What’s New on Public Sector IR35 2017-18?

A lot of doctors are working with the NHS as a locum doctor and IR35 has become a big issue to most doctors. It is nearly the anniversary of the public sector IR35 rule that kicked-in from April 17. Here we have provided the updated guidelines on the tax implications if you are inside IR35 and being paid to your Ltd company, the expenses claims and considerations of closing down a company.

Tax Treatment When You Are Inside IR35 and Being Paid to Ltd Company

A lot of locum doctors were deemed inside IR35, they still have active limited companies and being paid to the company bank account, but after tax/NI deducted as an employee. This caused a lot of confusion when it comes to corporation tax and income tax. And most importantly how one can avoid being taxed twice for the same income.

As the income inside IR35 were still technically ‘employment income’, you would declare this income under Self-Assessment, but you may not have additional tax liability on this income as taxes were already deducted.

When it comes to Ltd company corporation tax, the same gross income should be treated as the ‘revenue’ for the company. But equally, the same gross amount will be taken out as ‘director’s salary’ so that the income will not be taxed under corporation tax.

For example, Dr Rebecca being paid £6,000 gross per month, the tax/NI deducted was appx £1,500. That gives net amount of £4,500. Dr Rebecca would need to count the £6,000 as revenue, but £6,000 as ‘director’s salary’ which is ‘deductible expense’, so there’s no corporation tax charged on that income. And that income would declare the IR35 under her Self-Assessment.

Expenses Claims

If you still run an active company, any expenses that are necessary for the company are still tax deductible, e.g. your bookkeeping software or subscriptions. When you are doing any consultancy jobs that are outside of IR35, the expenditures that are directly related to those activities are still tax deductible.

When inside IR35, you may not claim travel and subsistence the same way as a self-employed individual. As you are technically an ‘employee’, you may only claim the travel to temporary workplace and that are necessary for you to perform your job. You may not claim travel from home to ‘clients’ office’ by justifying your home is your usual workplace, as those will be treated as usual work commute.

Company Strike Off Considerations

Some individuals might feel as though it is not worth to keep the company running and they just want to do the job, get paid and be tax efficient. In order to close down the company, the company has to be at least 3 months dormant. One thing to be aware of is the final assets of your company, if its less than £25,000 then you can do a normal strike off. Anything remaining will be counted as capital gain. If there is more than £25,000 you might need to use a liquidator to apply for members voluntary liquidation.

Summary

  • You would need to make sure you declare the income as employment income in your self-assessment.
  • Inside IR35, you are technically an employee, so any expenses related to the work that is inside IR35 you will claim the expenses as an employee.
  • You need to look at your long-term vision, if running a business is not your long-term vision then you would need to look at closing down the company.

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

Cash Out or Not? The ‘Exotic’ Ways to Use Cash in A Business

If you are running a profitable business it is likely that you have quite a lot of cash in the business and often you will be advised that if you take too much dividends or a high salary you will get taxed. This causes you to have cash in your business that you do not know what to do with. There are different strategies to take into consideration in order to enable you to use that cash in your business.

Aidan Dow, the company director of Aidan Dow Wealth Management Ltd, has taken some time to sit with Hannah Xu to talk about the different strategies and the steps you can take.

What to Do If You Want to Keep Some Cash in The Business?

If you have a company there is nothing to stop your company from having investments which means you can open investment accounts on behalf of your company. This enables you to put some funds in these investments, it is key to know how long you think you can tie the money up. If you are looking at using that money before 3-5 years it is recommended not to have an investment account or taking stock market risks. It is a good strategy to have an investment account for the business which is also separate from your name and taxed separately to your own name.

It is important to know what your objective is and how much cash you will need for the short-term but if you do not need it then an investment account is a good option for you. With interest rates so low, if you are keeping cash in the business, effectively over 2-3 years that money is going backwards. Whereas, if you can afford to tie up for 3-5 years and take some investment risk then that money will keep pace with inflation which will keep your business healthy. The money is there to call on when you have needs and you can take it out in a more tax efficient way.

What Are the Risks?

