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DON’T Go Paperless

It feels like almost every time you login into your online banking you’re asked to turn off paper bank statements. My strong advice is don’t!

As some of you will know I run a near-paperless office. I’m not against environmental, cost and space savings where they can be made but consider the following:

1. As a self-employed person or company director you’re required by law to retain your financial records for the past 6 years + the current year. Yet, banks, mobile phone companies, utility providers etc aren’t worried about that. Online documents are stored for anything between 6 months and 6 years. Further if you close your account you probably will not be able to access these online records.

2. The bank statements of your business and even your personal bank account will be amongst the first records requested during a HMRC tax investigation. Don’t have them? Or your banks online format not acceptable? Then I’ve known banks charge hundreds of pounds for supplying 6 years’ worth of paper bank statements – statements which you should have already received!

3. Finally, paper statements are primary records of your business. They provide a valuable visual reminder and control of what’s going on financially.

Switch on and keep turned on your paper bank and credit card statements. When you receive them in the post file them in number or date order and store them away for 6 years + the current year.

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Summer Budget 2015 – How Much Will It Cost You?

Summer Budget 2015 – How Much Will It Cost You?

The Summer Budget of 8 July 2015 was reportedly an expensive one for the owners of small limited companies. Let’s take a look at the most noteworthy measure – the new dividend tax. How much will it cost you?

At present a company pays 20% corporation tax on its profits after which dividends are paid out effectively tax free to basic-rate taxpayers.

Starting 6 April 2016 all taxpayers will be able to receive £5,000 of dividends tax free but will then pay 7.5% Income Tax until they reach the higher rate tax band on income over £43,000 after which they will pay 32.5% Income Tax on remaining dividends.

Let’s take a look at some common scenarios:

Typical husband and wife company with profits of £20,000 after directors salaries
Husband and wife can continue to receive a salary of around £8,000 each + dividends of £8,000 each all tax free.

In this case the husband and wife will receive £32,000 from the company and will not incur any additional personal Income Tax under the new rules. In fact their company will eventually benefit from a cut to corporation tax from 20% to 18% by 2020 and save, in the above scenario, £400+ per annum.

Typical husband and wife company with profits of £30,000 after directors salaries
Again the company would continue to pay the usual £8,000’ish salaries and in this case could afford to pay £12,000 dividends each.

Together the husband and wife receive £40,000 but would have a personal Income Tax bill of around £300 each. Yet in this case also the company will eventually benefit from the planned cut to corporation tax and save around £600+ per annum. No overall tax increase.

True, there are those at the top end of the scale that will pay as much as £1,700 more Income Tax for the year 2016/17 but it seems that even that increase will eventually be neutralised by the corporation tax saving.

The new dividend tax has reduced the attraction for new businesses to immediately incorporate but it doesn’t offer an incentive for dis-incorporation either. A limited company continues to be the most tax efficient trading vehicle for most small businesses.

For a more detailed analysis of the March and July 2015 Budgets please download our Full Guide to the Budgets of 2015.

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Do Charitable Donations Attract Tax Relief?

 

Yes, charitable donations given via Gift Aid do attract tax relief. If you compelte an Income Tax Return it’s worth understanding the basics so that you don’t miss out on additional tax relief or fall foul of one of the hidden traps of Gift Aid.

Regular donations supported by a Gift Aid Declaration
This is a very effective way to make your donations. You must first complete a Gift Aid declaration form provided by the charity to which you wish to contribute. You may then, for example, choose to set-up a monthly standing order using your assigned Gift Aid reference. Provided you are a taxpayer the charity will then claim an extra 25p for every £1 you donate. Brilliant! In fact, higher rate taxpayers will later go on to claim additional tax relief as long as they declare these donations on their Income Tax Return or let HMRC know to include them in your Tax Code.

This arrangement usually works fine, but the self-employed or small limited company director should beware – It is possible that this arrangement could cause a tax liability to arise upon completion of your Income Tax Return.

