payments a year.

As with the cash-accounting scheme, annual accounting VAT is only open to companies whose turnover is £1,350,000 or less.

How to register for VAT

You can register for VAT at any time on the HMRC website.

However, before you start the process, you’ll need a Government Gateway ID.

I don’t have a Government Gateway VAT ID

You start the process at this page – Register for HMRC Taxes.

At the same time as registering for VAT, you’ll also open a Government Gateway account.

Once you have done this, you may have to wait up to two weeks to start the next part of the process.

I do have a Government Gateway VAT ID

Sign in at the Government Gateway entrance and follow the on-screen instructions.

BusinessCostSaver tip – you’ll need your details, your business’s details, and any Unique Tax Reference numbers applicable.

Once you’ve completed this process, HMRC will send you a VAT registration certificate confirming your VAT number, when your first return and payment are due, and the date you went over the threshold for VAT.

Between registering and receiving your VAT certificate

Even though you won’t have a VAT registration number for a few days, in HMRC’s eyes, you’re a VAT registered business and you need to charge VAT.

If customers are not sure about VAT when you’re invoicing them without a VAT number, let them know that you’re waiting for your registration details. Reassure them by promising to reissue the invoice with your VAT number on as soon as it arrives.

Your new VAT responsibilities

Once you’re registered, you now must charge VAT to your customers.

You’ll be expected to keep good VAT records, submit your VAT returns on time, and pay any VAT that’s due to HMRC on time and in full.

You can use your first VAT return to let HMRC know about purchases you may before you registered that you can claim the VAT back on.

Logging in to submit your return

When you log in, you’ll be given three choices –

• set up a direct debit for VAT payments (not essential but handy)
• make a VAT return
• change your registration details.

Choose “make a VAT return” to provide HMRC with that quarter’s VAT details.

Paying VAT

You need to let HMRC know how much VAT you are due to pay.

Once you’ve informed them via their portal, you simply transfer the money into the bank account they give you using the reference number provided.

For most VAT customers, the payment window works like this. Let’s say your VAT quarter is 1st January to 31st March. You then have a month and 7 days to submit your return and make payment meaning you should do both no later than 11.59pm on May 7th.

Personal tax rates and allowances for 2017/2018 have been released by HMRC. In this article, we’ll look at when you start paying taxes, how much you’ll pay, and what you’re able to keep for yourself and away from the clutches of the taxman.

Personal allowance 2017/2018

	2017-2018	2016-2017	2015-2016	2014-2015
Annual personal allowance	£11,500	£11,000	£10,600	£10,000
Threshold at which personal allowances begins to fall by £1 for ever £2 income over threshold	£100,000	£100,000	£100,000	£100,000
Personal allowance if born between 6 April 1938 and 5th April 1948	–	–	–	£10,500
Personal allowance if born before 6 April 1938	–	–	£10,660	£10,660
Blind person’s allowance	£2,320	£2,290	£2,290	£2,230
Marriage Allowance	£1,150	£1,000	£1,060	–
Married Couples Allowance (maximum)	£8,445	£8,335	£8,335	£8,165
Married Couples Allowance (minimum)	£3,260	£3,220	£3,220	£3,140
Married Couples Allowance threshold at which allowance reduces by £1 for every £2 over threshold	£28,000	£27,700	£27,700	£27,000
Rent-a-room relief	£7,500	£7,500	£4,250	£4,250
Dividend Allowance	£5,000	£5,000	£5,000	–
Personal Savings Allowance (basic rate taxpayer)	£1,000	£1,000	–	–
Personal Savings Allowance (higher rate taxpayer)	£500	£500	–	–
Personal Savings Allowance (basic rate taxpayer)	–	–	–	–
Capital gains tax allowance	£11,300	£11,000	£11,100	£11,000
Child benefit ceiling (clawback applies on individual salaries above this amount)	£50,000	£50,000	£50,000	£50,000

Income tax personal allowance

For your first £11,500 of income (whether that’s salary, dividends, rental income, or any other form of earnings), you don’t have to pay any income tax on the amount.

Up until the start of the 2016/2017 tax year, an additional age-related personal allowance was applied to taxpayers born between 6 April 1938 and 5 April 1948. This benefit no longer exists.

Likewise, the additional age-related personal allowance for people born before 6 April 1938 is no longer available, having been scrapped from 6th April 2016.

Blind person’s allowance

If you’re registered blind or severely sight-impaired with your local authority in England and Wales, you receive an additional £2,320 on top of your personal allowance. As this income is not taxed at 20%, this means you’re not getting paying £464 income tax on that extra amount.

If you live in Scotland or Northern Ireland, you’re entitled to receive blind person’s allowance if your blindness or severe sight restriction stops you from doing work for which eyesight is essential.

To claim blind person’s allowance, you should phone 0330 200 3301.

You are allowed to transfer your blind person’s allowance to your spouse or civil partner. You qualify for this if you’re not paying tax or can’t use all of your blind person’s allowance. To do this, you need to fill in form 575.

Marriage allowance

If you’re married or in a civil partnership and at least one of you was born after 6th April 1935, you can transfer £1,150 of your personal allowance to your other half if:

• you earn less than £11,500 and
• your spouse or civil partner earns between £11,501 and £45,000 (£43,000 in Scotland).

By transferring that part of your allowance, as a couple you will pay £225 a year less in tax. To claim Marriage Allowance, click here.

You have four years in which you can make a claim for Marriage Allowance.

Marriage Couple’s Allowance

If you’re married or in a civil partnership and you were both born between 6th April 1935, you can claim Married Couple’s Allowance.

Couples claiming this allowance will receive between £326 and £844.50 in cuts from their tax bill. You can transfer any unused allowance to your partner if you don’t pay enough tax or your tax bill is not high enough (you need form 575 for this).

In addition, you can share or transfer Married Couple’s Allowance before the tax year starts by filling in form 18.

Rent-a-room

You can earn up to £7,500 a year without paying any tax with the government’s Rent-a-room scheme.

Open to both homeowners and tents, you can charge up to £7,500 in rent and other expenses (like providing meals, cleaning, washing, and so on) as long as the room is within your primary residence – that is, where you live.

If your charges are below £7,500, you do not need to report it to HMRC. If it’s over that level, you’ll need to fill in a Self Assessment and pay tax on the amount at the appropriate level.

If you and your spouse/civil partner are renting out the room, the £7,500 allowance turns into a £3,750 per person allowance.

Personal savings allowance

Introduced in tax year 2016/2017, a new tax-free allowance on income from savings was introduced.

If your total taxable income in a year is less than £17,000, no tax on savings is now payable.

For basic rate taxpayers, your first £1,000 in savings income is tax-free. For higher-rate taxpayers, it’s your first £500. For additional rate tax payers, there is no personal savings allowance.

Under the new scheme, the following counts as savings income:

• interest from bank and building societies
• interest from credit unions
• interest from National Savings and Investments
• distributions of interest from authorised unit trusts, open-ended investment companies, and investment trusts
• income from government gilts
• income from corporate bonds
• income from most types of purchased life annuity payments

The interest you make from Individual Savings Accounts does not count towards your £1,000 or £500 personal allowance as it’s already free of tax.

If you earn less than £16,500 a year, you can benefit from the “starting rate for savings”. Your first £5,000 of savings is tax free. This allowance reduces for every £1 you earn over the personal allowance of £11,500.

So, if you earned £13,500 in a year, your starting rate for savings would reduce by £2,000 as your pay is £2,000 above the personal allowance. Therefore, all interest you earn that year up to £3,000 will not be taxed.

Capital gains tax allowances

Capital gains tax is payable on the profit you make from certain types of transactions.

You have an annual capital gains tax allowance of £11,300.

Capital gains tax may need to be paid when you sell any of the following for profit:

• personal items worth £6,000 or more
• any property you sell which is not your primary residence (i.e. where you live all the time)
• any shares that you own that are not made tax-free by being part of an Individual Saving Account
• a business in which you’ve had a 5% shareholding for more than a year.

If you sell your business, you have a lifetime capital gains tax allowance of £10,000,000 on the profit you make minus the expenses you incur (for example, solicitors, accountants, business transfer agents). If you’re under that amount, you pay 10% tax on the profit you make from selling your business minus any fees.

Dividend tax allowances

A dividend is a payment made to the shareholders of limited companies. It is another way to take cash out of a limited company in addition to salary.

There is a £5,000 dividend tax allowance under which no dividend tax is payable.

Personal tax rates 2017/2018

There are two main types of tax you’ll pay on your earnings, Income Tax and National Insurance.

If you’re employed or you are in an unincorporated business (sole trader or partnership), this is how much income tax you’ll pay on your (non-dividend) salary

	2017-2018	2016-2017	2015-2016	2014-2015
Basic rate (England, Wales, Northern Ireland)	Up to £33,500	Up to £32,000	Up to £31,785	Up to £31,865
Basic rate (Scotland)	Up to £31,500	Up to £32,000	Up to £31,785	Up to £31,865
Higher rate (England, Wales, Northern Ireland)	£33,501 to £150,000	£32,001 to £150,000	£31,786 to £150,000	£31,866 to £150,000
Higher rate (Scotland)	£31,501 to £150,00	£32,001 to £150,000	£31,786 to £150,000	£31,866 to £150,000
Additional rate (all UK	£150,001 and over	£150,001 and over	£150,001 and over	£150,001 and over

Again, if you’re employed, these are the National Insurance rates you’ll pay…

National Insurance rates for employees	2017-2018	2016-2017	2015-2016	2014-2015
Between £157 and £866 a week	12%	12%	12%	12%
Above £866 a week	2%	2%	2%	2%
Rebate from employees in contracted-out workplace pension schemes	–	1.4%	1.4%	1.4%
Married women’s reduced rate between primary threshold and upper earnings limit*	5.85%	5.85%	5.85%	5.85%
Rate for employees deferring National Insurance**	2%	2%	2%	2%

* until April 1977, married women could choose to pay a reduce rate of National Insurance, sometimes called the small stamp. If you pay the small stamp, your State Pension will be reduced and you won’t be able to claim some benefits

** employees with more than one job may be able to defer paying Class 1 National Insurance.

If you are in an unincorporated business (sole trader or partnership), you pay two types of National Insurance – Class 2 and Class 4.

Class 2 National Insurance is fixed at £2.85 per week. Class 4 National Insurance is based upon your profit during the year.

Class 4 National Insurance	2017-2018	2016-2017	2015-2016	2014-2015
You pay 9% of your profit above this level	£8,164	£8,060	£8,060	£7,956
Above this limit, you pay 2% in Class 4	£45,000	£43,000	£42,385	£41,865

If you’re a shareholding director in a limited company, you can also pay yourself in dividends. Here is how dividends are currently taxed

Current dividend tax	Tax on dividends
Basic rate	7.5%
Higher rate	32.5%
Additional rate	38.1%

Receiving income from a trust

If you receive dividend income from a trust, that income does not qualify for the dividend tax allowance and you’ll have to pay income tax on them based upon your earnings levels.

Before you receive your income from the trust, the trustees must pay tax on it before the money reaches you. You can ask the trustees for a statement showing:

• the different sources of income
• the income you received
• the amount of tax was paid on your income

An accumulation or discretionary trust is a type of trust where the trustees have the choice on how they use the trust’s income, who they pay the income to, and when they pay it. With these types of trusts, trustees will often allow income to “accumulate”. They add accumulated capital to the capital already built up in the Trust. Pay-outs normally occur when the beneficiary has reach their age of entitlement.

With these types of trust, trustees will pay tax at 45% on the income. If you’re an additional rate payer, you won’t have any more tax to pay.

However, if you pay tax at 20% or 40%, you can reclaim the tax paid using form R40 or via your Self Assessment.

An interest in possession trust differs from an accumulation or discretionary trust. With an interest in possession trust, you, as the beneficiary, have an “immediate and automatic right” to the income as soon as the trust earns it. Your trustees must pass on to you all of the income they receive minus any expenses.

If you are a basic rate taxpayer, you will not have to pay any additional taxes on top of what your trustees paid unless it takes your adjusted annual net income into the higher rate category. Income that does take you past that threshold will be liable for tax.

If you are already a higher rate taxpayer, you will need to pay extra tax. The amount will be the difference between the amount your trustees paid and what you, as a higher rate taxpayer, would have to pay. You make this payment through Self Assessment.

If you are not a tax payer, you can reclaim all of the interest paid by your trustees using form R40.

