If you are the owner of a business that’s not publicly listed, you’ll want to draw money from your company for your own use. If your business is registered as a limited company, it’s a separate entity from you, and there are a number of ways you can draw money from it. It all depends on the relationship you form with your business.
According to Riz Wasti from 2E Accountants you will typically have three main relationships with your business: as a lender, an employee, and an owner/shareholder. Here he describes the five ways you can draw money from your business, based on these relationships:
If you have lent money to the business for any reason then this is considered a loan like any other loan, and as such it’s payable back to you.
Advantages: the cash you will receive personally as a loan repayment is not subject to personal tax.
As you work in your business you can earn an employee’s salary. Keeping the salary low can help to keep the tax costs to you and your business at a minimum.
For example you could pay yourself up to the limit of the employee National Insurance (NI) threshold (£153 per week for 2014-15 tax year) or up to the director’s annual personal basic allowance (£10,000 per year for 2014-15 tax year].
Advantages: salary is a tax deductible cost to a business thereby reducing your corporation tax. Also, under the threshold you will not incur personal tax.
You may incur expenses in your business which you pay personally. As long as the expenses were exclusively for business, you can claim them back from the business.
In addition HM Revenue & Customs (HMRC) allows for using some personal assets for business; eg if travelling in your own car for business purposes, you can claim 45p per mile without incurring income tax. There are also allowances for the use of your home if working from home.
Advantages: as long as expenses are allowable there will be no personal tax liability and you will get a reduction in corporation tax.
A company will pay 20% corporation tax on profits. The profit-after-tax is then available to distribute to its shareholders. This is called dividends.
If you pay yourself a dividend, up to the basic rate income level (the basic rate at 20% is £31,865 per year for 2014-15 tax year), you will not have to pay additional personal taxes.
Once your gross personal income goes over the basic income threshold, the tax rates for dividend income also go up.
Advantages: dividends give businesses the flexibility of keeping salary costs low and paying shareholders after earning actual profits, allowing owners to earn in the most tax-efficient way.
Capital gains occur when, as a shareholder, you sell your shares to someone at higher than cost value.
The capital gains tax rate starts from 18% (gains to basic rate limit 18%, gains above basic rate 28% for the tax year 2014-15). However, there is an annual exemption available for the first £11,000 (2014-15 individual allowance). Also, if you qualify for Entrepreneur’s Relief you will only have to pay 10% capital gains tax.
Advantages: tax liability is lower than income tax.
As a small business owner, you have multiple options to get returns from your own managed business. HMRC rules can be complex and the rates and allowances are subject to change each year. An accountant or a financial advisor can help you decide between options, to ensure that your decisions reflect the choice most economical and advantageous to your business.
Copyright © 2014 Riz Wasti of 2E Accountants.
Faith in the traditional banking system has waned and the doors are opening to new entrants. Anyone can be a banker now. In fact, anyone can be a central banker and create their own money or, rather, mine it, like gold. This is crypto-currency or secret currency, of which Bitcoin is the best-known example.
Reminiscent of the ’49 California gold rush, the giants of Silicon Valley are piling in. What’s not to like? Low transaction fees, no FX, no banker-of-last-resort, no deposit insurance scheme, no Financial Ombudsman.
In fact, it’s not money; it’s a commodity. The US Department of Justice has declared it to be ‘goods’. Paying with Bitcoin is not paying with money. It is barter: offering goods for goods.
Should VAT be added to a Bitcoin payment you are making if you are VAT-registered? Since Bitcoin is secret, do you even know who you are trading with, what VAT should be added or what you put in your EU Sales List?
Should payments made with Bitcoin be added to ‘Cost of Goods Sold’ or payments received added to ‘Sales’? What is the treatment if the value of Bitcoin owned rises or falls? Are such profits taxable and any losses tax-deductible?
These are some important questions, but ones that can get lost in the rush to innovation – small businesses really do not want to get caught out. Similarly, why can Bitcoin be termed an ‘investment’ when the exchanges on which it is traded are unregulated and their location, staffing, ownership and accounts may be invisible? Who is the market-maker in the goods and how can you be sure you can get your value out in real money when you want it? Bitcoin may appear attractive when deposit rates are 0% but the business propositions, security and safety nets are very different.
With crypto-currencies it’s as Tina Turner once said in the 1985 film Mad Max 3: Beyond Thunderdome: “I know you won't break the rules, because there aren't any”.
Copyright © 2014 Robert Lyddon. Robert Lyddon is general secretary of international banking network IBOS.
When compared to the corresponding quarter in 2013, the number of company liquidations in England and Wales decreased by 11.7% in July to September 2014, which could be further signs of better times ahead for the UK’s 4.9m businesses.
Compared to Q2 2014, there were 3.2% fewer company liquidations in England and Wales, with figures published by The Insolvency Service on 29 October also showed that in the 12 months leading to September 2014, 1 in 186 companies went into liquidation, compared to 1 in 177 in the 12 months to June 2014.
There were 858 compulsory liquidations, a 12.4% fall on the previous quarter and a 6.8% reduction on the corresponding quarter last year. Although creditors’ voluntary liquidations increased by 0.4% compared to the previous quarter, they are 13.3% down when compared to the same quarter last year. Administrations decreased by 18.8%, with company voluntary arrangements and receiverships also down.
And there was better news about individual insolvencies, too. According to The Insolvency Service the number of people who became insolvent in England and Wales in Q3 this year fell by 4.6% when compared to Q3 2013, the result of decreases in bankruptcy orders (down 18.7%) and individual voluntary arrangements (down 1.9%).
