Welcome to the latest instalment of our Tax Tips Series, where we delve into the world of (Value Added Tax) VAT Tips. Whether you’re a business owner or an individual navigating VAT intricacies, these expert VAT tips are designed to enhance your understanding and optimize your financial strategies. Let’s dive into our carefully curated VAT insights that can help you stay ahead of the game.
1. Strategic VAT Registration
The most important VAT tip is to know when you have to register. Missing the compulsory registration date could be extremely costly. Especially if you can’t go back and ask your customers for the VAT that should have been charged. A proactive approach to VAT registration can save you time and streamline your financial operations. Maintain a record of your total sales over a rolling 12-month period, and when you foresee your sales exceeding £85,000, consider applying for VAT registration. Keep in mind that the registration process takes several months, so plan ahead to avoid any disruptions.
2. Reclaiming VAT on Past Purchases
VAT registration doesn’t mean you miss out on past opportunities. Even after registering for VAT, you can reclaim VAT on goods purchased before registration if they’re tied to sales made post-registration and are still in your possession at the registration date. Items like resale stock, computers, and office equipment often fall into this category.
3. Reclaiming VAT on Post-Deregistration Invoices
If you’ve deregistered for VAT but still receive suppliers’ invoices pertaining to purchases made before deregistration, you can reclaim the VAT on these invoices. This practice ensures you’re not missing out on valuable VAT reclaims.
4. Efficient VAT Return Management
Embrace technology to optimize your VAT return process. Consider completing your VAT returns using online accounting software and making VAT payments via direct debit. This approach grants you a few extra days to settle your VAT liabilities, contributing to smoother cash flow management.
5. Reclaiming VAT on Bad Debts
Financial setbacks are inevitable, but VAT reclaims can help alleviate some of the burden. You can reclaim VAT on bad debts that have been outstanding for more than six months. This practice can provide a valuable cushion during challenging times.
6. Unlocking the Benefits of the Flat Rate Scheme
Businesses with an annual turnover below £150,000 can leverage the advantages of the Flat Rate scheme for small businesses. This scheme simplifies VAT return completion and, in some cases, reduces the VAT payable. Importantly, it doesn’t impact the VAT charged to your customers, ensuring a seamless experience.
7. Enhancing Cash Flow with VAT Cash Accounting
For businesses with an annual turnover below £1,350,000, the VAT cash accounting scheme offers an effective cash flow strategy. Under this scheme, you only pay VAT when you receive payment from customers, rather than when issuing sales invoices. This approach can have a significant positive impact on your cash flow dynamics.
8. Voluntarily Registering for VAT
Although you don’t have to register for VAT until sales in any 12 month period exceed £85,000, it could be worth registering earlier. That’s because customers who are VAT registered don’t mind being charged VAT because they can claim it back. So if most of your customers are VAT registered, consider voluntarily registering so that you can claim back VAT on your costs.
9. Reduce Prices After Registering for VAT
For your customers who are not registered for VAT, it is an added cost. So when you add VAT to your usual prices, it’s a 20% increase to their cost. However, you will be saving some money by claiming back VAT on your costs, so consider reducing the sales price to keep your customers.
10. Include VAT Before You Can Charge VAT
There may be a period of time between the date you need to start charging VAT and the date you receive your VAT number. During this period, you can’t show that VAT has been charged because you’re not officially registered yet. However, you can increase your prices by 20% to allow for VAT. You can also state that your VAT registration is pending. Once you have received your VAT number, you can then show that VAT has been charged. This will save you from going back to the customer and asking for the extra 20% for VAT.
By implementing these VAT tips into your financial strategy, you can navigate the complexities of VAT more effectively and make informed decisions that benefit your bottom line. As always, it’s recommended to consult with your tax advisor to tailor these insights to your specific circumstances. Stay tuned for our next Tax Tips Series instalment, where we explore invaluable insights into optimizing your employer tax strategy.About Us Our Prices Instant Quote
In the realm of personal tax, mastering the nuances of income tax tips can significantly impact your financial health. As we continue our Tax Tips Series, this edition is tailored to enlighten you with a comprehensive array of personal tax tips, each designed to optimize your income and minimize your tax liabilities. Let’s delve into these expert insights to empower you on your journey towards financial efficiency.
1. Maximize Pension Contributions
One of the best personal tax tips involves keeping your money! Seize the benefits of tax relief when contributing to a registered pension scheme. Automatically receive basic rate tax relief, and if you’re a 40% taxpayer, claim an additional 20% relief via your tax return. Consider this: contributing £4,000 (net of 20% tax) to your pension scheme translates to a further tax reduction of £1,000, resulting in a total contribution of £5,000.
2. Secure the Future for Your Young Ones
Explore the option of contributing up to £2,880 net (£3,600 gross) annually into a pension on behalf of your children or grandchildren. These funds remain protected from tax charges and cannot be accessed until the child/grandchild reaches the age of 55.
3. Unleash Investment Potential
A potentially significant income tax tip is to take advantage of greater flexibility for pension contributions. If you experience a large lottery win or possess surplus cash for retirement investments, there’s no longer a restriction on contribution amounts. While contributions up to the annual allowance (£60,000) can attract tax relief, you’re free to invest any amount.
4. Prioritize an Updated Will
Ensure your Will is current and valid, especially after marriage. A Will becomes void upon marriage, potentially impacting the inheritance rights of your spouse/partner.
5. Navigate Tax Implications of Gifts
If you plan to leave assets to a non-spouse partner, be aware that inheritance tax will be due on the gift. To ensure exemption from inheritance tax, formalize your relationship through marriage or civil partnership before making the gift.
6. Tax-Free Wedding and Partnership Gifts
Take advantage of tax-free wedding or civil partnership gifts to extended family members. Gifts up to £1,000 are exempt, with parents able to gift up to £5,000 tax-free.
7. Optimize Inheritance Tax Planning
Craft a tax-efficient Will to pass on value equal to the inheritance tax nil rate band (£325,000) and designate the remaining amount to your spouse/civil partner without incurring tax. If you are not married to your partner, get married to effectively double your nil rate band.
8. Ensure Business Continuity
Plan for business continuity in case of illness or death. Explore policies like life assurance and critical illness cover, often referred to as key-man insurance.
9. Make Gifts from Income
Gifts made from your income are inheritance tax-free once a consistent pattern is established, provided they do not negatively affect your standard of living or capital assets.
10. Utilize Gift Allowances
Capitalize on gift allowances: Up to £3,000 per tax year is exempt from inheritance tax, which can be carried forward if unused, enabling you to gift up to £6,000 in the following tax year.
11. Strategic Large Gifts
If considering substantial gifts to loved ones, do so as early as possible. Gifts are excluded from inheritance tax calculations if you survive for 7 years post-gift date.
12. Leverage Charitable Giving
Make a gift aid declaration when giving to charities, enabling the charity to reclaim basic rate tax relief while you claim higher/additional rate tax relief.
