The 5th SEISS grant

As the UK returns to normal after the Covid 19 pandemic, all government support for sole traders, self employed and small and medium sized business is winding down. Meanwhile HMRC is increasing efforts to maximise tax revenues. In some cases going back several years to find any unpaid taxes and add on interest and fines to the amounts. It use to be the anything under £50 HMRC wouldnt bother to chase but now every pound matters.

The deadline for the 5th SEISS (self employed / self assessment) grant is 30th Sept 2021 only a few days away.

The 5th SEISS grant is different from the previous ones as there are two levels available and the claimant needs to declare how trade as been negatively effected (reduced activity / capacity / demand) between 1st May 2021 to 30th Sept 2021. And requires that the 19/20 and 20/21 self assessments (personal tax returns) be completed.

There is also a relevant basis period applicable and a financial impact declaration (FID). This has caused a lot of members of the public confusion and worry on how to claim for this correctly and not make an incorrect that can be picked up by HMRC and asked to be paid back.

So we at Tax Affinity Accountants are here to help and support everyone who needs help with this regard. We can help complete the paperwork and documentation required to claim the 5th grant without the hassle and time spent trying to work out and worrying if you have declared everything correctly. Contact us via our online form here.

Bounce Back Loans

We have also noticed that a lot of banks are not telling customers clearly about their options (ensured by the goverment) when it comes time to start making repayments for the bounce back loan.  In short you have 3 options before having to make repayments in full when your business and you may not be able to afford to.

1. Changing from a 6 year repayment plan to a 10 year repayment plan. This will drop the monthly amount to pay and with the small interest fee doesn't add much on top of the total amount due considering the extra 4 years time given.
2. You can have at least a 6 month repayment holiday and hold off the payments in full.
3. You can make interest only repayments for at least 6 months. In otherwords the repayments will be very low and only the interest payable for 6 months and no capital or repayment amount for the original loan.

So be careful to ensure you and your business can afford to pay the BBL back before paying back your bank. And if you plan wisely and your bank allows you could use all of the options in turn.

Our company vision is to improve the financial life of every person in the world we are here to help anyone who needs help in these or any other matters. Feel free to Contact Us via our online form.

By Anni Khan at Tax Affinity Accountants

Tax Affinity Accountants are experts Business, Tax and Accountancy. With branches in Worcester Park and Kingston upon Thames and Epsom and Ewell they are considered in the Industry to be expert business accountants and tax advisors for both individuals and small & medium sized businesses (SME's). Helping and supporting both individuals and limited company owners / self employed people throughout the UK and the world, they regularly help clients grow their business providing tailored advice and support. Their support has been considered invaluable by many clients and key to their success.

For more information visit www.taxaffinity.com. To read more interesting articles like this visit www.taxaffinity.com/blog. Please feel free to comment and share this with your friends.

Only 20 working days left until HMRC self assessment deadline.

Did you know this year over 2700 people did their tax return on Christmas day this year according to HMRC. Those that did know that they have to get it done before the deadline of 31/01/2021 and that there is only 20 working days left (as of today 31/12/20).

So if you have not had your 2019/20 (6.4.19 to 5.4.20) tax return  completed then you urgently get in touch today as the number of working days are fast decreasing and before you know it the time will be gone and you may end up facing a fine by HMRC for missing the deadline.

By Anni Khan at Tax Affinity Accountants

Tax Affinity Accountants are experts in Tax and Accountancy. With branches in Worcester Park and Kingston upon Thames and Epsom and Ewell they are considered in the Industry to be expert business accountants and tax advisors for small and medium sized businesses (SME's). Helping and supporting limited company owners and self employed people throughout the UK, they regularly help clients grow their business providing tailored advice and support. Their support has been considered invaluable by many clients and key to their success.

For more information visit www.taxaffinity.com. To read more interesting articles like this visit www.taxaffinity.com/blog. Please feel free to comment and share this with your friends./

The Government and the Chancellor have confirmed that self-employed workers whose businesses have been negatively hit by coronavirus (Covid-19) would be able to claim “a second and final grant” in August 2020.

