Bonus, dividend or higher salary?

If you run your own company and are considering an increase in your salary 2010-11 you might like to consider the following points:

  1. From 6 April 2010 if your income is in excess of £100,000 you will start to lose your tax personal allowance, initially this can create a marginal tax rate up to 60%.
  2. From the same date if your income is over £150,000 you will be subject to the 50% rate of income tax.

Consequently increasing your earnings in 2010-11 may not be a tax effective move if you are a high income earner. Instead you may like to consider paying yourself a bonus in March 2010? You must have a clear and commercially sound reason for a bonus payment. If you were to follow this strategy the bonus would be taxable at the current highest rate, 40% and would have no effect on your current year personal allowance.

There is a timing downside to this arrangement; any tax and NIC due on the bonus would become payable on 19 April 2010 (22 April if you pay electronically) instead of being spread over the year if you settled on a salary increase instead.

Of course, when practical to do so, extra dividends are a better option than bonuses (because of the NIC costs). Dividends voted in March 2010 will mean extra higher rate tax due 31 January 2011.

If you are a high income earner and would like to discuss this and other strategies for minimising the impact of the changes coming in the next tax year please get in touch. There are still options we could look at before 6 April 2010.

The Christmas Party

For those of you who are organising a well deserved works party this Christmas we have sketched out below the current reliefs available:

The cost of a staff party or other annual entertainment is allowed as a deduction for tax purposes. Also as long as the criteria below are followed, there will be no taxable benefit charged to employees:

  1. The event must be open to all employees at a particular location.
  2. The cost is only tax deductible for employees and their partners (which would include directors in the case of a company) but not sole traders and business partners in the case of unincorporated organisations.
  3. An annual Christmas party or other annual event offered to staff generally is not taxable on those attending provided that the average cost per head of the function does not exceed £150. Partners and spouses of staff attending are included in the head count when computing the cost per head attending.
  4. All costs must be taken into account, including the costs of transport to and from the event or accommodation provided, and VAT. The total cost of the event is merely divided by the number attending to find the average cost. If the limit is exceeded then individual members of staff will be taxable on their average cost, plus the cost for any guests they were permitted to bring. No deduction will be allowed for the £150 exemption.
  5. VAT input tax can be recovered on staff entertaining expenditure. If staff partners/spouses are also invited to the event the input tax has to be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed and of course output tax should be accounted for on the amount of the contribution.

A final note on gifts for employees.

Trivial seasonal gifts for employees!

Employers may find the following Revenue concession useful – we have copied the note directly from the HMRC handbook:

“An employer may provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas. All of these gifts are considered to be trivial and as such are not taxable. For an employer with a large number of employees the total cost of providing a gift to each employee may be considerable, but where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees concerned.”

One final caution regarding VAT and staff gifts. VAT is chargeable by the employer when an employee receives gifts totalling more than £50 in a year. Turkeys however are zero rated for VAT purposes!

Merry Christmas!

Avoiding the high income tax rates

From 6 April 2010 the 50% income tax rate comes into play – for those with income over £150,000. For those earning over £100,000 personal allowances are withdrawn, creating an eye-watering marginal rate of 61.5%

There are options. If you are concerned about the impact of this new tax band on your taxed income do call there may be planning opportunities we could discuss with you prior to the end of the current tax year.

How do these new tax changes apply?

  • If your income exceeds £100,000 the basic personal allowance will be withdrawn at the rate of £1 for each £2 your income exceeds £100,000. If personal allowances stay at the present level £6,475, you will lose your allowance completely when your income exceeds £112,950. As you will be taxed at 40% on your income between £100,000 and £112,950, whilst progressively losing your personal allowance, the marginal tax rate in this banding can be up to 60% and there is also national insurance, making 61.5% in total.

Planning note:
If you have a legitimate strategy to keep your taxable income below £100,000 in 2010-11 and so potentially save 61.5% tax this would be an opportunity not to miss. Call us if you are affected.

  • From 6 April 2011 higher rate pension relief is being withdrawn from individuals who earn in excess of £150,000 a year.

Loss relief – don’t lose out!

