A progressive, South West based accountancy practice

LATEST POST

Annual Team Training Day

On Friday we enjoyed our team training day – held at the Quickstore Business Centre in Saltash.

During the day we all contributed to presenting topics such as ‘On the path to Excellence – how far have we come?’, ‘Our personal five year goals’, ‘What is a professional?’, ‘What makes Numbers UK Ltd unique? (What is our USP?), as well as celebrating the highlights of 2014/15, strategic planning for 2015/16, and various technical updates.

To end the day, we presented our Team Member of the Year award to Priscilla Squires – as voted by the whole team during the year. Priscilla, and a guest of her choice, will be enjoying dinner, bed and breakfast at Boringdon Hall Hotel. (I’m sure her husband is hoping she shares it with him!)

As a final ‘thank you’ to our hard working team, we informed them that from now on they could enjoy their birthday as a paid holiday. We think this fits nicely with our ethos of ‘Making Lives Better’.

Is your tax coding correct?

As part of an annual review of tax codes for the employees of a client we identified an error which has resulted in one employee receiving a tax refund of over £1,500. Are you sure your tax coding is correct?

Strategise!

By reviewing a client’s remuneration strategy Andy managed to identify annual tax savings of £17,800.

Cloud accounting

After 3 hours of training on @Xero a client left the office feeling like they are more in control of their business finances than ever before. Have you considered cloud accounting in your business? If not, contact us to find out why you should be thinking about it.

Doing Good

On Saturday night, Emily, and Pelynt Young Farmers, held a ‘Hoe Down Show Down’ and raised £1,000 for Cornwall Hospice Care. Well done to Emily and team!

The election’s over, what’s next?

So now we know the outcome of the most unpredictable election in a generation. The question for good businesses is not “How did that happen?”, but

“What happens next?”

The Tories look like they will be just one seat short of an overall majority. They are likely to form a government without partners, as the opposition is too divided to vote them out, so another 5 years as PM for David Cameron is on the cards.

The main opposition is likely to come from within the party. By this, I mean from his euro-sceptic element. It is possible that EU membership becomes the main battle ground for the next five years.

This uncertainty will be damaging to business, and my hope is we get to the promised in/out referendum as soon as possible.

What does that mean for business?

In many ways it is good news for business. The economic policy will continue. Deficit reduction will remain the central aim. In fact, the aim will be to generate a surplus.

The uncertainty over our EU membership is perhaps the biggest worry for business, especially those who export to that bloc.

General comments

The stability that this result brings probably means that interest rates will stay low for a while longer. We should see a gradual rise back to “normal” levels by 2020. This provides an opportunity to pay down debt, and strengthen the balance sheet.

As I write (midnight on Election Day), sterling has risen on the FX markets, meaning UK exports are more expensive, but imported costs are lower. The pressure for an early rise in interest rates is much reduced.

Here are a few specifics, and some suggested action.

A lower target for tax avoidance revenue

Despite my question on TV (!), (http://www.bbc.co.uk/iplayer/episode/b05t39yq/election-2015-english-regions-election-2015-a-bbc-spotlight-special) we have no idea on where the Government will raise the extra £5bn they pledged in their manifesto. We can expect most of the “vanilla” planning to remain unchallenged.

Presumably, some of the more esoteric strategies will be attacked, and there may be a tightening up of the rules on some of the CGT reliefs. Tax relief on pension contributions may also be restricted.

Therefore, the action point is to review the normal salary/dividend mix, expecting the planning to remain available.

If you are planning to sell your business over the next five years, it might be sensible to start planning now, as the only major taxes not subject to the “no increase” pledge are CGT and Corporation tax.

More encouragement to take on workers

The Tories have pledged to continue the employment allowance, so employers will be able to take up to £2,000 per annum off their Employer NIC bill. The pledge was to keep it for five years!

They want to fund up to 3 million more apprenticeships, and aim for full employment.

Small businesses should now be considering whether this is the right time to take on an apprentice. The skills shortage is likely to be the biggest brake on growth over the next five years.

The action to take here is to develop a five year plan to recruit apprentices and train them up to be your next generation of managers.

