Understand Your National Insurance Contributions

What is National Insurance and What is it Used For?

National Insurance is one of the payroll deductions and a majority of people do have to face it at some degree. National Insurance is used to fund state benefits such as; state pension, maternity allowance and unemployment allowance. These deductions are indirectly benefiting you or benefiting you for the long-term.

Who Needs to Pay National Insurance?

Employee – For employees, the payroll deduction will be class 1 National Insurance.

Self-Employed – There will be two kinds of National Insurance that you would need to pay when you are making a profit, the first is class 2 and the other is class 4.

Business Owners –As a business owner who has employees working for you need to take care of class 1 as well as the class 1 secondary contribution (i.e. employer’s contribution, which is paid on top of your employees’ gross salary).

Investors – Investment income like stocks and shares, dividend income, when you sell assets or if you rent a home do not trigger any National Insurance. However, if you run a property management business as a sole trader, class 2 and 4 National Insurance may apply to you.

Different Classes of National Insurance and Rates

  • Class 1 – As an employee, if you are earning above that then it is 12% till you earn up to £45,000 but after £45,000 it is only 2%. When your earning goes up, the rates go down. When you have multiple jobs, you need to watch out for your overall earning and if it is more than £45,000. If each job is under £45,000 and everything collected is at 12% then you may have overpaid National Insurance so you do need to watch out for that. Currently, if you are earning less than £8,164 you do not have to pay National Insurance.
  • Class 2 – This is a flat rate contribution, which means that it is £2.85 on a weekly basis. As a self-employed individual, you do need to declare your income through self-assessment, which is also known as a personal tax return. On your tax return, you will have the tax and the National Insurance, which you will have to pay. If your profit is less than £6,025 then you probably will not have to pay class 2 or class 4.
  • Class 3 – This is a voluntary contribution. For instance, if you do not pay National Insurance or if you are an investor and you want to contribute for your state pension then you can voluntarily choose to pay as class 3.
  • Class 4 – This has the same threshold as class 1. Between £8,164 and £45,000 it is 9% and above £45,000 it is 2%. It is collected based on the profit you make. It is important to note that in the future the government may abolish class 2 but if that is the case they may increase the class 4 rate.

Special Attention for Small Business Owners

If you decide to incorporate and are a one-man band company, then decide to take salary from the company, if you are taking more than £8,164 a year then you have to have the main class 1 contribution as well as secondary contribution. Secondary contribution is 13.8% which is paid on top of your gross pay.

  1. Director’s National Insurance – The way director’s pay National Insurance is different to their employees. If you are a normal employee your National Insurance is calculated on a monthly basis but as a director it is calculated on a cumulative basis. For example, if you take £1,000 in month 1, as it is under £8,164 there are no deductions but towards the end of the tax year your accumulative salary is above £8,164 so you start to have more deductions.
  2. Employers Allowance – Most small businesses qualify for approximately £3,000 per year for employer’s allowance. This amount can be deducted from the secondary national insurance. If the government is giving you a £3,000 exemption, you are able to save up to £3,000 a year. If you are a director-only company, unfortunately this does not apply to you, but if you are a small business then it is very likely you will qualify for it. You can double-check with your payroll bureau or accountant.

Three Simple Steps to Replace the Anxiety of Taxes with Peace of Mind

 

There are a lot of fear and stress around the topic of money and tax. I have been working with doctors since 2014 and have also been following the trends about public health. I have seen a lot of articles and stories in the media about doctors being stressed out, constantly overworked or even sadly committing suicide. I feel as though they are supposed to be the ones to look after other people’s health but how can doctors be expected to save more lives, if their own well-beings are not taken care of.

Also in order to stress less and feel good about finances, I do believe there are two parts of financial well-being that need to be looked at. The first part is the inner world, that is the self-worth and the relationship with money. The second part is outside practical guidance. This is the clarity of what’s going on with the own tax bills/finances. There are a variety of professional help out there to give enough practical guidance and look after your taxes. However, there is not enough professional advice on your mindset on money and how you feel about it. Fortunately, today I will be able to bring both of them together as three simple steps in which you can take to get rid of these fears related to your tax bill.