As a measure to help businesses during the recession, the Finance Bill 2009 allows trading losses for businesses to be carried back up to a maximum of three years. To qualify the losses must be suffered:

For limited companies, during trading periods ending in the two year period to 23 November 2010, and
For unincorporated, self-assessed businesses, during the tax years 2008 -09 and 2009 -10.
Losses have to be carried back to the latest year first. For example if the loss is incurred in the year to 31 March 2010 the first carry back is to the year ending 31 March 2009 (there is no restriction on the amount of losses carried back to this year). If losses are still available after this first set off they can be carried back a further two years. (In our example to the year ending 31 March 2008 and then the year ending 31 March 2007).

However the carry back to these further two years is capped at £50,000 per year against total profits for companies. For unincorporated businesses the carry back to the two earlier years is also capped at £50,000 per year but only against profits from the same trade.

If the loss carried back reduces taxable profits in any of the earlier years tax refunds should be forthcoming.

Take note of the following factors:

Tax losses can be enhanced by claims for equipment purchases, and
Self-employed tax payers can lose the benefit of their individual (personal) tax allowances and this needs taking into account when making loss relief claims.

Make the most of capital allowances

The rules on capital allowances have been changed and are now generous towards most small businesses. If you are thinking of investing in assets that qualify for the Annual Investment Allowance (AIA) during 2009-10 it is worth bearing in mind the additional relief you can claim to take advantage of the 40% First Year Allowance (FYA) that is available for one year to 5 April 2010 (1 April 2010 if you trade as a company.)

2007 Mini Cooper photographed in USA.
Image via Wikipedia

For most businesses the only assets that do not qualify for the AIA or the FYA are motor cars. Although don’t forget that if you buy a car with CO2 emissions under 110g/km a special 100% allowance can be claimed.

The AIA allows you to write off 100% of qualifying expenditure during 2009-10 up to a total spend of £50,000.

But what happens if you spend more than £50,000? Let’s say you invested £80,000 during 2009-10 in assets that qualify for the AIA and FYA. You would be eligible to claim the maximum £50,000 AIA and a 40% FYA on the excess. This would make your potential, combined claim £62,000, or an overall 78% tax write down in one year.

Even if the claims created net tax losses in 2009-10 this may enable your business to recover some of the tax paid in the previous three years.

Please call if you need more information on this topic, particularly, does your intended investment in new equipment qualify for these reliefs?

Do you want to pay 40%, 50% or even 61% tax?

New tax rates – you have choices!

We all know the story. Banks not properly regulated by the Government, and bailed out to the tune of billions and billions of pounds. The figure given in the budget was £175 billion deficit up from an expected £38 billion expected deficit just one year ago. I think most people agree the increased figure is also going to be an under-estimate. Now we have to pay for it.

From 6th April 2010 personal allowances are gradually withdrawn for those earning over £100,000. For every £2 of income earned above £100,000 personal allowances will be reduced by £1. This makes the effective rate of tax for those with earnings over £100,000 of 60%. There is national insurance of 1% also, so the true rate is 61%.

The rate will go back to 40% (really41%) for earningas over £112,500.

Then from £150,000 the new rate of 50% plus 1%NI ie 51%will apply.

If you dont like the idea of paying 40%, 51% or even 61% tax rates, you do have choices.

Perhaps one of the most straightforward options is to organise your affairs so that some or all of your income goes into a limited company. A company will pay 21% tax on profits up to £300,000. Clearly a big saving on 61%.

There is much more detail to discuss than we would wish to include here and indeed other tax planning options. Please contact us to discuss the details.

Directors – dont get bitten by losses

In the current harsh economic climate, many companies are making losses.

It is very common to find small companies paying modest salaries to the director / owners and also paying dividends, this is the most tax efficient way to extract profits from the company.

If the company is making losses then be aware that paying dividends could be dangerous! Dividends need to be paid from available profits – this could be profit earned this year or profits earned in earlier years but retained in the company rather than paid out as dividends.

Pay a dividend when there are no available profits and this is ‘ultra vires’ or invalid, this can have the following nasty consequences:

Firstly, the shareholders can be required to repay the invalid dividend to the company. This can happen after the company has gone into liquidation, and can be a very unexpected and financially painful experience.

Secondly, the Inland Revenue will treat the invalid dividend as a loan to a participator. Where such a loan is outstanding more than 9 months after the end of an accounting period, there is a tax charge of 25% on the value of the loan. This is commonly known as S419 tax (S419 ICTA 1988 is the legislation). There is also a tax charge on the benefit of an interest free loan (unless the amount of the loan is below £5,000)

Year end tax planning

We are approaching the end of another tax year – and an eventful one it has been! This has particular relevance to those who are self employed, either a sole trader or in partnership.