Wise Accountant tip – if your trustees do not pay tax, you’ll need to pay it via Self Assessment. If you do not currently fill in a Self Assessment form, you need to register by 5th October following the tax year in which you receive your trustee income.

Personal contribution restrictions 2017/2018

HMRC places limits on how much you (or the company you work for) can put into your pension pot every year.

You can invest right up until the amount you earn – that’s called the earning limit. Anything above that doesn’t qualify for tax relief. So, if you earned £35,000 in one year but decided to put £45,000 into your pension scheme, it’s only the initial £35,000 that would get the tax relief.

For those earning £40,000 a year or more, you can pay a maximum of up to £40,000 into your pot and still enjoy the tax relief benefits. You can stretch your allowance back over 3 years too.

What that means is that if you’d put £20,000 into your pot for the last three years, you could invest £100,000 into your pension that year by combining the £40,000 for the current tax year and the £20,000 you didn’t put in in each other previous three tax years.

If you earn more than £150,000 in a year (that includes your salary, your pension contribution, and your employer’s pension contribution), your annual limit will reduce by £1 for every £2 you earn over £150,000.

So, if your earned £170,000 in a year, your annual limit goes down from £40,000 to £30,000. However, once you reach £210,000 in a year, when your annual limit will have shrunk to £10,000, that’s when the rule stops being applied. Anyone earning over £210,000 will have an annual limit of £10,000 – it will not go beneath that.

There is also a lifetime limit, in the current tax year, of £1,000,000 for your pension pot. Any savings above that level (including any interest or capital gains your pension makes for you) does not qualify for further relief.

Corporation tax is payable by companies on the profits they make. Corporation tax is only paid by limited companies. If you’re doing business as a sole trader or a partnership, this guide doesn’t apply to you.

Corporation tax rates

Corporation tax is currently at 19%. The government has set a target for corporation tax to be reduced to 17% by the 2020/2021 tax year. Boris Johnson did state this change would be put on hold during his election campaign.

Below, find out how corporation tax has changed in the previous 3 years to date:

		2019-2020	2017-2018	2016-2017	2015-2016
Size of profits	Level of profits	% rate	% rate	% rate	% rate
Small	Up to £300,000	19	19	20	20
Small to main	£301,000-£1,500,000	19	19	20	£10,500
Main	£1,500,001 and above	19	19	20	21
Applicable fraction		N/A	N/A	N/A	1/400

There are two rates of corporation tax – “small” for companies whose profits are £300,000 or less and “main” for companies whose profits are more than £1,500,000.

Since April 2015, both the small and the main rate of corporation tax have been identical.

Corporation tax, company tax returns, and accounting periods

First of all, your accounting period for Corporation Tax is the amount of time that’s covered by your Company Tax Return.

BusinessCostSaver tip – you must file your company tax return (which shows your company’s profit and loss for corporation tax purposes) and your corporation tax bill no later than 12 months after the end of your accounting period.

Your accounting period can’t last more than 12 months.

This creates headaches for companies in their first year. If you started your business on the 11th February 2018, your first company tax return would be the 11th February 2018to the 10th February 2019. After that, you’d have a second accounting period lasting from 11th February 2018 to the 28th February 2019.

However, your first annual accounts can last more than 12 months. Using the same example, if you set up on the 11th February 2018, your first accounting period would last from 11th February 2018 to 28th February 2019.

So, in that time, you’d have one accounting period and two company tax periods. From your second year onward, the accounting period and the company tax period start and end on the same dates.

Corporation tax, company tax returns, and accounting periods – companies that have started doing business again

 

Every year, your company needs to report to Companies House what it’s done for the previous year. If the business is trading, you send Companies House your accounts. If the business is not trading, you declare the company as “dormant” and you send dormant accounts to Companies House every year.

Your corporation tax period starts when your company resumes trading. If your company has started up again after a period of being dormant, you can:

• keep the company’s accounting reference date the same with Companies House
• prepare account for the 12 months up to your accounting reference date
• send your accounts to Companies House and use the same accounts to complete your company tax return.

With these three options, your accounting period remains the same so it’s the simplest option for many directors restarting their business.

How do you work out what is profit for corporation tax?

Corporation tax is payable on the:

• money you make from your activities (your trading profits)
• the returns on any investments your company has
• profits it makes from selling assets it owns (HMRC’s term for this is “chargeable gains”).

What if my accounting period is shorter than 12 months?

Both the small profit and the main profit threshold last for a year.

If you decide to shorten the length of your accounting period to 9 months, then you need to reduce both the small profit and the main profit thresholds proportionately.

In the case of a 9-month accounting period, take the £300,000 threshold, divide it by 12 (giving you £25,000) and multiple it by 9. That means that, for this shorter accounting period, the small profit threshold is £225,000.

What if my company has links with other companies?

If you have a series of companies which is linked, either because…

• one company controls another company or
• two or more of your companies are controlled by the same people or companies

…then they have a shared tax threshold.

If one company is part of a group of three companies, they have a shared tax threshold. That means that, for the purposes of small profit corporation tax whose threshold is £300,000, all three companies share that £300,000 threshold.

So, for all three of the companies in the group, their actual small profit threshold is £100,000 each.

What is marginal rate relief and how do I claim it?

As we mentioned earlier, up until April 2015, the small rate and the main rate were taxed differently. If your company’s profits fell somewhere in between the small rate and the main rate (£300,001 and £1,500,000), you could apply a marginal relief to that part of your profit that was between the two rates.

How does this work? Let’s assume that your business made £750,000 profit in 2014/2015. How do you deal with the £300,000 corporation tax threshold?

First, take the £750,000 profit and apply the main tax rate of 21%. This leaves you with a figure of £157,500.

Then, take the main relief threshold of £1,500,000 and then subtract your level of profitability. You’re left with £750,000. Then multiply this figure by the fraction.

So, that’s £750,000 multiplied by one and divided by four hundred, which equals £1,875.

Subtract the £1,875 from the £157,500 to get the corporation tax payable of £155,625.

Using capital allowances is a great way of reducing the amount of corporation tax your business has to pay. There are lots of different ways to do it as well.

Capital allowances 2017/2018

In this article, we look the breaks that are open to business which allow them to keep more of the money they make

Annual investment allowance

Annual investment allowance (limited companies)	1 January 2016 to present	6 April 2014 – 31 December 2015	1 January 2013 – 5 April 2014	6 April 2012 – 31 December 2012
Amount	£200,000	£500,000	£250,000	£25,000
Rate	100%	100%	100%	100%

Annual investment allowances, also known as AIA allowances, are designed to incentivise and encourage businesses to invest in plant and machinery. From 1st January 2016, the annual investment allowance was increased to £200,000.

According to HMRC’s definition, plant and machinery includes:

• items that you purchase to use in your business, including cars
• costs involved in demolishing plant and machinery
• parts of a building considered integral (covered later in this article)
• fixtures, for example (fitted kitchens or bathroom suites)

• alterations you make to a building so you can install other plant and machinery

You can’t claim AIA allowance on cars, gifts, or items/assets you owned before they were used for the business.

Wise Accountant tip – you can allocate your AIA against any qualifying expenditure you want. You’re also able to use your allowance against assets with a lower rate of allowance. You can even also assign your AIA to any company losses. If your company loses £50,000 in a year but have AIA qualifying expenditure of £100,000 in a year, you can increase your taxable losses to £150,000. You can also carry those losses forward meaning that if you made £100,000 the following year, you could use the previous year’s £100,000 to “null” your profit, meaning that no corporation tax would be due, if you run a limited company.

Pools

Writing down allowances are used by businesses to decrease the level of profitability by claiming against the deterioration in value of assets held by the business.

We look at writing down allowances in depth in this article from this point onwards. They’re a convenient and easy way to reduce the level of tax you pay, whether you’re a sole trader, a partnership, or you run a limited company.

When planning your writing down allowances for the year, you should group the assets into three types of pools:

• a “main” pool with a writing down allowance of 18%
• a “special rate” pool with a writing down allowance of 8%
• single assets pools where the asset contained within can attract either a writing down allowance of 18% or 8%.

Each pool has a balance – that is the value of items contained within the pool. Each year, you can claim a writing down allowance against each pool based upon the assets contained with it.

If you buy something new for your company, allocate it to the correct pool and that adds to the balance. If you sell something in the pool, the value of the pool goes down by the amount you sold the item for.

You can only claim writing down allowances on items for which AIA allowances have not, or cannot, be claimed. That may be because you’ve spent more than £200,000 in that year or the asset may not qualify for AIA.

First, let’s look at main rate writing down allowance assets and how they work.

Main rate writing down allowance

General writing down allowance	2017-2018	2016-2017	2015-2016	2014-2015
Rate	18%	18%	18%	18%

When you’re buying any asset for your business, in most cases you can take off the full value of the asset from your profits before taking using the Annual Investment Allowance mentioned earlier in this article.

Writing down allowances should be used if you’ve spent more than your AIA allowance annual limit of £200,000 or if what you’ve bought is not eligible for AIA.

To work out how much you can claim with writing down allowances, you need to begin what you paid for the assets. If the asset was given to your business as a gift or it’s something you personally owned before allowing it to be used by the business, the figure to start off with is the market value.

The main writing down allowance is 18% a year. Let’s look at how that writing down allowance at 18% works over a ten-year period on, for example, an IT system

	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Value of asset	£10,000	£8,200	£6,724	£5,514	£4,521	£3,707	£3,040	£2,493	£2,044	£1,676
18% WDA	£8,200	£6,724	£5,514	£4,521	£3,707	£3,040	£2,493	£2,044	£1,676	£1,374
Value of WDA	£1,800	£1,476	£1,210	£992	£814	£667	£547	£449	£368	£302

As you can see, in the first year, the writing down allowance is equivalent to £1,800. That means that you can take £1,800 away from your profits, meaning you pay either less corporation tax or income tax/National Insurance, depending on whether you are a limited company or not.

That reduces the value of the asset on your books from £10,000 to £8,200. So, when you claim writing down allowance for the second year, you’re able to deduct 18% of £8,200 from your profits, equivalent to £1,476.

As you can see, as 18% of the value is written off every year, that means the asset’s value decreases every year as does the amount you can deduct from your profits.

Special rate allowances

Other than the main rate of writing down allowances, there is a special rate.

The special rate is 8% and that’s the rate you have to use forL

• items with a long-life
• the thermal insulation applied to a building
• cars with CO2 emissions greater than 130g/km
• the integral features of a building.

You can also claim AIA allowances on all of the special rate items with the exception of cars. You should only claim writing down allowances on each of these items if your AIA allowance has run out that year (that is, you’ve spent more than £200,000 on items that qualify for AIA).

Integral features writing down allowance

Integral features writing down allowance	2017-2018	2016-2017	2015-2016	2014-2015
Rate	8%	8%	8%	8%

You can claim a lower writing down allowance rate of 8% on what HMRC considers are integral features to a building, including:

• lifts, escalators, and move walkways
• air-conditioning systems
• air cooling systems
• space heaters
• water heating systems
• hot and cold water systems (excluding for toilets and kitchens)
• electrical systems (including lighting)
• external solar shading systems.

What effect does an 8% writing down allowance have on the amount of corporation tax you can claim back over 10 years look like

	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Value of asset	£10,000	£9,200	£8,464	£7,787	£7,164	£6,591	£6,064	£5,578	£5,132	£4,722
8% WDA	£9,200	£8,464	£7,787	£7,164	£6,591	£6,064	£5,578	£5,132	£4,722	£4,344
Value of WDA	£800	£736	£677	£623	£573	£527	£485	£446	£411	£378

Long-life assets writing down allowance

Life-long assets writing down allowance	2017-2018	2016-2017	2015-2016	2014-2015
Rate	8%	8%	8%	8%

You can also claim writing down allowances at 8% on items which have a useful life of at least 25 years from when they are bought as new.

If you’re a sole trader or a partner, allocate your long-life assets to your special rate pool if, within your tax year, your spending on long-life assets adds up to £100,000. If that’s not the case, put them in your main rate pool if their total combined value is less than £100,000.

Single asset pools writing down allowances

Single asset pools are used for one-off, single assets which have a short life or which you don’t intend to use/keep for very long, or, if you are a sole trader or a partnership, an asset that you use outside the business for personal reasons.

You can’t create a single asset pool for a car or for any special rate items.