Gift Aid – the hidden trap
Taxpayers benefit from Gift Aid, non-taxpayers don’t. Strictly speaking your donations will qualify as long as they’re not more than 4 times what you have paid in tax in that tax year. The problem arises because the self-employed person might be a taxpayer one year but not the next. Small limited company directors sometimes pay no personal income tax, especially if their dividends are under the Dividend Allowance.

If you cease to be or are not expecting to be a taxpayer in the current year you should tell the charity and cancel any existing Gift Aid arrangements. Failure to do so will mean that when you complete your Income Tax Return you’ll be required to repay the tax that the charity has reclaimed.

Of course, you can continue to make your regular monthly standing order / direct debit payment to the charity but if you’re not a taxpayer for any given year you’ll be better off cancelling your Gift Aid arrangement.

Finally, for those that like to squeeze a little more out of the tax man
Let’s presume you’re a small limited company director earning under the higher rate tax threshold and only in receipt of your company salary and modest dividends. In that case you might not be a taxpayer. However, there is a way that your donations can continue to attract tax relief for your chosen charity under the Gift Aid small donations scheme:

Charities can claim an additional 25% on cash donations of £20 or less, even if you don’t have a Gift Aid declaration. So, if the small company director is able to physically contribute cash each month the charity will benefit from Gift Aid regardless of his status as a taxpayer!

(Article last updated February 2018)

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Entertaining and Meals Out – What is the correct tax treatment?

Entertaining and Meals Out – What is the correct tax treatment?

Entertaining clients & staffCan your company pay for the occasional meal out? Maybe. You might be surprised at how much entertainment is allowable if you play within the rules.

Let’s have a look at a few scenarios:

Two directors enjoy a meal out to discuss business
Not allowable for corporation tax. In fact if the company does pay for the meal then the benefit should be reported and National Insurance paid on form P11D. To avoid this needless complication either the company should not pay for such meals or they should be posted against the directors’ loan accounts.

A director or employee takes a client out for a meal
Unfortunately, as above, business entertainment is not allowable against taxable profits. HMRC Guidance found here.

Annual staff function (usually annual xmas party)
Annual staff functions are an allowable expense provided the following criteria are met: The cost of the event does not exceed £150 (inc VAT) per head. The function is annual and not a one-off. Such staff entertaining is allowable for corporation tax and no benefit in kind will arise on staff members thanks to the exemption given by Section 264 ITEPA 2003.

Finally, two company directors (husband and wife) enjoy a meal out together which they hold as their annual staff function. The company has no other employees. Is this tax deductible?

Yes, presuming the function costs no more than £150 per head, all staff are invited and the function is held annually.

Nb: This guidance is not to be confused with costs of travel and subsistence (i.e. modest lunches in the normal course of business travel). See my previous post here.

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Optimal Director’s Salary for 2015-16

Probably the most important post of the year for company directors!

Wage riseThe small owner managed limited company will usually pay their directors / shareholders with a small salary + dividends.

The level of the director’s salary is usually set in order to avoid any income tax and national insurance. On this basis the recommended remuneration package would be:

Upper limits for 2015-16

Salary – per annum: £8,060 (last year £7,956)
Salary – per month: £671 (last year £663)

Dividend – per annum: £30,891 (last year £30,518)
Dividend – per month: £2,574 (last year £2,543)

However, since the introduction of Employment Allowance some company directors will be better off paying themselves a £10,600 salary and slightly lower dividends (up to £28,606).

Employment Allowance means that most employers will be able to reduce their Class 1 National Insurance contributions (Employers NI) by up to £2,000.

So, increasing your salary and yet not having to pay the Employers NI will save the company £203 per director / shareholder.

Not everyone will benefit. Generally if you have other income you’d be better sticking with the above “usual” remuneration package.

Each client of Massey Accounting Company will be receiving a personalised recommendation shortly.

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