13. Optimize Child Tax Credits
For those with children under 16 or in full-time education, consider making a provisional claim for Child Tax Credit. If your taxable income drops unexpectedly due to losses or deductions, you can adjust your claim.
14. Navigate Child Benefit Restrictions
If you earn between £50,000 and £60,000 as a higher rate taxpayer, Child Benefit amounts will be restricted. Earnings over £60,000 render Child Benefit nil. Not really a personal tax tip, but you could stop receiving child benefit to potentially avoid having to submit a tax return.
15. Harness ISA Investment Potential
Maximize your ISA investment limit, currently set at £20,000. Income and capital growth on savings in an ISA remain tax-free.
16. Junior ISAs for Young Beneficiaries
Explore junior ISAs for those under 18, offering a tax-efficient savings option for the younger generation.
17. Optimize Income Tax Through Joint Investments
Minimize income tax by optimizing joint investments with your spouse/civil partner. Consider transferring income-producing investments to the partner with a lower tax rate.
18. Capital Gains Annual Exemption
Utilize your annual Capital Gains exemption, currently set at £6,000, to optimize your investments.
19. Gross Bank and Building Society Interest
Ensure you receive bank or building society interest gross, without any tax deductions, if you’re a non-taxpayer.
20. Embrace Investment Reliefs
Investing in small unquoted trading companies can yield tax reliefs. Under the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), enjoy income tax relief and capital gains tax exemptions on qualifying investments.
21. Venture into Venture Capital Trusts (VCTs)
Invest up to £200,000 per tax year indirectly in small companies through a VCT, and receive a 30% tax reduction on the invested amount.
22. Avoid Going Into Higher Tax Bands
Be aware of the tax bands and how it affects the rate of tax you pay. Higher rate tax is applied to income exceeding £50,270. The tax-free personal allowance is gradually withdrawn as your total income exceeds £100,000. Then the additional tax rates apply to income over £125,140. Pension and charity contributions can mitigate the effect of going over these thresholds.
23. Flexible Pension Withdrawals
Capitalizing on modern pension policies, you can begin drawing your pension while still working. Blend pension benefits and contributions to optimize financial flexibility until age 75.
24. Capitalize on Premium Bonds
Invest up to £50,000 in premium bonds for a chance at tax-free prizes. These prizes offer potential rewards without sacrificing your initial investment. Although this isn’t really an income tax tip, any winnings are tax free!
25. Tax-Optimized Property Ownership
When purchasing buy-to-let property, consider joint ownership with your spouse/civil partner as tenants-in-common. This can help reduce tax liabilities by dividing rental income proportionally.
26. Let Your Property Instead of Selling
When moving homes, contemplate letting your old property instead of selling it. Upon eventual sale, the majority of the gain can be protected from capital gains tax.
27. Rental Income Tax Break
If renting out a room in your home, take advantage of the £7,500 tax-free allowance for rental income received annually.
28. Insulation Tax Allowance
When installing insulation in your let residential properties, check for the special tax allowance available to cover costs. While the allowance is up to £1,500, any excess costs are not tax-deductible.
29. Strategic Property Financing
Consider borrowing funds for property investment, even if not required, to capitalize on tax relief on loan interest.
30. Timely Tax Return Submission
We’re moving slightly away from personal tax tips to admin tips now. When it comes to filing your tax return, timing is crucial. To have the Taxman calculate your tax bill automatically, submit your tax return by 31st October for paper filings or opt for online submission by 31st January. This digital route employs a computer program to compute your tax obligations efficiently.
31. Strategically Utilize PAYE Code Collection
For those seeking a more manageable tax payment timeline, consider having the Taxman collect owed taxes through your PAYE code. To make this happen, ensure you submit your tax return online by 30th December or via paper by 31st October. This arrangement grants you extended time to settle your dues, with the Taxman agreeing to collect up to £3,000 of tax through this mechanism.
32. Adjusting Tax Payments on Account
Life’s circumstances are dynamic, and so are your income levels. If your taxable income decreases, resulting in a lower tax bill, seize the opportunity to adjust your income tax payments on account. These payments are typically due on 31st January during the tax year and 31st July after the tax year concludes.
33. Vigilant Business Recordkeeping
Whether you’re a sole trader or a business owner, meticulous recordkeeping is paramount. Maintaining comprehensive and accurate business records not only facilitates smooth tax compliance but also reduces the risk of errors, extra tax payments, and penalties that might arise during a tax audit.
34. Consultation Before Responding
Should you find yourself facing inquiries from the Taxman—be it in writing, over the phone, or during an on-site visit—prioritize consultation with your accountant. Seeking professional advice ensures that your responses are accurate and well-informed. If needed, request written queries to allow for thorough research before answering.
35. Vigilance Against Errors
It’s crucial to remember that even the Taxman can make mistakes. If you’re accused of underpaying taxes, engage your accountant to review the calculations before agreeing to any payments. This precaution can save you from potential financial setbacks caused by inaccuracies.
Incorporating these personal income tax tips into your financial strategy can lead to greater efficiency, increased savings, and a stronger financial future. Remember, every individual’s financial circumstances are unique, so consult with your dedicated tax advisor to tailor these personal tax tips to your specific needs. Stay tuned for the next instalment of our Tax Tips Series, where we’ll delve into expert insights on VAT savings.About Us Our Prices Instant Quote
Navigating the intricate world of business taxation requires a savvy approach to optimize your financial standing and compliance. As a business owner, mastering the art of tax management is essential for sustained growth and profitability. In this first instalment of our Tax Tips Series, we unveil a range of business tax tips that can make a significant impact on your bottom line. Let’s delve into the expert advice tailored to elevate your business and corporate tax game.
1. Optimize Family Involvement
Leverage familial connections to your advantage by employing strategic salary payments. If your spouse or civil partner earns below the annual personal allowance of £12,570 and contributes to your business, consider remunerating them. This practice not only lowers your taxable profits but also fosters pension and state benefits credits for them. A weekly wage between £120 and £183, exempt from national insurance, can prove valuable.
2. Harness Youthful Assistance
Employing your children, aged 13 or older, to contribute to your business presents a golden opportunity. Their income below £12,570 can be transformed into a wage, effectively reducing your taxable profits.
3. Plan Pre-Year-End Tax Meetings
Secure your financial success with proactive planning. Arrange a pre-year-end tax planning meeting with your accountant to ensure timely execution of essential actions. Waiting until year-end might hinder your ability to optimize tax strategies effectively.
4. Strategic Partnership
For sole traders facing 40% tax and whose spouse or civil partner is a lower-rate taxpayer, consider partnership arrangements. Shifting a portion of profits to them reduces tax liability. Limited Company structures offer the alternative of gifting them shares to distribute dividend income efficiently.
5. Optimal National Insurance Contributions
Sole traders earning less than £6,725 yearly can skip Class 2 national insurance but consider voluntary payments for state pension entitlement. Smart financial planning can lead to a secured retirement.
6. Ideal Business Structure
One of the most important business tax tips is to evaluate your business structure carefully. Sole traders and high-rate taxpayers should explore Limited Company options. Consider the benefits of Limited Liability Partnership structures for enhanced financial security.
