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LBW Newsletter December 2011
This month’s topics:
2011 Round up and How to enjoy a tax efficient Christmas
Round up for 2011 – All topics covered in our newsletters
This month represents the end of our second year at LBW and we would like to take this opportunity to detail the various topics we have covered in our newsletters throughout that period.
All of these topics can be read in alternate newsletters from LBW:
| Bicycles | Motor vehicles |
| Business premises renovation allowances | National Insurance |
| Business records check | Ni Holiday |
| Capital Allowances – Annual Investment allowances | On line filing |
| Capital allowances- Buildings | PAYE & CIS |
| Capital allowances – Buildings consultation | Penalties |
| Capital Allowances – Energy efficient | Pensions |
| Childcare | R & D |
| Children | Rollover relief |
| Collection of taxes | Short Life assets |
| Company cars | Tax credits |
| Disclosure initiative | Tax payment dates |
| Employee mileage rates & VAT | Tax payment methods |
| End of year tax planning | Tax relief on charitable donations |
| Entrepreneurs relief | Tax save |
| Expense deductions | VAT Flat rate scheme |
| IHT | Wills |
| Winding up |
A Tax efficient Christmas
On a more festive note, Christmas is coming and thoughts turn to the annual Christmas staff party. Indeed the party may well have been booked many months ago perhaps without any thought given to the taxation consequences. We will explore those consequences with a view to ensuring that you do not incur an unexpected tax liability and with careful planning ensure that you comply with the regulations and thus avoid any unnecessary charge.
Employee benefits
There is a £150 (average cost per person) per tax year limit under which no benefit in
kind arises on the employee in respect of attendance at a staff party/function. There is no
requirement for the function to take place at or around Christmas, although many do. The employer has to identify the average cost per function per person and if there is more than one function the employer has to establish to which if any of the function or functions the exemption applies.
To determine the average cost per person you include of VAT, accommodation and any transport costs and then divide the total by the total number of people attending, including
non employees, for example spouses or partners. Each function must be open to all employees generally, although in larger organisations it can be restricted to employees from a department, division or site. If any staff are excluded from any particular function it would result in that function being taxable in full on the employees attending, and there is no exemption available for that function.
If there is one function and the cost per person exceeds £150, it is a taxable benefit as
the limit has been exceeded. The full amount of the cost is taxable and there is no ability
to deduct £150 from the benefit in kind arising.
If there is more than one function and the overall total cost exceeds £150 then the exemption is only available on the function or functions which in total amount to £150 or less. For example if there are two functions at £120 and £85. Assuming that the employer determines that the £120 function is exempt but the £85 function is taxable in full then if an employee only attended the £85 function, they would be taxed on the £85 benefit in full. If the employee attended both functions they would still only be taxed on the £85. Obviously, if the employee does not attend either function or just the one with a cost of £120, no taxable benefit would arise.
Note that the £150 annual function exemption (and the various points below) has no impact on the tax position of the employer. The exemption is a relief from an income tax benefit in kind charge for employees. The expense is allowable in the employer’s tax computation no matter what the impact on the employee. In addition the employer can recover VAT incurred in respect of attendees who are employees (but not in respect of other attendees e.g. partners of employees, customers, suppliers etc). This employer related relief has no limit but clearly common sense should prevail. Recording in the books and records of the business as the staff Christmas party (including any ancilliary costs) will make identification easy to determine and thus ensure the relief is not overlooked.
Class 1A National Insurance contributions would be payable by the employer on any benefit in kind which is charged on employees and must be included on forms P11Ds.
Gifts
Most gifts from an employer to an employee are taxable in full. If the gift can be classed as immaterial, say one bottle of wine a year, it will be non-taxable on the basis of triviality but regular gifts or one high value gift would have to be declared on form P11D (except in the case of non director employees earning at the rate of less than £8,500 per annum) and these give rise to a tax liability on the employee and a Class 1A National Insurance liability on the employer. Precisely how much is trivial can be a matter of debate but clearly any alcohol acquired as part of a Christmas celebration could be regarded as part of the overall Christmas party celebration/function and therefore careful recording of the costs involved would be needed.
Entertaining
The entertaining of customers/potential customers/other business contacts by an employer is not a tax deductible expense for an employer. The employer cannot reclaim VAT on the costs relating to entertaining events unless the event is predominantly for staff in which case VAT can be recovered on the costs of staff attendees (but not in respect of non staff attendees e.g. partners). Entertaining is defined as including any hospitality whatsoever and therefore would include such items as tickets for concerts or football matches in an executive box. The cost incurred on entertaining is not a taxable benefit on the employee so long as the cost is incurred wholly, exclusively and necessarily in the performance of their duties.