Because you are in  control of the company’s money, you can control how much risk you take with the investments. You are not restricted within the company regulations to be fixed to a low-risk or high-risk. You are able to pick your risk which means you have the flexibility of having it towards the low risk side which is down towards cash or bring in some risk in with some equity exposure.

Company Pension Contribution

A company can make pension contributions to an individual, this means that the individual will get better remuneration even though you cannot access it until you reach retirement age. It is tax efficient for the company because the company does not pay National Insurance on the pension contribution. If you are paying yourself more or the company is paying individuals more then the company would have to pay National Insurance on the salary payments it makes. If the company pays into a pension on behalf of the individuals, in some ways it feels like a salary because it is a benefit but the company does not pay National Insurance on that contribution.

Pension contribution is one of the tax deductions for your company tax. An example of this is if you have kids there is employer supported childcare which you can take advantage of.

Advice on Having Cash in The Company

  1. Know how much cash the company needs for running costs for 3-4 years before you consider tying up any cash in investments.
  2. Understand the risk, understanding your own risk profile and how the company risk profile may be different from your own risk profile because they are two different entities. Saving for the 20-30 years will have a different risk profile of saving for 4-5 years and it alters the investment profile quite dramatically by having two different time scales.

Venture Capital Trusts

Venture Capital Trusts have been running for about 20 years and it is a government scheme used to encourage investments in smaller companies and start-up companies. The government is offering really good tax breaks for people taking risks and investing in these companies. Most people start to consider this option once they have used up their ISA allowance and their pension contributions. Any money you put into a Venture Capital Trust you get tax relief on. If you invest £1, you get 30% tax relief on that £1. Throughout the life of that VCT you will get a dividend payment and it will be tax-free.

VCT are made up of a collection of up to 20 or 30 individual venture type companies, they offer growth opportunities and offer diversity because you cannot access this area of the market through normal stock markets. They are high-risk investments so it is best not to invest in them purely for the tax relief. Once you put money in, you cannot access the capital for 6 years. You cannot change the risk profile within the 6 years which is unlike a pension.

Are VCT’s and Pension Contributions Good Options for People Who Are Not Risk-Takers?

The default rate of VCT’s failing is quite high and it is up around 40%. It is a fund of different venture companies which means there is a fund manager sitting over that and picking the best investments for their Venture Capital Trust. What they usually do is meet 1000 different companies and each year they will only invest in 6. By narrowing it down it helps to reduce some of the risk. They will also pay out to these venture companies capital, so over the period of 6 years they will give a small amount in year 1 then more in year 2 etc. What eventually happens is that the companies that are not doing so well do not get much of the money because they tend to fail within 2 or 3 years. The companies that do well will receive more money and the default rate drops from 40% to 14%.

Pension Contributions are very tax efficient. Once you put money into your pension you can play around with the risk level you are taking within that pension which is positive as you are not locked into high-risk. Although you do not have access to the money, you have access to the risk within the pension.

What is Tax Relief?

If you earn anything over £11,000, you will pay 20% tax on that and if you earn over £45,000 you will pay 40% tax. If you are in that bracket and you are earning over £11,000, anything you contribute into a pension the government will give the equivalent of the amount of tax back. If you invest £1 you will get £1.40 invested which is worth it.

P.S. If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please book me in via the link so we can arrange a chat: https://hannah-xu.youcanbook.me

How Not to Forget to Pay Yourself

One of the most important factors of building wealth of any kind is to start paying yourself. It does not matter the amount that you pay, even if it is a small amount, the most vital part is that it will accumulate over time. In Tony Robbins, ‘Money Master the Game’, it mentions the power of compounding where it explains that time can actually make a small amount accumulate so that when you get to retirement age you will have a healthy pension retirement fund. It also tells us that it is very important to start paying ourselves no matter what the income level is. Some people may question the fact that they will be living on paycheque by paycheque but the point is that you should not wait until you are earning over a certain amount before you start paying yourself. As long as you are receiving an income, you should pay yourself and then eventually start to think about planning and paying your bills etc.