7. Strategic Asset Acquisition
Timing matters when purchasing assets like equipment and vehicles. Procure these assets just before your year-end to accelerate capital allowance tax relief, often at 100% of their cost in the first year.
8. Business Financing Advantage
Align personal and business loans strategically. Convert personal loans into business loans to enjoy tax relief on interest payments, enhancing your financial efficiency.
9. Ownership Distribution
Minimize future Capital Gains Tax by spreading business ownership among family members. Ensuring a reduced tax burden upon the eventual sale of your business.
10. Maximizing Loss Relief
Claim relief for business losses by setting them off against prior-year profits and other income before carrying the balance forward.
11. Unquoted Company Loss Relief
Under specific conditions, you can claim tax relief for losses incurred in unquoted company investments by offsetting them against trade profits.
12. Business Tax Tips for Boats
An unusual business tax tip unless you are planning on owning a boat! Unlock potential tax benefits by claiming capital allowances for boats owned by the business and occasionally chartered out.
13. Home Office Deductions
Working from home? Claim a portion of mortgage interest, utilities, and other related expenses as tax deductions.
14. Recordkeeping Essentials
Maintain comprehensive records of expenses even without receipts, ensuring accurate business deductions.
15. Private Use Allocations
Review expenditure allocated for private use annually with your accountant to remain compliant and transparent.
16. Legitimate Business Promotion
Demonstrate genuine intent to benefit your business when engaging in activities like sponsoring events for tax-deductible expenses.
17. Effective Stock Valuation
Lower your tax liability by accurately valuing stock. If its market value is below purchase or production cost, adjusting stock value reduces taxable profits.
18. Capital Gains Tax Advantage
For trading businesses held for at least 1 year, selling qualifies for a 10% Capital Gains Tax rate on the first £1 million of gains, subject to review of trading duration.
19. Tax-Efficient Dividend Extraction
Employ a balanced approach of low PAYE salary and dividends for optimal extraction of funds from a limited company.
20. Dividend Compliance Assurance
Ensure dividends are properly documented with board resolutions and dividend vouchers to prevent reclassification issues.
21. Goodwill Tax Relief Strategy
To access tax relief for purchased goodwill, operate through a limited company, not as a sole trader or partnership.
22. Employee Partnership Benefits
Transform senior employees into partners to reduce employers’ national insurance liabilities and boost employee engagement.
23. Creative Company Fund Extraction
Extract funds efficiently through royalties, interest payments, or asset sales, capitalizing on annual exemptions.
24. Property Ownership Evaluation
Analyze the merits of personal vs. company ownership for your business property to maximize tax efficiency.
25. Navigating IR35
Mitigate IR35 implications by adopting the necessary measures to avoid national insurance and PAYE obligations on a substantial portion of earnings.
Mastering these diverse business tax tips strategies arms you with the knowledge to navigate the intricate world of corporate taxation effectively. The implementation of these insights can yield substantial savings, enhanced financial security, and compliance. Stay tuned for our upcoming Tax Tips Series articles, where we’ll delve into more tailored advice to further elevate your financial acumen. Next up will be our personal tax tips, followed by VAT tips, and then employer tax tips. Consult with your trusted tax professional to tailor these strategies to your unique circumstances and embark on a journey toward financial prosperity and peace of mind.About Us Our Prices Instant Quote
Here we explain the 2023 Xero Price Increase. How much Xero’s Prices are increasing. Why Xero’s prices are increasing. Also, the alternatives to Xero. With CloudBook Online Accountants, you can choose whichever software suits you the best.
The Xero Price Increase
Here are the Xero Price increases over the past two years:
|2020 price pcm||£10||£24||£30|
|2021 price pcm||£12||£26||£33|
|2022 price pcm||£14||£28||£36|
|2 Year increase||40%||17%||20%|
|2023 price pcm||£15||£30||£42|
|3 Year increase||50%||25%||40%|
Why are Xero’s Prices Increasing Again?
Xero state that they are continuing to invest in their platform to deliver more efficient tools, powerful insights and access to faster payments. The only noticeable change over the past year is that all of the reports have changed to allow you to edit them. They have now removed the old reports.
Has Xero improved?
In our opinion, Xero is certainly improving all of the time, however those changes are small. Where the changes are not small, they usually come at an extra cost, such as the Expenses or Projects add-ons. The core platform, in our opinion, has not improved enough over the past two years to justify up to a 50% increase in the Xero price over the past three years. Having said that, it is still the best online accounting software for small businesses. So if you can afford to continue using it, you should.
Alternatives to Xero Price Increase
Use CloudBook Online Accountants
With CloudBook Online Accountants, unlike other accountants, you can use whichever software you prefer. We don’t make you use Xero software, so you don’t have to pay their high prices. As well as that, you’ll probably save on accountancy fees too, with our low fixed monthly fees.
Downgrade Xero Plan
To avoid the price increase, could you downgrade your Xero plan? The Starter plan now has unlimited bank transactions and allows up to 20 sales invoices and 5 bills per month. Instead of using bills you could just attach them to the bank transaction. The Standard plan is only missing multi-currency which is only essential if you have foreign bank accounts. If you have few foreign currency transactions you could convert them manually.
Use Move My Books
Move My Books is a free service that helps you move your accounting data to Xero, QuickBooks or Sage Accounting. This could be useful if you are thinking of moving from Xero to QuickBooks or Sage.
Pandle is unlimited and comes with multi-currency and bank feeds for £5pcm. We can get it for £2.50pcm. It’s relatively new, sometimes slow, and takes a while to get used to. However, it should cope with most things you use Xero for.
QuickBooks is our next most popular software after Xero. It does most things that Xero can do and is quite easy to use. Their Self-Employed package is £10pcm, Simple is £14pcm, Essentials £24pcm, Plus is £34pcm.
FreeAgent is geared towards small business and freelancers. Natwest, RBS and Mettle bank customers can get it for free. We can get it for our clients for £17.50pcm.
Kashflow is less popular than it used to be. However, if you have straightforward accounting transactions, it can work well for you. Starter is £10.50pcm, Business is £22pcm or with payroll is £29pcm.
Quickfile is used by a few of our clients. It’s less easy to use but it can be free if you have less than 1000 entries per year, otherwise it’s just £60pa. If you want automated bank feeds, that’s an extra £15pa.
MyT accounting is a new software with a built-in receipt reader using AI to categorise your costs automatically. The Standard subscription is £5pcm, Plus is £15pcm and Pro is £30pcm.
From our experience Sage have struggled to keep up with their online competition. As such, we still don’t have any clients using Sage at the time of writing but we’d be happy to help you use it. However, it’s not much cheaper than Xero. The Start price is £14pcm. Standard is £28pcm and Plus is £36pcm.
If you’re not VAT registered, you could use a spreadsheet (e.g. Excel, Google Sheets, Numbers) to do your accounting. While we prefer online accounting software, if your accounting transactions are straightforward, a tidy spreadsheet would be ok. All transactions need to be categorised. Read more on our bookkeeping using a spreadsheet page.