You can keep assets in a single asset pool for up to 8 years before you have to move them into your main asset pool.

First year allowances

You can qualify for first year allowances, meaning you can deduct the full cost of an asset from profits before tax, if you buy a qualifying asset.

Assets that qualify for first year allowances are called “enhanced capital allowances”

Enhanced capital allowances	2017-2018	2016-2017	2015-2016	2014-2015
Rate	100%	100%	100%	100%

The Enhanced Capital Allowances scheme was launched to promote the purchase by businesses of energy-saving plant or machinery chosen for inclusion on the government’s Energy Technology List.

The Energy Technology List has two parts to it:

• The Energy Technology Criteria List, a set of tests that qualifying products must pass, and
• The Energy Technology Product List, a register of the products that have passed the test.

Technologies and products featured on the scheme include:

• Air-to-air energy recovery.
• Automatic monitoring and targeting (AMT) equipment.
• Boiler equipment.
• Combined heat and power (CHP).
• Compressed air equipment.
• Heat pumps.
• Heating, ventilation and air conditioning (HVAC) equipment.
• High speed hand air dryers.
• Lighting.
• Motors and drives.
• Pipework insulation.
• Radiant and warm air heaters.
• Refrigeration equipment.
• Solar thermal systems.
• Uninterruptible power supplies.

You can claim 100% of the costs you incur when purchasing equipment as part of the scheme. All you need to do is to keep the records of your purchase and hand them over to your accountant who will include them on your tax return at the end of the year.

Enterprise zone capital allowance

Enterprise Zone allowances	2017-2018	2016-2017	2015-2016	2014-2015
Rate	100%	100%	100%	100%
To a limit of	€125 million	€125 million	€125 million	€125 million

Businesses situated in Enterprise Zones (see the list here) which invest in new and qualifying plant and machinery qualify for 100% capital allowance relief against their taxable income up until 31 March 2020.

The money spent must be on new and unused plant and machinery. The plant and machinery must not be a replacement of current assets – the scheme is designed to help companies enhance both their productivity and activity.

The equipment must be bought and the company have title of the equipment. Leasing the equipment will not qualify for the enterprise zone capital allowance.

There are a number of excluded industries from the scheme including fisheries, aquaculture, coal, steel, shipbuilding, synthetic fibres, management of waste, and primary agriculture.

Business property renovation capital allowances (not open to new applicants)

Business Property Renovation	2017-2018	2016-2017	2015-2016	2014-2015
Rate	Withdrawn	100%	100%	100%

This scheme has recently ended.

The Business Property Renovation Allowance was a 100% tax allowance when:

• your company converted a building into business premises
• you renovated a building that already is or will become business premises
• you carried out repairs on business premises.

It was only available in Northern Ireland and areas of Great Britain that were considered disadvantaged.

Landlord’s energy saving capital allowances (not open to new applicants)

Landlords’ Energy Saving Allowance	2017-2018	2016-2017	2015-2016	2014-2015
Rate	Withdrawn	Withdrawn	£1,500	£1,500

This scheme has also ended.

The Landlord’s Energy Saving Capital Allowance was a way for a landlord to move £1,500 across from the capital to the revenue column for installing the following in a residential dwelling:

• cavity wall insulation
• loft insulation
• hot water insulation
• draught proofing,
• solid wall insulation
• floor insulation

How to claim capital allowances

When you’ve worked out what capital allowances you’re going to claim for, you must make your claim via:

• a company tax return, if you’re a limited company (you’ll need to include a separate capital allowance calculation)
• Self Assessment, if you’re a sole trader
• Partnership tax return, if you’re a partner.

On the relevant form, the amount that you’re claiming for will be deducted from your profits, meaning either lower corporation tax or income tax/National Insurance.

2017/2018 PAYE tax codes – your guide. All employees (including directors with shareholding) receive a tax code from HMRC which helps employers understand how much tax and National Insurance to deduct from their wages.

What should my PAYE tax code be?

Tax codes are issued by HM Revenue and Customs (HMRC) soon after an employee starts a job, every year when personal allowances change, and when there is a substantial change in an employee’s salary (for example, sales reps whose bonuses and commissions push them from one tax banding to another).

There is an online HMRC questionnaire where taxpayers can check their tax code for themselves – click here to try it.

The online questionnaire will not work for you if the way you pay your income tax is via Self Assessment.

What do the numbers on my tax code mean?

HMRC uses a four-step process to work out the number part of your tax code.

First, they take your tax-free personal allowance for you for the year. Then they take income you’ve not paid any tax on like interest payments you’ve received or any part-time earnings you’ve received.

They also consider any benefits-in-kind you’ve received, like a company car.

Any income that you’ve not paid any tax on is then subtracted from the personal allowance. What’s left is your actual personal allowance for the year.

They then remove the last number from the your actual personal allowance – for example, if your personal allowance was £11,200, it would appear at 1120 on your tax code.

The standard basic rate tax code

All basic rate tax payers and higher rate tax payers (up to earnings of £100,000) have a personal allowance of £11,500 a year. You don’t have to pay any income tax on earnings below that amount.

For basic rate taxpayers, they will receive the 1150L PAYE tax code.

If you’re an employer, HMRC advices that you should use 1150L unless they indicate otherwise or if your employee has a tax code in the previous year that was not the basic rate tax code.

0T tax code

If your employee’s personal allowance has been used up in its entirety, they will have the 0T tax code for the remainder of that year.

0T is also sometimes used if an employee has just started working at your company but you have not received from them the information you need to generate the correct tax code for them.

Single person tax code and married person tax code

There is a benefit that married couples and those in civil partnerships can pass on to their significant other.

It’s called the Marriage Allowance and it lets one spouse or civil partner to transfer 10% of their personal allowance to the other. 10% of the current personal allowance is £1,150. If they transfer it to their partner, this results in a tax saving of £225 for the year.

In order to qualify, the following conditions must be met:

• one of the spouses or civil partners must be earning less than £11,500 a year
• the other spouse or civil partner earns between £11,500 and £45,000 (£43,000 in Scotland).

For an employee to apply for the Marriage Allowance, they can do so at the relevant section of HMRC’s website – click here. If you run a family business in which your spouse or civil partner takes an active role, it may be much more advantageous for you to issue shares to your significant other and pay them via salary and dividends.

What affect does this have on a tax code?

• The spouse or civil partner whose 10% has been transferred has an “N” on their tax code
• The spouse of civil partner in receipt of the 10% benefit has “M” appended to their code.

Your tax code if you earn more than £100,000

For employees that earn £100,000 or more, their personal allowance decreases by £1 for every £2 they are paid (by whatever means, known as adjusted net income) above £100,000.

Once your employee’s salary reaches £123,000, they no longer have a personal allowance.

If their salary is greater than £100,000, the letter in their tax code is “T”.

To work out adjusted net income, you need to add up:

• salary
• benefits
• self-employed income
• qualifying state benefits
• pensions
• dividends
• rental income
• trust income
• savings interest, and
• tax relief on payments to trade unions and police organisations.

From that total, you then subtract the following:

• tax reliefs (gross payments made into a pension scheme and any trading losses)
• Gift Aid donations
• contributions to pensions schemes where the provider has already given you tax relief.

Emergency tax code

Emergency tax codes are shown as:

• 1150 W1
• 1150 M1
• 1150 X

Emergency tax codes are normally assigned to employees new to your company or who have returned to employment after a spell of self-employment.

They may also be given to staff members who receive company benefits or the State Pension.

By their nature, emergency tax codes are temporary. If you have the information you need to update your employee’s tax code, you can do so by clicking here.

PAYE if you owe tax

HMRC will alter your employee’s tax code so that they collect any outstanding and unpaid tax. When running your payroll, you must make these extra deductions and transfer them to HMRC via payroll by the 22^nd of the following month after you’ve collected the money.

They have recently increased the amount of money they can deduct from your staff member if their earnings are greater than £30,000. How much is taken is determined on a sliding scale based upon your employee’s main PAYE-qualifying income.

The current scale is as follows:

Employee’s PAYE earnings	Maximum annual tax repayment
Up to £29,999.99	£3,000
£30,000-£39,999.99	£5,000
£40,000-£49,999.99	£7,000
£50,000-£59,999.99	£9,000
£60,000-£69,999.99	£11,000
£70,000-£79,999.99	£13,000
£80,000-£89,999.99	£15,000
Above £90,000	£17,000

Under the current system, HMRC may compel you to collect up to £17,000 from your staff member if they’re earning more than £90,000 in a tax year. HMRC refer to this process as “coding out”.

Employees can run up debt with HMRC by:

• having outstanding balancing amounts from periods when they completed a Self Assessment,
• PAYE underpayments
• National Insurance debts
• being overpaid tax credits.

Tax codes if you have more than one job

If your employee has more than one job, they may be assigned the following tax codes:

• BR (taxed at the basic rate)
• D0 (taxed at the higher rate)
• BR (taxed at the additional rate)

Scottish taxpayers

In April 2016, the income tax system in Scotland diverged from the income tax systems in England, Wales, and Northern Ireland. The new parallel systems are identical except for the rate at which taxpayers start paying higher rate tax.

From April 2016, the income tax system slightly differs between Scotland and the rest of the countries that form the United Kingdom.

Tax band name	Scottish bands	Rest of UK bands	Applicable income tax rate
Personal allowance	Up to £11,500	Up to £11,500	0%
Basic rate	£11,501 to £43,000	£11,501 to £45,000	20%
Higher rate	£43,001 to £150,000	£45,001 to £150,000	40%
Additional rate	Over £150,000	Over £150,000	45%

Taxpayers living in Scotland and who are subject to Scottish Income Tax have the letter “S” prefixed to an their tax code.

“K” tax code

Staff members with a “K” tax code have income that’s not being taxed in a different way. That income is worth more than the tax-free allowance. The “K” code means you take the tax due on the income that’s not been taxed so far from either your employee’s wage or pension.

If they have the “K” tax code, you can’t deduct more than half of their pre-tax wages.

Other “K” tax code employees will either be:

• paying tax they owe from a previous tax year,
• in receipt of taxable state benefits like the Employment and Support Allowance, Carer’s Allowance, Jobseeker’s Allowance, or the State Pension, or
• receiving benefits-in-kind from your company

Get help with PAYE and tax codes

Payroll is a complex issue for many employers. To get the help with all issues payroll, PAYE, and tax codes, call our team.

Use of home as an office is an increasingly popular trend among the 600,000 new businesses starting up every year in the UK.

On the surface of it, there’s lots to like about using your home as your office. There’s no commute, there’s no office rent, there’s no business rates, and there are no business-only bills like gas, electricity, water, internet, and so on.

Some people love working at home. Others hate it. If you’re not sure how you feel about it, try it for a few weeks and then make your mind up.

If you do choose to use your home as your office, are there any ways to claim back expenses from HMRC? Yes, but it’s an area you have to be careful with.

Flat rate method

These claims are not particularly generous but, if you have neither the time nor inclination to be forensic in your calculations, HMRC will allow the following:

Hours worked at home per month	Amount you can claim per month
0 to 24	£2
25 to 50	£10
51 to 100	£18
101 or more	£26

source: gov.uk

Can my company rent a room in my house?

Yes, A limited company can deduct those rental payments fully from its profit meaning a lower corporation tax bill.

However, the rent you receive from your company will affect your own personal tax position. Your company might save money but it might end up costing you more money personally.

Be careful not to “overpay” rent for the space in your home, make sure there is, in case of an inspection, an actual room dedicated to work, and have a legitimate rental contract in force between you and your company.

Telecoms and internet

If you make any personal calls from a landline phone, you can’t claim back any of the rental costs of the phone or the phone line. Actual phone calls can be claimed back however.

You can install a second landline in your home, specifically for business purposes, and claim back the total cost of the line. Make sure the line is in the name of the business and that the bills are paid via the business.

For mobile phones, all expenditure can be claimed back, again as long as it’s in the business’s name and the business pays the bills.

If you have broadband at your home, you can claim for the business use of it although you will need to keep records clearly demarcating how much of the usage was business-related. One way to ensure that you can claim it all back is by having the broadband account in the name of your business and making sure your business pays the direct debit.

Computer costs

As long as there is no significant personal usage, you can claim it back against taxes. However, if there is personal usage, HMRC will treat it as a benefit-in-kind and tax you for it at your highest rate of tax (20%, 40% or 45%). For limited companies, that benefit-in-kind may also attract National Insurance Employers’ Contributions too.