When reporting the news of personal bankruptcies falling to their lowest level since 2006 BBC News said this was because many people were choosing other forms of insolvency. “There has been a rise in the number of people using Individual Voluntary Arrangements or Debt Relief Orders, which can often be cheaper or cause less disruption to their home lives,” it reported.
According to official website Gov.uk: “An Individual Voluntary Arrangement (IVA) is an agreement with your creditors to pay all or part of your debts. You make regular payments to an insolvency practitioner (IP), who will divide this money between your creditors.
“Your IP works out what you can afford to repay and how long the IVA lasts. You’ll have to give details about your financial situation, eg your assets, debts, income and creditors. Your IP will contact your creditors. The IVA will start if the creditors holding 75% of your debts agree to it. It will apply to all your creditors, including any who disagreed to it.”
It adds: “Debt Relief Orders (DROs) are one way to deal with your debts if you owe less than £15,000, have little spare income and don’t own your home. If you get one: your creditors can’t recover their money without the court’s permission; and you’re usually freed (‘discharged’) from your debts after 12 months. You get a DRO from the official receiver, but you must apply through an authorised debt adviser.”
Blog written by Tax Donut editor and freelance start up and SME content writer Mark Williams.
Submitting your first self-assessment tax return can feel daunting. The deadline for online returns for the tax year 2013-14 is 31 January 2015. This may feel like a long way off but it will roll around sooner than you may think, especially as we approach the busy months in the run up to Christmas. It pays to be well prepared.
HM Revenue & Customs (HMRC) is running a live interactive webinar at 12pm on 24 October 2014 aimed at self-employed people who are submitting their tax return for the first time.
It will demonstrate:
You will also have the opportunity to ask the presenter your own questions.
You can take part in the free live webinar by pre-registering on the HMRC website and submitting questions in advance to be answered on the day. The webinar will last an hour.
Register for the HMRC live webinar self-employment and your online tax return
HMRC is also holding another live interactive webinar on record keeping for the self-employed at 3pm on 20 October 2014.
This webinar is aimed at sole traders and partnerships (but not LLPs) and is intended to give an introduction to the basic principles of keeping good records. It will give you guidance as to what HMRC expects from you and how you can get into good habits from the start.
Again, you can take part in this free live webinar by pre-registering on the HMRC website and submitting questions in advance to be answered on the day. The webinar will last an hour.
Register for the HMRC live webinar record keeping for the self-employed
One of the main advantages of being self-employed is that you have more control over your finances than you would as an employee, meaning you can use tax-planning techniques to reduce your bill. Here are my top tips about how to be more tax efficient when you’re self-employed or running your own small business.
If you are newly registered as self-employed you are probably operating as a sole trader, though as your business grows and generates profits of £25,000 or more each year, it may be more tax-efficient to operate through a limited company. The benefit of working as a limited company director is that you will have greater opportunity for tax planning.
Business costs that you incur solely and exclusively for your business, for example, accommodation, travel and equipment, could be claimed as expenses. Offsetting your business costs as expenses could save you 20% tax (or 40% as a higher earner). Remember that HM Revenue and Customs (HMRC) could ask for proof that the expense was incurred – up to seven years following the claim. Make sure you keep your receipts!
Registering for the Flat Rate VAT scheme could save you money, especially if you don’t incur many business costs. In basic terms, through the scheme you would charge your clients 20% VAT on your services, but pay back a lower VAT rate to HMRC.
You could claim tax relief your pension contributions. This means you would pay your pension out of your gross salary, not your net salary, and save 20% tax or 40% if you are a higher earner.
Missing online tax return deadlines results in a penalty of £100. If your return is more than three months late the penalty will increase by £10 each day up to a maximum of £900 or 90 days. If your return is six months overdue an extra £300 or 5% of the tax due (whichever amount is greater) will be added to your penalty, bringing the total to £1,200. The fine will increase by this amount again if your tax return is 12 months late and then you could potentially incur further penalties depending on your individual circumstances. Employing an accountant will help you keep up-to-date with your bookkeeping and manage these deadlines so you don’t incur any penalties.
Britain has seen a surge in self-employment over the past 12 months, but becoming your own boss comes with the daunting task of filing tax returns. Some of the most common mistakes to look out for when filing your return yourself are:
It’s no wonder a lot of self-employed people leave their return until the last minute, thinking about the number crunching, hunting for receipts and statements, and finding the hours to sit down and fill in your return is all time consuming. It can be difficult to find the motivation to file early, but with the late charge rates and the amount of mistakes found in late submissions, is it wise to miss the initial deadline?
Maths errors are commonly found on tax returns, as well as miscalculations surrounding taxable income, childcare deductions and tax credits. These inaccuracies can be easily avoided by keeping accurate, up-to-date records, so month on month you are sure your figures are correct. Using free online tax return software is a free and simple way of keeping on top of things.
Double-check to make sure there are no mistakes on your return. Look out for any missed information, for example, empty boxes should alert you to possible mistakes. Recalculate your sums to check your answers are 100% correct to the best of your knowledge, and if possible have a colleague or family member check for you. If you are unsure of something always get a second opinion or contact the helplines available. It’s always best to get advice rather than shrug it off and hope for the best.
To avoid interest and penalties on repayments ensure your financial account numbers are correct. If they contain a typo or are incorrect, it can cause delayed refunds to yourself or even result in late charges if HMRC can’t collect your tax bill payment in a timely manner.
All self-employed people have a Unique Reference Number usually referred to as a UTR. This is a ten-digit number that identifies you to HMRC. It is most important that you note this down correctly, because it can cause problems if incorrect. In the case of self-employed builders, if your UTR number is incorrect when given to someone you are subcontracting for, it could mean that you have emergency tax deducted at 30% instead of the normal 20%.
Copyright © Celso Pinto 2014. Celso is the founder and CEO of SimpleTax.