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

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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