This test is generally satisfied if the employee in question can be said to have acted as a host or guide to the employer’s guests.
Following on from the above it should be noted that if VAT is recovered on an item of entertaining on the basis that it relates to staff entertainment then the item is likely to represent a taxable benefit in the employee’s hands (unless the annual function £150 exemption applies). Where the staff act as hosts to the employer’s guests this should not give rise to a taxable benefit but VAT incurred will be irrecoverable.
As you can see this particular area can be a minefield of what is and what is not allowable for both direct and indirect taxes. Careful planning and structuring the event before it happens will ensure the most tax efficient outcome.
Reminders for tax payments & miscellaneous updates
A couple of reminders for you.
PAYE & National Insurance
Employers PAYE & NI payments (including construction industry payments) for the month of November 2011 (which include any salary pay days between 6th November 2011 and 5th December 2011) will be due for payment by 19th December 2011 or 22nd December 2011 if payment is made electronically.
Corporation tax liabilities.
Companies with a year ending 31st March 2011 will be required to make payment of corporation tax on or before 1st January 2012. Late payment will entail an interest charge. Payment can now only be made electronically (which does include payment via your own bank or the post office using the payslip issued by H M Revenue & Customs for this purpose).
H M Revenue & Customs business payment support helpline is still open for those who are unable to settle the full amount by the due date and wish to enter into an arrangement to settle the outstanding tax in instalments. If you wish to take advantage of this please contact Steve and he will discuss the process as well as any perceived changes in H M Revenue & Customs attitude to the use of this scheme with you.
Posted in LBW Newsletter Articles
Tagged employee, employee benefits, employment, entertaining, gifts
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How do we get you 40% income tax relief?
Entrepreneurs’ relief allows business owners to pay a lower rate of capital gains tax on the proceeds of business sales. The entrepreneurs Capital Gains Tax rate, for qualifying disposals, is effectively 10% for the first £10M of business disposals.
Example 1
Soletrader with £60K annual taxable profits
A local builder has been trading a sole trader since January 2006. His taxable profits are approximately £60,000 per year. He decided to incorporate on 6 April 2011.The goodwill that will be sold to the Limited Company has been valued at £100,000. Taking advantage of Entrepreneurs Relief, his capital gains tax liability would be £8,990 (an effective rate of less than 10%).
The £100,000 would be credited to the builders loan account with the company which can be drawn down TAX FREE.
Example 2
A two partner partnership with £500K annual taxable profits
A two partner partnership has annual taxable profits of £500,000 per year. At this level of profit, each partner would have an annual income tax liability of approximately £110,000 (£100,000 of the profit would be taxed at the 50% upper rate level = £50,000 tax). If the partnership incorporated and the goodwill was sold to the Limited Company at say a value of £2.5M, the individuals would benefit from Entrepreneurs Relief and would pay tax on the capital gain at a rate of 10%. £1.25M would be credited to the individuals Loan Account with the company and could be drawn down TAX FREE.
To enquire about this subject call: 0151 644 4848
or email: lee@lbwaccountants.co.uk (LBW Director)
gary@lbwaccountants.co.uk (LBW Tax Director)
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LBW Newsletter November 2011
National Insurance and how we can reduce your liability
Successive Governments have insisted that national Insurance is not a tax when it comes to defending the pledge of not raising taxes whilst at the same time increasing national Insurance. National Insurance can therefore be seen as a prime candidate for raising funds for the Treasury on political grounds. This month we will explore the various forms of NI, the benefits which arise to the contributor and we will look at ways of reducing the charge.
National Insurance comes in 4 main classes with Class 1 having a number of sub-classes. We will look at each in turn below.
Class 1
This class applies to earnings from employment. The main charge is levied on earnings and applies if income exceeds £139 per week for a contribution by the employee and £136 per week for a contribution by the employer. The respective rates are 12% and 13.8% (an increase of 1% from the previous years for both types of contribution). There is an upper limit for employee contributions of £817 per week for the 12% rate and earnings in excess of this limit are liable to a 2% contribution. There is no threshold for employer contributions.
The contributions by the employee will entitle the employee to certain social security benefits including state pension. Whilst it is appreciated that the level of state pension as well as the age at which entitlement vests are in a state of flux, maintaining an entitlement to these benefits is still important.
