OTS review may mean changes on the way for Limited Company contractors

The OTS review

The Office of Tax and Simplification (OTS) has made recommendations for changes to small company taxation, which would mean major changes for Limited Company contractors.

 

So what are these changes and what do they mean for small businesses? In this blog we explore everything you’ll need to know and how you could be affected.

 

What’s it all about?

A new taxation on shareholders rather than the company is just one of the new far reaching proposals set out in the latest OTS review. They’ve already considered unincorporated businesses and partnerships in previous reviews.

 

Proposal number 1: ‘Look through’

Most hard hitting is the proposal of the ‘look through’ company whereby company shareholders would be charged income tax on profits rather than paying corporation tax. OTS is considering the change further, as they believe it could simplify life for some small companies.

 

The question arises whether this form of taxation is voluntary or mandatory. If the principle of look through became mandatory this would have a dramatic negative effect on the flexibility contractors have on the level of income and the tax outcome.

 

Proposal number 2: Structural change

SEPA – which stands for the sole enterprise with protected assets – is the second revolutionary structural proposal by OTS. It’s essentially a new business entity, that’s effectively a trading model which will provide limited liability protection without the need for formal incorporation.

 

The practical use of a new model of this kind is questionable. It would require changes to tax legislation to be any use for contractors. Agencies and engaging clients are not inclined to use a self employed model due to the risk of liability for PAYE.

 

Simplified administration

A package of changes, including the streamlined, joined up registration and reporting process between Companies House and HMRC, would be welcomed. Limited Companies would also be pleased if PAYE and VAT filing and payment dates were aligned and a ‘truly digital’ service that would include prompts for contractors when filling out forms, were to be introduced.

 

Another area that would be welcomed would include HMRC providing extra evening and weekend support, to assist Limited Companies with their tax.

 

What’s next?

At present, the proposals within the OTS review are just that and are poised for the longer term. Government has asked the OTS to push ahead with further detailed work, suggesting that they are in favour of change. However, the general feeling in camp, is that just as many people are for the changes, as there are against them.

 

The OTS is intending to continue to develop this area and if you have an opinion you’d like them to know about, you can share it here.

 

Reducing the complexity of the corporation tax calculation, abolishing some tax allowances and potentially calculating on a cash basis are ideas for future development. The OTS has expressed their wishes for the government to push all three forward.

 

Intouch Accounting’s view

We are fundamentally against the principle of a look through company and believe that contractors should be entitled to distinguish company from personal money and tax should follow that principle.

 

The proposal for a non corporate limited liability model has definite attractions for freelancers but has no added value to Limited Company contractors. We would encourage the addition of a such a model for use where it is deemed appropriate. However, it must follow with appropriate changes to taxes to avoid restricting the market for work (by agencies and clients) for those using the model.

 

Looking to the future

The review recognised the increasing trend for people to be their own boss with many sole traders going Limited in order to limit their liability, enhance their professional credibility and formalise their business structure.

 

The proposals are bold and the implementation likely to be challenging. If ‘look through’ and SEPA are introduced, there is the potential for the majority of micro businesses to feel out of their comfort zone.
Whatever changes are implemented to the small business sector, there will certainly be a large imprint left on the corporate market landscape.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

How much salary should I pay myself as a Limited Company contractor?

How much salary should I pay myself as a Limited Company contractor?

Making the right choice on the level of salary to draw as a Limited Company director and contractor is one of the more important decisions to take. Surprisingly though it’s not just an annual decision, taken at the beginning of each tax year, but one that should be revisited whenever changes occur in your circumstances.

To fully understand the mechanics affecting the choice of salary requires a working knowledge of Income Tax (PAYE), National Insurance and IR35, Corporation Tax and the rules concerning National Minimum Wage and that’s something your specialist contractor accountant can help you with. But to avoid a detailed technical analysis we can whittle these down to a short list of considerations:

I’m subject to IR35, so it makes no difference

If you are subject to IR35 your eventual salary is determined according to the defined rules of IR35; however you retain the choice of how much to take during the year that affect the amount of tax payable and when it is payable.

The Employment Allowance (EA) was introduced in April 2014 to provide a deduction of up to £2,000 from the Employer’s NI payable by your company. However EA is not available to any part of your salary determined as a deemed payment under IR35 and so only deductible against Employer’s NI payable on normal salary. You should therefore set a level of normal salary that utilises the EA limit. For 2015/16 the level of salary that fully utilises EA would be £22,552.

The second choice concerns timing of tax payments. Taking a monthly salary that utilises EA will result in quarterly PAYE and NI payments, whereas the tax on the deemed salary is payable at the end of the tax year. So it would appear better to keep your salary low enough to utilise the EA and leave the IR35 balance to be determined at the end of the year and pay PAYE and NI much later.

Although one point to appreciate is that any money taken from the company on account of a final IR35 salary will be a loan and subject to beneficial loan interest rules when the loan exceeds £10,000. A minor point not to be overlooked.

What about National Minimum Wage (NMW)?

New rules introduced in March 2015 mean that any failure to pay NMW can result in a fine of £20,000 per employee. Ok, this is unlikely to be an issue in practice, but HMRC can take action where the NMW rules apply and such a fine is an attractive motivator.