Our Own Software
We have our own free software which very basically allows you to list your sales and expenditure. It can also submit MTD VAT returns.
Other Online Accounting Software
There are many other online accounting software platforms available. We’ll consider doing your accounts etc using any online accounting software. Look out for ones that can link to UK bank accounts and are MTD compliant. Unfortunately, this excludes Wave accounting which is a free alternative if you don’t need those things.About Us Our Prices Instant Quote
As businesses continue to embrace digital transformation, the role of online accounting software has become paramount in ensuring streamlined financial management. Whether you’re a small startup or an established enterprise, the right online accounting software can make a significant impact on your efficiency, accuracy, and overall success. In this article, we will delve into the 15 specific features in online accounting software that should be on your radar when selecting online accounting software tailored to your business needs.
The foundation of any effective online accounting software is a user-friendly interface. Intuitive navigation, clear labeling, and organised dashboards ensure that users can quickly access the tools they need, reducing the learning curve and increasing overall productivity.
Cloud-based accounting software enables users to access their financial data from anywhere, at any time, fostering collaboration and flexibility. Cloud solutions also eliminate the hassle of manual backups and offer enhanced security measures to safeguard sensitive financial information.
Time-consuming manual data entry and tedious reconciliation processes become things of the past with automated bookkeeping features. These capabilities include bank feed integration, transaction categorization, and automatic reconciliation, saving valuable hours and reducing the risk of errors.
Invoicing and Billing
Efficient invoicing and billing tools allow businesses to create, send, and track invoices seamlessly. Customizable templates, automatic reminders, and integrated payment gateways improve cash flow and enhance the customer experience. Choose software that allows you to personalize your invoice templates to reflect your brand.
Managing expenses becomes effortless with software that intelligently categorizes and tracks your business expenditures. Detailed expense tracking features enable users to monitor business expenditures and easily allocate costs to appropriate categories. This data helps in budgeting, expense analysis, and tax preparation.
Make data-driven decisions with up-to-the-minute financial reports. Seek software that generates real-time reports. Comprehensive financial reporting capabilities provide insights into the health of the business. Balance sheets, income statements, cash flow reports, and customisable analytics empower informed decision-making.
Project or Inventory Accounting
Ideal for service-based businesses, project-based accounting allows you to track income and expenses for specific projects or clients. This feature provides insights into project profitability and resource allocation.
For businesses dealing with physical products, inventory management is crucial. Opt for software that tracks inventory levels, alerts you when it’s time to reorder, and integrates seamlessly with your sales and purchasing processes.
In a connected business ecosystem, integration is key. Seamless integration with other business tools, such as CRM systems, e-commerce platforms, and payroll software, ensures a unified and holistic approach to financial management.
For businesses operating in the global market, multi-currency support is essential. The ability to handle transactions and conversions in various currencies simplifies international operations.
Top-tier security features, including data encryption, two-factor authentication, and regular software updates, protect sensitive financial data from unauthorized access and cyber threats. Choose software that employs bank-level security measures, including data encryption and secure servers, to ensure the confidentiality of your information.
Seamless integration with payroll processing ensures that employee salaries, taxes, and deductions are accurately calculated and recorded, saving you from the complexities of manual payroll management.
Collaboration Tools and Controls
Collaboration tools allow multiple users, such as accountants, bookkeepers, and business owners, to work together in real time, facilitating efficient teamwork and ensuring accurate financial records. Maintain control over who can access and modify your financial data. Opt for software that offers customizable user permissions and access controls to prevent unauthorized changes.
In an increasingly mobile world, mobile accessibility ensures that users can manage their finances on the go. Mobile apps with essential features make it convenient to stay connected and informed. This allows you to manage invoices, track expenses, and access financial reports from your smartphone or tablet.
Ensure accountability and transparency by using software that maintains a comprehensive audit trail. An audit trail feature provides a detailed history of all financial transactions and changes, enhancing transparency, accountability, and compliance.
Responsive customer support, including live chat, email, and phone assistance, ensures that users receive timely help with any issues or questions that may arise during their software usage. When you have questions or run into issues, timely customer support can make all the difference. Choose software providers that offer responsive customer support channels, as well as training resources to help you maximize the software’s potential.
Selecting the right online accounting software is a crucial decision for businesses aiming to optimize their financial management processes. The 15 must-have features in online accounting software outlined in this article serve as a comprehensive guide to help businesses make informed choices that align with their unique needs and objectives. By embracing these features, businesses can navigate the complexities of modern finance with confidence, efficiency, and accuracy.About Us Our Prices Instant Quote
Are you tired of feeling overwhelmed when it comes to understanding and calculating your income tax in the UK? You’re not alone. The world of taxes can be complex and confusing, leaving many individuals scratching their heads and dreading tax season. But fear not, because we’re here to demystify the process and make it as simple as possible. In this step-by-step guide, we’ll walk you through the ins and outs of UK income tax, breaking it down into easy-to-understand terms and providing you with practical tips for calculating your taxes accurately. From understanding the different tax bands and allowances to knowing what deductions you can claim, this guide has got you covered. Say goodbye to confusion and hello to clarity as we empower you to take control of your tax obligations. So, let’s dive in and unravel the mysteries of UK income tax together!
Understanding the UK income tax system
The UK income tax system is based on the principle of progressive taxation, which means that the more you earn, the higher the percentage of tax you pay. It is important to understand the different tax bands and allowances to accurately calculate your income tax.
In the UK, there are three main tax bands: the basic rate, the higher rate, and the additional rate. The basic rate is currently set at 20% and applies to income up to a certain threshold. The higher rate is set at 40% and applies to income above the basic rate threshold. The additional rate is set at 45% and applies to income above a higher threshold. The respective rate for dividends are 8.75%, 33.75% and 39.35%.
To determine your tax liability, you need to know your total income for the tax year, which includes your salary, rental income, dividends, and any other taxable income sources. It is important to keep track of all your income throughout the year to ensure accurate calculations.
Different types of income that are taxable
In the UK, most types of income are subject to taxation. This includes income from employment, self-employment, rental income, dividends, and interest on savings. It is important to understand which types of income are taxable to ensure accurate calculations.
Income from employment is taxable and includes salary, bonuses, commissions, tips, and benefits in kind. Self-employment income is also taxable, and you are required to report your income and expenses on a self-assessment tax return. Rental income from properties is taxable, and you need to report it on your tax return as well.
Dividends received from UK companies are also subject to taxation. The amount of tax you pay on dividends depends on your income tax band. Interest on savings above a certain threshold is also taxable. It is important to keep track of all your income sources and report them accurately to avoid any penalties or fines.
Personal allowance and tax bands in the UK
Understanding personal allowance and tax bands is crucial when calculating your income tax in the UK. Personal allowance is the amount of income you can earn tax-free each year. It is currently set at £12,570 for the tax year 2023/2024.