Rather interestingly for an employee who is not a director, the minimum requirement to ensure a year of contributions qualifies for state pension is either 52 contributions for weekly paid or 12 contributions for monthly paid, but a director need only make one contribution regardless of the frequency of payment of the salary! This requirement was brought about because of a perceived abuse of pay levels by directors in the 1970’s and 80’s to minimize contributions whilst receiving large salaries. This was dealt with by imposing a single contribution period each year. This has meant that by ensuring salaries exceed the annual NI limit of £7,225 (for 2011/12) a contribution has been made and thus the tax year qualifies for basic state pension. Directors can then ensure the remainder of their requirements are drawn from the company in some form other than salary. Dividends are the most common however there are alternatives which will be considered later.
There are two further subclasses of Class 1 being Class 1A and Class 1B. Neither of these provide any social security benefit to the employee
Class 1A is an employer contribution which arises on any benefits in kind as reported by an employer. The rate is currently 13.8%. The most
common benefit reported is the company car and company car fuel benefit, the latter being particularly expensive if very little private mileage is travelled and in these circumstances we would advocate that all private mileage is paid personally to avoid not only the benefit charge but also the Class 1A charge.
Class 1B arises in respect of PAYE settlement arrangements whereby the employer agrees to pay any tax due on benefits, for example the provision to employees of non-cash gift vouchers at Christmas whereby the employee would not be happy with a tax charge arising on the vouchers and thus defeating the object of the exercise in engendering goodwill at Christmas.
Are there ways of reducing this NI charge?
As can be seen above NI is based on earnings. If a director is able to draw funds from the company in a form other than earnings then the Class 1 charge will not apply. Dividends have been mentioned and are perhaps the most common method of avoiding the charge. Other alternatives to consider would be rent of property and loan interest.
If a company uses for its own trade business premises owned by a director then the payment of rent may be considered. The company would obtain tax relief on the rent paid (which may be at the higher rate of corporation tax) whilst the director would pay income tax on the income arising (maybe at the basic rate). Care should be taken however, with the eligibility of the property for inheritance tax business property relief as highlighted last month as well as possible restrictions on the availability of entrepreneur’s relief under the associated disposal rules.
Frequently a director will lend money to a company. This will arise either as a cash injection or by not taking any entitlement to salary or dividend and thus building up a credit. If it is decided to charge interest at a commercial rate on the loan made to the company, the company can claim relief for the interest which may be at the higher corporate tax rate whilst the recipient director may be taxable at basic rate. Strictly any payment of interest would need to be made under deduction of tax at the basic rate and accounted for to H M Revenue & Customs on a quarterly basis. Apart from the benefit of differing tax rates, this can be most useful if there are 2 or more directors who have each left differing amounts on credit with the company and perhaps are seeking a scheme of redressing the imbalance which can not readily be achieved by the use of dividends or salary/bonus which has an added NI charge.
Class 2
This is the basic charge for self employed. Currently paid at a flat rate of £2.50 per week it entitles the contributor to a basic state pension dependant of having the required number of complete qualifying years of contribution. Whilst this is a small level of payment for such a perceived benefit as state pension, there is a balancing up with Class 4 contributions which will be referred to below.
Are there ways of reducing this NI charge?
The charge can be avoided only if earnings are below a lower threshold, but then the year would not qualify for state benefit purposes (to make up the year, voluntary contribution at higher rate would be required and thus may prove more expensive in the longer term). A further method of avoiding the charge is if maximum Class 1 NI is being paid from an employed source of income.
Class 3
This is a voluntary contribution currently paid at a flat rate of £12.60 per week. This can be used to top up non-qualifying years to preserve entitlement to full basic state pension. In order to determine whether such contributions are required for state pension purposes, a pension forecast can be obtained and the arithmetic of cost – v- benefit exercise carried out. A pension forecast can be obtained at any time unless the contributor is in the final few months before state pension age.
Class 4
As alluded to above, this is a further contribution payable by self employed people. It is currently at the rate of 9% and is levied on the level of profit. There is a lower limit below which no contributions are due and upper limits for the 9% rate. Profits in excess of the upper limit are liable at 2%.
The contributions in themselves confer no benefit on the contributor and can be viewed as an additional tax charge.
Are there ways of reducing this NI charge?