Those eligible can apply for the first grant (which was 80% of average monthly profits up to maximum of £2,500 per month for three months ie £7,500) until 13 July 2020.

In the extension, those eligible for the second and final grant (businesses adversely affected on or after 14 July 2020) can make a claim in August 2020 (to be confirmed when it will open). You can make a claim for the second grant even if you didn’t make a claim for the first grant.

The second grant will be a taxable grant worth up to 70% of your average monthly trading profits (ie £2250 per month), paid out in a single payment covering a further three months’ worth of net profits, to a maximum of £6,570 in total.

Clients are advised if they have not claimed for the first grant to do so by the 13 July 2020. And if they are adversely effected in (June, July and August 2020) then to claim for the second grant also as soon as the scheme is opened by the Chancellor and the Government.

By Anni Khan at Tax Affinity Accountants

Tax Affinity Accountants are experts in Tax and Accountancy. Based in Worcester Park and Kingston upon Thames and Epsom they are considered in the Industry to be expert business accountants and tax advisors for small and medium sized businesses (SME's). Helping and supporting limited company owners and self employed people throughout the UK, they regularly help clients grow their business providing tailored advice and support. Their support has been considered invaluable by many clients and key to their success.

For more information visit www.taxaffinity.com. To read more interesting articles like this visit www.taxaffinity.com/blog. Please feel free to comment and share this with your friends.

Claiming a grant through the coronavirus (COVID-19) self-employment income support scheme (SEIS) worth 80% of trading profit

You can use this scheme if you're self-employed or a member of a partnership and have lost income due to coronavirus.

This scheme will allow you to claim a taxable grant worth 80% of your trading profits up to a maximum of £2,500 per month for the next 3 months payable after HMRC checks your last 3 years tax returns filed. This may be extended by the government if needed.

Who can apply for this
You can apply if you’re self-employed (sole trader) or a member of a partnership and you:

• have submitted your Self Assessment income tax return for the tax year 2018-19
• have traded in the tax year 2019-20 - you have a limited time extension to back date and submit by 23/04/20 if this return was not done
• are trading when you apply, or would have been doing so except for COVID-19
• definitely intend to continue to trade in the tax year 2020-21
• and have lost trading/partnership trading profits due to COVID-19

Your self-employed profit before tax must also be less than £50,000 and more than half of your income must come from self-employment. This is determined by at least one of the following conditions:

• have trading profits/partnership trading profits in 2018-19 of less than £50,000 and these profits constitute more than half of your total taxable income
• have average trading profits in 2016-17, 2017-18, and 2018-19 of less than £50,000 and these profits constitute more than half of your average taxable income in the same period

If you started trading between 2016-19, HMRC will only use those years you filed a Self-Assessment tax returns.

If you have not submitted your Income Tax Self-Assessment tax return for the tax year 2018-19, you must do this by 23 April 2020. We can help you do this and you need to get in touch today.

HMRC said they will use data on 2018-19 tax returns already submitted to identify those eligible and will risk assess any late returns filed before the 23 April 2020 deadline in the usual way. If you have tax to pay for your 2018-19 tax return then this will need to be up to date.

How much will you get from hmrc
You can get a taxable grant which will be 80% of the average profits from the tax years (if all 3 available):

• 2016 to 2017 ie 6.4.16 to 5.4.17
• 2017 to 2018 ie 6.4.17 to 5.4.18
• 2018 to 2019 ie 6.4.18 to 5.4.19

To work out the average HMRC will be adding together the total trading profit for the 3 tax years (if all 3 available) then divide by 3 and then further divide by 12 to calculate a monthly amount.

They say it will be up to a maximum of £2,500 per month for 3 months. And they will pay the grant directly into your bank account, in one instalment. The bank details on your 18-19 tax return will most likely used as it is already in their records.

How to apply for it
You cannot apply for this scheme yet yourself. HMRC say they will contact you if you are eligible for the scheme and invite you to apply online. This may take some time as staffing levels are affected by COVID-19.

Individuals are advised they do not need to contact HMRC now and doing so will only delay the urgent work being undertaken to introduce the scheme.