3 Simple Steps

  1. Own your own financial power

A lot of healthcare professionals say they are not good with money and do not like numbers. In fact, every human being is inherently valuable and you need to believe that you do have whatever it takes to be good with money. You need to have the mindset that you are the only person that can look after yourself. Of course, you will ask for help from an accountant or financial adviser, but eventually you will need these people to work for you and not let them own your power.

Throughout my years of experience, I have noticed that the clients that gain the best results are the ones who are more self-aware. They are aware of the basics of tax, their financial situation and they know who to speak to. This is really important as you are the person who needs to take responsibility of your own finances.

  1. Money you pay into the system is still YOURS

The tax you pay into the system is still yours because you are the one who added value and you have worked hard to earn this money. The taxman will take their share and you do need to pay your fair share as well. If we look at the bigger picture, the tax is eventually funding our public health and public facilities which are benefitting us.

When you receive a payslip, there are different kinds of deductions. One of them is tax and the other one is called national insurance. National insurance is a social security, these are the money used to fund the state benefits like your state pension. Another example of a state benefit is if you lose your job then you will receive unemployment benefits. If you are pregnant and have stopped working for a while but you are not entitled to any statutory maternity pay, you will get a maternity allowance. This goes to show, the money you pay into the system does benefit you indirectly or in the long-run even if you will not see it immediately.

  1. Understand the universal rule of tax

To explain this, I usually refer to the Cash Flow Quadrant by Rich Dad Poor Dad:

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  • Employee – If you are employed, the tax rate is 40% because most working-class people are paying 40% in tax.
  • Self-employed – If you are self-employed and run a very profitable self-employed business, you would need to pay approximately 50% of your profit as you pay two kinds of national insurance on top of it. Also, there are different rules such as having to pay half of next year’s tax in advance.
  • Business Owner – Currently, if you run a corporation, corporation tax is 19%. The percentage is much lower than people that work as employed or self-employed.
  • Investor – If you are an investor, when you have an investment you do have to pay different kinds of tax. This applies when you have dividends or when you sell assets as you will have capital gains tax. On the other hand, if you are a sophisticated investor, you will be aware of how to invest in a tax-efficient way. There are certain types of tax-efficient investments out there. Investing £10,000 in start-ups will enable you to gain £5,000 back from the government which is one of the very generous tax-breaks that investors can get. Perhaps you could put a portfolio in a tax-free environment, which means you will not need to pay any tax. If you save £500 per year, that is £5,000 for 10 years which is an example of how the tax savings amount will build up over time.

Business owners and Investors have more earning potential than employees and self-employed but they are riskier. As an entrepreneur, it is difficult and investments can go down which will lead to you losing money. Effectively, if you look at the whole economy, business owners start businesses because they want to solve people’s problems and they create jobs. This is adding huge value to the economy, as they are giving more people jobs, giving people stability and guarantee a decent life.

Investors are injecting capital into the businesses, if they become successful it will make their dreams come true. They are also adding massive value to the economy. In comparison to employee or self-employed, you are still adding value but you might serve one or two clients in one go, which means the adding value factor is not as repetitive as businesses and investors. Even though they pay less tax but are earning more money, eventually they are adding massive value to the economy which is why the government rewards them with more tax breaks.

 

P.S. – Do you want to replace your anxiety about taxes with clarity, reassurance and financial well-being? We created an online programme ‘How to prosper as a trainee doctor’ specially to help you get there.

 

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Understand Your Payslips

 

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What is the number you care about the most when you receive a payslip? That would be the net pay for most people. But your payslip is more than just the net pay!

In this article, we will guide you through what are included in the payslips you receive, what are the deductions, tax codes, etc., in order raise awareness so you can look after your own finances better.

 

Deductions on a Payslip

 

There are two parts of a payslip; income and deductions. The income part of the payslip is very straightforward, some people might notice they may have some other taxable income such as commission, bonuses, etc. However, there are different types of deductions that you need to be aware of. Income tax and national insurance are the two main types of deductions, but at times you may come across a third which is pension.

