Ever had a tax or accounting question that you’ve always wanted to ask an accountant, but didn’t want to pay the associated hourly fee that comes with it? Well now you can! Simply ask us your question here, and our team of expert Personal Accountants will respond – it’s that simple! No associated fees, dodgy advice or questionable answers from unskilled account managers, just an honest, clear and precise response from our team of experts – that’s The Intouch Promise.
Take a look below at the questions we’ve already been asked.
How much can I pay myself?
There are ordinarily two methods of taking money from your PSC – salary and dividends. You can pay yourself whatever level of salary you choose, but you may want to choose a mix of low salary and high dividends. The most tax efficient level of salary for the current tax year is £8,164 for a director where that person is the only “employee” of the company. As a director you are not really an employee and your salary is remuneration for your services as a director. This is why you aren’t bound by national minimum or living wage legislation.
Can a company pay for pension contributions?
Your limited company can contribute pre-taxed company income to your pension. Because an employer contribution counts as an allowable business expense, your company receives tax relief against corporation tax, so the company could save up to 19% in corporation tax. The current annual allowance is £40,000, but you can carry forward up to 3 years if required.
How can I reduce my tax?
The simple answer is, legally by either earning less or paying more. A very common way to reduce your tax is by paying into a pension from your company direct, but sometimes depending on your circumstances might not be worthwhile if you require to take all of the profit generated out of the company.
Speak to our team of expert Personal Accountants to find out more about how you can legally reduce your tax by becoming an Intouch Accounting monthly client.
Why should I register for VAT?
There are several reasons to register for VAT. Firstly, you may have to. If your turnover in the first twelve months of trade is likely to exceed £83,000 then you will have to register for VAT.
Even if you don’t have to register, it may be beneficial to do so. As a VAT registered business you may be able to reclaim any VAT on purchases, which is significantly more tax efficient than claiming corporation tax relief of 19% on that portion of your costs. There may also, at least in the first year of trade be advantages to being registered under the flat rate scheme.
Registering for VAT can be a complicated topic, therefore we encourage you to call our team of expert Personal Accountants for more information.
Should I be on the standard or flat rate VAT scheme ?
This depends on how much you spend on standard rated supplies each year versus the VAT retained by your company under the flat rate scheme. Since the introduction of the Limited cost Trader category in April 2017 a lot of business have found that the standard scheme is the best scheme for them. This may not always be the case and we would be happy to discuss this further with you.
How can I be more tax efficient?
From a corporate point of view, you should only spend money on items that qualify as genuine business expenditure. Spending £100 to save £19 doesn’t add up! There are expenses such as pension contributions which can be met by the company and do reduce the company’s corporation tax liability while increasing your future income potential.
In terms of personal tax efficiency, being aware of the tax thresholds is a good start but there are other things that you can do personally such as saving in an ISA that would help. We always advise speaking to a contractor accountant to find out exactly how it could affect your circumstances.
Should I be on the standard or flat rate VAT scheme ?
The answer will depend on how much you spend on standard rated supplies each year versus the VAT retained by your company under the flat rate scheme. Since the introduction of the Limited cost Trader category in April 2017 a lot of businesses have found that the standard scheme is the best scheme for them.
This may not always be the case for you personally, and we would be happy to discuss this further with you.
What will my take home pay be?
The amount of income that you take home, after accounting for tax will vary greatly between individuals and depends on your day rate and the level of costs that you incur.
These costs may be linked to travel and subsistence, for those outside IR35 or not subject to Supervision, Direction and Control. They may also be linked to those who have not / are not aware that they have been at the same location for more than 24 months, as well as other business costs such as insurance, equipment purchased, communications costs, etc.
For a detailed discussion on take home pay please contact us with details of what you expect to earn and what you expect to spend.
What is IR35?
IR35, or Intermediaries Legislation is aimed at identifying the nature of the relationship between those operating through an intermediary (such as a PSC) and their end client. The aim is to judge whether that individual is a deemed employee or not and three main areas have emerged after years of legal precedent as being fundamental to this argument.
Control – this considers how much of a right to control the end client has over the individual, particularly with reference to the method by which they perform services. The less of a right to control they have, the better and the more you decide how you do, what you do the more that would point away from IR35 and deemed employment.