You will access this scheme only through GOV.UK. website so be careful of fraud - And if someone texts, calls or emails claiming to be from HMRC, saying that you can claim financial help or are owed a tax refund, and asks you to click on a link or to give information such as your name, credit card or bank details, it is a scam.

After you’ve applied for it
Once HMRC has received your claim and you are deemed eligible for the grant, they will contact you to tell you how much you will get and the payment details. Previously this was by letter to the tax payers home for income tax refunds - it may be by text or emails also if HMRC has these records for you.

Note: If you claim tax credits you’ll need to include the grant in your claim as income. This income is taxable.

Other help you can get as well
The government stated it is also providing the following additional help for the self-employed:

• deferral of Self Assessment income tax payments due by 31 July 2020 (19/20 payment on account) and VAT payments (VAT regsitered business) due from 20 March 2020 until 30 June 2020
• grants for businesses that pay little or no business rates - apply to local council
• increased amounts of Universal Credit to £94.25 per week - apply direct to that dept
• Business Interruption Loan Scheme - apply direct to bank

If you’re a director of your own company and paid through PAYE you may be able to get support using the Job Retention Scheme (read her for more about this).

If you need help with your applications for government grants, loans and allowances as described above then as authorised HMRC agents and expert tax accountants Tax Affinity Accountants are available to support your business at this critical time. Urgently contact us by clicking here and we will use our expertise to support your business through this difficult time.

By Anni Khan at Tax Affinity Accountants

Tax Affinity Accountants are experts in Tax and Accountancy. Based in Worcester Park and Kingston upon Thames and Epsom they are considered in the Industry to be expert business accountants and tax advisors for small and medium sized businesses (SME's). Helping and supporting limited company owners and self employed people throughout the UK, they regularly help clients grow their business providing tailored advice and support. Their support has been considered invaluable by many clients and key to their success.

For more information visit www.taxaffinity.com. To read more interesting articles like this visit www.taxaffinity.com/blog. Please feel free to comment and share this with your friends.

The UK Government and the Chancellor have set out a package of temporary measures to support public services, people and businesses through this period of disruption caused by COVID-19.

This includes actions to support businesses including:

• a Coronavirus Job Retention Scheme
• deferring VAT and Income Tax payments
• a Statutory Sick Pay relief package for SMEs
• a 12-month business rates holiday for all retail, hospitality and leisure businesses in England
• small business grant funding of £10,000 for all business in receipt of small business rate relief or rural rate relief
• grant funding of £25,000 for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000
• the Coronavirus Business Interruption Loan Scheme offering loans of up to £5 million for SMEs through the British Business Bank
• a new lending facility from the Bank of England to help support liquidity among larger firms, helping them bridge coronavirus disruption to their cash flows through loans
• the HMRC Time To Pay Scheme

If you need help with your applications for government grants, loans and allowances as described above then as authorised HMRC agents and expert tax accountants Tax Affinity Accountants are available to support your business at this critical time. Urgently contact us by clicking here and we will use our expertise to support your business through this difficult time.

Support for businesses through the Coronavirus Job Retention Scheme
Under the Coronavirus Job Retention Scheme, all UK employers are able to access support to continue paying part of their employees’ salary for those employees that would otherwise have been laid off during this crisis.

Eligibility
All UK businesses are eligible.
How to access the scheme
You will need to:

• designate affected employees as ‘furloughed workers,’ and notify your employees of this change - changing the status of employees remains subject to existing employment law and, depending on the employment contract, may be subject to negotiation
• submit information to HMRC about the employees that have been furloughed and their earnings through a new online portal (HMRC will set out further details on the information required)

HMRC will reimburse 80% of furloughed (those on payroll but not working) workers wage costs, up to a cap of £2,500 per month. HMRC are working urgently to set up a system for reimbursement. Existing systems are not set up to facilitate payments to employers.

If your business needs short term cash flow support, you may be eligible for a Coronavirus Business Interruption Loan.