 

Income Tax vs National Insurance

 

Income tax can also be called PAYE and the amount deducted is based on how much you earn. On the other hand, national insurance goes to the state benefit and has its own threshold. For example, if a person earns more than £8,164 for the current year, then they will have to pay national insurance. The starting rate is 12% up until £45,000 but anything above is 2%. That is what makes income tax and national insurance so different. The more you earn the more income tax is deducted but at the same time the more you earn the less national insurance is being deducted.

 

Pension

 

With auto-enrolment taking place, more people will start to see pension being deducted from their payslip. Although it is classed as a deduction, it is of benefit to you as the amount taken will go into your own pot. The amount is put aside for your retirement. The more you put into your pension the less income tax you have to pay, which is something you might want to consider for the long-run.

 

Tax Codes

 

Tax codes can be very complicated to understand but they are very important. Every year, the normal tax code can be slightly different because each year the personal allowance is different.

 

· 1150L – A lot of people will have this tax code which is the tax code for the current year 16/17. This means that the personal allowance is £11,500.

 

· Emergency Tax Code – There may be different tax codes based on previous overpaid or underpaid tax and if you have a second job. This type of tax code will appear if your employer was not sure what tax code you had from your previous job. Currently it is 1150L W1/M1.

 

Where appropriate, it is important to consider talking to an accountant so that you can make sure you have the correct tax code or paying the right amount of national insurance.

 

Have you found this article useful? For more insights and support from our penal of financial experts, please be free to request to join our exclusive Facebook group Tax Deductible Lifestyle Tribe.

For more details of the tax breaks and tailored advice, please get in touch with the author of this article!

Keep Calm and Get Your VAT Right

 

VAT is a slightly different kind of tax than income tax and corporation tax, which are income based. You would need to submit a tax return at the end of the year and declare the amount of tax to pay based on your profit/income. However, VAT is an indirect tax. That means that if you are VAT registered, you are registered as a tax agent for the tax man. When you sell any good or services you charge a certain amount of VAT on behalf of the tax man. After doing so, you declare the VAT return and pay the VAT directly to the tax man. It is paid on behalf of your customers.

 

Do You Have to Register VAT?

 

Firstly, you would need to ask yourself whether your type of service or products are required to register for VAT. For example, if you are a doctor, the services that you carry out that are related to human health are exempt from being registered for VAT. If you provide a healthcare service and sell equipment that have been registered for VAT then you have a segregated type of service/goods. That means the healthcare service is still exempt but because you sell the equipment then you can register the business for VAT. You would need to declare that you charge VAT on the sales of the equipment and submit a VAT return. For a majority of other services or goods, you might be able to register for VAT.

 

The second question you would need to ask yourself is based on the threshold. At the moment, the annual threshold for VAT registration is £85,000 for 12 months. If you are under that threshold it means you can voluntarily choose whether you would want to register or not. It is not a choice and an obligation if you are aware that the services or products you are providing are required to be registered for VAT.

 

Different Circumstances if You Do Not Meet the Threshold

 

  1. If you are a start-up company, you only incur the cost and you have very little sales/no sales but have a lot of expenses that incur VAT then it might be beneficial to register and claim the VAT back to aid the cash flow.

 

  1. If you are still under the threshold but your business is growing really well then you might need to register VAT at this point just in case your business will be above the threshold very soon. It is more than likely you will receive a call from HMRC if you register late and they might carry out an investigation or give you a penalty.

 

  1. If you see certain services not charging VAT it will be obvious that they are not earning above the threshold. On the other hand, if the services are charging VAT, it is likely that they haven’t reached the threshold yet but it is perceived that they are big. If it is important to you to be perceived as big then it’s probably better for you to register VAT.

 

It is important to note that the registration form for VAT, that you fill in online, does not cost you anything but if you want more reassurance it is best to ask a professional to do it for you.

 

What Happens Once You Are Registered

 

Once you are registered, on a quarterly basis you are expected to declare how much VAT you need to pay. If your VAT number is confirmed, you will have to invoice customers and charge 20% of VAT on top of what your service/product is worth. At the same time, if you have purchased anything and paid VAT to the suppliers you need to keep their invoice in order to claim the VAT back. At the end of the quarter, you are only paying the net amount of VAT to HMRC which is a basic duty.

 

For some rare cases, if you qualify for being on annual basis then you only need to submit a VAT once a year. That does not mean you only pay VAT once a year. You will still need to pay quarterly, which is based on the estimation on how much VAT you will pay at the end of the year. When you submit the annual VAT, you will be able to make adjustments on that. It is important to keep records of your VAT certificate, sales invoices and purchase invoices such as receipts.

 

If you are an IT consultant and you register VAT but you have very little expenses which means you cannot really claim anything. In this scenario, it might be beneficial to register on the flat rate scheme. This means you only pay a fixed percentage to the tax man every quarter on your VAT inclusive invoices. For instance, if you invoice £10,000 worth of service plus VAT which totals to the amount of £12,000 then you only pay 14% of that total amount. The percentage depends on the service you have to offer. From April 2017, no matter what service you have to offer, some businesses may have to pay 16.5% if they are on the flat rate scheme. You cannot reclaim VAT on purchases unless you have a capital item that is more than £2,000.

 

Selling Services to the EU/Foreign Country

 

  • Business to Consumer – If the client is in the EU, you still have to charge 20% of UK VAT to your customer.
  • Business to Business – If your customer is registered for VAT in the country that they are in then you do not need to charge VAT.

 

What Can Trigger a VAT Investigation?

 

There are some circumstances that might trigger a VAT investigation. For example, if your VAT return is inconsistent, you are often late when filing or one quarter has a big amount of liability and another quarter there is a big amount of claim. In this case, HMRC might want to have a look at the records and see what is going on with your business. At times the investigation may be random, but in most cases HMRC want to protect their revenue. If you have a big claim it is very likely there will be a full investigation and HMRC will send you letters to ask you for certain documents.

 

If you do receive an investigation it is best not to panic. You need to make sure you keep all records properly so that you can pull out any VAT receipt or invoice for HMRC. HMRC might give you further advice because some business owners might not be aware of certain things. An investigation is also a good opportunity for you to clarify certain questions that you are not sure about.

 

3 Principles to Help You Get Through the Investigation

 

  • Telling – It is best to tell HMRC what situation your business is in. If you do discover something before they find out it is best to tell them as soon as possible.
  • Helping – Help HMRC to understand your business and if there is an issue help them understand why it went wrong.
  • Giving – Give HMRC access to information as they have no right to look for the information themselves without your permission.

 

Things to Do to Avoid an Investigation

 

Sometimes an investigation happens unexpectedly but it is important to try your best to avoid it. Make sure you file all of your tax returns on time, normally you have 1 month and 7 days to prepare the certain quarterly VAT return. Keep all your records and keep VAT bills. If you do have a big VAT bill it is likely you will have a big claim. It is best to tell HMRC in advance and send them a copy of that bill to help them understand what is going on.

 

 

Please note that this is not a replacement of tailored professional advice. For personalized and confidential review of your taxes and tax saving opportunities, please contact the author of this article below.

Choosing the right business structure for your Start-Up

Have you been wondering if it is better for you to run your business as a sole trader or limited company? What are the pros and cons? When is it worthwhile to form a company? We will give you guidance of the pros and cons, as well as other options, in order to decide the right business structure for you. Many people may find themselves in this position and there are a lot of questions around business start-ups because it is something new to them. It is important to make sure that you know the tax implications and your responsibility because you are about to become a business owner/company director.

 

Sole Trader vs Limited Company

 

For pure tax purposes, a limited company has a lot of advantage. In particular, if you are running a profitable business the tax advantage is quite big because the company tax is only 19%. If you are making profit as a sole trader then effectively it can be taxed as high as 40%-45%. This proves that running a limited company is better for tax purposes.

