Our guidance note explains the changes to taxation of dividends and how they will affect limited company owners
Here is a really useful guide to reducing your tax bill.
Please contact us if you need any further infomation
We are pleased to give some more information about the radical changes to pensions and ISAs announced on Wednesday.
You can download the file from here
Please remember that we are able to support you with an auto-enrollment pension solution. If you would like to know more, please contact us.
The introduction of the £2,000 employment allowance for the 2014/15 tax year, brings some added complications and opportunities regarding the amount that the Boards of Limited Companies approve as Directors’ salaries.
To re-cap – for the year from 6th April, 2014, most employers will be able to reduce their Employers National Insurance Contributions (NIC) (levied at 13.8% on monthly pay over £663) by a maximum of £2,000 for the year.
There are 2 options.
1/ If the company has other employees and is able to use all the £2,000 Employment Allowance in the year against employer NICs for them , then the best route is for the Company to pay the Director £663 per month. The Company votes dividends to the shareholder/directors to top up their earnings from the company. Care should be taken to avoid any higher-rate tax on the dividend. We can advise you based on your individual circumstances.
2/ If the company has NO other employees, then we suggest that the company pays a one-off bonus to each Director of £2,044 in the last quarter of the 2015 tax year (between 6th January and 31st March 2015). This uses all of the Director’s 2014/15 personal allowance to reduce company profits (saving a further £408 Corporation Tax). The Director pays £245 Employee’s NIC so there is a net benefit of £163. The Company votes dividends to the shareholder/directors to top up their earnings from the company. Care should be taken to avoid any higher-rate tax on the dividend. We can advise you based on your individual circumstances.
If you are interested in option 2, we strongly suggest you contact us as there are some pitfalls that need to be avoided.
In both the above cases, please consider the flexibility offered by a rent agreement between the company and Director for use of home for business purposes (please see my earlier article).
Please note that Directors under IR35 will not be able to claim the Employment Allowance against their deemed salary, but if they actually pay themselves through the payroll under RTI they can.
Where a Director takes a monthly salary of £663 and has no other income, dividends of up to £30,500 can be received without additional income tax being charged.
Following the recent announcements from HM Revenue and Customs, I am pleased to put forward our recommendations for tax-efficient wages and dividends for the year beginning 5th April, 2013.
If you are the owner of a limited company, the most tax-efficient remuneration package is an annual salary of £7,692 and dividends of £30,382 (profits allowing). This assumes you have no other income. At this level, you will have no income tax to pay. The limited company will have been taxed on the dividend income. Dividends in excess of this amount will be taxed as 25%.
There are some formalities about dividend vouchers and board minutes which we would be happy to advise on.
You may recall that last year we advised a salary of £7,600 and dividends of £30,933 – £459 more than we advising for this year. This is because the higher-rate income tax threshold has been reduced to take account of the increase in annual personal allowance from £8,105 to £9,440. National insurance thresholds have not benefited from the same increases as income tax thresholds. Annual wages between £7,692 and £9,440 will be subject to a combined national insurance charge of 25.8%, more than offsetting the Corporation Tax relief.
By substituting £1,748 of dividends for rents charged for a use of home office, an overall annual tax saving of £350 can be achieved. Please contact for more details if this suits your situation.
We are often asked about the tax reliefs available for the costs incurred when working at home. In this and a previous article , I intend demistify this for you and, hopefully, help save you some tax (or at least stop you falling into some nasty hidden traps).
In the previous article, I explained the issues faced by a Director of a limited company when trying to claim tax relief to defray the costs of working from home.
The simplest route for a Director to obtain tax relief is to charge the limited company rent for the use of his own premises. There are formalities that need to be followed including a board minute and a formal rent agreement. The Director has to show this rental income on his self-assessment tax return but will be able to claim back the incremental costs incurred as a result of working from home. We recommend that the rent charged is the same as the incremental costs incurred as a result of working from home.
Sole traders and members of partnerships are able to claim tax relief (as a cost to their business) on the same basis on the self-employed pages of the tax return.
Calculating the incremental costs of working from home
You need to work out what rooms (or floor area) you use for business, and how much you’re using that room (or floor area) is for business use as opposed to private use. So lets say, you have 8 rooms and use 2 of them for business use 50% of the time. You will be able to claim 1/8th of your household costs as business costs (50% of 2 rooms = 1 room; total number of rooms 8).