Computer software can be claimed back on in the year of purchase however if the software is expensive and likely to be used for more than two years, an exception may be made regarding the tax year of purchase.

Computer-related costs under £500 will normally be fine for the revenue column of your accounts however anything over that amount may be treated as capital expenditure for which you could make a claim on Annual Investment Allowance (if you’ve spent less than £1,000,000 on AIA assets that year) or writing down allowances (if you’re out of AIA credit).

Office furniture

If you buy any office furniture for your home office under £300, HMRC are unlikely to dispute it as a business expense.

If they do however, or if your furniture costs more than £300, you may have to explain how it’s only used for personal reasons and not business reasons.

For example, if you spend more than 100 hours or more a month working from home, that’s likely to be fine. However, if you spend 20 hours or less working from home, that’s much more contestable in HMRC’s eyes.

Business insurance

This will be an added expense but it will provide a form of proof to the taxman that you are working from home.

Weigh up this option carefully though because the amount you pay in business insurance may drastically reduce the amount of financial benefit you gain from claiming expenses back because of the size of the premiums you’ll pay.

Can I claim back against mortgage expenses and other running costs?

Yes, but please be aware this is another area open to interpretation.

Think about the number of rooms in your home. For argument’s sake, let’s say there are six rooms. Your mortgage is £800 per month. You have one room set aside for work.

Then, let’s say that you paid £100 a month for electricity, £60 for gas, £130 for council tax, and £20 for insurance.

In total, your mortgage and running costs are £1,110 a month.

£1,110 divided by six is £185. If you were working full-time for 40 hours a week in your home carrying out revenue-generating activity, HMRC “may” consider that a fair claim.

But what if you were only working 20 hours a week in your home working and spending 20 hours elsewhere? HMRC may now consider that £185 is not reasonable – they may want to halve it to £92.50.

To obfuscate matters further, what if that room, even if it’s set aside for an office, has the kids’ PlayStation 4 in it together with a couple of puffee cushions beneath a brand new 64” 4K HDR TV hanging proudly on the wall?

It’s mixed use. So, now that 20 hours for £92.50 doesn’t seem so fair to the taxman anymore. He may want to halve it because the kids enjoy playing on the console in there. Your tax claim may now be judged to be equitable at £46.75.

And for £46.75, do you want the taxman poking his nose in to your affairs?

“Unfair, often disproportionate and probably counterproductive,” says Paul Aplin, the vice-president of accountancy trade body ICAEW, of the current system of HMRC penalties.

He also stated that “… even with a nil liability — even indeed if HMRC owes you tax — being a year late incurs a penalty of £1,600.”

As many as 840,000 taxpayers missed the deadline on January 31st this year, according to the Financial Times, making late penalty fees an indisputable goldmine for the Treasury. Last year, HMRC wrote off a total of £23million in late self-assessment fines.

Accountants and professional bodies across the country are calling for the system to be scrapped but, so far, there is no sign of change coming anytime soon.

So, where do taxpayers stand who miss the deadline?

Penalty for late tax return – paper filing

Date	Deadline	Fines & penalties
5th April 2017-31 October 2017	Paper filing	N/A
1 November 2017-31 January 2018	First three months’ lateness	£100
1 February 2018-30 April 2018	Second three months’ lateness	£10 a day fine (up to £900 fine if still not filed by 30 April 2018)
1 May 2018-31 July 2018	Third three months’ lateness	5% of tax due or £300, whichever is greater
1 August 2018-31 October 2018	Fourth three months’ lateness	5% of tax due or £300, whichever is greater

Penalty for late tax return – electronic filing

Date	Deadline	Fines & penalties
5th April 2017-31 January 2018	Paper filing	N/A
1 February 2018-31 April 2018	First three months’ lateness	£100
1 May 2018-30 July 2018	Second three months’ lateness	£10 a day fine (up to £900 fine if still not filed by 30 April 2018)
1 August 2018-31 October 2018	Third three months’ lateness	5% of tax due or £300, whichever is greater
1 November 2018-31 January 2019	Fourth three months’ lateness	5% of tax due or £300, whichever is greater

Penalty for late tax return – 12 months lateness

If HMRC do not receive a late filing in the 12 months after the deadline, they may assume information is being withheld deliberately. This can lead to them filling out your tax return themselves and deciding the amount you owe them. When HMRC believe your delay is deliberate, they will also decide whether your delay is:

• An attempt to conceal your tax affairs from the authorities. If they conclude it is, you will be fined 100% of the tax you owe, or £300 depending on which figure is higher.
• Not an attempt to hide the amount you owe from HMRC. You will still be fined 70% of the tax due or, again, £300 if that is higher.

They may apply certain reductions for showing a “giving and helping” attitude during the process and for unprompted disclosures.

Interest on late filing penalties

Interest is chargeable on both unpaid tax and any penalties you are charged.

How HMRC may deal with your late payment

The longer a payment is delayed, the more penalties can build up. The cut-off date for 2017/2018 tax returns is 31st January 2019. If you failed to file these documents until 1st February 2020, this is how a tax bill of £20,000 would accumulate fines without interest added.

How would HMRC deal with a late filing and late payment?

If a return is severely delayed, the penalties can mount quickly.

If you do not send in your tax return for the 2017/2018 year by 31^st January 2019 however instead file it on the 1^st February 2020, this is how your fines would accrue before interest was applied if your tax bill was £20,000.

Type of penalty	Reason for penalty	Charge for penalty
Filing	Missed filing deadline of 31 January 2019	£100
Payment	Tax unpaid by 1 March 2019	£1,000 (5%)
Filing	Missing 3 month late deadline of 30 April 2019	£10 a day (up to £900)
Filing	Missing 6 month late deadline of 31 July 2019	£1,000 (5% or £300 whichever is greater)
Payment	1st August 2019 – tax six months late	£1,000 (5%)
Filing	Missing 12 month late deadline of 31 January 2020	£1,000 (5% or £300 whichever is greater)
Payment	1st August 2019 – tax twelve months late	£1,000 (5%)

Time to pay arrangements

To avoid deliberate late payments, HMRC offers a “time to pay” arrangement for those who feel they will struggle to pay their tax bill.

If HMRC accept your request, you will be able to spread your bill over up to 12 months from the due date. This is an option available for personal taxation, corporate tax, VAT and sometimes PAYE.

Immediately after self-assessment day, HMRC starts to pursue tax payers who have missed their deadlines, so it’s recommended that you apply for Time to Pay before then. Let them know how much of your bill you can pay and assure them you have explored other methods of covering your bill before asking.

They will want to know about your:
– Income,
– Expenditure,
– Assets,
– Savings and investments,
– And what you are changing in order to not require Time to Pay again.

Time to Pay is usually paid in instalments by direct debit. Defaulting on even one payment could be considered a breach of your agreement with HMRC; meaning you may need to pay the outstanding amount immediately, potentially additional fines.

Do you need to do a self-assessment?

Visit the government website to see if you are required to complete a self-assessment.

If you don’t meet the criteria, you should tell the taxman as soon as possible. If you don’t inform them, and you miss the deadline, you may start to accrue penalties. You must contact HMRC and ask them to withdraw your self-assessment.

You may only withdraw your tax return if all your income during the period was taxed through PAYE or savings income, or if you had no taxable income in that year. If you’re self-employed, you still need to fill out a tax return regardless of your tax liability.

You can request a withdrawal of your self-assessment form by calling HMRC on 0300 200 3310.

How to appeal a late penalty

Make sure you file your tax return before appealing against a late filing penalty. You will be expected to send in your tax return as soon as possible, within 14 days of whatever it was that caused the delay in the first place. You should make your appeal straight away too, in at least 30 days of the penalty being issues to ensure it will definitely be considered.

You will need to make your appeal in writing and with a Form SA370 – click here to download.

If your appeal is rejected, you can then ask for a review by another official. This may help if you failed to include information in your initial application that may have helped your case. If this is not successful, you could also appeal to the First Tier Tax Tribunal to challenge the decision.

HMRC may also consider a reduction in your penalty if your late payment was due to special circumstances.

What do HMRC or the First Tier Tax Tribunal consider as reasonable grounds for appeal?

If your excuse for late filing is considered acceptable by the HMRC and First Tier Tax Tribunal, they will waive your entire penalty. The Tribunal is thought to be more considerate what qualifies as a reasonable excuse for late filing, so taking your case to them can often be a good last resort to appeal the decision.

Valid grounds for appeal include:

• the death of a partner or close relative shortly before the tax return and payment deadline
• an unexpected stay in hospital
• a serious or life-threatening illness
• your computer or software failed just before you submitted your online return or while you were doing it
• fire, flood, or theft
• postal delays that you could not predict
• disability-related delays
• service issues related to the HMRC Self Assessment website (click here to read planned downtimes and service issues)
• registered for online filing before the deadline but didn’t receive your access code on time

Simple Assessments

Starting in October 2017, self-assessments will be replaced for some by the new Simple Assessment. Tax payers that are either…

a) claiming their state pension for the first time, whose income in 2016/17 was higher than that year’s personal allowance rate of £11,500
b) contributing to the system through PAYE who have underpaid their tax but cannot have their underpaid tax collected by HMRC
…will be taking part in the switch.

Make sure you never miss a deadline again

Working with our team, you’ll never miss a deadline. We’ll make sure that all of your details are submitted correctly and on time. We’ll advise you on what you need to pay well in advance of the deadlines.

A directors’ loan account can be in credit or it can be in debit. If the directors’ loan account is in credit, the company owes you money. If it’s in debit, you owe your company money.

Companies borrowing money from their directors happens all the time, particularly when a business is being started or a director is lending the firm money to grow. It makes far more sense (in most cases) to fund a company through loans you are repaid rather than paying them in via the issuance of addition shares.

Conversely, company directors taking loans out from their businesses is a very common way of being paid. A loan is issued and then, over the course of the following weeks and months, it will be paid back to the company with the issuance of salary, expense re-claims, and dividend payments.

If you owe money to your company because it has lent you money, this is often referred to as an “overdrawn directors’ loan account”.

What do you need to know about directors’ loan accounts?

Wise Accountant note – this article makes references to directors’ loan accounts in close companies – they are generally business with five or fewer participators (normally shareholders, directors, or shareholding directors who exert financial control over an incorporated limited company).

Always keep an eye on your directors’ loan account

HMRC have long been worried about the “free flow” nature of directors’ loan accounts.

Money going into it, money coming out of it – it’s all very fluid because a directors’ loan account tends to be reconciled and reorganised at the end of the year. Depending on how an accountant manipulates a directors’ loan account, it can lead to substantial tax savings for an individual.

If your directors’ loan account is overdrawn at the end of year, expect HMRC to want to inspect why.

These things need to happen to allow a company to lend money to its director:

• the company is not in financial dire straits
• it’s in adherence with the company’s articles of association
• it complies with the 2006 Companies Act
• if under £10,000, shareholder approval is normally not need
• if over £10,000, shareholder approval is given at a board meeting by ordinary resolution
• if the money is needed to meet company expenditure, it can be no more than £50,000.

S.455 corporation tax – when you borrowing money from your company and you don’t manage to pay it back within a certain time

When directors take out loans from their company, there is normally no interest charged by the company on the loan.

If a director takes out money from their business in the form of a loan, there will be no additional tax for the company to pay on it if it’s paid back nine months after the end of the company’s tax year.

If you still owe money nine months after the end of the company’s tax year, there will be an additional corporation tax levied on your profit called S.455.

S.455 is charged at 32.5% of the outstanding loan or loans amount.

For an example, you borrowed £30,000 from your company in June 2017. Your company end-of-year is 31^st March 2018. That means that you have nine months after 31^st March to pay back the £30,000 – that is, 31^st January 2019.

But what if you couldn’t repay any of the £30,000? You’d have to enter 32.5% of that onto the S.455 section of your CT600 corporation tax return. So, your corporation tax bill would rise by £9,750.

If you paid your overdrawn directors’ loan account down by £10,000 leaving the balance at £20,000, your company would have to pay 32.5% of that £20,000 in S.455 corporation tax.

Wise Accountant tip – for the avoidance of doubt, S.455 is paid by your company and not by you personally.

You can claim this money back but you’ll have to wait.

Is there interest on an overdrawn directors’ loan account?

No, but you will pay interest on the amount of the overdrawn directors’ loan account if you’re late paying your Corporation Tax bill.