If your income is below the personal allowance, you do not need to pay any income tax. However, if your income exceeds the personal allowance, it will be subject to taxation at the applicable tax rate.
As mentioned earlier, the UK has three main tax bands: the basic rate, the higher rate, and the additional rate. The basic rate applies to income between £12,571 and £50,270. The higher rate applies to income between £50,271 and £125,140 (was £150,000). The additional rate applies to income above £125,140 (was £150,000). These bands are effective from 2023-24.
It is important to note that the tax bands and personal allowance may change each tax year, so it’s crucial to stay updated with the latest information.
Calculating income tax: Step-by-step guide
Calculating your income tax in the UK can be a daunting task, but with a step-by-step approach, it becomes much more manageable. Here’s a guide to help you calculate your income tax accurately:
1. Determine your total income for the tax year: Add up all your income from employment, self-employment, rental income, dividends, and any other taxable income sources.
2. Subtract your personal allowance: If your total income is below the personal allowance, you do not need to pay any income tax. Subtract the personal allowance from your total income.
3. Calculate the tax on your taxable income: Once you have subtracted the personal allowance, you will have your taxable income. Apply the relevant tax rate to calculate the tax due. For example, if your taxable income falls within the basic rate band, apply the basic rate of 20%. The first £1,000 of dividends are taxed at 0%. The first £1,000 (£500 for higher rate tax payers) of interest received is taxed at 0%.
4. Consider any tax reliefs or deductions: There are certain tax reliefs and deductions that you may be eligible for. These include contributions to pension schemes, charitable donations, and certain business expenses. Make sure to claim any applicable deductions to reduce your overall tax liability.
5. Calculate the total tax due: Add up the tax due from each tax band to calculate your total tax liability for the year.
By following these steps, you can calculate your income tax accurately and ensure compliance with the UK tax laws.
Deductible expenses and tax reliefs
When calculating your income tax in the UK, it’s important to take advantage of any deductible expenses and tax reliefs that you are eligible for. These can help reduce your overall tax liability and maximize your tax savings.
Some common deductible expenses include:
– Business expenses: If you are self-employed, you can deduct certain business expenses such as office rent, utilities, travel expenses, and professional fees.
– Pension contributions: Contributions to registered pension schemes are eligible for tax relief. This means that you can deduct the amount of your pension contributions from your taxable income, reducing your overall tax liability.
– Charitable donations: Donations to registered charities are also eligible for tax relief. You can claim tax relief on the amount of your charitable donations, reducing your overall tax liability.
It’s important to keep accurate records of your deductible expenses and claim them on your tax return. This will help ensure that you are not paying more tax than necessary and that you are taking advantage of all available tax reliefs.
National Insurance contributions
In addition to income tax, individuals in the UK are also required to pay National Insurance contributions (NICs). NICs are used to fund state benefits and the National Health Service (NHS).
There are different classes of NICs depending on your employment status and level of income. Class 1 NICs are paid by employees. While class 2 and class 4 NICs are paid by self-employed individuals based on their profit.
The amount of NICs you pay depends on your earnings and the specific class of NICs you are liable for. It is important to be aware of your NICs obligations and ensure that you are paying the correct amount.
For example class 1 NIC is 12% and class 4 NIC is 9% on income in the basic rate band. The rate decreases to 2% on income above the basic rate band for both class 1 and class 4. Class 2 is a flat rate of £3.45 per week if profits exceed the personal allowance.
Self-assessment and filing your tax return
If you are self-employed or have income that is not taxed through the PAYE (Pay As You Earn) system, you will need to file a self-assessment tax return. Self-assessment is the process of reporting your income and expenses to HM Revenue and Customs (HMRC) and calculating your own tax liability.
Filing a self-assessment tax return can be complex, but it’s crucial to ensure accurate reporting and compliance with the UK tax laws. You can file your tax return online using HMRC’s online self-assessment service or by using commercial software.
When filing your tax return, make sure to include all your income sources, deductible expenses, and any tax reliefs or deductions you are eligible for. It’s important to keep accurate records and retain supporting documents in case of an audit or query from HMRC.
The deadline for filing your self-assessment tax return is 31st January following the end of the tax year (5th April). Failure to file your tax return on time can result in penalties and fines, so make sure to mark the deadline in your calendar and allow enough time to complete your tax return accurately.
Paying income tax
The tax payable for a tax year ending 5th April is payable to HMRC by the following 31st January. Depending on how much tax is owed, and how much is collected by PAYE, you may also have to make payments on account. These are payments in advance towards the following tax year’s amount owed. A first 50% payment on account is payable by 31st January. A second 50% payment on account is payable by the following 31st July. These payments on account are deducted from the tax you owe in the following year. The easiest way to pay your income tax is using online banking – see here.
Common mistakes to avoid when calculating income tax
When calculating your income tax in the UK, it’s important to avoid common mistakes that can lead to inaccurate calculations and potential penalties. Here are some common mistakes to watch out for:
1. Not keeping accurate records: It’s crucial to keep accurate records of all your income, expenses, and other relevant financial information. This will help ensure that your calculations are accurate and that you can provide supporting evidence if required.
2. Forgetting to claim all eligible deductions: There are various tax reliefs and deductions available in the UK tax system. Make sure to claim all eligible deductions to reduce your overall tax liability.
3. Not staying updated with the latest tax rates and allowances: The tax rates and allowances can change each tax year. It’s important to stay updated with the latest information to ensure accurate calculations.
4. Filing your tax return late: Failing to file your tax return by the deadline can result in penalties and fines. Make sure to mark the deadline in your calendar and allow enough time to complete your tax return accurately.
5. Not seeking professional help when needed: Calculating your income tax can be complex, especially if you have multiple income sources or complicated financial situations. If you are unsure about any aspect of your tax calculations, it’s advisable to seek professional help from a tax advisor or accountant.
6. Not registering for a tax return on time: If you owe tax for a tax year ending 5th April and you don’t have a personal unique tax reference (UTR), you need to register for self assessment by the following 5th October. It can take several weeks to receive your UTR which is needed to submit a tax return.
By avoiding these common mistakes, you can ensure accurate calculations and compliance with the UK tax laws.
Seeking professional help with your taxes
While it’s possible to calculate your income tax on your own, seeking professional help can provide peace of mind and ensure accurate calculations. A tax advisor or accountant can help you navigate the complexities of the UK tax system, maximize your tax savings, and ensure compliance with the tax laws.
A tax professional can help you with various aspects of your taxes, including:
– Calculating your income tax accurately, taking into account all income sources, deductions, and tax reliefs.
– Ensuring compliance with the UK tax laws and avoiding penalties or fines.
– Providing advice on tax planning and strategies to minimize your tax liability.
– Assisting with the preparation and filing of your tax return, including dealing with any queries or audits from HMRC.
If you have a complicated financial situation or multiple income sources, it’s advisable to seek professional help to ensure accurate calculations and compliance with the tax laws.