NMW only applies to Limited Company contractors who are the directors of the company where there is a contract of employment, and to the company’s employees. If you are one of the few contractors that has issued a contract to yourself then you should pay the NMW. Since October 2014 this is £6.50 and from October 2015 it is expected to be £6.70.

NMW has no influence over IR35 status and can be ignored where no contract of employment exists.

Are you thinking of pensions?

The level of salary taken affects the level of personal pension contributions you are able to make that take advantage of the tax benefits. If you pay pension contributions then you should seek advice from your financial advisor on the minimum required level of salary to support the tax benefits.

I’m outside IR35, pay enough to support my pension provisions and don’t have a contract of employment

Congratulations, you have complete freedom of choice. You can set any level of salary that now suits your personal circumstances and your view on tax. The next step in this discussion assumes that you want to minimise tax. If that’s not your driver then select any level of salary that you want and can be supported by the company’s income.

Most contractors are aware that dividends incur less tax than salary because NI does not apply to dividends. However there is a minimum level of salary that should be taken that overall reduces total tax (Income Tax, National Insurance and Corporation Tax). That minimum level used to be linked to the thresholds when NI became payable, however since the introduction of EA the best level of salary is linked to your personal tax allowance.

Personal Allowances (or your tax free allowance) changes every year. For 2015/2016 most contractors start off with Personal Allowances of £10,600. This typical level may be reduced if you have tax liabilities from earlier years that are collected via your tax code or you have any taxable benefits in kind. If you are not sure then obtain a copy of your tax code calculation from HMRC.

Your Personal Allowance is a tax free allowance and is set against your total income. So if you have other income such as interest or rental income then deduct the gross value of that other income and you are left with your available personal allowance.

The level of your available Personal Allowance is often the best level for your salary that achieves the least tax liability overall.

Let’s explain that with some examples:

Assumptions:

  • Personal Allowance is £10,600
  • No higher rate tax (but only to keep it simple)
  • No other income
  • Profit after expenses but before salary £40,000
  • Available dividends are declared
example salary

Conclusion: Salary at Personal Allowance is the least tax

Now let’s compare the result where Personal Allowances are £8,000 because of underpaid tax brought forward

Assumptions as above except:

  • Personal Allowance is restricted to £8,000

 example salary 2

Conclusion: Salary at Personal Allowance is still the least tax

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

How will RTI (Real Time Information) affect me?

RTI (Real time information)

Will this affect me as a one man Limited Company, should I expect my accountant just to deal with it within the fee. What do I need to do to comply and protect myself?

Although you may not have any employees, one man Limited Companies will be affected by RTI. The reason is that as a one man Limited Company you are a director of your company. For the purposes of PAYE this means you are therefore an employee of the company, in the role of company director, which is within the scope of RTI.

RTI is replacing the year end PAYE P35 Employers Annual Return which details employees tax, NI and statutory payments made during the tax year. With RTI this data must instead be submitted to HMRC on a monthly or quarterly basis throughout the year.

A key point is that this affects PAYE submissions only. It has no impact on dividends or other payment arrangements.

The main benefit of RTI is that it will eventually make the PAYE system easier for employers and HMRC to manage and will be far more accurate. All this should mean that HMRC have better information to help them review employee’s income information and ensure they are paying the right amount of tax and NI in any tax year. The other key point is this will also mean that any benefits payable to employees are reported to HMRC as you go, and any tax codes can be amended accordingly. The majority of employers and pension providers will start using this system from April 2013 and all employers must be using it by October 2013.

The biggest issue with RTI is the sheer volume and frequency of administration.

For a one man Limited Company the easiest way to administer this is to plan all 12 of your salary payments in advance. This makes it much easier for you to then simply submit your pre-calculated PAYE figures on time and therefore avoid any late penalties. As the current late penalty proposals are for a minimum of £100 per week for small companies these are clearly best avoided.

If you have an accountant, agree with them what your monthly salary amounts across the year will be – and stick to them. Varying your salary without telling your accountant, making ad hoc cash withdrawals and so on are what may potentially cause problems. Ideally your accountant should be able to deal with your RTI administration for you as part of their regular service.

In practice, with good planning, the majority of one man Limited Companies who have an accountant will not experience much change when RTI rolls out.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

How to pay PAYE during 2011

How to pay PAYE during 2011

HMRC are no longer sending out yellow payslip booklets to enable a company to pay its PAYE, instead they are issuing a letter reminding companies of the details needed in order to pay online.

PAYE can be paid monthly, or quarterly if your payments are under £1,500 per month on average.

A direct payment can be made to HMRC with the following details:

 

Account name:                                    HMRC Shipley

Account number:                                 12001020

Sort Code:                                            08-32-10

You will need your accounts office reference which will be similar to 049PG012345678.

If you are unsure of your reference, please contact us.

Each payment made will also need to include a reference that is specific to the month it relates to.

So for the quarter to 5th July 2011 you would use 049PG0123456781203.

The cleared funds must reach HMRC’s bank account by the 22nd of the month or quarter it relates to.  HMRC can charge interest and penalties if payments are late.

If no PAYE is due you must still inform HMRC, and you can do this online here:

http://www.hmrc.gov.uk/payinghmrc/paye-nil.htm

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.