As this charge is based on profits it can be reduced if profit levels are reduced and therefore for every £ of expenditure claimed the reduction in tax should not be just seen as a reduction in tax but also of NI at the appropriate rate.
This charge can also be reduced if maximum Class 1 Ni is being paid from an employed source of income.
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Tagged class 2, class 3, class 4, class1, contribution, employment, national insurance, NI, PAYE, social security
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LBW Newsletter October 2011
This month’s topics:
Inheritance tax.
Is your net worth over £325,000
Do you know what a PET is?
Do you want to protect your family interests after death?
In 1789 Benjamin Franklin famously wrote to Jean-Baptiste Leroy “In this world nothing can be said to be certain, except death and taxes”. But when these two come together it spells double trouble. In our newsletter this month we shall go through the basics of Inheritance Tax and identify some simple ways of reducing exposure to the liability. We will also discuss one or two relevant reliefs which are available on business assets.
What is a PET?
Inheritance tax applies to any transfer of assets. Thus a lifetime gifts can be caught by IHT. However, relief is available in circumstances where such a gift is between two individuals in which case it is referred to as a PET (potentially exempt transfer) and will only become chargeable if the donor dies within 7 years of making the gift. The other occasion of transfer which will be chargeable is death itself.
IHT is levied on the value of the estate of the deceased and will include gifts which are PET’s made in the seven years prior to death (a tapering relief is available such that gifts made more than 3 years before death are only partly chargeable). The first £325,000 (currently) of the estate of the deceased will be exempt (unless there have been lifetime chargeable transfers which have used up this exemption but they will be rare and will in the main comprise any transfers made to discretionary trust in the 7 years prior to death). This is exempt amount is known as the nil rate band. It is therefore important to make gifts as early as possible, whilst at the same time not affecting the standard of living of the donor, to reduce an estate to below this threshold.
Married? – Some benefits…
Married couples (including registered civil partnerships) can have two allowances. The way this works is that if the first of the couple were to die and leave the whole of the estate to the surviving spouse then as this is an exempt transfer (in most cases, care needs to be taken if one spouse in non-UK domiciled) the deceased will have used up none of their nil rate band. This means that the survivor will have available not only their own nil rate band (at the prevailing rate at their death) but also a further 100% of the nil rate band at that date as this is still available. Thus if the first to die died when the nil rate band was £325,000 but by the time the second death occurred it had risen to (say) £400,000, on the second death the available nil rate band would be £800,000 (i.e. £400,000 + 100% of £400,000) notwithstanding that the first death occurred when the nil band was only £325,000.
The same principle is applied if part of the estate of the first to die was chargeable and used up (say) 10% of the nil rate band then as 90% was not used, 90% of the prevailing rate at the date of the second death is available. In the example above although £292,500 (90% of £325,000) is unused, on the second death the allowable nil rate band would be £760,000 (i.e. £400,000 + 90% of £400,000).
If the value of the deceased estates exceed the combined nil rate bands what can be done to reduce the value of the estate and also what reliefs are available.
Business Assets – some welcome news
Probably the most valuable relief is business property relief. This applies to relevant business property which includes a trading business run by a sole trader, an interest in a trading partnership and shares held in a trading non-quoted company (note the trading requirement in each case although in the case of shares, any shares on the AIM market will be eligible). The various assets need to have been held for 2 years as at the date of death and providing there are no contracts to sell the asset at the date of death, the relevant value will fall out of charge altogether as the relief is 100%. A further relief is available if the deceased owned business premises which are used for the purpose of the trade of the partnership or limited company. In this case the relief is 50%.
Arguably therefore in attempting to reduce the value of the estate for IHT purposes, any assets qualifying for BPR can be left out of consideration.
How to reduce your IHT liability
How else can an individual reduce their estate? Although mention was made of lifetime gifts being potentially liable to IHT, there are a number of small exemptions available.
The first exemption is the annual gifts exemption. This is £3,000 per annum (and has been at this level for a very long time). If the exemption for any one year has not been used then it can be carried forward to the following year (only) and used after the exemption for that year has been used up. This is a total exemption and can be used up on a number of gifts.
There is also the small gifts exemption of £250. This can apply to as many gifts as the donor wishes to make in any one tax year but no more than one gift to any one person is allowed. This is useful for birthdays and Christmas presents to children and grandchildren.