Understanding and calculating your income tax in the UK doesn’t have to be overwhelming. By following this step-by-step guide, you can demystify the process and take control of your tax obligations. From understanding the different tax bands and allowances to knowing what deductions you can claim, this guide has provided you with the knowledge and tools to calculate your income tax accurately. Remember to stay updated with the latest tax rates and allowances, keep accurate records, and seek professional help when needed. With a little bit of knowledge and careful planning, you can navigate the world of UK income tax with confidence. Take charge of your taxes and enjoy the peace of mind that comes with accurate calculations and compliance with the tax laws.About Us Our Prices Instant Quote
In today’s rapidly evolving digital landscape, the integration of artificial intelligence (AI) has revolutionised various industries, and accounting is no exception. The advent of AI accountants has propelled the accounting profession into a new era of efficiency and accuracy. By harnessing the power of AI tools and technologies, online accounting services are redefining traditional accounting practices, making them more streamlined, error-free, and time-effective. In this article, we will explore how AI tools such as Dext or Hubdoc, bank statement data extraction, and Xero’s bank reconciliation AI are transforming the accounting landscape and enhancing the capabilities of online accounting services.
CloudBook are AI Accountants
At CloudBook Online Accountants, we have always been ahead of the curve in terms of technology. When we were formed in 2013, we specialised in online accounting software. In fact we only helped clients who used or wanted to use online accounting software. This was when most accountancy firms were reluctant to even try it! Now we are AI accountants but everything is fully controlled by qualified accountants. It’s the same personal service we’ve always provided but using AI tools where possible. It will keep us efficient and keep your fees low.
Here are a few examples of the AI Tools we are already using:
MyT AI Accounting Software
MyT is possibly the first accounting software with a built in AI tool to read invoices and receipts. The tool will extract the data and allocate the cost to an expense category determined by AI. We are MyT accountants and are ready to help you use MyT AI accounting software. See our MyT review for more information.
Streamlining Data Extraction with Dext or Hubdoc:
One of the most time-consuming tasks in accounting involves manually extracting data from receipts and invoices. However, with AI-powered tools like Dext or Hubdoc, this process is streamlined and automated. By simply uploading receipts or invoices, these tools use AI algorithms to extract key information, such as vendor details, transaction amounts, and dates. This eliminates the need for manual data entry, reduces human error, and significantly speeds up the data processing workflow. AI accountants can now allocate their valuable time to higher-level tasks that require human judgment and analysis.
Efficient Bank Statement Data Extraction:
Traditionally, extracting data from bank statements and reconciling transactions has been a painstaking task for accountants. However, AI-powered algorithms have transformed this process. AI accountants can now leverage cutting-edge technologies to automatically extract data from bank statements and categorise transactions with high precision. By accurately extracting and categorising data, online accounting services powered by AI can provide real-time insights into a company’s financial health, identify patterns and trends, and help businesses make informed financial decisions swiftly.
Enhanced Bank Reconciliation with Xero’s AI:
Bank reconciliation, a critical component of accounting, can be a complex and time-consuming task. However, AI accountants can leverage intelligent solutions like Xero’s AI-powered bank reconciliation feature to automate this process. Xero’s AI technology learns from historical data, including past reconciliations and categorisations, to identify patterns and suggest matches for unmatched transactions. By automating bank reconciliation, AI-powered accountants eliminate human error, improve accuracy, and save significant time for both accountants and business owners.
The Benefits of AI Accountants:
By adopting AI tools and technologies, online accounting services can offer numerous benefits to businesses:
- Time-saving: AI-powered accountants automate manual tasks, freeing up time for accountants to focus on critical financial analysis and strategic decision-making.
- Increased accuracy: AI algorithms excel in data extraction and analysis, minimising the risk of human error and ensuring precise financial records.
- Real-time insights: AI accountants provide real-time access to financial data, enabling businesses to make informed decisions promptly.
- Cost-effective: AI accountants offer cost-effective solutions compared to traditional accounting services, reducing the need for extensive human resources.
- Scalability: Online accounting services powered by AI can seamlessly handle growing volumes of financial data, adapting to the changing needs of businesses.
AI accountants have revolutionised the accounting landscape by harnessing the power of AI tools and technologies. By automating tedious manual tasks, such as data extraction from receipts and invoices, bank statement data extraction, and bank reconciliation, online accounting services can significantly enhance efficiency and accuracy. Businesses that embrace AI accountants gain access to real-time insights, accurate financial records, and the ability to make data-driven decisions swiftly. With AI as their ally, businesses can optimise their accounting processes, focus on core operations, and stay one step ahead in today’s competitive business environment.
P.S. Yes, this post was AI generated and tailored. It saved us hours, giving us more time to help our clients save tax!About Us Our Prices Instant Quote
MyT online accounting software provides small businesses an AI solution for their accounting needs. We are MyT Accountants and this is our MyT review. We have many clients that use MyT to do their online bookkeeping, VAT returns, and management accounts. We also do bookkeeping for our clients using MyT. You can see all of our fees and get an instant quote from the menu above. This is our MyT accounting software review covering their online accounting software.
Is MyT any good?
This is our MyT review which gives a detailed opinion on various parts of the software. If you’re looking for a quick review of MyT, our overall rating is 3/5, however it is brand new and improving and could save you a lot of money.
How much does MyT cost?
Prices range from just £5pcm up to £30pcm, after a free trial and the MyT offer of £1 per month. The Standard plan should be sufficient for most small businesses which is £5pcm and is £9pcm cheaper than the Xero Starter plan. Our MyT review for cost is 5/5.
How easy is it to use MyT
MyT could be more intuitive at times but once you get used to it, it’s quite easy and quick to use, with a clear layout. There could be some improvements like bulk categorisations and banking rules. Read on below for how easy it is to do various things on MyT. Our MyT review for overall ease of use is 3/5.
MyT Sales Invoices
To add new sales on the mobile app, from the Home screen just click on Create Customer Invoice, add the details, then Create. The layout is in the style of an invoice, so it’s clear what information needs to go where. Then you need to go to Customer Invoices to email it to your customer from the mobile app. On the desktop app, go to Sales, Create Invoice, add the details then Save. Again, you have to go to the Sales Overview to email the invoice to your customer. It would be easier if there was an option to email the invoice directly from the created invoice. You can set up a payment service with BOPP to add a payment option to give customers an easy way to pay the invoice. Adding attachments is a useful option which will make it easy to show the customer their order.
MyT Purchase Invoices
On the mobile app you have to add a photo or a file to create a supplier invoice. This is where the MyT Artificial Intelligence comes into play. It will read the details on the photo or file and create the supplier invoice for you.
On the desktop app you can add supplier invoices without uploading a photo or file.
Connecting Bank Accounts
Connecting Bank Accounts was easy and powered by the reputable MoneyHub. It involves choosing your bank (the open banking one worked for us), then logging into that bank account with your online banking details. Then you can choose the specific account to import and the range of dates you want to import transactions from. Both HSBC and Lloyds Bank worked fine.