More encouragement to start up businesses

The recent pension rule change has opened up a new source of funding. Up to 10% of retirement age people are considering using their pension pot to fund a new venture.

In addition, the Government want to triple the number of start-up loans to 75,000.

Those considering a new business venture should look outside of the traditional sources for funding; there are a huge number of alternatives to the “Big Four” banks.

Other taxes

Cameron pledged no increase in Income tax, VAT or NIC for five years. It is difficult to see where he can increase taxes, as the Tories want to increase the IHT limit to £500,000 per person (£1m for married couples and civil partners).

The UK is in a competitive market for non-EU companies, so it is difficult to see them reversing the recent trend in reducing corporation tax rates.

This pretty much leaves only CGT, business rates, council tax and consumer taxes (alcohol, tobacco and fuel duty) as the only major areas in which taxes could be raised.

The recently announced review of business rates is expected to increase the take by £1bn, so now is the time to review that rates bill and make appeals if you think you have a case.

Tax reliefs

The other way in which tax could be raised is to restrict tax reliefs. For example, tax relief for pension contributions and gift aid could be restricted to the basic rate of tax. Gift aid relief costs around £1bn a year. Cutting gift aid relief could protect another £0.5bn of tax, without “raising” any tax.

Pension tax relief costs around £4bn a year. Another £2bn could be protected by limiting relief.

If a pension contribution is planned, it may be sensible to do it sooner rather than later, as tax relief may be restricted after the next budget or Autumn statement.

Good housekeeping in general

Of course, major changes are always a good reason to review your prices and costs. We can assist in identifying the “low cost, big impact” changes that would have the most effect, and help you to implement them if required.

Contact us, or your current adviser for help with this.

Maximising tax efficiency in 2015/16

Introduction
The introduction of the Employment Allowance (“EA”) allows employers a discount of up to £2,000 off their liability to Employers’ NIC. This has added another factor into the salary vs dividend debate.
There is one other complicating factor as well. The level of other taxable, non-dividend, income enjoyed by the director/shareholder.

If there’s no other income
A salary equivalent to the director’s personal allowance is most efficient. The additional NIC paid by the director (at 12% on the excess over £8,060) is more than compensated by the additional corporation tax saving at 20%.

With no other employees, this works for companies with up to 5 directors/ shareholders.

What if the director has other income?
Many directors own the company premises, and enjoy a rent from that. Where rent (or indeed any other taxable income) is enjoyed by the director, a little more care is needed. The optimal position would be to create total taxable income (excluding dividends) of exactly £10,600 (for 2015/16). So if the director was receiving rent of £3,000 a year, the ideal salary would be £7,600.

What about pensions?
There are two aspects to this.

Contributions to a private pension scheme
Dividends do not count as pensionable income, and so tax relief on personal contributions would be limited to the amount of taxable salary. (Rent doesn’t count either).
The simplest way around this is to get the company to make an employer contribution, but you may need a different kind of pension scheme, and this may need to be negotiated/agreed with fellow directors.

I had just such a case where one of three directors wanted to top up his pension. Unfortunately, the wider savings from the low salary route meant his tax relief was limited to just £5,000, as he already had two smaller schemes running, and the company did not have sufficient profits to get full tax relief on even that small amount.

State pension entitlement
Employees are credited with a year’s worth of contributions if their weekly earnings exceed £112.00 (2015/16 rates). Therefore, the director will need a salary of at least £5,824 to add another year to their state pension accrual. In the example above, a salary of £7,000 meets the criteria, but what if the rental income was £6,000?

Voting a salary of £5,824 would take the director into income tax, as total income would exceed the personal allowance.

At 2015/16 rates, this would impose an income tax bill of £244.80 on the director, but would add a year to the pension entitlement. The cost-benefit decision is personal to each individual; is an extra year’s pension worth paying that tax?

The factors to consider are:

  • how many years before you can take your pension,
  • how long you think you’ll be around to enjoy it, and
  • how much more could you generate in income by saving that tax over the years before you retire/

among others.

Creating alternative income
If the circumstances allow, it may be more efficient to draw one’s income as rent or interest from your own company, rather than by way of salary.