Also available are gifts in contemplation of marriage. Parents can give up to £5,000 each and other relatives can give up to £2,500. Any other person can give up to £1,000 and the intended spouses can give up to £2,500 (this is apparently because in the marriage ceremony, rings are given before the parties are legally married and prior to the introduction of the PET in 1984, lifetime gifts were taxable albeit at lower rates and thus this allowance was deemed necessary otherwise intended spouse would perhaps reconsider marriage on taxation grounds!).
The final method of reduction of is expenditure out of income. This can be used if the donor can make gifts to anyone without affecting his standard of living and which are regular. Naturally to become regular some pattern or commitment needs to be established. For example, a deed of covenant or the payment of premiums under a life insurance policy.
Naturally taxpayers should retain evidence of any gifts made or the regular pattern of expenditure and bank statements and other such documents should be retained. H M Revenue & Customs do have the power to ask for such documents if they perceive the full value of lifetime gifts has not been recorded correctly on the IHT returns on death.
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LBW Newsletter September 2011
Children
This month we will explore the various tax and other implications of having children.
Employing children
Children like any individual are allowed to have income up to £7,475 per annum before they pay tax. Whilst savings income may account for some of this allowance it is possible to employ children in your business to use up some of this allowance as well. Caution is required to ensure that the hours worked do not exceed the legal limits for the age of the child and that the work is something they can perform and do actually carry out that work. For tax purposes the costs will be tax deductable providing the expense can be justified in terms of the hours actually worked. Paying a child substantially more that you would an unrelated person to do the same work may be disallowed so providing a sensible amount is chosen relief is available
National Savings and Investments
National Savings Children’s Bonus Bonds allow parents to invest for a child’s future in their own name, with no tax to pay on the interest or bonuses. The minimum investment is £25 and the maximum is £3,000 per issue, per child. Bonus Bonds have a five-year fixed term until the child’s twenty-first birthday. For further details on the current issue see the National savings website at www.nsandi.com.
Gifts to children
Rules exist that prevent parents or guardians from switching money from a personal savings account to one opened in a child’s name to avoid paying tax on the interest.
Money given to a child under the age of 18 will be treated by HMRC as belonging to the donor (usually the parent) and they will continue to be taxed on the interest the money in the child’s bank account earns. However, there is an exception to this rule in that no tax will be payable if the annual interest on all savings accounts is not more than £100 per parent, per child, per tax year. As long as this limit is not exceeded, HMRC treat any interest earned on the gift as belonging to the child. Therefore, when the child’s total income for the year is less than the annual personal tax-free allowance (£7,475 for 2011–12) a parent or guardian can reclaim any tax deducted from the child’s savings by the bank or building society by completing HMRC form R85.
Junior ISA
A new Junior ISA is being introduced, which will be available for UK resident children (under 18s) who do not have a CTF account. Junior ISAs will be tax-relieved and will have many features in common with existing ISA products. They will be available as a cash or stocks and shares product. It is expected that Junior ISAs will be available later this year.
Child Trust Funds
All children born since September 2002 have received an initial voucher worth at least £250, with those from low-income families receiving an additional £250 paid directly into their accounts, making £500 in total. However, as announced, government contributions to Child Trust Funds (CTFs) were reduced in August 2010 and ceased completely from 1 January 2011. Existing accounts will remain open but will not receive any further government contributions. Family and friends may contribute up to £1,200 a year to each account. There will be no tax to pay on the income or gains arising on the monies in the account, provided the person entitled to the fund is a UK resident at the time the fund is paid out.
Child Tax credits (CTC)
CTC has little, if anything, to do with tax. CTC is a social security benefit that is paid to parents and guardians of children under 16 if the parents or guardians income is low enough to qualify. It is paid on a regular basis, usually into the claimant’s bank account. Children are eligible up to 1 September following their sixteenth birthday. The credit remains payable after that date for those in full-time education (which excludes further education) up to the age of 19, and for up to eight weeks following the death of a child. The usual test to be applied is that the child is living with the claimant(s). Where competing claims exist, the test is who has the main responsibility for the child. It’s usual for a joint election to be made over main responsibility but, in the absence of such an election, HMRC will make a decision based on the information available.
Working tax credit (WTC) is paid to people on low incomes who satisfy certain age requirements and who work more than a certain number of hours a week. WTC also has a childcare element to help to cover the costs of registered or approved childcare. Individuals can generally claim the childcare element for any child up to the Saturday following 1 September after the child’s fifteenth birthday.