Support for businesses through deferring VAT and Income Tax payments
Government will support businesses by deferring Valued Added Tax (VAT) payments for 3 months. If you’re self-employed, Income Tax payments due in July 2020 under the Self-Assessment system will be deferred to January 2021.
VATFor VAT, the deferral will apply from 20 March 2020 until 30 June 2020.
Eligibility
All UK businesses are eligible.
How to access the scheme
This is an automatic offer with no applications required. Businesses will not need to make a VAT payment during this period. Taxpayers will be given until the end of the 2020 to 2021 tax year to pay any liabilities that have accumulated during the deferral period. VAT refunds and reclaims will be paid by the government as normal.

Income Tax
For Income Tax Self-Assessment, payments due on the 31 July 2020 will be deferred until the 31 January 2021.
Eligibility
If you are self-employed you are eligible.
How to access the scheme
This is an automatic offer with no applications required.
No penalties or interest for late payment will be charged in the deferral period.
HMRC have also scaled up their Time to Pay offer to all firms and individuals who are in temporary financial distress as a result of Covid-19 and have outstanding tax liabilities.

Support for businesses who are paying sick pay to employees
Goverment will bring forward legislation to allow small-and medium-sized businesses and employers to reclaim Statutory Sick Pay (SSP) paid for sickness absence due to COVID-19. The eligibility criteria for the scheme will be as follows:

• this refund will cover up to 2 weeks’ SSP per eligible employee who has been off work because of COVID-19
• employers with fewer than 250 employees will be eligible - the size of an employer will be determined by the number of people they employed as of 28 February 2020
• employers will be able to reclaim expenditure for any employee who has claimed SSP (according to the new eligibility criteria) as a result of COVID-19
• employers should maintain records of staff absences and payments of SSP, but employees will not need to provide a GP fit note. If evidence is required by an employer, those with symptoms of coronavirus can get an isolation note from NHS 111 online and those who live with someone that has symptoms can get a note from the NHS website
• eligible period for the scheme will commence the day after the regulations on the extension of SSP to those staying at home comes into force
• the government will work with employers over the coming months to set up the repayment mechanism for employers as soon as possible

Eligibility
You are eligible for the scheme if:

• your business is UK based
• your business is a small or medium-sized and employs fewer than 250 employees as of 28 February 2020

How to access the scheme
A rebate scheme is being developed. Further details will be provided in due course once the legalisation has passed. Government websites will contain more details.

Support for businesses that pay business ratesBusiness rates holiday for retail, hospitality and leisure businesses
Goverment will introduce a business rates holiday for retail, hospitality and leisure businesses in England for the 2020 to 2021 tax year.

Businesses that received the retail discount in the 2019 to 2020 tax year will be rebilled by their local authority as soon as possible.
Eligibility
You are eligible for the business rates holiday if:

• your business is based in England
• your business is in the retail, hospitality and/or leisure sector

Properties that will benefit from the relief will be occupied hereditaments that are wholly or mainly being used:

• as shops, restaurants, cafes, drinking establishments, cinemas and live music venues
• for assembly and leisure
• as hotels, guest & boarding premises and self-catering accommodation

How to access the scheme
There is no action for you. This will apply to your next council tax bill in April 2020. However, local authorities may have to reissue your bill automatically to exclude the business rate charge. They will do this as soon as possible.
You can estimate the business rate charge you will no longer have to pay this year using the business rates calculator.

Further guidance for local authorities is available in the expanded retail discount guidance.

Cash grants for retail, hospitality and leisure businessesThe Retail and Hospitality Grant Scheme provides businesses in the retail, hospitality and leisure sectors with a cash grant of up to £25,000 per property.
For businesses in these sectors with a rateable value of under £15,000, they will receive a grant of £10,000.
For businesses in these sectors with a rateable value of between £15,001 and £51,000, they will receive a grant of £25,000.
Eligibility
You are eligible for the grant if:

• your business is based in England
• your business is in the retail, hospitality and/or leisure sector

Properties that will benefit from the relief will be occupied hereditaments that are wholly or mainly being used:

• as shops, restaurants, cafes, drinking establishments, cinemas and live music venues
• for assembly and leisure
• as hotels, guest and boarding premises and self-catering accommodation

How to access the scheme
You do not need to do anything. Your local authority will write to you if you are eligible for this grant.
Guidance for local authorities on the scheme will be provided shortly.
Any enquiries on eligibility for, or provision of, the reliefs and grants should be directed to the relevant local authority.
Find your local authority on Google.