Refunds on S.455 corporation tax payments

Once you pay the money you owe back in full, your company will be entitled to get its £9,750 S.455 corporation tax payment back

HMRC are in no hurry though.

Let’s think about the director whose company paid £9,750 in S.455 corporation tax. Let’s say that she managed to pay the loan back in its entirety in April 2019.

When you claim back the S.455 corporation tax payment, you’ll only receive it 9 months after the end of your accounting year. For our company here, the next year of year after April 2019 is March 2020.

The £9,750 would be received at the end of January 2021. Even though she had paid back her loan in April 2019, her company will have to wait another 21 months to receive it.

When you claim an S.455 corporation tax payment back, you use Form LP2. You can do this online although you will need your Government Gateway ID to go through the process.

Are there ways to offset or mitigate S.455?

There are lots of different ways.

You can declare dividends but only if retained profit exists in the business at the time when the dividend is declared. Remember that you start having to pay personal tax on dividends when you have received £5,000 or more of them in a financial year (£2,000 from April 2018).

You can pay yourself a bonus but be careful as this might incur hefty charges in income tax, National Insurance Employees’ Contributions, and National Insurance Employers’ Contributions. You will have to pay the tax on your next payslip via PAYE using Real Time Information.

You can do a mixture of both if there is some retained profit that can be declared as dividends or not. Again, be wary about income tax, National Insurance Employees’ Contributions, and National Insurance Employers’ Contributions charges.

Wise Accountant tip – whenever salary or a salary-based bonus is paid to offset an overdrawn directors’ loan account, that salary must be reported via Real Time Information prior to transfer.

All of these methods are paper exercises. You and your bank account never personally see the money. Your accountant will simply move various figures into different columns and make the required declarations for HMRC.

You can get your accountant to make sure that all personal allowances due are paid into your overdrawn directors’ loan account – items like business mileage.

If you personally own any assets that the company uses, you can “sell” them to the company – and that includes your car. The sale must take place at market value. This is another paper exercise where you will not personally feel the benefit of cash entering your personal account.

Wise Accountant tip – you won’t be able to sell any vintage cars to your company without potentially incurring capital gains tax.

You may have more than one director’s loan account. One might be in credit and the other in debit. However you choose to raise money to put into a loan account, get your accountant’s advice on the correct allocation of dividends, bonuses, salary, and so on into the most beneficial account for tax purposes.

Wise Accountant tip – HMRC may wish to aggregate however many directors’ loan accounts you have together to create a tax demand from you. In this case, you will need professional advice to appeal your case.

If this is a family business, you could sign an agreement to the credit in another directors’ loan account against the debit in your directors’ loan account. Make sure this is done as soon as possible and pass a board resolution to that effect.

Wise Accountant tip – the S.455 corporation tax payment is only due on the participators in a business (normally shareholders, directors, or shareholding directors who exert financial control over an incorporated limited company), not any non-participator staff member to whom your company has lent money.

Finally, pension savers can now take a 25% lump sum out of their pension pots if they are aged 55 or over without paying any tax. If you so wish, you could use this lump sum to pay off an overdrawn directors’ loan account.

Benefit-in-kind considerations

A benefit-in-kind payment is a method of payment to an employee (including a director) that does not take the form of cash. The most common types of benefits-in-kind are company cards, private medical insurance, and loans.

Let’s look at the rules around loans. When thinking about loans for benefit-in-kind purposes, a loan is the total amount of money borrowed over the course of a tax year. That could be one loan or ten loans.

If the total value of all loans taken out by a staff member total £10,000 or less over the course of a year, this is not considered a benefit-in-kind.

If it’s higher than £10,000, different rules apply. Every year, HMRC produces an interest rate for, among other things, loans to staff members. At the time of writing, that rate is 3%.

If you lend money to a member of staff in excess of £10,000 a year where there is either no interest or the interest rate is under HMRC’s rate, a benefit-in-kind is produced because your staff member is getting that loan at a cheaper rate than they could anywhere else.

In these cases, and this includes company directors with shareholdings who take money out of the company, the person must pay tax on the difference between what they have paid in interest and what they would have paid in interest at the HMRC rate. The amount of tax the employee pays is consistent with their normal level of tax (20%, 40%, or 45%)

When declaring this type of benefit in kind, you must use form P11D Working Sheet 4.

Can I write the loan off?

You can, but there are dangers. First, we’ll look at the mechanism.

If the money has been borrowed by a participator, then it can be written off and the amount written off is treated as a distribution (like a dividend payment).

If the person is not a participator, it will be treated as taxable income – that is subject to income tax and National Insurance Employees’ Contributions for them and National Insurance Employers’ Contributions for you.

For participators, it must be written off via a resolution passed at a board meeting.

There may be National Insurance consequences to a write off for the person, Class 1 National Insurance contributions are payable by your company, and, because it is distributed in the same way as a dividend, it’s not an expense so it won’t lower profits to bring down your Corporation Tax.

If you have paid the S.455 corporation tax on the overdrawn amount, you make a claim for the money back from HMRC for your company using Form LP2.

Insolvency and overdrawn directors’ loan accounts

If your company goes into liquidation soon after a loan has been written off, expect an insolvency practitioner to question the circumstances under which the write-off happened. The practitioner may view this as an action that is prejudiced against the company’s creditors.

If your loan remains unpaid and you’ve paid the S.455 corporation tax supplement, the insolvency practitioner will still consider the money as outstanding and will be within his or her rights to chase the money from you.

Other directors’ loan account points

HMRC will be on the lookout for “bed and breakfasting” arrangements. This is where you pay off your loan just before the end of the period lasting 9 months after the end of your company tax year and a new loan is made to you shortly thereafter.

If a director with an overdrawn loan account dies, the amount that is written off will be treated as the director’s taxable income. For National Insurance purposes, any loan that is written off will be considered and treated by HMRC as taxable if HMRC deems it as pay or employment-derived profit.

Want to go freelance but want someone else to take care of your taxes, paperwork, and allowances? You need to find out about umbrella companies.

What is an umbrella company?

Think of being a contractor/freelancer using an umbrella company as being in a half-way house between:

• being an employee,
• and being a contractor/freelancer running your own limited company.

Traditionally, contractors have set up their own limited companies to sign contracts with and receive payments from their clients.

What would an umbrella company do for you that’s different? The umbrella company will:

• act as an intermediary between you and your client
• they will chase up payments from your clients
• they will handle the payroll associated with the work you perform for clients
• do all your paperwork, specifically with regards to expenses claims

Umbrella companies do a lot of the legwork you’d have to do as a company director.

When you’re doing work for your client through an umbrella, you will log all the time you spent on the job for that client on a timesheet. Assuming your client agrees, they will then sign your timesheet confirming the hours served.

You forward that timesheet to your umbrella company which then invoices your client.

When the client pays, the umbrella company will forward the payment to you. Some will forward the money as soon as they are in funds from your client and others will pay you on set dates every month.

Your umbrella company will usually deduct their fee from your pay before tax which has the net effect of reducing your tax liability. When you’re paid, you’ll be on Schedule E taxation – in other words, you’ll pay the same tax and National Insurance as would an employee working at the firm which has contracted your services.

An umbrella company does NOT go out to find new clients for you. That’s entirely your responsibility.

So, you may be asking at this point what’s the benefit to you? Why should I pay an umbrella company to pay me at the same rates as an employee when there are lots of contractors out there who might be turning over the same amount of money but who aren’t paying an umbrella company’s fees and whose tax bills are substantially lower than yours?

Contractor umbrella benefits

IR35 is a subset of the tax rules in the UK designed to catch people in what HMRC considers as “disguised employment”.

Imagine working for a company for many years. You’re paying income tax and National Insurance at your normal rate. Your employer is paying an additional 13.8% of your wages above a certain level too. HMRC makes a lot of money from your employment.

What if you left that employer and set up your own limited company? What if, instead of being paid via PAYE by the very same company, you sent invoices instead? What if you were working the exact same hours in the same location, maybe even at the same desk, as a contractor that you were as an employee?

As a contractor, you can pay yourself using a mixture of dividends and salary. You can claim back all sorts of expenses that an employee cannot claim to bring down your profit. Your employer no longer has to shoulder the 13.8% National Insurance Employers’ Contribution tax they did before.

You win. Your employer-cum-client wins. HMRC loses thousands, if not tens of thousands.

HMRC set a list of questions and conditions to determine whether or not your arrangement with your client is, in fact, disguised employment. If they find out later that even one of your former clients had an arrangement with you that was, in their opinion, disguised employment, you would be “in the scope of IR35” and HMRC would bill you for unpaid tax, interest, and penalties. If they found one contract that was in the scope of IR35, they would check all of your contracts going back years to find other examples. At the end of this process, you could face a ruinous tax bill from HMRC.

If a contractor expects most of his or her contracts to be caught by IR35, there are very few strong reasons to go to the expense, time, and ongoing hassle of opening and running a limited company. You also never have to experience the laborious process of closing a limited company which are regularly challenged by both HMRC and Companies House.

Statistically speaking, the chances of being caught up in an IR35 investigation are infinitesimal. Even HMRC admits that however such is the fear of being investigated, many do not want to take the chance.

With an umbrella company, you’ll never be investigated for IR35 because you’re being paid as an employee by your umbrella partner.

They manage your tax and National Insurance. They take care of payroll, real-time information requirements, auto enrolment requirements, and much more. On the 22nd of each month, they send all your due tax across to HMRC so you know that you’re being compliant and you’re always up to date.

And when you sign with an umbrella, it’s not a contract for life. You can leave whenever you want and choose to go the limited route later. Everything is under your control.

Are you a potential umbrella contractor seeking advice on the best umbrella company?

There are lots of different umbrella companies who would love you on their books.

Competition is intense so the best thing to do to start off with is to make a list of the requirements you need a potential partner to meet.

Fees

Some companies charge a percentage of what you earn. Most charge a fixed fee every month.

Take a look at what you think your earnings will be over the next six months. Get quotes from as many companies as you can and examine how their individual fee structures will eat into your earnings.

A percentage fee might be better for you if you expect to earn a low sum. If you expect your income to fluctuate across quite a wide range of earnings, a percentage fee might ease pressure on your domestic cashflow.

If you’re expecting higher earnings with a stable fee income every month, a fixed-fee solution may be more suitable for you.

Do your research. Ask every company quoting you to provide you with a detailed and itemised program of fees because it’s not unknown for some umbrella companies to advertise a low rate only to make up their income through additional fees and charges not prominently mentioned on their website or during their sales pitch to you.

Even in the internet age, word of mouth still counts. Do you know anyone who has gone from being an employee to working with an umbrella company? If you hear good things about a firm from someone you trust, that’s a good place to start.

Understanding your umbrella payslip

By their nature, umbrella payslips are different from standard payslips you received from your employer. They can be confusing so never be afraid to call up and speak to someone in the company if you have concerns.

It is not unknown for umbrella companies to make mistakes with payslips. It’s more common than you might think so, even though you’re paying them for the service, it’s wise to keep an eye out so that you notice anything that doesn’t look right.

Your tax, national insurance, and pensions contributions? Does it look like you’re paying too much or too little? Multiple errors can mean that HMRC will start scrutinising your tax affairs.

And it’s not just HMRC you need to be concerned about. Errors on your payslip can affect your child tax credits, working tax credits, and other benefits to which you might be entitled.

The introduction of Real Time Information for salary payments means that your payroll data is now directly linked to the benefits system. Mistakes can affect the amount you pay or you receive in child maintenance payments.

Remember that, under the law, you’re the employee of your umbrella company and, as an employee, you’re legally entitled to a clear and unambiguous payslip and you’re also entitled to ask questions of the person in charge of the process.

Don’t let yourself be pushed around if you think there’s something that’s amiss.

Umbrella company dispensation

A dispensation is a collection of expenses that your umbrella company does not have to record on a P11d form.

Wise Accountants tip – a P11d is an expenses and benefits form for directors and employees earning over £8,500 a year. It’s the way that a company reports expenses and benefits enjoyed by a director of employee that is not put through PAYE. If you earn less than £8,500, the relevant form is called a P9D.

HMRC is the only body which can decide which expenses can reduce a tax bill or not. It is not within the power of any umbrella company. Be wary of any umbrella firm that offers “special dispensations” that other umbrella firms cannot claim on your behalf – it’s not true.