The childcare element can help with 70 per cent of eligible childcare costs (which are those paid to a registered or approved childcare provider) up to a maximum of £175 a week for one child and £300 a week for two or more children. Therefore, it is possible to get up to £122 per week for one child and £210 per week for two of more children.
If the claimant employs an approved home childcare provider, such as a childminder or nanny, it is possible to claim up to 70 per cent of the gross costs of employing that person within the £175 or £300 a week limits. The costs include employer’s NICs and any other costs associated with employing that person, such as insurance.
The main point to be made regarding tax credits is that making a claim is often worthwhile, especially given that claimants do not necessarily have to work, or pay tax, to receive CTC. Many people who qualify do not get anything simply because they do not bother to apply. Please contact us if you require further information.
Child benefit
Child benefit is paid tax-free to anyone bringing up a child or young person. From April 2011, the weekly rate payable is £20.30 for the eldest, or only, child and £13.40 for other children.
Child benefit is paid until the September after the child’s sixteenth birthday but extended up to 1 September after the child’s eighteenth birthday if he or she is still in full-time education. Child benefit is payable for a whole extra year for a child born on 1 September than one born the day before on 31 August!
In addition to child benefit, someone entitled to child benefit for a child or young person who is not their own, may also be entitled to guardian’s allowance for them if both of his parents have died or, in some circumstances, where only one parent has died. From April 2011, guardian’s allowance is payable at the weekly rate of £14.75.
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Tagged children, employment, savings, tax deductable
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National Employers Savings Scheme (NEST) LBW Financial Solutions
People are living longer lives. This means people can enjoy more time in retirement and need to plan and save for their later years.
The Government estimates that around seven million people are not saving enough to meet their retirement aspirations. Therefore the Government is making changes to the pension system which, as an employer, will affect you too.
What do the changes mean for employers?
From 2012, employers will be required to automatically enrol all eligible jobholders into either the National Employers Savings Scheme (NEST) or an alternative ‘qualifying’ workplace pension and to make minimum contributions into it.
The process will be staged, dependent on employee head count, from 1st October 2012 to 1st September 2016, with large employers being the first to have to take action.
Who will need to be automatically enrolled?
All jobholders working in Great Britain aged at least 22 years old who have not yet reached State Pension age and are earning more than £7,475* a year (the income tax threshold at 2011) will need to be automatically enrolled into either an employer’s workplace pension or NEST.
*2012 figure to be confirmed.
What is the minimum contribution employers must pay?
Under NEST, employers will need to contribute 3% on a band of earnings for eligible jobholders – between the Personal Allowance in 2012 and £33,540 a year **
This will be supplemented by the jobholder’s own contribution and around 1% in the form of tax relief. Overall contributions will total at least 8% for this type of scheme.
NEST will carry an annual management charge of 0.3% per annum.
** Based on 2006 levels, 2012 figure to be confirmed.
Who can opt in?
Jobholders aged between 16 and 22, and between State Pension age and 75 who are earning more than the above figure, will be able to opt in to their employer’s workplace pension and will qualify for the compulsory minimum employer contributions. Those earning below the above figure may opt in to their employer’s workplace pension. Their employer will not be required to make a contribution, but may do so if they wish.
Which scheme can employers use?
Employers will be able to choose the pension scheme(s) they want to use provided the scheme(s) meet certain quality criteria (including any current scheme). These may be based on contributions or benefits people receive.
Currently, it is suggested therefore that the certification process is as simple as possible with any of the following being ‘acceptable’.
Money Purchase Schemes (existing):
- A minimum nine per cent contribution of pensionable pay (including a four per cent employer contribution) or;
- A minimum eight per cent contribution of pensionable pay (with a three per cent employer contribution) provided pensionable pay constitutes at least 85 per cent of the total pay bill or;
- A minimum seven per cent contribution of pensionable pay (three per cent employer contribution), provided that the total pay bill is pensionable
Final Salary Schemes (existing):
In order to qualify an existing final salary scheme will need to have a contracting out certificate in force as this is taken in evidence that the scheme already meets the ‘reference scheme test’ standard. This test requires for schemes to commence a pension at age 65, payable for life and must be:
a) 1/120th of average qualifying earnings in the last 3 tax years, preceding the end of pensionable service multiplied by
b) The number of years of pensionable service up to a maximum of 10.
When do the changes start?
The changes are planned to start from 2012. The plan is to stage in automatic enrolment over a period of time, starting with large employers, medium and then small.
