CHOOSING THE MOST TAX-EFFICIENT WAY TO BE REMUNERATED.
The tax regime in the U.K. is notoriously complicated. That's why multinational companies hire the top accountants to minimise their tax bills. You can do the same.
One of the best ways to keep the tax you pay to a minimum is to trade as a limited company. This is usually a more tax-efficient way to trade than trade as a sole-trader or partnership. A director can pay themselves by way of dividends, which are subject to tax at 10% (or 32.5% if you are a higher-rate taxpayer), as opposed to income tax at 20% or 40%. However, if dividends are not paid in the correct manner then HM Revenue can accuse you of paying yourself a salary - which would be subject to National Insurance and Income Tax.
This strategy, combined with drawing a low salary and the use of director's loan accounts, is a very tax-efficient way to be remunerated.
Call us on 07733555233 to make an appointment, so that you can benefit from expert advice.
THE TAX SYSTEM FOR THE SELF-EMPLOYED
If you start working for yourself, you must register with HMRC within the first three full months of self employment. Otherwise you may be liable to penalty of £100.
There are three ways that you can register:
- Online – www.hmrc.gov.uk/startingup
- Phone – call the Newly Self–Employed Helpline on 0300 200 3504
- Post – download and complete form CWF1 (accessed as in online above) or use the form incorporated in leaflet SE1 (Are you thinking of working for yourself?)
Once you become self–employed, the tax rules are quite different from those that may have applied when you were an employee. Instead of tax (and national insurance) being deducted from your earnings at source, you must be prepared to receive a bill at some time in the future. This can be a shock if you haven’t put enough money to one side.
We aim to give you as much warning as possible of the likely timing and amount of tax payments, but it is not easy to do this during the first year of your new business, or if you do not keep your records up–to–date.
What profits do HMRC tax?
The starting point for the calculation of taxable profits is your profit and loss account. In calculating taxable profits you are entitled to claim deductions from your business income in respect of any expenses incurred for the purposes of trade (with a few minor exceptions).
When you buy equipment for your business, you will be entitled to deduct the full cost (up to a maximum of £500,000 per year from 6 April 2014 to 31 December 2015). For most cars, you can deduct only a proportion of the cost for each year you own them and use them in the business.
Tax is payable on the whole of the profits of a trade, and so payments for your own ‘wages’ are not deductible. However, if your spouse works in the business, the wages are an allowable deduction, provided they are actually paid and are a reasonable reward for what is done.
How is tax collected?
Tax returns covering income for the year ending 5 April 2015 have to be submitted to HMRC by the ‘filing date’ which is 31 October 2015 for paper returns and 31 January 2016 for online returns. The return will include a self assessment of your liability to income tax and capital gains tax.
There are automatic penalties for late filing of tax returns.
Payment of tax
Payments on account of income tax and Class 4 national insurance contributions (NICs) will be due on 31 January 2015 and 31 July 2015. These interim payments will be based on one half of the total liability (less any tax deducted at source) for 2013-14. You will have the right to reduce payments on account if you believe the income tax for 2014-15 will be lower.
The balance of income tax for 2014-15 is due on 31 January 2016 (along with the first payment on account for 2015-16 and any capital gains tax for 2014-15).
Interest and penalties will be levied for late payment.