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Archive for the ‘Tax tips and advice’ Category

Tax tips and advice

July 19, 2009

I have been charged a £100 penalty for not filing my Income Tax return on time.

For individuals in the UK, you are currently required to file your personal paper tax return by 31 October each year.  If, like many people you use the internet to file your return, then you have until 31 January.

Should you file your paper return after 31 October or your online return after 31 January you will automatically be fined £100.

However, if you do not owe any tax then your penalty will be reduced down to £NIL.  Or if you tax liability is say only £50 then the maximum your late filing penalty can be is £50.

Also, if you have a reasonable excuse (it has to be pretty good though) then it is worth attempting to appeal against any penalty in writing.  This should be done as soon as you receive the penalty.

 If you are late paying your Income Tax liability then you will be charged interest on the late amount and for very late payments you will also be charged a surcharge based on the amount of tax owed and how late the payment is.

Tax tips and advice

June 24, 2009

I’m now self employed, when do I pay my tax?

When you become self employed you enjoy a nice long tax holiday compared to those in regular employment who have tax deducted from their wages each week or month.

If you were to begin self employment on say 1 June 2009 then it would be best to prepare your first set of business accounts for the period from 1 June 2009 to 5 April 2010 (or 31 March 2010 if you prefer).

 If you manage to make a profit then the tax and class 4 national insurance that is due will be payable by 31 January 2011.  Be warned though, if your tax and NI liability is over £1,000 then you will need to start making payments on account every six months.

 Say your tax liability for the period from 1 June 2009 to 5 April 2010 was £2,300.  Then by 31 January 2011 you must pay the £2,300 for the current year plus half again, £1,150.  The total payable by 31 January 2011 would therefore be £3,450.

 The second payment on account of £1,150 would then be payable by 31 July 2011.

The tax system aims to ensure that your tax payments become fairly consistent with a payment of tax being made every six months.

 Let’s now imagine that your profits for the year ended 5 April 2011 had soared and the tax payable had increased to say £4,000.  Then the total tax due for the year of £4,000 would be due for payment by 31 January 2012, less the payments you made on account, £1,150 in January 2011 plus the £1,150 in July 2011.   You would therefore need to pay the balance of tax of £1,700 plus £2,000 payment on account (half of the £4,000) by 31 January 2012.

 

 I hope the above explains this clearly, if not please let me know! Sometimes it’s easier to explain things with a time line drawing! Or sometimes it’s best to just pay the tax-man when your accountant reminds you to!

Tax tips and advice

June 15, 2009

Should I incorporate my business?

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Firstly what is meant by incorporate?  Well simply put, if a business incorporates, it changes its legal form.  For instance, imagine you are an electrician and you work for yourself.  You are self employed and each year you submit an Income Tax return to HMRC.  You would pay national insurance at 8% and income tax at 20% on earnings over a certain amount.

 However, you have heard from ‘Big Steve’ in the pub that he has ‘incorporated’ and is now paying much less tax.  So what does it mean to ‘incorporate’ and should you do it?

 Incorporation involves setting up a limited company.  You would become a shareholder and a director of the new company.  You need to select a unique name that no other company currently uses.

 Advantages of incorporation

 Instead of paying income tax and national insurance on your self employed profits, the company pays ‘corporation tax’, this is currently 21%. 

 If you decide to sell part or all of your business or retire it can be easier to sell the shares in the company.

 Some may view a limited company as being more reputable and therefore some may be more inclined to use your business.

 The owner enjoys ‘limited liability’.  This means that if the company should fail and become insolvent, then the shareholders home and personal belongings are normally not at risk.

 Disadvantages of incorporation

 More paperwork! There are far more rules and regulations to comply with than for the self employed.

 Your accounts must be filed at Companies House, and the public can gain access to this information.  You can send in very abbreviated information if you prefer, most smaller companies do and this reduces the amount of information that your competitors can see.

 If you decide to finish trading then there are far more rules to abide by.

 Most of the tax savings are enjoyed on the route INTO becoming a limited company, on the way out the tax savings are very few, in fact the can be tax costs to consider.

 If you do decide to incorporate then you would be wise to obtain the help of a qualified accountant as it’s definitely not a DIY job!

Tax tips and advice

June 9, 2009

Profit extraction from a limited company

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So lets imagine that you and your wife run a local business. You both work in the business and are both directors.  What is the best way to take your money out of the company, reduce your tax bill and keep as much of your earnings as possible?

Firstly, for the year to 5 April 2010, you should both pay yourself a wage of between £95 and £110 per week.  At this level neither you or your company pay any national insurance and you do not pay any tax.

Why between £95 and £110? Well at this rate your earnings count towards your state pension, I know it’s a long way off, but really, we need to think about these things!

Ok so now what? Well next you can each draw a dividend based on the shares you own in the company.  Warning, a dividend can only be taken from profits, so you can’t take a £200,000 dividend if your business only made after tax profits of £120,000!

So let’s consider how dividends work.  A dividend paid by cheque to you of £9,000 is actually a total dividend of £10,000 less a notional (imaginary) 10% tax credit deducted.  So what does that mean?

It means that the tax has already been paid on the dividend drawn at a rate of 10%. So if you are a basic rate tax payer, there is no more tax due. You keep the £9,000 and no personal tax is due.  If your earnings exceed the basic rate limits, then you WILL have extra tax to pay on the dividends.

So show me the numbers……..Well assuming you pay yourself a wage of £5,720 (52 wks x £110) then you can pay youself an actual dividend of up to £34,339 during the 2009/10 and not pay any personal tax, not bad hey!

There are a number of other ways to extract your hard earned profits, including rental payments and also interest.

Tax tips and advice

What is my tax code?

When a person is employed we are given by the UK tax office a PAYE (Pay as you earn) tax code.  It will often look like this ‘647L’.

How is it calculated? Well, most people can, during the year ended 5 April 2010 earn £6,475 tax free and they will not need to pay any tax on these earnings, lovely!

The tax man simply snips the last number of the tax free amount off, adds a letter and bingo, you have a tax code.

Next he chops the tax free amount of say £6,475 into 52 slices for those paid weekly or 12 slices for those paid monthly.  So you can earn say £539 in April 2009 from your employer and not pay any tax.

If your earnings exceed this amount then you will pay tax of 20% on the excess.  If however you are earning lots each year, once your monthly earnings go over £3,655 then the excess falls into the 40% band, ouch! 

And if you are a big fat cat, you can even pay the super duper rate of 50%, but that is for those earning over £150,000 and it doesn’t come in until next year anyway, so don’t worry too much!

Tax tips and advice

So what are capital allowances?

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A business will incur expenditure buying larger items, eg. equipment for use in its business.  If for example a business buys a new digger for say £10,000, then no doubt this will be used for possibly the next 5 years. 

The taxman realises than some larger items bought by a business will be used over the coming years, therefore he does not usually allow the full cost to be deducted in the first year.  Rather, a business can normally claim capital allowances, ie say 20% of the orignal cost each year against its profits. 

This is a fair system as you get some of the cost matched to the income earnt by using the asset each year.

These rules have over the past few years changed with every single budget.  For example, some years you can claim a first year allowance of say 50% of the cost in the first year, then a percentage of the residual cost for the remaining years.

So is this starting to sound a little confusing? Well don’t worry, since the recent rules have changed a business can currently claim 100% of the cost of a new equipment bought during the year up to a limit of £50,000 per year. 

The idea is to try to encourage smaller businesses to invest in new plant and equipment and help everyone to start spending again!

If you have any questions please feel free to leave a comment or question and I’ll try my best to reply.