You can only claim costs ‘wholly and exclusively incurred in carrying out the duties of the employment’

You’ll need to show you’ve spent the money to claim it. If you don’t have the receipt, as far as the taxman is concerned, it doesn’t exist and it’s not claimable. If you can’t prove you incurred a cost, we would advise not trying to claim on it because, at a later date, HMRC may ask you for the evidence.

If you can’t show them the reciepts, you’ll more than likely have to pay back the tax. If HMRC think you’ve falsified expense claims, you will also be fined on top of the backdated tax.

Pensions

Auto-enrolment into the Pension Regulator-run workplace pension scheme is now compulsory for all employers. The system began rolling out in 2012 and, from October 2017, every employee now has to comply.

Anyone aged between 22 and the State Pension Age is entitled to receive the option to join a workplace pension. Companies which employ qualifying staff must register with the Pensions Regulator. If you don’t have any qualifying staff, you need to let the Pensions Regulator know you’re exempt.

When you join an umbrella, they will write to you explaining the approved pensions scheme they are enrolled in. Unless you inform the umbrella otherwise, they will begin to deduct pension payments from you – this deduction will be 5% of your wages from tax year 2020/2021.

You are entitled to opt out of the workplace pension scheme by informing your umbrella company.

Maternity and paternity rights

You are an employee of your umbrella therefore all standard employment rights apply to your relationship with them.

To claim maternity or paternity pay, you need to have worked for 26 weeks as a minimum earning at least £113 a week (the so-called Lower Earnings Limited for National Insurance contributions in tax year 2017-2018) before the fifteenth week before your baby is due to arrive.

If that isn’t your situation, you’ll need to ask your umbrella company to provide you with a form SMP1. SMP1 is there to claim Maternity Allowance.

With Maternity Allowance, you can claim either £140.98 a week or 90% of your average weekly earnings (the lesser of the two) for 39 weeks, £27 for 39 weeks, or £27 for 14 weeks. Paid every fortnight or every four weeks, you can claim Maternity Allowance once you’ve passed 26 weeks of pregnancy and be paid 11 weeks before the due date.

If you don’t qualify for Maternity Allowance, you’ll automatically be assessed for Employment and Support Allowance.

Starting life with an umbrella company

Remember that you’re in charge of selecting your umbrella company, whether you switch to a different one, and choose the time you leave the umbrella company’s employment altogether.

Make sure that, at all times, you make the best choice for you.

Mortgages for contractors, although still more difficult to obtain than standard mortgages, are available in greater numbers now than they have been for many years.

How hard is it to get a contractor mortgage?

It is harder – sorry, there’s no way around that. But it’s not just contractors that have difficulties in securing mortgages, sole traders, partners, and directors of limited companies all face additional struggles in their first few years of business.

You’d do very well to get an offer from a high street bank or major lending institution. They generally want to see three years’ accounts before they’ll consider your application.

On the subject of accounts, remember that your accountant’s job is to try to make your profit as small as possible so that the corporation tax you pay goes down.

And as a major part of a mortgage lender’s approval is related to the amount you earn compared to the price of the property you want to buy, your accountant may actually be making things harder by wanting to keep your taxes down.

Will banks and building societies look at me?

It depends. It’s not just all down to your declared profits and the cash you extract from your company.

Other important factors come into play like a poor credit history or a record of bad payments. These two issues weigh heavily on an underwriter’s decision to grant you a mortgage or not.

Banks and building societies will be concerned about how much money you actually receive from your limited company.

It makes a lot of sense for tax purposes to minimise your salary and maximise your dividends but any high street financial institution you approach will, more likely than not, see things differently from you and your accountant.

Every time you apply for a mortgage with a bank or a building society, it gets recorded on your credit file. This is one of those cases where, even though you might not like to do so, it’s better to pay a mortgage professional fees rather than trying to do it all yourself.

How many years’ accounts will I need?

There are specialist mortgage lenders on the market who understand the fluctuations and cash flows within a contracting business and how you, its director, get paid by it. For many of these specialist lends, they will only offer their mortgages through a broker who will “package” an application before they send it over for consideration.

You don’t need to have three years’ accounts but, at the same time, if you’ve just started out, you might be asking too much of a mortgage broker. Either way, evidence counts. A copy of your CV showing a solid and dependable track record in your area of contracting will help your application as will copies of the contracts you have currently running with clients and contracts with clients whose dealings with you have recently ended.

 

Many mortgage brokers argue that there is little to no harm in applying for a mortgage after you’ve won your second contract but make sure that, as mentioned above, your CV supports your earning potential.

What sort of interest rate could I expect?

Mortgage interest rates are affected by many different factors.

Contractors are in a good position here. As you’d expect, the mortgage industry as a whole pays keen attention to the demographics of customers likely to keep up repayments and those who struggle and default. Contractors’ rates of keeping up with their mortgage are actually better than directly employed staff.

From a lender’s point of view, you’re actually less of a risk. Find the right mortgage provider through your broker and you might actually pay less for your mortgage than the employees working with you on situ when you’re on contract.

Are self-certification contractor mortgages still available?

Self-certification was banned in 2008 by the then Financial Services Authority shortly after the impact of the major financial crisis that hit the world in the same year.

UK lenders don’t offer them. For a short while, a company based in the Czech Republic offered self-certified loans for UK borrowers however the offer was so oversubscribed that the firm do not believe they’ll be able to offer new mortgages again for at least 3 years from time of writing.

Try to resist any companies offering a fast track service. The direction of travel in the mortgage market currently is currently strongly against mortgage deals which appear to circumvent the rules laid down by the now Financial Conduct Authority.

How will my application be considered?

Again, go to a mortgage broker. They’re used to answering honestly and openly the questions that a mortgage lender would ask you if you approached them directly.

Remember that, as mentioned earlier, your line of business is a safer bet for mortgage lenders than your employed colleagues. Take the strain away from yourself by letting your broker answer the difficult questions on your behalf from lenders.

Are mortgages for contractors based upon my contract values?

Those specialised mortgage lenders who want to lend to contractors like you will look at your average contract value over the year. They will then allow you to borrow money based upon a multiple of your historic annualised total contract value.

It’s best to show that the contract or contracts you have are ongoing and that you have a reasonable expectation of work from your client base. That said, if you’ve just switched from an employee to a contractor and you’re working for the firm who used to employ you, this counts as a big positive to underwriters.

What if I have a poor credit history?

Poor credit or payment histories do make the process harder but certainly not impossible.

You will need, via your broker, to present lenders with a positive picture of the way your contracts are going and demonstrate that your previous credit problems are a thing of the past. If your credit problems are less than 2 years old, your broker may struggle to find a lender for you.

Should I use a financial advisor?

No, but probably yes.

Every time you make a mortgage application, a record of it will appear on your credit file. As most traditional lenders are not geared up to cope with contractor mortgages, your likelihood of failure on each application is higher. The more and more applications and declines you get on your credit file, the more and more it will become difficult to persuade lenders to say “yes”, even the lenders which were set up specifically to offer mortgages to contractors.

You will pay a commission to your broker. It could vary from a few hundred pounds to a couple of thousand pounds and become payable on the day you move. In most cases, you will pay an upfront fee of up to £500.

The question you need to ask yourself as a professional and would-be homeowner is whether you’re willing to pay someone to take you through what is a difficult and complex process where most suitable mortgage providers will not consider direct approaches from potential borrowers.

What are the main types of contractor mortgages?

The types of mortgages available to you are identical to the types of mortgages available to other borrowers.

You can go for a repayment mortgage, where your repayments pay off both the capital (the amount of money your mortgage provider lent you) and the interest payments on the capital.

Interest only mortgages where you only pay the interest and not the capital are available but are traditionally difficult to obtain unless you provide proof of how you’ll pay off the capital.

You might choose a fixed interest or fixed-rate mortgage which offers guaranteed mortgage payment amounts no matter how interest rates fluctuate.

Variable rate mortgages change when the interest rate changes.

Offset mortgages are combined mortgage and savings accounts. The more you have in the savings account, the lower your mortgage and the interest payments attached will be.

Flexible mortgages allow you payment holidays and over-payments without penalty.

The interest rate you pay will also depend on how big a deposit you are able to place on your property. Generally, the lower the Loan To Value ratio is, the better interest rate you’ll get.

Wise Accountants tip – If you buy a house for £500,000 and you put down a £50,000 deposit, the Loan To Value ratio is 10%. If, on the same house, you have a £100,000 deposit, the Loan To Value ratio is 20%.

How long does it take to get a contractor mortgage?

Securing a decision-in-principle (called a DIP in the mortgage trade) is the first step of your mortgage journey. The second and final stage is securing an actual offer.

DIPs can be received within two working days based upon the contracts you have ongoing right now, any previous contracts you’ve had, 24 months of bank statements, the value of and equity in any other assets you have (like buy-to-let properties) and more. They will almost certainly need to see your personal bank statements too.

Once you have your DIP, your lender starts a much deeper investigation into you and your personal and business circumstances. Some providers can take a couple of weeks to make an offer, others up to two months.

What information and documentation will lenders need?

The more documentation you can provide, the better. Try to go back as far as you can to provide a potential lender with as much comfort as possible.

As a bare minimum, you can expect to be asked for:

• your CV
• your current contract and any previous ones
• three months of limited company and personal bank statements
• your proof of ID
• your current address
• proof of funds for your deposit
• if there has been any unexpected or unusual activity in either bank account, an explanation for the reasons it occurred.

Start looking when you get your offer

When you get your offer, the offer will only usually last for three months.

It’s better to start looking for your new house before the final offer but, if you’re being cautious, make sure you start booking appointment to view potential homes as soon as the firm offer comes in.

Setting up a limited company in the UK is straight forward, inexpensive, and remarkably quick. Limited companies offer many advantages over being a sole trader, particularly in the area of keeping and accumulating cash in your business.

Welcome to the Wise Accountant’s guide to setting up a limited company

What is a limited company?

Setting up a company creates a “moral person” in UK law. Your company is a unique entity entirely different and separate from you and your other shareholders (if you have them).

Just like you, it can make or lose money. It can take on loans and overdrafts. It has its own system of tax it needs to adhere to.

A company is distinct from you. Whatever income it brings in belongs to the company and is subject to the corporation tax laws of the land, it does not belong to you.

Yes, you own the company and can direct the company to pay you money but, in law, it’s the transfer of money between a “moral person” and a “natural person” (i.e. you).

When your company transfers money to you, you are subject to the personal taxation laws of the land for that transfer.

Choose a name

You can call your company anything you want, albeit with a few restrictions.

There are “sensitive words and expression” that require you to obtain the prior approval of the Secretary of State if you want to use them in a company name. You can see a list of those names at the bottom of this article.

Make sure your name sums up who you are, what you believe, and, more importantly than ever, the domain name for it hasn’t been taken. As soon as you’ve decided the name, buy the domain name straight away!

Your share structure for dividends

Now, you’ve got to decide how you want to divide up the shareholding.

How you decide how to divide up the shares is up to you. Let’s say that you and a friend were putting money in to start your company. You were putting in £7,500 and your friend was putting in £2,500. You may wish to split the shares 75% to 25% based upon introduced capital.

If you are setting up business with your spouse or civil partner, it would be advantageous for you to both own shares. That’s because you’ll both be entitled to £11,500 in personal allowance and £5,000 in dividend allowance, meaning that your household will not start paying income tax until (divided equally between you), you’re earning £33,000.

Wise Accountant tip – the dividend allowance reduces from £5,000 to £2,000 from April 2018.

How shares are divided up is important as it will dictate how much you and the other shareholding directors can draw in dividends as they are normally paid out proportionately to shareholding.

You can issue different types of shares in your company for different reasons. If you have a particular corporate structure in mind when it comes to how dividends are paid out, ownership of the company, and each person’s role within the business, speak with a good accountant to put together a shape that suits what you have in mind.

Your memorandums of association

 

You’ll need to prepare Memorandums of Association for registering at Companies House.

This is a very important document as it informs everyone about:

• why you set up the business, and
• the rules that are in place to run it.

Later on, it may be used in tax disputes and legal proceedings to help tax judges and law judges arrive at decisions on disputes between you and the other shareholders and between the company and the authorities.

You can download templates of Memorandums of Association and use them to file at Companies House.

Alternatively, it may be wise for you to seek professional help and advice from accountants or solicitors, particularly solicitors who can stress-test the Memorandums of Association against commonly-occurred disputes and disagreements intra-company and with public sector organisations.