Personal service- this considers whether the individuals company (PSC) has to provide the individual to perform the contracted services or whether that company has the right to send whomever it deems appropriate. If the individuals company can send whomever it chooses then that would indicate that the individual’s personal service is not required and therefore that IR35 may not apply.
Mutuality of obligations – this considers whether the end client has an obligation to offer work to the individual / company and whether the individual company has an obligation to accept such offers, where they are made. The less obligation the better. We do of course offer free IR35 reviews of contracts under our monthly service so please do contact us if this is of interest.
Is my Directors Loan Account balance correct? What is included in that balance?
The balance on the Director’s Loan Account will be correct if you have maintained the Intouch portal accurately. The balance on this account reflects the balance of transactions between yourself and the company.
Director’s Loan Account is the name that we give to the nominal code where we record all transactions that are processed between you and your company. We record all salary processed, expenses and mileage claimed and dividends declared as amounts owed to you through your Director’s Loan Account.
Any payments that you make to yourself are also recorded through the Director’s Loan Account and reduce the amount owed to you.
How often can I pay dividends?
As the director of your Limited Company it is up to you to decide how frequently and at what rate the company declares dividends.
Every contractor will take a slightly different approach, and your approach will be individual. It may be that your dividend income needs to form part of your monthly budgeting, or it may be that you are comfortable taking dividends on a less frequent basis.
More importantly, you should only declare dividends where the company has profits to do so, and the Intouch portal dashboard contains advice around the maximum dividend payable. This information is based on the retained profit in the company, as at the end of the most recently closed month. If you are using the Intouch portal dashboard as a basis for making dividend payments, then it is imperative that the portal is up to date to avoid you declaring dividends in error.
What is the most tax efficient salary?
The most tax efficient salary depends on your circumstances i.e. if you are a one man band Limited Company, then the optimal salary would be up to the secondary NI threshold, which for 2017/18 is £8,164 per annum. This would mean that no NI or income tax is payable on the salary level, and the left over personal allowance amount can be used for tax free dividends or other income from property, pension etc.
If there were two employees including yourself then you can take advantage of the employers NI allowance of £3,000. This would then make a salary level of up to the personal allowance more tax efficient, because the amount above the secondary NI threshold would be taxed at 12% (employees NI), and the employers NI at 13.8%, would be offset by the annual allowance, so only an additional tax to pay of 12% over the £8,164.
The company make a saving of 19% from the increase in salary, and save on corporation tax, therefore making this more tax advantageous. We at Intouch would look at your individual circumstances and establish what level of salary would work best for you.
What will my personal tax liability be?
Your personal tax liability will depend on the income that you have received during the year. This may have come from a range of sources including; salary from your PSC, salary from other sources if you’ve been employed elsewhwere, dividend income from either your PSC or other sources, income from investments, rental properties and any other income that you might have.
The 2017/18 personal allowance (the amount that you can earn before incurring income tax) is £11,500. This plus the next £33,500 of income forms the basic rate band. You can have income of up to £45,000 then without any of that income being taxed at the higher rates. Once your income exceeds this threshold then any marginal income is taxable at the higher rates.
Coming out of contract so what is the next step
There are a few options, which are voluntary closure, liquidation or keeping the company open in a non-trading status. But which one you choose will depend on your circumstances in the future and the profits in the company.
If the company has retained profits of below £25K we can deal with this for you entirely, however if the company retained profits are over £25K you would also need to appoint formal liquidators to deal with this for you.
Depending on what you will be doing instead of having a Limited Company will depend on how the final funds are treated, but in short there is legislation in place that states if you go into the same business activity within two years of closing down your company, you will no longer be able to receive the profits as a capital gain. Instead the profits will need to be received as income, being dividends. The rules around what falls within ‘the same business activity’ has not been specified and whether this solely relates to setting up another Limited Company or whether it includes permanent work too.
So, if you choose to receive the funds as a capital gain, you are at risk of HMRC disallowing this in the future and the income will be treated as dividends. We advise that you receive the funds as income (being dividends) if you are going into the same business activity. We can of course look at this again if you do want to close the company. Generally it may be better to keep the company dormant if there’s a chance you’ll use it again in a year.
We have more tax and accounting Q&As that we will be posting next week, so keep an eye on our social channels for a chance to see if your question has been answered. If not, feel free to ask away! We will then post the answers here in our blog.
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.