A. A. BALLANTYNE ACCOUNTANTS

Tax Tips


SOLE TRADER

Tax return and payment deadlines

As a sole trader, you need to pay income tax and one kind of National Insurance, called Class 4 National Insurance, on your business’s profits.  You’ll also have to pay Class 2 National Insurance unless your profits are very low (£5,595 or less in the current tax year). These taxes must all be paid each year by 31st January following the end of the tax year (5th April), or you’ll risk incurring penalties from HMRC. You must also file a self-assessment tax return (or tax return for short) by the same date each year, if you file it online.

Beware the payments on account trap

If your income tax and class 4 National Insurance amounts to more than £1,000 a year, then you’ll have to make payments on account.  Briefly, what that means, is that on 31st January and 31st July each year, you have to pay half of what you think your next tax bill will be, based on the previous year. This means that in your first year you can end up paying 1 ½ a year’s tax bill all in one go – gulp!  Make sure you have an idea in advance of what your tax bill might be, and save towards it.

Cut your tax bill

Claim business use of home.  To many freelancers fall into the trap of missing costs out of their accounts, which means they don’t claim all the tax relief they can, and therefore they end up by paying too much tax. If you work from home as part of your freelance business – whether that’s all the time or just occasionally – then you may well be able to claim some of the running costs of your home as costs of your business, so reducing your tax bill.  

Cut your tax bill

Claim the cost of using your own car.   Another way to reduce your tax bill is to claim the cost of using your own car for business travel. There are two ways you can do this.  If your business’s turnover is below the VAT threshold, currently £77,000 a year, then you can add up your business mileage, multiply that by HMRC’s approved rates, which are the same as mileage rates for employees, and include that cost in your accounts.  This is a simpler method than the other option, but if your car is a gas-guzzler, then you might find your tax relief is increased by using the second method. If your turnover is above £77,000 a year, then you need to keep a full mileage log, showing not only business mileage but private as well.  Turn the business mileage into a percentage of the total, then work out how much you’ve spent on your car all together – fuel, MOT, repairs, insurance, and so forth – and multiply that by the business percentage use of the car.

Money you take out has no effect for tax

When you’re a sole trader, unlike directors of limited companies, you can take as much money out of your business’s bank account as you like and it doesn’t have any effect on your business’s tax bill – none at all. This is because there’s no legal difference between you and the business when you’re a sole trader.  Legally you are the business.  So you can’t claim tax relief on money you take out of the business, or money that you spend on personal items from your bank account. As a sole trader you still need to make sure you comply with HMRC’s rules, but by taking the right advice you can avoid paying too much tax! –

LIMITED COMPANY

Remember you are an employee – the company is your employer.  When you’re running your business through a limited company, it’s crucial to remember that the company is a separate legal entity from you.  This applies even if you’re the company’s only director and you also own all the shares in the company.  This means that any money the company earns from its customers belongs to the company, rather than to you personally, and you have to be careful how much money you take out of the company as taking too much out can increase tax bills.  If you’re going to take anything out of the company at all, either by way of a salary or if the company pays you back for expenses you’ve incurred personally on its behalf, then you must register the company with HMRC as an employer, and you will be an employee of the company.

Taking money out of the company

Because the company’s money doesn’t all belong to you, you can’t simply withdraw money from the company bank account like sole traders can from their business accounts, without risking paying excess tax.

There are three ways the company can pay you money.  It can pay you a salary as a director, it can pay you dividends on the shares you hold in the company (assuming it has enough profit available after corporation tax to pay those dividends) and it can pay you back for money you’ve lent it, or that you’ve spent personally on company costs, or costs that you’ve incurred for the company but without spending any physical cash – like mileage travelled on business in your own car. That’s it.  If you take money out of the company over and above these amounts, you could have to pay extra tax.  If you get the mix of salary and dividends right, then you can reduce your tax bill, because there’s no National Insurance to pay on dividend income.  Speak to your accountant about this because it’ll vary depending on any other income you have.

When the company pays on your behalf

If the company pays for personal costs on your behalf, for example if it provides you with private health insurance, or pays for your children’s school fees, then this will almost certainly be a taxable benefit, and you may, in some cases, need to add the value to your salary and pay tax and/or National Insurance on it.  HMRC provides full guidance to help you to deal with taxable benefits.

Could you be a quasi-employee of your clients?

There may be some clients you work for, or projects you take on, where you have the status of an employee.  This is covered by a piece of legislation which is usually called IR35.  Briefly, if you were actually employed by your client then they would have to pay employer’s National Insurance on the full cost of what they paid you, and so HMRC’s coffers would be swelled.  If you’re caught by IR35, then your company will have to make a “deemed payment” to HMRC to compensate for this National Insurance.  If you were a sole trader, and found to be a quasi-employee, it would be your client who would have to make this payment – which is why many clients insist that their freelance contractors operate through limited companies.  HMRC look at the whole picture and what actually happens when they’re trying to determine whether a contractor is an employee in all but name, rather than simply reading the contract between you and your client.  Make sure you have a genuine business, rather than being a quasi-employee!

Tax returns and paying tax

A limited company must pay corporation tax on its profits for each year it trades.  This tax must be paid to HMRC by 9 months and a day after the year end.  So if your company prepares accounts to 31st March each year, then any corporation tax is due by 1st January the following year.  Using a tool like FreeAgent’s tax timeline can help you make sure that the company has saved enough money to pay its tax dues on time.  The company must also file a form called a corporation tax return, or CT600, to HMRC each year, showing how its tax was worked out.  Usually your accountant will file this for you, or you can use HMRC’s free software or a piece of commercial software (such as TaxCalc) to create and file your return.  The CT600 isn’t due until 12 months after the year end, but in practice, because the company must pay corporation tax 3 months before this, most companies don’t file so long after their year end.  A company must also file accounts and a form called an annual return, listing the company’s directors, shareholders and address as well as what it does, each year with Companies House.  The accounts are due 9 months after the year end, and Companies House impose very stiff penalties for late filing of accounts.  The annual return is due each year on the anniversary of the company’s incorporation.  Running your business through a limited company can result in you paying less tax than if your business were a sole trade, but there are a lot of extra hoops to jump through so if you have any doubt, take advice from an accountant.

 

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