In this article, we will be breaking the whole process down into a couple of steps in order to make things clear on how you can pay yourself and how you can make the idea of paying yourself more fun and positive.

Be Clear with Your Value and Objective

First of all, in order to not forget to pay yourself you will need to prioritise your needs. You cannot neglect your needs and then think about paying yourself. If you do not know what you need and if you do not prioritise your own needs then it is very hard to make things easy. You need to decide how much you need to pay your bills, groceries etc. You will also need to consider the other aspects that are important to you because if you are living under a certain budget then you cannot have a lot of luxury things. You need to decide on what you value the most. For example, if you value going out that is completely fine but you would need to let go of what is not important in order to fund the parts of your life that are the most important to you. Always know your value, know what you need and be clear on why you need that extra money.

Set Income Goal

After you have decided what you need the extra money for and why, you can start to set an income goal. It does not matter whether you are self-employed or employed, you are always able to set an income goal. If something is really important to you, you will always find the extra money. When people state they cannot afford something what it really shows is that they do not want to do whatever it takes to pay for that or they choose not to buy that. Instead of saying you cannot afford something you should start to ask yourself how can you make it affordable and then set some income goals.

If you are self-employed, you might want to work backwards and figure out how much you need to fulfil your needs and the things you value the most. You are then able to work out your bare minimum and how much you have to earn as a minimum for that particular month in order to support yourself. If you are on a fixed-contract or if you are an employee, you can still set some goals based on how much you actually need in order to support the lifestyle you really want. You might want to consider negotiating a pay rise or sell some unused items from your home to create some income.

Put a % of Income Aside First

Whenever you have a pay cheque, you need to make sure you put a small percentage aside for your long term financial future. You should not wait to pay yourself after you have paid for the expenses and there is a bit of money left over. It will not work this way, you need to make sure you pay yourself first before anything else.

When you have a business, you need to use the same concept. Whenever a customer or client pay you, you need to put aside a small percentage first and then use the rest to pay bills or expenses. If you find out you do not have enough money to fund your expenses it does not mean you have to borrow from yourself, it just means you need to re-think your current strategy. You have to strategize your business to make sure you are making extra income or figure out if there are any expenses that you can save for the time being.

This concept works for personal finance too. If you are an employee, when you receive your net pay, you can put a small percentage into your pension pot. This is a very tax efficient approach because every £80 you pay in; the government will put £20 on top and for a higher rate tax payer the government will top up even more. Paying your pension means you will get 25% return and no other investment can be as good as that.

You can also consider putting money into an ISA which will allow you to earn some tax-free interest. If you have an investment ISA or if you sell the shares then all the dividends you get from your ISA wrapper is tax-free as well.

Tax Efficiency

When you are a business owner, especially a limited company, once you decide how much money you need to fund your lifestyle it is important to go through everything with your tax advisor or accountant. You need to make sure you are extracting money in a tax-efficient way and doing it properly because when you have a limited company you cannot randomly withdraw money. You can either have a salary or dividends but you would need to work out which option is the most tax-efficient. If you have a home-based business, there are certain expenses you can claim as a business expense and you can let your company pay for it. An example of a type of business expense is use of home, which means that if you are working from home a portion of your bills will be paid for by your business.

If you are self-employed, there is no restriction. Whatever you earn, you can use as long as you have sufficient funds to pay all of your expenses as well as your tax bill. There are certain strategies as mentioned that you can use such as pension contribution and the ISA wrapper.

If you are earning really good profit but for some reason you cannot incorporate as a company it is best to consider taking more advanced advice on things like Venture Capital Trust investment which will give you good tax relief as well. Every £10,000 you invest will give you back £3,000. However, please note that this type of investment is very risky as it involves funding start-up businesses and it is likely that they will fail. If they succeed you will get tax-free dividends.

If you are running a profitable business from a limited company, you can think about retaining some money. You do not need to extract the money if you already have enough to fulfil your needs. Business can sometimes slow down, it is always ideal if you have money to have it in a vault account. You can also set up investment funds under the company name in order to keep the cash in there and get some return.

If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please direct message the author of this article so we can arrange a chat.

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.

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.

 

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