Should I take advise from solicitors and accountants?

It’s up to you. Even the closest friendships, family relationships, and even relationships between spouses and civil partners can come under unbearable strain caused by the financial, emotional, physical, and psychological pressures of running a business. We all know how hard it is to run a company which is struggling. It’s just as hard, in many ways, to run a successful company too.

Taking advice from an accountant can help you with tax structures and taking advice from a solicitor can help you with shareholder disputes, all of which can be covered in your Memorandums of Association.

Register with Companies House

Now everything is in place – your name, your proposed share structure, the cash to start your business, and your Memorandums of Association.

All you have to do now to become an official shareholding director of a limited company is to register it online with Companies House. Set-up fees are very low and the system to establish your new company is quick and online.

When you register, it will make sure there is no conflict over your name and it will ask you to name your company director, company secretaries, and the persons holding significant control in the business.

Wise Accountant tip – a person of significant control (PSC) is anyone within your business who has 25% or more of the shareholding and/or the voting rights at board meetings. PSCs can appoint or remove the majority of the directors or management of a business, and can exert a large influence or control over a company.

Choose an accountant

If you’ve already worked with an accountant to set up your company, you trust their abilities and you’re happy with their fees, this might be the best accountant to choose to launch your entrepreneurial career with.

It’s best to play three to four accountants against each other in the early days. That’s not just because you’re trying to get the best price. Your accountant is one of the people you will come to rely upon most in business. Arguably, your accountant will be your closest business confidante and friend.

You have to feel a personal affinity with them and they with you. Your accountant is going to be relying on you for work and for your fees. You’re going to be relying on your accountant to keep you out of trouble. Does your accountant still sound excited about what they do and the idea of representing you? Do they strike you as the type that look for both opportunities and problems and will alert you proactively?

Choose your accountant carefully and he or she will be there with you protecting and enriching you for the months and years ahead.

Open up the company bank account

There are plenty of choices for you when selecting a bank account for your business.

It can take up to 2 weeks to open a business account and, on most occasions, they’ll ask you to go to a branch and meet a business manager. When you’re there, you’ll be required to present two forms of identification to prove who you are – normally a passport or driving licence with your picture on it and a couple of utility bills sent to your home address which are less than three weeks’ old.

Once approved, you’ll receive your cheque book, paying-in slip book, and your debit card.

Most banks will offer a period of free business banking to incentivise you to sign up with them so choose the offer that’s best for you.

Do you need to register for VAT?

You only need to register for VAT if your turnover is higher than £85,000.

You can apply online for VAT registration by clicking here. When you register for VAT, you’ll also create a Government Gateway account. This will come in handy later as it not only allows you to submit your VAT return online but you’ll also be able to handle payroll, corporation tax, and more through your Gateway account.

Once you have appointed an accountant, you can ask them to register you for VAT. Your accountant will also sign up with HMRC to become your “appointed tax representative” so they’ll be there to answer any HMRC queries.

What start-up expenses should I cover?

It’s always best to start with 3-6 months’ personal running money so that you can pay your domestic bills as you’re building your business up.

How much of what you use personally can be used in the business too? Whatever you purchase to run your business, try to minimise your expenditure as much as you can.

How should I fund the company?

Wherever you can, try to fund it with your own money. Don’t “give” your money to the company, instead you should lend it. If you lend it, the company is in debt to you and you won’t pay any tax or national insurance on the repayment of the capital of the loan. Any repayments made by your company to you would also not eat into your annual personal allowance.

Good luck!

Welcome to the world of being a shareholding limited company director! Always check back with the Wise Accountant to read the latest news and advice on all matters related to running a business and corporate & personal taxation.

Restricted names

Earlier in this article, we mentioned that some names require permission from the Secretary of State to be used in your limited company’s name. Click here to find out how to appeal to make use of these words and phrases.

For all contractors – indeed, for all limited companies, sole traders, and partnerships – the art of preparing an invoice and sending it out is one you have to master quickly.

How quickly you get paid has a direct correlation with what’s on your invoice, the terms of payment you’ve agreed with your client, and how quickly you print it off and send it over to them (or email it to them).

In this article, the BusinessCostSaver looks at everything you need to know about putting together the perfect invoice, together with three different examples for you to model your own on.

How to write an invoice UK

When you issue an invoice, there are certain pieces of information that need to go on it.

Some of that is for legal reasons. The main reason however is that you want to be paid in time and in full for the work you’ve done as fast as possible.

Britain, unfortunately, is swept up in an endemic of late payment. The average invoice now takes 71 days to be paid. And a lot of the time the reasons clients give are based around alleged deficiencies on invoices.

So, what needs to go onto your invoice?

Your company details

First, your company details – your company name and company address.

Putting a telephone number and an email address on there is also recommended. If there are problems with your invoice, it may be that it’s dealt with by a separate department within your customer’s organisation. Don’t make the mistake of assuming that, just because the person who buys from you has your contact details, that accounts will too.

By putting down your contact details, they can phone or email you to tell you if there is something wrong.

If you’re VAT-registered, you’ll need to state your VAT number on the invoice too.

Invoice number

An invoice number is important as it ties a particular payment your company has received to a specific bit of work that you’ve done.

Some clients may place continual orders with you. If a payment has gone past due and you’ve not marked each invoice with a number, it may be difficult for your client’s accounts team to figure out which invoice you’re phoning about asking for payment on.

Purchase order number

Many modern accounting systems will send you a purchase order number that you then have to include on your invoice to be paid on it.

If you have been given a purchase order number, always place it on your invoice as your client’s accounting system may not permit payment if the purchase order number is not there.

Dates

There should be two dates on your invoice:

• issuance date – when you raised the invoice
• due date – the number of days after the issuance day on which you expect to be paid. In Britain, the standard gap between the issuance date and the due date is 30 days.

BusinessCostSaver tip – you don’t have to choose 30 days. You can choose 7, 14, or any number you like. The best one is zero where you ask your client to make payment before you provide your product or service to them.

BusinessCostSaver tip – public sector bodies in the UK are now obliged under law to make payment no later than 30 days after a product or service has been provided or performed to their satisfaction.

Details of your customer/client

Make sure that you include your client’s company name, postal address, email address, and telephone number on your invoice.

Better still, if the person who buys from you is not the person that pays you, ask your for the contact details of the right person in accounts. When you issue your invoice, make sure that the person’s details who can authorise payment to you are on the invoice.

Fees and charges

Your invoice must, of course, include the amount that you expect to be paid.

Try to itemise your invoice as much as possible by supplying:

• a description of the products or services you provided
• the amount due as a result of providing those products or services.

If you are VAT-registered, you’ll need two additional pieces of information:

• the VAT being charged on the invoice
• a figure showing the sum of the amount you’re charging for what you’ve provided and the VAT figure.

How you are paid

In an ideal world, you’ll give your customers as many ways to pay as you possibly can.

Cheques are still around but they’re declining in use. Whether or not you want to accept them is your choice. Bear in mind that even though, at the time of writing, there is a proposal to make cheques clear within one day as opposed to the current average of 3 or 4, there are still delays involved in this method of payment. If your cheque is sent by second class mail, it could take up to 3 days to reach you depending on which part of the UK you’re based in. On top of that, cheques can also bounce which just add more time to the procedure.

If you do accept cheques, write on your invoice – “Please make cheques payable to (your company name). Please write the invoice number on the back of the cheque.”

If you do not accept cheques, write on your invoice that “(your company name) does not currently accept payment by cheque as remittance for work done”.

The most common method of payment is now by direct bank transfer. All major UK banks and financial institutions are signed up to the Faster Payment scheme meaning that payment can be instantaneous. It’s not always straight away you get the money though as all online banking options offer to place a delay on when the transfer is made.

If you wish to accept bank transfers, use the following – “Please make payment by bank transfer to the following account:

(Your company’s name)
(Your bank’s name)
Sort Code – (your sort code)
Account Number – (your account number)”.

More and more, businesses and consumers are happy to pay by credit or debit card. If you wish to accept these forms of payment, write the following on your invoice – “We accept payment by all major debit and credit cards. To settle your account using this method, please phone (your number).”

BusinessCostSaver tip – at time of writing, you are still allowed to add a surcharge to customers’ payments made by credit or debit card. From January 2018, this practice will be outlawed.

Always end your request for payment with “Your business is appreciated – thank you very much”.

Invoice template UK

Customers rarely specify whether they wish invoices to be delivered by email or post so, in most cases, the choice is yours. To save money, you may wish to email the client at first. If payment is not made by due date, you may choose to send the invoice again by email but send out a hard copy in the post.

If you are a contractor and your client requires a timesheet to make payment, make sure it’s signed and included with the invoice. Always make a copy of any timesheet prior to sending it.

If your client has not paid you by the due date, they are in breach of the contract they have made with you. First of all, check to see that there are no problems or issues with the products or services you have provided them with.

If there are not, try to take payment there and then with a credit or debit card. You will be pleasantly surprised how, in the case of most small business customers and consumers, that there is a lack of resistance against this option.

If your customers say that they cannot pay you in full, this is the first sign to you that they may be suffering from cashflow problems. If this is the case, ask them how much they could afford to pay you comfortably now and attempt to take payment by card. If they refuse to pay you by card, ask them to agree to transfer that amount directly and on the same day into your bank account two working days from now. Finally, at this point, ask them when they expect they can make up the rest of the payment to you.

If your customer does not make the bank transfer two days later (or whenever you agreed), it’s time to call them up and go through the same process again.

As you get more experienced in business, you’ll understand when someone is telling you the truth or when someone is lying. As soon as you sense that they are lying to you, serve formal notice to them that, if payment is not made in full by a date you specify, that you will be escalating the action by charging them interest and passing their account to a debt collection firm.

Please only do so when you feel that the customer is lying to you or, if not lying, not being straight with you. When that is the case, they have lost the right to expect patience and understanding from you because the best business relationships are formed on honesty, openness, transparency, and an empathy for the position of the other person.

Be careful though to make the right call. You may well get your money from the customer, even if much later than expected, by doing a bit of arm-twisting. They will, however, always remember you as the person that didn’t stick with them when times were tough.

Self-employed invoice template / sole trader invoice template UK

Invoices if you’re self-employed or a sole trader not registered for VAT should look like this:

Invoice Number	ITV001	INVOICE
Date	6 November 2019
Due date	6 December 2019	Your Purchase Order No	30 days from invoice
From:	Your Company Name, 2 Side, Newcastle upon Tyne, NE1 3JE	To:	ITVIU Megacorp, 2 Strand, London, WC2N 4JF
Telephone	0330 101 1010	Telephone	0330 010 0101
Email	123@abc.xyz	Email	abc@xyz.123
Description of Service	Quantity	Price per unit	Overall price
Website design	1	£1,500	£1,500
Website hosting (3 years in advance)	3	£100	£300
Domain name registration	1	£5	£5
		Total	£2,166
Payment terms	30 days from invoice
Please make payment to the following account
Sort Code 20-20-01		Account Number 12341243

Limited company invoice template

If you’re a non-VAT-registered limited company, your invoice should look like this:

Invoice Number	ITV001	INVOICE
Date	6 November 2019
Due date	6 December 2019	Your Purchase Order No	30 days from invoice
From:	Your Company Name, 2 Side, Newcastle upon Tyne, NE1 3JE	To:	ITVIU Megacorp, 2 Strand, London, WC2N 4JF
Telephone	0330 101 1010	Telephone	0330 010 0101
Email	123@abc.xyz	Email	abc@xyz.123
Description of Service	Quantity	Price per unit	Overall price
Website design	1	£1,500	£1,500
Website hosting (3 years in advance)	3	£100	£300
Domain name registration	1	£5	£5
		Total	£2,166
Payment terms	30 days from invoice
Please make payment to the following account		Company Registration Number
Sort Code 20-20-01	Account Number 12341243	12341243

VAT invoice template

If you’re VAT registered, you need to issue VAT invoices to clients.

What do you need to put on a VAT invoice that’s different from a non-VAT registered sole trader invoice or a limited company invoice? Let’s look at the example of a limited company which is VAT registered.