To help employers adjust gradually, the plan is to phase in the employer contribution levels – starting at 1% and then moving to 2% and finally 3%. The jobholders’ contributions will also be phased in the same period.
How will I know what to do in the future?
DWP, The Pensions Regulator (TPR) and the Personal Accounts Delivery Authority (PADA) are working to ensure that information will be available to help prepare employers and individuals for the changes.
TPR will be writing individually to all employers at around 12 months and again at 3 months in advance of their automatic enrolment start date, to inform you when you need to take action and what you need to do to comply.
What should I be doing now?
As an employer, you should ensure you understand the basic information on the changes as outlined in this letter. A review of existing arrangements should also be undertaken sooner rather than later.
For some firms these changes could be in less than 1 pay review’s time!
A review is also important as The Pensions Regulator, who will oversee the implementation process, does carry the power to levy fines of up to £50,000 on employers who do not take action.
LBW Newsletter August 2011
The PAYE Scheme
The PAYE scheme is fundamental to the operation of a business which has employees. This includes companies where the only employee is the company director/shareholder. The operation and use of the PAYE scheme has in previous year not seen too much attention from H M Revenue & Customs which has meant that it was open to manipulation. However, this is all about to change and we believe a full run down of how PAYE operates along with how to avoid the pitfalls which employers call fall into would be appropriate.
PAYE is a method of collecting tax from employees during the course of the year. For the vast majority of employees the tax collected will be the amount they are due to pay for any one tax year. However, this is not always the case and some employees, mainly company directors, those receiving employer provided benefits and those with a second employment or a pension may find at the end of the year they have an underpayment or overpayment of tax. This balancing will be achieved either by way of the completion of a self assessment return or H M Revenue & Customs will issue a tax calculation for the year showing the relevant balance. The balancing up did come in for some bad publicity last year when they issued a substantial number of such notices for underpayment which had in the main arisen out of the use of in appropriate PAYE tax codes.
An underpayment of tax is unwelcome at any time be it on a self assessment return or on a revenue assessment and the best way to ensure any underpayment is minimized with tax being paid as you go and thus assisting personal cash flow is the ensure the correct PAYE code is in use. Agents no longer receive PAYE tax codes showing the detail of the allowances granted and restrictions imposed and these should be checked as soon as they are received and if there is any uncertainty advice should be taken and the code corrected as soon as possible. In addition any change in circumstance such as the receipt of a new source of income or pension should also be a trigger for considering in detail the tax code with corrective action taken as necessary.
With the advancement in computer technology H M Revenue & Customs are taking full advantage and are imposing more burdens on the employer in respect of penalties for late payment of monthly or quarterly PAYE and will shortly be introducing “real time” returns of employee deduction details.
In our June newsletter we briefly mentioned penalties for late PAYE payment. Each time in each tax year that a PAYE payment is made late, the clock starts ticking. One late payment in a tax year does not give rise to a penalty. Late more than once and a penalty is imposed, that penalty starting at 1% and rising to 5% on a sliding scale. The penalty percentage cannot be determined until the end of the tax year and the number of late payments identified and once determined is applied to the amount of all late payments in the year. A further penalty applies to any payment which is more than 6 months late.
Making prompt payment is important and in each newsletter we provide details of the due dates drawing particular attention to occasions when the due date falls on a weekend in which case payment needs to be made by the Friday before. Care should also be taken if the payment date falls on a bank holiday.
It may be tempting for an employer to reduce the amount of PAYE and Ni paid each month if funds are short and to make the payment at a later date perhaps accumulated with a later sum due as after all no return is made to H M Revenue & Customs of amounts due until the year end declaration is made. However, in order to ensure they can take full benefit of the new penalty regime, H M Revenue & Customs will be introducing real time returns of the amounts due. This is similar to the scheme operated by employers who are required to make returns under the construction industry scheme. It is proposed that the new scheme will replace the annual return requirement such that each tax month an employer will be required to make a return of the deductions made. This will ensure that the correct PAYE & NI is accounted for at the right time making manipulation of payroll records difficult.
The final details of how this will operate have not yet been made available and thus how an employer accounts for errors made in any one month such as a miscalculation of pay due which is corrected at a later date but once the full details are made known we will advise all employer clients who operate payrolls.
Winding up companies
There may well come a time in a company’s life when it is no longer required having served the purpose for which it was created. If the company is solvent and has funds in a bank account the owner will naturally wish to take hold of those funds but would like to do so with the minimum tax payable, as after all the money belongs to the company.