Costs that can be claimed on this basis include:
- Council tax
- Heat and light
- Home insurance
- Mortgage interest
- Rent, if you rent your home from a landlord
- General household repairs and maintenance
- Water rates, unless your business use of home is “minor”
Other costs you could claim include
- Business telephone calls
- A proportion of your landline rental
- A proportion of your broadband
The claim would be based on your estimate of business v private costs.
There is some very good guidance on the HMRC web-site.
I hope this is article is useful. Please do hesitate to contact us if you require further information.
We are often asked about the tax reliefs available for the costs incurred when working at home. In this and a number of future posts, I will demistify this for you and, hopefully, help save you some tax (or at least stop you falling into some nasty hidden traps).
Firstly, it is important to understand that there are different rules for
a/ employees, including directors with an employment contract
b/ directors without an employment contract (office holders)
c/ sole traders/partners
In this post, we are going to explain the rules for employees, including directors with an employment contract.
Considerations regarding Directors
However, before we do this, we need to explain why there are different rules for Directors depending on whether or not they have an employment contract.
If you are a company director you are automatically an ‘office holder’ in law. You are not entitled to receive the National Minimum Wage for the work you do as an office holder. If you also have an employment contract, you will be entitled to the National Minimum Wage for the work you do under that contract.
For the 2012/13 tax year, the main rate of National Minimum wage is £6.08 per hour. This means that a Director with an employment contract must, in law, be paid £11,856 per annum (assuming a 37.5 hour week). That is way above our recommended tax-efficient 2012/13 Directors salary of £7,600 per annum. We, therefore, usually recommend that full-time Directors do not have an employment contract (and will not be able to claim the working from home relief outlined below – but please see later article for a method of claiming releif). If a Director works 24 hours per week or less, you should consider issuing an employment contract and subject to other considerations pay a salary of £7,600 p.a. Working Tax Credit issues may also need to be considered.
Tax reliefs for employees working from home , including directors with an employment contract
Section 316A ITEPA 2003
If you are employed specifically to work at or from home, and have no alternative but to do so, you may be able to get tax relief on some of your household expenses. Similarly, if you volunteer to work at home under a ‘homeworking arrangement’. A homeworking arrangement is an agreement with your employer that you’ll work at home on a regular basis. Evidence may be required by HMRC.
Tax relief can only be obtained by your employer making these payments free of tax and NI.
You don’t have to work at home every day but there must be a regular pattern – for example two days at home and three days in your employer’s premises each week. The work you do at home must be work that you’re required to do as part of your employment.
Typically HMRC will allow claims for:
- the extra cost of gas and electricity to heat and light your work area
- business telephone calls
You won’t be able to get relief on domestic expenses that you’re paying anyway – like your mortgage or council tax. You also won’t be able to get relief for expenses that relate to both business and private use – such as your telephone line rental, or Internet access.
From 2012-13 onwards, for payments of up to £4 per week, or £18 per month for monthly paid employees, you don’t need to provide any records of the household expenses you’re claiming relief for. For amounts above £4 you will need supporting evidence to show that the amount you are claiming is no more than the additional household expenses you have actually incurred.
This type of claim is most appropriate where a spouse is employed part-time to work at home on administration. The annual tax saving for a sole trader using the uncontested £4 per week rate will be £60 (at basic rate). OK its not a lot of money, but it is simple to claim.
Section 336 ITEPA 2003
For completeness, I have included tax relief claims using the above legislation. This is the only option available to the employee where the employer does not pay a tax-free allowance.
Quoting from HMRC “Before a deduction can be permitted for a household expense it must be demonstrated that the expense has been incurred wholly, exclusively and necessarily in the performance of the duties of the employment…….. HMRC accept that those conditions are met where the following circumstances apply:
- the duties that the employee performs at home are substantive duties of the employment.
- those duties cannot be performed without the use of appropriate facilities
- no such appropriate facilities are available to the employee on the employer’s premises ( or the nature of the job requires the employee to live so far from the employer’s premises that it is unreasonable to expect him or her to travel to those premises on a daily basis)
- at no time either before or after the employment contract is drawn up is the employee able to choose between working at the employer’s premises or elsewhere.”
As I said, any claim here faces some very difficult hurdles.
I really hope this helps. Please watch out for future articles and, as always, if you need further advice do not hesitate to call us.