Due to the current economic downturn you may recently have experienced a drop in your profitability, indeed you may be trading at a loss.

If this is the case please read the check list that follows. We can help you to achieve the very best tax result if we are made aware, in good time, of your financial situation. Read the check list and call for a pre year end review.

If you are trading at a loss you may be eligible to carry up to £50,000 of the loss back for an extended period under new rules applying to the current year only. To maximise the losses claimed it may be beneficial to change your accounting date to 31 March 2009, if it is not already this date.

Timing of capital purchases or disposals, either before or after the end of the tax year, can be organised to maximise claims under the new Annual Investment Allowance of £50,000. (You can spend up to this amount each year on plant and equipment and get 100% relief in the year you spend the money)

If your profits have decreased this year, to 31 March 2009, compared to the previous year (31 March 2008), this may reduce the tax payments on account you offer in January and July 2009.
If you are forced to layoff staff and have some flexibility when you make redundancy payments, is this best charged in this current year, or the decision deferred to the next trading year?

What is your bad debt situation. Have you made adequate provision in your accounts. Has any VAT on bad debts over 6 months old been claimed back? Note that if you use Cash Accounting for VAT you only pay VAT added to your invoices when you are paid – so you don’t need to worry about claiming for bad debts.

If you have made a loss in this current year does this affect the tax relief you may have received on pension contributions? Will the tax have to be repaid or contributions recovered?

This is a year when careful consideration of your current trading position is paramount. There is no point in ducking this issue. If you do, you may end up paying more tax than is necessary. Paying less tax, or winning repayments of tax will only be one aspect of your fight to sustain a healthy cash flow – nevertheless it is not one you should ignore.

Running your company from home

If you run your business through a limited company and your base of operations is your home office, it is possible to charge your company rent. Of course if you do this the company will be able to deduct the rents from its profits and you will need to declare the rents on your self-assessment return. There may be some expenses to offset, but on the face of it there would seem to be little advantage.

But what if you also have buy to let properties and are making losses? Very often buy to let property owners have more costs (loan interest etc) than they have rents receivable. Unfortunately it is not possible to set off these rental losses against other income. The losses have to be carried forward to be set against rental profits in future years.

If on the other hand you do charge your company rents for the use of a Home Office it would be possible to set off any buy to let losses against this income. The rents from your company and your buy to let rents are taxable as property income. Effectively you would be getting tax relief through your company for the rental losses you personally suffer on your buy to let property. A number of considerations need to be taken into account:

  1. If you charge your company rents you must have a proper rental agreement between you and your company, otherwise the revenue could seek to treat the rental payments as part of your salary from the company.
  2. The rents that you charge for your home office must be charged on a commercial basis. It may be sensible to have a formal valuation undertaken.
  3. The rental agreement should state that the office space at home is only available for fixed periods each day. This is necessary to observe the non-exclusive principle. Without this you could jeopardise your principal private residence exemption for capital gains tax purposes.
  4. If you have a mortgage, you may need to check with your lender before entering into such an arrangement

Capital Allowances and personal tax planning

There has been a big change to the amount small businesses can claim for tax purposes when they invest in capital items such as plant and machinery (these are known as capital allowances).

From the 6 April 2008 sole traders and partners can claim up to £50,000 a year as a direct write off against their profits if they invest in certain qualifying assets; plant and equipment, vans and so on. Small and medium sized companies can also claim (from 1 April 2008). This article alerts individuals claiming the allowance of two other matters they should consider before making a claim.

First the good news!

Tax credits

If the claim you make reduces your income sufficiently you may be eligible for tax credits.

The problem is that until the current tax year’s earnings are quantified, you will not know for certain that you are eligible to claim – a pity as you can only back date claims for three months!

The solution may be to make a protective tax credit claim now. Your initial claim can show £nil but when adjusted for your actual post AIA claim the actual claim achieved may be much higher.

(While we are on the topic, you might like to know that you can also reduce your income for tax credit purposes by paying pension contributions)

And now the bad news!

Mortgage applications

Many lenders now ask for taxable income rather than trading profits when they consider if you are eligible for a loan. If your trading profits of £50,000 are covered by an AIA claim of £50,000, zero income is not going to qualify for much of a loan. Hopefully lenders will take into account the reason for the dip in your taxable income – but some may not! You might expect the request for information from a bank or building society to be consistent and informed, however in practice the requests vary widely and often appear to ask non senseical questions.