Importing Bank Transactions
If you can’t connect to your bank account, or if there are transactions missing, you can upload your bank transactions instead. First, you need to log into your online banking account and download your bank transactions. The download needs to be in the CSV format or some others might work, but not PDF. Once you have that click on Banking in MyT, then Import Data. Then choose the file you downloaded click on Import, then match the filed names. Make sure you select the correct bank account to import the data into.
Manually Adding Bank Transactions
To manually add bank transactions on MyT Accounting, just select either Spend Money or Receive Money, then Add Transactions.
Once your transactions are imported into MyT, you’ll need to categorise each one. For manually added transactions, you will have done this when adding the transaction. Click on the bank account, then click Review alongside the transaction. Then select the correct category and any other details required such as name and VAT rate, then Add. If it relates to a sales invoice or purchase bill, use the View More Match Options to allocate it against the invoice/bill. There are also options for Transfer and Credit Card payments.
Preparing and submitting VAT returns on MyT is very easy once you’ve entered the VAT settings and connected the account to HMRC. Just click on Taxes, Prepare VAT for the period, check the numbers, then submit. To check the numbers you can click on them, or rather than clicking Prepare there are other options to view different VAT reports.
Reports on MyT
MyT provide a basic suite of useful reports, including the ones shown below. You can export the reports into a spreadsheet or PDF file. Our MyT review on reporting is 3/5.
Support and other features
There’s telephone support which is great. It’s fairly new software so there aren’t many support articles yet.
Our QuickBooks rating for support and other features is 2/5.
Overall QuickBooks Review
Overall we rate MyT Online Accounting 3/5 which for brand new software which is good. It’s a cheaper alternative to Xero and QuickBooks but doesn’t provide as much functionality or time saving features. However, it has the AI receipt/invoice reader built in which could save you a lot of money compared to using Dext alongside Xero or Quickbooks. At CloudBook Online Accountants, we help out clients with whichever online accounting they choose to use, all for a low fixed monthly fee. See our prices or get an instant quote below.About Us Our Prices Instant Quote
Are you searching for a reliable accounting solution to streamline your financial operations? Look no further than the AI powered MyT accounting software! We, as dedicated MyT accountants, are here to revolutionize your business finances. We can do this by leveraging the power of AI with MyT accounting software. Say goodbye to tedious manual calculations and paperwork, and embrace a smarter, more efficient approach to managing your accounts.
Why Choose Us?
1️⃣ Expert Accountants: Our team of seasoned professionals possesses extensive expertise in accounting and finance. So we understand the intricacies of financial management and can provide you with valuable insights to enhance your business’s profitability and growth.
2️⃣ MyT Software Specialists: We specialize in working with the cutting-edge MyT accounting software. Our in-depth knowledge of the platform allows us to maximize its features to suit your specific business needs. So we’ll guide you through every step of the process. Ensuring a seamless transition to the software and providing ongoing support.
3️⃣ Tailored Solutions: We understand that every business is unique, and there’s no one-size-fits-all approach to accounting. So our dedicated team takes the time to understand your business model, goals, and challenges. We then customize the MyT software to align with your requirements. Ensuring you have a tailored solution that fits like a glove.
4️⃣ Efficiency and Accuracy: With our accounting expertise and MyT software, we guarantee enhanced efficiency and accuracy with your bookkeeping. That is from managing transactions and generating invoices to tracking expenses and reconciling accounts. Our streamlined processes will save you time and reduce the risk of errors.
5️⃣ Cost-Effective Solutions: We believe that professional accounting services should be accessible to businesses of all sizes. So, by leveraging MyT software, we can offer cost-effective solutions that deliver outstanding value for your investment. Our MyT accountant services will streamline your finances and also help you make informed financial decisions for your business’s success.
6️⃣ Ongoing Support and Training. We don’t just set up the MyT software and leave you to figure it out on your own. Our commitment extends beyond implementation. That’s because our MyT accountants support team is always available to address any questions or concerns that may arise.
Take Control of Your Finances Today!
Don’t let accounting complexities hold your business back. Embrace the power of AI accounting software with MyT software with our expert accounting services. So, by partnering with us, you’ll experience seamless financial management. As well as accurate reporting, and the freedom to focus on what you do best—growing your business.
Contact us today for a consultation and let’s unlock the full potential of MyT accounting software for your business’s success!About Us Our Prices Instant Quote
Running a limited company can be daunting for new business owners. Especially if you’re moving your business from a sole trader to a limited company. You need to know about many more things, such as how to run a limited company? How do I take money from my company? What do I need to do to comply with company law? Do I need to register for PAYE and VAT? How much tax will I pay? Do still need to submit a personal tax return? We will guide you through all of the common questions in easy to understand language.
What is a limited company?
Registered at Companies House
A company is a business which is a separate legal entity to its owners. Until registered at Companies House, a company does not exist. From that point, information about the company is publicly available at Companies House. This includes addresses, directors, shareholders, shares and accounts.
A separate entity
Being a separate legal entity is an important point to distinguish a company from a sole trader. A sole trader is an individual’s business, they are one and the same. The sole trader’s business and money is the individual’s business and money. An individual pays tax as and when their sole trade business makes a profit. However, a company’s money is its own money, not any individual’s. A company pays tax on its profit. An individual would only pay tax if they receive money from a company.
You set up a new limited company with an amount of money e.g. £100 that should always stay in the company. We call this money is share capital and it represents a number of shares at a cost per share, e.g. 100 £1 shares. The company effectively sells each share to an individual called a shareholder who then owns part of the company. In a small company there are usually only one or two shareholders, so they would own all or half of the shares. As a reward for the investment from shareholders the company pays profits to shareholders which is a dividend. Shareholders would usually also be directors who are responsible for running the company.
Every company must have at least one director. A director is a person responsible for running the company and must ensure it complies with company law. As a reward for the work they do, a director receives a salary.
What must a company do?
Open a bank account
As it’s a separate legal entity, a company must have its own bank account, in the company’s name (with Limited or Ltd). This is to ensure the money belonging to the company is kept separate from the director/shareholder’s money. Otherwise, all of the money received should be treated as received by the owner of the bank account. That person is then taxed as if they took all of the money from the company.
Directors must ensure that there is an up to date record of all of the company’s financial transactions. They must also prepare accounts which show how much profit a company has made over a period. The accounts also need to show how much a company owns and owes at the end of a period. The accounts should be prepared on a regular basis and provided to shareholders, Companies House and HMRC annually. We recommend using online accounting to make this easier and some are free. With online accounting you can import bank transactions and send invoices on the go. However, you could also do the company bookkeeping using spreadsheets.
As well as company accounts, there are other forms that must be sent to Companies House. A director must update the information held by Companies House about a company whenever anything changes. For example, if a director moves home they need to update their address though the home address is not on public record. Every year a director needs to confirm that the details at Companies House are correct using what’s called a Confirmation Statement. An annual fee is also payable to Companies House (currently £13).
HM Revenue and Customs are responsible for collecting taxes from a company. This would at least be corporation tax, which is a tax on the profit a company makes. At least every 12 months a company must submit a corporation tax return to HMRC, together with accounts for that period. It could also be PAYE/NIC, CIS tax, VAT etc.