Rent
Any rent charged must be at a market rate. We would suggest that a written agreement is drawn up, making it clear who is responsible for repairs etc., as well as covering the amount of the rent.

Interest
A director can only charge interest to his company if he has a loan account in credit, and there is an obligation on the company to pay interest. Any “interest” paid on a loan which was intended to be interest-free could be challenged and treated as remuneration. In order to avoid any uncertainty, we would suggest a written agreement, which makes clear the terms of the loan. The agreement does not need to be onerous, but a clear statement can help to avoid later disputes.

Action
The start of a new tax year is a good time to review your financial positon, as many rates and allowances change. Thankfully, for directors’ salaries, the annual earnings period means you haven’t lost out if your review has not yet been completed.

Contact your advisor, or drop us a line if you’d like a review done of your personal situation.

Director/shareholder reward packages: The dynamics have changed

Introduction

The introduction of the Employment Allowance (“EA”) allows employers a discount of up to £2,000 off their liability to Employers’ NIC. This has added another factor into the salary vs dividend debate.

There is one other complicating factor as well. The level of other taxable, non-dividend, income enjoyed by the director/shareholder.

If there’s no other income

A salary equivalent to the director’s personal allowance is most efficient. The additional NIC paid by the director (at 12% on the excess over £8,060) is more than compensated by the additional corporation tax saving at 20%.

With no other employees, this works for companies with up to 5 directors/ shareholders.

What if the director has other income?

Many directors own the company premises, and enjoy a rent from that. Where rent (or indeed any other taxable income) is enjoyed by the director, a little more care is needed. The optimal position would be to create total taxable income (excluding dividends) of exactly £10,600 (for 2015/16). So if the director was receiving rent of £3,000 a year, the ideal salary would be £7,600.

What about pensions?

There are two aspects to this.

Contributions to a private pension scheme
Dividends do not count as pensionable income, and so tax relief on personal contributions would be limited to the amount of taxable salary. (Rent doesn’t count either).

The simplest way around this is to get the company to make an employer contribution, but you may need a different kind of pension scheme, and this may need to be negotiated/agreed with fellow directors.

I had just such a case where one of three directors wanted to top up his pension. Unfortunately, the wider savings from the low salary route meant his tax relief was limited to just £5,000, as he already had two smaller schemes running, and the company did not have sufficient profits to get full tax relief on even that small amount.

State pension entitlement
Employees are credited with a year’s worth of contributions if their weekly earnings exceed £112.00 (2015/16 rates). Therefore, the director will need a salary of at least £5,824 to add another year to their state pension accrual. In the example above, a salary of £7,000 meets the criteria, but what if the rental income was £6,000?

Voting a salary of £5,824 would take the director into income tax, as total income would exceed the personal allowance.

At 2015/16 rates, this would impose an income tax bill of £244.80 on the director, but would add a year to the pension entitlement. The cost-benefit decision is personal to each individual; is an extra year’s pension worth paying that tax?

The factors to consider are:

  • how many years before you can take your pension,
  • how long you think you’ll be around to enjoy it, and
  • how much more could you generate in income by saving that tax over the years before you retire/

among others.

Creating alternative income

If the circumstances allow, it may be more efficient to draw one’s income as rent or interest from your own company, rather than by way of salary.

Rent

Any rent charged must be at a market rate. We would suggest that a written agreement is drawn up, making it clear who is responsible for repairs etc., as well as covering the amount of the rent.

Interest

A director can only charge interest to his company if he has a loan account in credit, and there is an obligation on the company to pay interest. Any “interest” paid on a loan which was intended to be interest-free could be challenged and treated as remuneration. In order to avoid any uncertainty, we would suggest a written agreement, which makes clear the terms of the loan. The agreement does not need to be onerous, but a clear statement can help to avoid later disputes.

Action

The start of a new tax year is a good time to review your financial position, as many rates and allowances change. Thankfully, for directors’ salaries, the annual earnings period means you haven’t lost out if your review has not yet been completed.

Contact your adviser, or drop us a line if you’d like a review done of your personal situation.

Numbers (UK) Limited

5 May 2015