There are two tax efficient methods of withdrawing the funds being either the payment of a dividend or by way of a winding up.
A dividend payment would only be used if the shareholders still have available for the year the payment is to be made, an unused portion of their basic rate band. Paying out the remaining funds in this fashion may take some time if there is a substantial sum to be distributed so what alternative is available?
A capital payment on a distribution can be seen as a viable alternative of getting hold of the money quickly. There are two methods of making such a distribution. The first is to appoint a liquidator to wind up the company. If the company is a trading company then subject to satisfying the normal conditions, any distribution made to the shareholders would qualify for entrepreneur’s relief the result being a 10% rate of tax on the distribution (after the annual exemption has been deducted). The only costs involved would be the liquidator’s costs which can vary depending on the assets involved in the winding up and can range from £2,500 upwards.
The second method is to apply for an informal dissolution and request HMR&C to operate Extra Statutory Concession C16 (ESC C16). This avoids the need to appoint a liquidator (and thus avoid the costs involved). The company will need to ensure it is up to date with all returns and tax payments and providing an undertaking is given by the shareholders that they will pay any tax that is later found to be due, the same outcome is achieved as with a liquidator.
Time is however running out for the use of this informal method of winding up a company. H M Revenue & Customs have been consulting on the use of all their Extra Statutory Concessions including ESC C16. They are proposing to formally legislate this concession but to only allow the capital treatment to companies which have up to £4,000 available to distribute. If a company wishes to dissolve informally and has more than £4,000 to distribute the distribution will be treated as though it was paid as a dividend and thus higher rate tax may apply. To avoid this problem in these situations and to ensure the 10% tax treatment, a liquidator can be appointed but with the associated costs. Naturally each case would need to be considered on its own merits to identify a breakeven between the costs of liquidation and the tax cost. At the time of writing the concession is still available and has in the last few weeks been granted to a client of this office.
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Entrepreurs Relief
How do we get you 40% income tax relief?
Entrepreneurs’ relief allows business owners to pay a lower rate of capital gains tax on the proceeds of business sales. The entrepreneurs Capital Gains Tax rate, for qualifying disposals, is effectively 10% for the first £10M of business disposals.
Example 1
Soletrader with £60K annual taxable profits
A local builder has been trading a sole trader since January 2006. His taxable profits are approximately £60,000 per year. He decided to incorporate on 6 April 2011.The goodwill that will be sold to the Limited Company has been valued at £100,000. Taking advantage of Entrepreneurs Relief, his capital gains tax liability would be £8,990 (an effective rate of less than 10%).
The £100,000 would be credited to the builders loan account with the company which can be drawn down TAX FREE.
Example 2
A two partner partnership with £500K annual taxable profits
A two partner partnership has annual taxable profits of £500,000 per year. At this level of profit, each partner would have an annual income tax liability of approximately £110,000 (£100,000 of the profit would be taxed at the 50% upper rate level = £50,000 tax). If the partnership incorporated and the goodwill was sold to the Limited Company at say a value of £2.5M, the individuals would benefit from Entrepreneurs Relief and would pay tax on the capital gain at a rate of 10%. £1.25M would be credited to the individuals Loan Account with the company and could be drawn down TAX FREE.
For your downloadable document visit: http://www.lbwaccountants.co.uk/Entrepreneurs_Tax_Relief.pdf
Call: 0151 644 4848
Email: lee@lbwaccountants.co.uk
gary@lbwaccountants.co.uk
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Tagged annual taxable profit, Entrepreurs relief, income tax relief, tax free
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The Business Decision
1) Self employed or Limited company
There are a number of factors which will need to be considered before the decision is made as to whether or not the business should trade as an unincorporated entity or as a company. Some of these factors will be tax driven whilst some will be commercially based. Each individual case will need to be considered on its own merits. If the decision is made to trade as a sole trader or in partnership then H M Revenue & Customs will need to be notified. Failure to notify within 3 months of the commencement of the trade may give rise to a late notification penalty.
2) Formation of a Limited company
If however, the decision is made to trade as a limited company it will be necessary to form the company. Companies can be purchased “off the shelf” and if the name under which the company was formed is not suitable it can be changed to the preferred name providing that name is both available and acceptable. The website at Companies House contains more details on the obligations of company directors and the other requirements of the company. To view the website click here.
Call: 0151 644 4848
Email: Lee@lbwaccountants.co.uk or Mark@lbwaccountants.co.uk