Support for businesses that pay little or no business ratesThe government will provide additional Small Business Grant Scheme funding for local authorities to support small businesses that already pay little or no business rates because of small business rate relief (SBBR), rural rate relief (RRR) and tapered releif. This will provide a one-off grant of £10,000 to eligible businesses to help meet their ongoing business costs.
Eligibility
You are eligible if:

• your business is based in England
• you are a small business and already receive SBBR and/or RRR
• you are a business that occupies property

How to access the schemeYou do not need to do anything. Your local authority will write to you if you are eligible for this grant.
Guidance for local authorities on the scheme will be provided shortly.
Any enquiries on eligibility for, or provision of, the reliefs and grants should be directed to the relevant local authority.
Find your local authority on Google.

Support for businesses through the Coronavirus Business Interruption Loan SchemeA new temporary Coronavirus Business Interruption Loan Scheme, delivered by the British Business Bank, will launch early next week to support primarily small and medium-sized businesses to access bank lending and overdrafts.
The government will provide lenders with a guarantee of 80% on each loan (subject to a per-lender cap on claims) to give lenders further confidence in continuing to provide finance to SMEs. The government will not charge businesses or banks for this guarantee, and the Scheme will support loans of up to £5 million in value.
Businesses can access the first 12 months of that finance interest free, as government will cover the first 12 months of interest payments.
Eligibility
You are eligible for the scheme if:

• your business is UK based, with turnover of no more than £45 million per year
• your business meets the other British Business Bank eligibility criteria

How to access the schemeThe full rules of the Scheme and the list of accredited lenders is available on the British Business Bank website. All the major banks will offer the Scheme once it has launched. There are 40 accredited providers in all.

You should talk to your bank or finance provider (not the British Business Bank) as soon as possible and discuss your business plan with them. This will help your finance provider to act quickly once the Scheme has launched. If you have an existing loan with monthly repayments you may want to ask for a repayment holiday to help with cash flow.
The scheme will be available from early next week commencing 23 March.

Support for larger firms through the COVID-19 Corporate Financing Facility
Under the new Covid-19 Corporate Financing Facility, the Bank of England will buy short term debt from larger companies.
This will support your company if it has been affected by a short-term funding squeeze, and allow you to finance your short-term liabilities.
It will also support corporate finance markets overall and ease the supply of credit to all firms.
Eligibility
All UK businesses are eligible.
How to access the schemeThe scheme will be available early in week beginning 23 March 2020.
The Government will provide information on how to access the scheme soon - keep an eye on their website updates.

More information is available from the Bank of England website.

Support for businesses paying tax: Time to Pay serviceAll businesses and self-employed people in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through HMRC’s Time To Pay service.
These arrangements are agreed on a case-by-case basis and are tailored to individual circumstances and liabilities.
Eligibility
You are eligible if your business:

• pays tax to the UK government
• has outstanding tax liabilities

How to access the schemeIf you have missed a tax payment or you might miss your next payment due to COVID-19, please call HMRC’s dedicated helpline: 0800 0159 559.
If you’re worried about a future payment, call HMRC nearer the time.

Insurance
Businesses that have cover for both pandemics and government-ordered closure should be covered, as the government and insurance industry confirmed on 17 March 2020 that advice to avoid pubs, theatres etc is sufficient to make a claim as long as all other terms and conditions are met.
Insurance policies differ significantly, so businesses are encouraged to check the terms and conditions of their specific policy and contact their providers. Most businesses are unlikely to be covered, as standard business interruption insurance policies are dependent on damage to property and will exclude pandemics.

If you need help with your applications for government grants, loans and allowances as described above then as authorised HMRC agents and expert tax accountants Tax Affinity Accountants are available to support your business at this critical time. Urgently contact us by clicking here and we will use our expertise to support your business through this difficult time.

By Anni Khan at Tax Affinity Accountants

Tax Affinity Accountants are experts in Tax and Accountancy. Based in Worcester Park and Kingston upon Thames and Epsom they are considered in the Industry to be expert business accountants and tax advisors for small and medium sized businesses (SME's). