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Understand Your Payslips

 

Payslip v01

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!

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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.

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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.

 

 

 

 

 

 

 

 

 

 

 

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Tax penalty, and how to negotiate the best outcome when things go wrong

“A tax is a fine of doing well, a fine is a tax of doing wrong”

When you make a profit, the taxman has to take a cut which means you have to pay a fair share of tax. However, when you do submit your tax return to HMRC and something goes wrong you will then have to pay a fine.

Penalty for Missing the Tax Submission Deadline

If you submit a tax return late and miss the deadline the HMRC system will detect this and will automatically issue you a penalty. This means it is issued by default because they do not know the reason behind the late submission. The penalty depends on how late your tax return is submitted. If this is the case and you do have a reasonable excuse you are able to appeal the penalty. Having supporting evidence will maximise the chance and if they accept your reason they will cancel the penalty. If you cannot negotiate the penalty then you just have to pay the full amount.

Reasonable Excuse

There are some excuses that HMRC will accept:

  • Illness – If you are critically ill then you cannot fill in the tax return which may be accepted depending on the circumstances.
  • Documents Destroyed by Accidents – If you are self-employed and your business records have been destroyed by the accident then that is a reasonable excuse as well.
  • No UTR Number – Another common scenario is if you do not have your unique taxpayer reference number (UTR). The UTR has to be issued first in order to submit a tax return. If it has been issued late then that is not your fault.

Unreasonable Excuse

There are some common excuses that people give and are not seen as reasonable:

  • Being Busy – This is not a reasonable excuse because if you are busy you are able to ask for help. You can ask for help from an accountant as they can make sure everything is submitted on time.
  • Too Complicated – If you think it is too complicated for you then that is not acceptable too. There are a lot of experts out there and the tax authorities give you 9 months to prepare your tax return. Even if you do work with an accountant, the primary responsibility is yours. You need to chase up your accountant and if you do not receive a response you can always find another one.

The reasons stated can always be prevented and if you are in this position, HMRC will not accept these excuses.

 

Penalty of Errors or Mistakes in Tax Return

If you make any mistakes on a tax return or VAT return then there may be a penalty as well. The penalty amount will be based on the potential loss of revenue or how much tax you owe to HMRC. For example, if you are expected to pay £5000 tax within the year but you only declare that you have £4000 outstanding then the remaining £1000 is a potential loss of revenue. HMRC would charge a percentage of that £1000, the percentage will be determined by your behaviour and intention.

  • Because of a Lack of ‘Reasonable Care’ – This means every individual is expected to keep records in order to provide a complete and accurate return.HMRC expects you to check with your accountant, or HMRC, to confirm the correct position, if you are not sure. However, ‘reasonable care’ is different according to each individuals circumstance. For example, someone with straightforward tax affairs may only need a simple system of record keeping that is regularly updated. A large business is expected to have a more sophisticated system that is well-managed. The penalty is levied at 0% – 30% of the amount of tax due.
  • Deliberate – This occurs if you intentionally send incorrect information. The Penalty is 20% – 70% of the amount of tax due.
  • Deliberate and Concealed – If you intentionally send incorrect information and take further steps to hide the error. The penalty can be up to 100% of the amount of tax due.

The level of the penalty is linked to the reason why the error occurred. The more serious the reason, the higher the maximum penalty can be. HMRC can reduce the penalty if you help them to put things right.

Ways to Negotiate the Best Outcome

  1. Telling – If you find something out and you tell HMRC, they will consider what you have informed them whilst determining the next steps. You should make them aware of any issues even if they do not know.
  2. Helping – It is important to help HMRC understand your scenario and where it went wrong.
  3. Giving – Enable HMRC to have access to your records to help them investigate further. You need to show them your intention of wanting to put it right and that you want to pay back any outstanding tax. After doing so, HMRC will decide what penalty they will give you or they may decide to remove the penalty completely.

 

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!

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Auto-Enrolment: Are you ready for the new item on your payroll cost?

A vast amount of big companies have been taking part in Auto-Enrolment for a couple of years now. In some countries like Australia, they already operate something similar to the Auto-Enrolment scheme, which has also been running for many years. The scheme encourages employers to take care of their employees and for people to put some money aside for their retirement.

 

Auto-Enrolment is related to your payroll costs. If you are running payroll at the moment you should be aware of the deductions such as income tax which is also known as PAYE or National insurance. However, if you have a pension contribution as well that is another deduction. Even though it is being deducted, the money paid into your pension scheme will still be yours afterwards which will be of benefit to you. The scheme is applicable for all businesses as long as you have employees.

 

What is Staging Date

 

If you are on a PAYE scheme, the pension regulator will pick up that information automatically and send you a letter confirming your staging date, which is the duty start date. Once the staging date commences you will need to automatically enrol the workers to the pension scheme.

 

Exemption

 

If you are the only company director and have no other employees, the duty does not apply to you. You are able to voluntarily contribute to a personal pension as the decision is entirely up to you. Also, if you are company director but have other employees, you don’t have to enrol yourself into the pension scheme if you don’t want to.

 

2 Important Triggers to Take into Account

 

On the other hand, if you have employees then you have two factors you need to consider. The first is the earning trigger and the second is their age.

 

· Earning Trigger – Per month, the earning trigger is £833. If someone is earning £900 per month and they are aged 23 then at the company’s staging date, the employee needs to automatically be put into the pension scheme.

 

· Age Trigger – From the age of 16 to 74, an employee has the right to enrol into a pension scheme. But if the employee is between the age of 22 up until the state pension age then it is highly likely they have to be enrolled automatically. For the employees that are aged between 16 to 22, they have the choice of whether they want to be enrolled or not.

 

Until April 2018, employees contribute 1% of their pay cheque to a pension scheme and the employer contributes 1%, overall there is a 2% contribution but it will increase in later years.

 

 

Is the Staging Date the Start Date for The Pension Contribution?

 

If you are running the payroll monthly, the last working day of the month after your staging date is the day that you have to show the deduction on the payslip. For example, if your staging date is 1st August 2017, you would need to show the deduction on 31st August 2017 which is the last working day.

 

Where to Find Comprehensive Guidance Online

Most small businesses do not have enough knowledge on the benefits of contributing to a pension. If you are someone who needs more information, you are able to get more guidance from NEST Pension website. NEST also offers one of the pension schemes which you can choose from. Bigger businesses might go for other pension providers to set up the workplace pension for them and have specific educational training from the provider, but for small businesses NEST Pension might be the only option available.

 

What About Family Businesses?

There are cases where there are family businesses operating where one family member is the director and they have a spouse or children working for them. If your family members are employees, this duty will also apply to them. You do need to check your staging date and be aware of the steps you need to take to make sure everything is compliant.

 

What If an Employee Does Not Want to Be Enrolled?

It is important to note that as an employer you cannot force your workers, who are entitled to the pension, to get out of the pension scheme. It is up to the employees to make the decision for themselves. There is an opt out period for the employee, which is one month from the date he/she is enrolled. If there has been a deduction previously, and they do decide to opt out they are able to get a full refund. In order to validate the opt-out process, the employee would need to give you a notice and request a notice form from the pension provider. Re-Enrolment into the pension scheme is carried out once every 3 years, employees that have opted out will be put back in which means they would need to opt out again.

 

Things You Need to Do Prior To Your Staging Date

 

1. Work out your payroll costs

2. Assess your workers

3. Communicate with your workers

4. Decide which pension scheme to go for

 

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!

 

 

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Tax Return: DIY or NOT?

It is now the mid of 2017 which means it is time for people to start filing their 16-17 tax returns. There are people that wonder if they are able to do their tax returns themselves or if they would need to hire an accountant to do it for them. Different people have their own opinions and understanding of what a tax return is and what is required. Today we will run through the basic requirements and reliefs for Self-assessment which will give you an opportunity to decide whether DIY tax returns are a good choice for you.

 

Does Self-Assessment Apply to You?

 

Employee: If you only have a salaried job and that is your only source of income, you are less likely to be required to file a self-assessment. Because your taxes are being taken care of by PAYE tax code. However, this duty is required if you earn more than £100k per year. Also, if you claim the child benefit plus you earn more than £50k a year, then you are required to file a self-assessment and declare the high income child benefit tax charge.

 

Also if you claim professional expenses, e.g. medical doctors claim their professional fees, etc, you may find it quicker to receive a tax rebate when you claim it via filing a self-assessment. In particular, you will need to do so if your expenses are more than £2,500.

 

Self-employed: Currently, there’s a £1,000 exemption for self-employment income, which means that you may not need to file tax return if you earn less than that for the year. If not, a full self-assessment tax return is required.

 

If there are expenses and eventually you quit your job and you pay tax on your employment income then you might find it beneficial to file a self-assessment. This is because if you are making a loss you can use the loss to offset your employment income and get some tax refunds to aid your cash flow.

 

Company directors: If you are director of a company you are required to file a self-assessment, as you may receive dividend income which is not taxed at source. However, in the event your company is dormant, or your business is making a loss where no dividends to take, you can avoid this duty.

 

Investors: Income from stocks and shares, investment properties, and capital gains are required to be declared via self-assessment. However, If your rental income is less than £1,000 then you do not need to declare it. Also if you are renting out a spare room, the rent-a-room scheme means that you do not have to declare the rental income if it is less than £7,500 (under the current legislation).

 

 

Some DIY-able Tax Relief

 

  1. Charitable Donations – Charitable donations can help you reduce the total taxable income. In particular, for individuals who earn more than £100k and start losing personal allowance, some charitable donations may well protect your personal allowance.

 

  1. Pension Contribution – You can contribute into a personal pension and get tax relief. If you are a basic rate taxpayer, you get £20 tax relief for every £80 you contribute. And if you are a higher rate taxpayer, the tax relief you get will be even more.

 

  1. ISA – With an ISA you earn tax-free interest, including a stocks and shares ISA. Your money is in a tax-free environment.

 

  1. Usual Saving Accounts – If you have a joint account with your spouse or your family member, but they are earning under the tax-free threshold (currently is £11,500), or not earning at all, then you may consider telling the bank as they will be able to give the interest without deducting the tax. This is because the bank will usually deduct 20% of the tax before they pay the interest.

 

  1. Tax-efficient Investments – Investing in certain types of small businesses provides some tax relief. If you invest £10,000 in a Venture Capital Trust, where it provides funds to those small businesses, then you get £3,000 back from the government. When the businesses start making money, they will start paying your dividends which are tax-free as well. But this type of investment can be risky too, so please do seek for advice from a financial advisor to review your investment strategy as a whole.

 

What If You Don’t Fill in A Tax Return on Time?

 

There are late filing penalties if you do not file the self-assessment on time. The deadline for this is 31st January each year, i.e. the deadline for 16-17 tax return is 31st January 2018. If you are late for less than 3 months then the penalty is £100. If it is more than 3 months, there will be a daily penalty which could be around £10 a day. If you do owe any tax, then you might have a late payment penalty as the deadline is also 31st January and the penalty depends on how much tax you owe.

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Paying Her Majesty: Understand your tax codes and how taxes are collected

Most people feel as though if they are an employee then their tax bill has already been taken care of, but that is not always the case. There are people who have several employments and they do get confused about their tax code. For example, we’ve worked with medical professionals, and when a trainee doctor is working on rotation basis, he/she may have several employers in a year, so the tax code might not all be correct. Some of the HR departments do provide people with the wrong tax codes so individuals will end up having underpaid or overpaid tax.

Tax Codes

1150L – The most common tax code for the current year is 1150L. For 17/18, your tax-free allowance is £11,500, this is where the code comes from, the tax code is calculated by dividing the allowance by 10. The letter L at the end means you will always have a tax-free allowance available which can also be referred to as ‘Personal Allowance’. This tax code is a normal tax code and it can be found on your payslips or documents.

1100L – In 16/17, the normal tax code was 1100L which can mainly be found on your P60. Last year’s personal allowance was £11,000. Each year the code is different and the personal allowance may change so you need to be aware of that to prevent any confusion.

Tax codes beginning with ‘K’ – This tax code means you do not have the full personal allowance. Normally, HMRC will send a letter explaining why your tax code is like this and you will have a detailed calculation. If you have underpaid tax from a previous year you may have this tax code because it saves you time from having to fill in a tax return. In some cases, if your underpaid tax is more than £3,000 you can pay an amount upfront and the rest can be collected via tax code.

BR – Another tax code is BR which stands for ‘Basic Rate’. Normally, it is used for people that have a second job and they pay tax at basic rate tax bracket. Everything they earn will be deducted by 20% because 20% is the basic rate. For example, if you earn £1,000 you will need to pay £200 tax.

D0 – This tax code applies to people that have more than one job here they earn a higher rate. This means that you fall within the 40% tax bracket.

D1 – This applies when an individual has more than one job and where all income are taxed at 45% becomes appropriate.

NT – This particular tax code means no tax is being deducted. This is quite rare but if you are not a UK resident and you do not subject to UK tax then you do not have to pay tax.

0T – This tax code usually applies to people that have zero tax-free allowance. Usually, if you are earning over £100,00 for every extra £2 you earn above £100,000, you lose £1 of personal allowance. In 17/18, you will lose your personal allowance completely if your salary is over £123,000.

Second Payment on Account

If less than 20% of your tax is paid by tax code then you might have to pay tax twice a year. This is called, ‘Second Payment on Account’. From tax year 16-17, the dividend tax changed so for some director only companies or contractors who have taken dividends may have a second payment on account.

In regard to this, it is advised to do your tax return as early as possible just to make sure you have some funds to prepare as you are required to pay half of next year’s tax bill upfront. It is important to take note that the deadline for 16/17 self-assessment is 31st January 2018 and the deadline for the second payment on account for 16/17 is 31st July 2018.

If you feel as though next year your situation is going to change and you do not think you will have a tax bill which means you will have nil then you can claim reduction on second payment on account.

Running as a Limited Company? When to Pay Company tax

A company is a separate entity, separate from yourself, so on itself it has its own deadline and its own financial year. It depends on when the company was registered. Normally, the financial year is 12 calendar months but it is not the usual calendar months. For example, if the company started in 1st April 2016 then your financial year ended 31st March 2017. Corporation tax which is the company’s self-assessment needs to be paid 9 months and 1 day after your financial year ends.

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Is Your Business In Sleep Mode? Critical Issues For Dormant Companies

Currently, the IR35 is heating the public sector and is affecting a lot of NHS doctors that are working as a locum via limited companies. Because of IR35, the trust or the agency are using the blanket approach to push everyone into either PAYE or umbrella companies.

As a result, lots of locums would stop using limited companies. Those companies would be inactive. And some of them are even considering closing down their companies to avoid the hassle. However, setting companies aside doesn’t mean no responsibilities at all. Here are some critical issues you may need to be aware of.

What defines a company as inactive?

A dormant company is a company that does not have any activities, there are no major transactions apart from minimal transactions if there is a bank account still open and the bank is still charging a fee.

If you have any activities even though you have any money coming in but you still have a pile of cash and are still running payroll out of the company then your company is not dormant. It just means you do not have any sales coming in but you still incur payroll costs. You still have to file a full set of accounts, the company tax return and declare what a standard company needs to declare.

Filing Confirmation Statement

If your company qualifies as dormant, it doesn’t mean you do not need to do anything for the company. For instance, every limited company is required to fill a confirmation statement once a year. A confirmation statement is a replacement of annual return. The detail is very similar to any return, it confirms who are the shareholders/directors are, the address and it makes sure all information is up-to-date. You would also need to declare the people with significant control, this is not only the shareholder but the person who has more than 25% of shares. If you file the confirmation statement online then there is a fee of £13 but if you file it by paper then you need to pay £40.

If you forget or do not file the confirmation statement there is no penalty. It is your responsibility as director to file it on time, if you leave it for a while then Companies House will assume your company is no longer trading so they will automatically dissolve your company.

Filing Company Accounts

If your company is dormant then of course there is no transactions and no activities but you still need to file dormant company accounts. You still need to declare how much shares your company is holding and some basic information. The format is much simpler than the normal set of accounts but it is still something you need to file. It needs to be filed within 9 months after the accounting period.

Responsibilities to HMRC

For a dormant company, by law corporation tax is not required, but it is still your responsibility to let HMRC know the company is dormant, or simply file a nil Corporation tax return to fulfill the requirement. If you do not file the company tax then they will still issue the penalty.

This applies to companies that are VAT registered as well, you still need to file your quarterly VAT return except you would put everything as zero.

What happens with your self-assessment?

This mainly relies on your personal circumstances. If you do not have any dividends income to declare and everything goes through PAYE, even if you think you do not need to file a self-assessment, it is better to let HMRC know rather than leaving it.

Closing down the company

If you think you will never use the company again, in order to reduce the hassle of having to take on all these responsibilities, you might decide to close down the company completely. For most contractors, if their net assets are less than £25,000 then the majority of the time they do qualify for the striking off process. It is important to check with Companies House to see if you do qualify for the striking off process.

There may be issues that will affect this such as if you still have payment arrangements with creditors then you might not qualify. You would need to go through a liquidator so that they are able to deal with this for you and close down the company.

If your company does qualify for striking off then there is an application on Companies House that needs to be signed by all directors. However, before you do the application you need to de-register for VAT, PAYE etc. Any obligations need to be fulfilled and every order needs to be paid, especially HMRC debt. After this process, you are then able to continue with the application, the company will normally be dissolved within 2 months. Within the 2-month period you need to make sure you close down all business accounts because if you do not all the business assets will go to the crown, which means you end up losing all the money.

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!

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Taxable vs Non-Taxable Income (in the UK)

Not all income are created equally. We all think it is good when receiving money but there are different ways to receive it. The most common way to receive money is by earned income i.e. we earn income by exchange of value. The other way is if you sell some assets, for example if you sell a property or car and it is not regular, then it is a capital gain. These two are very common forms of income and with any type of income you will need to pay income tax. However, there are certain types of income that you do not need to pay tax on.

Tax-free Income

Rental Properties: If you have just started to rent out a property and by the end of the tax year you only receive less than £1,000 of earned income from the rental property then you do not need to declare that amount. If you have your own property and rent out your spare room and receive rental income, there is a Rent A Room Scheme where you can earn up to £7,500 for the year without having to declare the income. If you jointly let a property as a couple, you will share the £7,500 allowance, i.e. £3,250 each.

Self-employed: If you are self-employed, you don’t have to declare your self-employment income if earning less than £1,000. But you may still find beneficial to fill in a tax return if you receive less than £1,000 in sales but you have a lot of expenses, as you can use a trading loss to offset your earned income.

Interest from ISA Accounts: When you earn interest in an ISA account you do not have to worry about the tax as well because you are in an ISA wrapper and that protects you from income tax. If you have a stocks and shares ISA then that protects you from capital gains tax as well. In 17/18, you have an allowance of £20,000 to invest into the ISA, the allowance will be different each year.

Capital Gains Tax: In terms of capital gain, you do have annual exemption. If you make capital profit of less than £11,300, which is the annual exemption in the current tax year, you do not have further capital gains tax burden.

Dividends: Dividend allowance is still £5,000 in current tax year, but it will decrease to £2,000 in the next tax year. However, if you invested in Venture Capital Trust and receive dividends from that, the dividends are tax-free.

Some misconceptions

1. Receiving Health Insurance: In most cases, receiving health insurance is not a tax-free perk. By the end of the year, the company will report the benefit in kind via P11D, which means you would need to pay tax on.

2. High-Income Child Benefit Charge: At the moment, most people may overlook the fact that there may be a tax charge when receiving child benefit, i.e. High Income Child Benefit Charge. This means that if one of you is earning more than £50,000 a year then you start getting charged. You would need to fill in a tax return to declare this and report the tax charge.

3. Forex Trading: Some people say Forex trading is tax free, but it depends on the type of activity. It can be treated as trading like normal earned income, capital gain or just gambling. If you are entering a Forex betting contract, that is just spread betting, then that might be something that you may not have to pay tax for. If it is normal trading where you buy and sell currency then that is more like a capital transaction. If you make a profit of less than £11,300 for the year then you do not have to pay tax on your gain.

4. Receiving Cash from Parents: Normally, this is just a cash gift and you do not need to worry about the tax. In some cases, there may be inheritance tax implication if parents give cash gifts and died within 7 years. However, there is £3,000 annual gift allowance that is free from inheritance tax. Also if you get a cash gift at your wedding, then your parents can give you up to £5,000 that is exempt from the inheritance tax. If it is from your grandparents then the amount that they can give and would be exempt is £2,500. Borrowing money is not an income as you are not exchanging value on that and eventually you would have to pay it back.

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!

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