Register for tax
A company will need to register for other taxes as and when necessary. The directors are responsible for registering at the correct time and they must not wait to be told to do so. Companies are automatically registered for corporation tax, but not for PAYE, VAT, CIS etc. A company must register for PAYE if it pays wages to anyone. It takes several weeks to receive the PAYE reference numbers so plan ahead. VAT registration is compulsory from the time sales exceed £85,000 in any 12 month period (a monthly test). It may be worth voluntarily registering for VAT if customers are VAT registered. A company must register on the Construction Industry Scheme (CIS) if it is a contractor or hires subcontractors in the construction industry. This includes typical trades like electricians and plasterers as well as builders.
Comply with laws and regulations
Whatever the company does, it needs to comply with any laws and regulations that apply. For example, if it sells food, it must comply with the relevant laws and regulations about selling food, such as hygiene and labelling. If it employs anyone, it must comply with employment laws and regulations such as health and safety and pensions. Directors are responsible for ensuring that the company complies with all relevant laws and regulations.
How to take money from a company?
If directors or employees spend their own money on business costs, they can claim this back from the company as expenses. As long as the costs were necessary for the director to perform their job, there are no tax implications for receiving expenses from the company.
Directors can only be paid by a company with a salary. A director can also be a shareholder, and as a shareholder they can also receive dividends (see below). If a company pays anyone wages of over £123 per week (2023-24), or pays anyone who has received other employment income or benefits in the same tax year, it must register with HMRC an an employer. If the company is registered as an employer, all wages must be reported to HMRC as and when they are paid, and at least monthly if none are paid. The recommended salary for a director-shareholder of a profitable company is £12,570 (2023-24). This salary is usually free from income tax and employee’s NIC. On the salary amount exceeding £9,100pa, it may cost the company Employer’s NIC at 13.8%. However, the company may save corporation tax on the whole salary at 19% or more.
More on a directors salary.
A company can pay its shareholders with payments called dividends if it has sufficient profit reserves. Profit reserves are all the profits or losses a company has made since it was first registered, minus all of the dividends it has paid since it was first registered. The profit reserves amount can usually be found in the company’s accounts. Either at the bottom of the company’s profit & loss account or at the bottom of the balance sheet. It can also be called retained earnings and, confusingly, the profit & loss account.
If you want to work out profit reserves, the taxable profit in one period is calculated as income, minus allowable expenses (including salaries). You need to deduct corporation tax from that taxable profit at between 19% (small profits) and 25% (large profits) to calculate the net profit. Then you deduct any dividend payments from the net profit to calculate the retained profit/earnings for that year. All of the retained profit/earnings for all of the years so far are added together to calculate the profit reserves.
Unlike a salary, dividend payments don’t reduce corporation tax. They are paid from profits after tax. So effectively they have already been taxed at 19% or more. Individuals pay tax on dividends received in a tax year. The first £1,000 (reducing to £500 from 2024/25) of dividends are taxed at 0%. Dividends received in the basic rate band (total income up to £50,270) are taxed at 8.75%. The tax rate increases to 33.75% in the higher rate band. Then 39.35% in the additional rate band (on total income over £125,140).
More on Dividends
If a director-shareholder receives money from a company that is not expenses, salary, or a dividend, then it needs to be treated as a loan from the company. The loan goes into a directors loan account, where it is added to other loans taken. Or it is offset against money loaned to the company, or money owed to the director/shareholder such as unpaid expenses, unpaid salary, or unpaid dividends.
If the balance on the directors loan account exceeds £10,000 owed to the company, it must charge interest. The interest charge must be at the HMRC beneficial loan rates or more. Otherwise, the interest that should have been charged on the loan is taxed as a benefit in kind. Which means income tax is payable by the director/shareholder and NIC payable by the company.
Tax on directors loan accounts
At the end of the accounting year, the director/shareholder may owe money to the company. If so, the balance on their loan account must be repaid to the company within 9 months from the end of the accounting year. Otherwise, the remaining balance is taxed on the company at 33.75%. This tax is eventually refunded to the company after the year in which the loan is repaid. The loan account can be repaid in several ways or a combination of any of them. Money can be transferred from the director/shareholder to the company. A dividend can be declared but instead of paying that dividend it can be used to repay the loan account. Wages can be processed through the payroll but credited to the loan account instead of being paid. Or the director/shareholder can claim expenses but not be paid those expenses.
How much tax will I pay?
A company pays tax on its taxable profits at between 19% and 25%. Its profits are its sales minus costs. Costs include salaries but but not dividends or loan payments. The accounting profits are adjusted for non-taxable things like the cost of using business equipment (depreciation), to get the taxable profits. If these profits are less than £50,000pa, and there are no other related companies, the profits are taxed at 19%. If they are over £250,000pa (no related companies), the tax is 25%. A profit between these levels is taxed at a rate between 19% and 25%. To calculate it work out 19% on £50,000, then 26.5% on the profit exceeding £50,000.
More on corporation tax rates.
As an employer the company does not suffer PAYE or Employees NIC. However, it may have to deduct these taxes from the employee’s pay and pay it over to HMRC. An employer may also have to pay (and suffer!) Employers NIC. This applies to pay over £9,100pa and on any benefits in kind provided at 13.8%.
Employees (including directors) usually pay PAYE on salaries over £12,570pa. This will be at 20% on salaries within the basic rate band (total income up to £50,270). It increases to 40% on income in the higher rate band and 45% in the additional rate band (total income over £125,140).
Employees also pay NIC at 12% on salaries between £12,570 and £50,270. Then 2% on the salary above this level.
A business not registered for VAT does not need to add 20% VAT onto their sales. It also can’t claim any VAT back on costs, so VAT paid out on costs is just part of the cost, just like it is to most people.
VAT registered businesses don’t ‘suffer’ VAT. It’s not a cost or an income to them. However, they have to pay the VAT they have collected to HMRC. The company must pay to HMRC, the VAT received on sales to customers, minus the VAT paid on purchases from suppliers. The VAT payments and VAT returns are usually quarterly.
See above for the tax on dividends.
Do I still need to submit a personal tax return?
All sole traders need to submit a personal tax return to report their profits and pay the tax on those profits. You may think that if you use a company, the company pays tax on the profit so you no longer need to submit a personal tax return. However, you must still submit a personal tax return if any of the following apply:
- HMRC request a tax return. You can call HMRC to try to cancel their request if you think you don’t have anything to pay tax on. Otherwise, you will have to do one.
- You haven’t paid tax on taxable income. For example dividends or interest above the tax-free allowances.
- Your total income is over £100,000.
If you do need to submit a tax return for the first time, you will need to register for your tax reference (UTR). Search ‘register for self assessment tax return’ and follow the HMRC instructions.
Ready to run a limited company?
There are many things to consider if you want to run a limited company. Hopefully, this gives you a good introduction on the main considerations. Our clients can get further advice, all included in our fixed monthly fees.About Us Our Prices Instant Quote