 

For some people being a sole trader is a better option especially if you are a bootstrapping entrepreneur. This means you are a start-up but in the meantime, you’re still keeping your day job due to your business not making enough sales. Due to it being too early so you do not have enough income to cover your living expense. For example, if you are starting a consulting business or if you are a life coach and you start your business on the side, at the beginning you may have a lot of business expenses. It is worthwhile to stay as a sole trader because at this point you are effectively making a loss in your business. If you are making a loss, you can use that loss to offset any employment income. This can help you get some tax back in order to aid some cash flow to give you some more money to invest in your business.

 

Even if you are not keeping your day job and just starting out your business small, the structure is not too complicated. If you are providing services, it is worthwhile to remain as a sole trader because your responsibility is less than a limited company. You only have to file a self-assessment once a year as a sole trader.

 

At the same time, if your business structure is not that big and you are company director you have to file your company accounts every year. This is due to a limited company being a separate entity from yourself. You have to take care of your company’s tax return as well as your tax return so it’s double the responsibility. Filing company accounts is more complicated than doing sole trader accounts. You cannot randomly draw money from the company because you might get a tax charge if you are not careful enough.

 

When is it Worthwhile for You to Set Up a Limited Company?

 

Whether you are a sole trader or a limited company, you are taxed on the profits not on the top-line revenue. If you are earning £50,000 and you spend the same amount it does not make any difference because you don’t pay tax. But if you are making £20,000 in profit then at this point you might think it’s better to set up a limited company. If you do run a limited company, you can take £10,000 as your own salary because it is under the personal tax-free threshold. This does not trigger much personal tax burden and if you are running your own salary through the payroll it is a tax-deductible expense which is a tax benefit. As a limited company, you do not have to worry about the Class 4 national insurance. As a sole trader, you are not paying your income tax and national insurance as well. You might have to pay second payment on account which means you have to pay next year’s tax in advance. Cash flow wise it might not be suitable for you. Effectively, you will save company tax and then the rest can be taken as a dividend.

 

At the moment, even though dividend tax has changed, it is still cheaper than a salary or your sole trader income. If you are earning within the basic rate bracket, which is currently £45,000, then the dividend tax is only 7.5% which is an advantage. If you have a profit of £45,000 then 20% of it will be taxed.

 

When Limited Company is the ONLY option?

 

If you are a start-up, for example a technology start-up and you request funding or looking for investments at this point you have to set up a limited company structure. This is because you might have to give up your equity to your investors as a sole trader you cannot attract investors. As a sole trader, the business is relying on you.

 

If you as a business owner resign, you are ill and cannot work, or the sole trader has died then the business will die because of that person. But if you run your limited company even if you resign, you can give your share to other people and set up other people as the director so that the business can continue.

 

If you are looking for investors, you have to have a limited company structure. You will be able to set up a share structure for the investors, you will have A share and the investors could have B share. They will have different rights and you will have decision voting rights.

 

Should You Get an Accountant to Set Up the Limited Company?

 

It is important to consider that a limited company is more complicated and most people start looking for an accountant to help. You have to keep your books in a more comprehensive way as well as there being a double-burden. This is mainly due to filing accounts, filing the company tax and personal tax. You would need to find a professional to do it to make sure it is compliant and to keep the peace of mind. Even if you are confident to do it yourself, the time is also the cost so all of these elements need to be considered.

 

If you are confident and have the knowledge yourself then you can do it yourself. However, the benefits of using an accountant are:

 

  • They will save you time.

 

  • They will give you extra reassurance.

 

  • They will be able to take care of what is essential to you. Especially for your start-up, the accountant will make sure you understand what you are doing and what are the critical deadlines.

 

Other Structures

 

There are other structures apart from a sole trader and limited company. For example, there is a partnership or even a limited liability partnership. If you are a small business, it is more effective for you to be a sole trader as things are simple but it will not stop you from being a limited company in the future.

 

Please note that this is not a replacement of tailored professional advice. For personalised and confidential review of your taxes and tax saving opportunities, please contact the author of this article.