Invoice Number	ITV001	INVOICE
Date	6 November 2019
Due date	6 December 2017	Your Purchase Order No	30 days from invoice
From:	Your Company Name, 2 Side, Newcastle upon Tyne, NE1 3JE	To:	ITVIU Megacorp, 2 Strand, London, WC2N 4JF
Telephone	0330 101 1010	Telephone	0330 010 0101
Email	123@abc.xyz	Email	abc@xyz.123
Description of Service	Quantity	Price per unit	Overall price
Website design	1	£1,500	£1,500
Website hosting (3 years in advance)	3	£100	£300
Domain name registration	1	£5	£5
		Sub Total	£1,805
		VAT at 20%	£361
		Total	£2,166
Payment terms	30 days from invoice
Please make payment to the following account		VAT Registration Number	Company Registration Number
Sort Code 20-20-01	Account Number 12341243	123 1234 12	12341243

Invoicing – the basics

There’s an old saying in business that if you look after the pounds coming in, the pounds coming in will look after you. Getting invoicing and customer payment management right from the start should be a priority from your first day of trading.

It’s not just the likes of Google, Facebook, and Amazon that offer shares to employees. It happens here in Britain too under something called the Enterprise Management Incentive (EMI) scheme.

The long-term business benefits of employee share ownership have been proven as they:

• encourage staff to stay with a company and go that extra mile in helping that business develop, and
• give the opportunity for committed staff to share the benefits in any later trade sale, initial public offering, or round of investment.

If you run a business and are interested in the EMI scheme, here’s the very latest information on it.

Who can I offer the EMI scheme to?

Which staff members qualify? Those who either:

• work 25 hours a week or more for you, or
• whose time working for you is at least 75% of your working day

You can grant them up to £250,000 worth of share options a year.

Wise Accountant note – when you “grant” share options, that’s the time when you award them. Those shares can be “vested” or exercised at a later date.

Wise Accountant note – HMRC will likely not grant an EMI scheme the approval it requires if it believes that the arrangement is being made to avoid tax.

What is a share option?

An EMI share option gives your employee the right to buy the shares at a later date for an agreed price.

If your business is valued at £1m, you might want to give your employee the chance to hold 1% of the total shares. The value of those shares would be worth £10,000. That £10,000 worth of share options might be made up of 100 shares priced at £100 each. You want your staff member to hold onto their share options for five years before they can “vest” them.

Let’s say your company has a brilliant 5 years and you grow the value of your business from £1,000,000 to £4,000,000. Your employee’s share options are now worth £40,000 but their share option allows them to buy these £40,000 worth of shares for £10,000. Each individual share has increased in value from £100 to £400.

Are there conditions surrounding an EMI scheme?

Yes.

The shares under option must be part of the ordinary share capital of your company. Each share option must be fully-paid up and not redeemable.

At any given time, the value of the unvested share options must not be greater than £3m.

Also, there is a time limit of 10 years between the granting and vesting of share options so that your employee gains the full tax benefit.

Deciding on a company valuation

The value of a business is always difficult to judge, whether it’s for EMI scheme purposes or you’re putting your company up for sale.

HMRC will always have their own opinion so it’s best to get them and other independent experts involved in the process.

When you’re valuing your company, use professionals like your accountants and always get them to show the methodology they’ve used when coming up with the price.

The more independently verified and thoroughly calculated, the better. If you have solid figures to operate on such as a recent offer to purchase your business or someone has put in a round of investment for a stake in your company, those are very valid metrics you can employ in deciding on the actual value of your firm.

How does tax and EMI work?

How tax works depends on the EMI scheme you’ve offered to your staff.

Many employers give share options away free of charge to their staff members. Using the example of the company above worth £1,000,000 at time of grant and £4,000,000 at the time of vesting, the value of their shares at vesting is £40,000 and their original share option of £10,000 was given to them free.

This is how the tax would work for them:

• your employee pays income tax and Employee’s National Insurance on each £100 share.
• they will pay capital gains tax at the Entrepreneurs’ Relief rate of 10% on £300 a share (today’s price of £400 minus the original £100 price)

For higher rate taxpayers, their shares would be worth £328 each.

That’s £400 minus £40 income tax (40%) and £2 National Insurance (2%) on the original £100 price. That leaves the employee with £358 per share. They pay an additional £30 per share in Capital Gains Tax at Entrepreneurs’ Relief level, leaving each share worth £328 after tax.

Your company would be liable to pay National Insurance Employers’ Contributions at 13.8% of the original £10,000 value, a cost of 13.8%. It is not unusual in these agreements to ask the employee to bear this cost.

What if you charged for the full value of those £10,000 worth of shares when they are vested?

• Your employee pays no tax or National Insurance Employees’ Contributions on the £10,000
• Your employee pays capital gains tax at the Entrepreneurs’ Relief rate of 10% on the £300 increase in value per share.

After the deduction of tax, they make £270 per share after tax.

If, by the time shares are vested, they are below the value of the time they were granted, employees will pay tax based upon the market value at the time of vesting.

EMI scheme qualification criteria

Your company must be independent in that it controls 51% or more of its shares and be based in the UK.

You can’t have any more than 250 staff and your net liabilities sheet can’t show more than positive £30m in its gross assets column.

There are certain restricted trades that don’t qualify for the EMI scheme, including:

• land investors
• share investors
• financial services companies
• asset leasing
• royalties or licence fees recipients
• legal services
• accountancy-related services
• property developers
• forestry
• farming

Setting up an EMI scheme for your company

Your company can grant options on its shares to employees at any time.

First, you need to decide which employees you want to be included in the scheme and the number of share options granted to each staff member.

Second, you need to think about the structure and the design of the scheme, specifically when the shares can be “vested” – that point in time when the employee actually exercises their options to buy the shares. Will it be straight away, a percentage after a defined number of years, or an exit event, like a sale or an investment round?

Third, what the price of the options are going to be to your employees and what is the basis for the valuation you are giving your company?

There is no need to seek the prior approval of HMRC on EMI schemes – you just simply need to notify HMRC within 92 days after an option has been granted.

We do however recommended you work with HMRC. The EMI scheme has been in place since 2000 and enjoys widespread support politically so there is a strong operational motivation for HMRC to help you while you are setting the scheme up and particularly during valuation.

You will need to change your company’s Articles and pass the necessary resolutions at board meetings to enable the scheme. The new Articles and the resolution will need to be filed at Companies House.

At the end of each year, you will need to complete your EMI return on HMRC’s online portal and your employees will have to individually notify the taxman about their participation in the scheme

EMI scheme disqualifications

The income tax and National Insurance elements of the scheme are lost incrementally if a share option is not vested within 90 days of what HMRC call a “disqualifying event”.

Tax and NI will be charged on the monetary amount that HMRC deems to be applicable if the market value of the shares at the date of vesting is higher than the market value before the disqualifying event.

The income tax charge is based upon the growth in value after the event. If the share option is granted free to the employee or at a discounted rate, income tax will be an added to the charge on the discount at applicable rate.

What are disqualifying events?

• the company comes under the control of another company
• the company comes under the control of another company or any person connected with that company
• the company begins to trade in areas that are restricted (see above)
• the employee holding the share option ceases to be an employee
• an employee’s working hours are reduced to less than the qualifying working hours
• there are changes to the terms of the option
• the company’s share capital structure is changed
• the company’s shares are converted
• a new wave of share options means that an option holder now has over £250,000 worth of share options
• enough shareholder leave so that an EMI option holder has more than 30% of the company’s share capital
• if another company invests and it fails the independence test
• a change is made to a company’s articles allowing others to take control of the company if certain financial or operational performance levels are not met

Business property relief is a way to shield some of your assets from inheritance tax.

Depending on the type of asset it is, you can qualify for either full (100%) relief or partial (50%) relief.

What is inheritance tax?

You pay inheritance tax on your “estate”.

To work out the value of your estate, you add the following together:

• the value of any property shareholdings you have
• the value of any business shareholdings you have
• the value of your vehicles
• how much cash you have in the bank
• anything you own of worth
• your Premium Bonds
• ISAs, shares, or investments that you hold in a trust
• any residential rental payments you’ve made in advance
• any due life insurance or term insurance pay-outs that are not in a trust

Those are your assets. Then you add the following together to find out what your liabilities are:

• the outstanding mortgage left on your home
• what you owe to finance companies, for example loans, credit cards, and bank overdrafts
• any unpaid or accruing household bills.
• an overdrawn directors’ loan account (if the company does not write it off upon your death)
• any director’s guarantee you have signed (so that your company could access finance – there is a strong chance the guarantee could be called upon by the lender upon your death).

You then subtract the liabilities from your assets and this comprises the value of your estate.

How do inheritance taxes work?

40% tax is payable by the recipients of your estate by the people you bequeath your estate to. They do not pay inheritance tax on the first £325,000 of value in your estate.

From the year 2020, different inheritance tax rules apply to your primary residential property. Parents or grandparents can pass on their main home with no inheritance tax payable if the property is worth less than £1m (or £500,000 per parent or grandparent).

What is business property relief?

Business property relief is a relief used when working out the value of your estate. It’s a way of bringing down the value of certain assets which, in turn, reduces any potential inheritance tax payment.

You can pass on some or all of your estate while you’re still alive and some of them may qualify for business property relief. There are two conditions:

• the person you give the asset to keeps it as a going concern until the time of your death, and
• you owned the asset for 2 or more year before you gave it away.

If you die within 7 years of giving the asset away and it doesn’t count for business property relief, it is still considered to form part of your estate. The person you give the asset to must pay 40% inheritance tax on it (if your estate qualifies for inheritance tax) within 2 years of your death.

In the third, fourth, fifth, sixth, and seventh year after your death, inheritance tax taper relief applies. Please below for how it applies.

Years between gift and death	Tax paid
3 to 4	32%
4 to 5	24%
5 to 6	16%
6 to 7	8%
7 or more	0%

Once seven years has passed, it is no longer part of your estate and can not be considered as a potential inheritance tax liability.

The following types of asset can have business property relief claimed against them at 100%:

• a business or an interest in a business
• securities on a private limited company not traded on a recognised stock exchange which either on their own or put together with shares in such a company give you control over the company
• shares in a private limited company not traded on a recognised stock exchange

50% business property relief can be claimed against the following:

• shared in a public limited company which give you control over the company
• property and land (plus machinery and plant) which are used either exclusively or mainly by a company or a partnership for business purposes*
• property and land (plus machinery and plant) which are under a life interest (a right held that last for the lifetime of the person holding that right, like a life tenant) and which are used by a business carried on by the person it is bequeathed or given to.*

* To qualify, the property must have been owned by you for at least two years to qualify for relief.

What to look out for

If you’re a sole trader, 100% business property relief is claimable when the business is transferred as a whole. However, there is no business property relief for property and land (plus machinery and plant) unless the assets are held in a trust. The sole trader business also needs to be operated by the person the business is bequeathed to or given away to and this person needs to have a life interest in that trust.

For partnerships, full 100% business property relief is claimable for their interest in the partnership. For property held in a personal capacity but lent to and used by a partnership, 50% relief is available. 100% relief on the property can only be claimed if the partnership owns the property.

There is no business property relief given on any loan made to a partnership following retirement.

The situation in Scotland is different. In Scotland, family partnership property can be split into different ratios according to the partnership agreement.

Directors of limited companies can’t claim business property relief on any loans they have made to a company. Any property that’s personally owned by a shareholder but used by the company will only qualify for the 50% relief bracket and that’s only if the property-owning shareholder controls the company.

Why do some assets qualify for business property relief and others don’t?

Business property relief is focused on protecting revenue generating businesses and entities to ensure their continued survival. Anything considered extraneous to that purpose will not qualify.

Therefore, business property relief does not apply to a company or shares in company which is not carried on for profit or for a commercial purpose, one that has drawn up Heads of Terms for its own sale (in legal terms, that’s “subject to contract”), or one that is being wound up.

Companies set up to generate investment incomes are also excluded – examples of these are:

• those dealing in securities, shares, or stocks
• residential property letting
• commercial property letting
• a company that deals property
• serviced offices

Types of businesses which are not clear-cut and will normally need case-by-case examination include:

• holiday companies
• property management companies
• property development companies whose activity includes property letting and property dealing
• businesses which mix farming and property letting
• caravan parks whose activity includes property letting, holidays, and the sale of caravans.

Generally, HMRC consider farming businesses, woodland management companies, and enterprises involved in shooting and fishing as trading entities so qualify for business property relief.

Be careful about letting cash accumulate in your company account too. If HMRC deems that there is so much cash in a business and not all of it is needed for the continuation of a business, it will seek to reclassify a proportionate amount of a company’s shares to make it liable for inheritance tax.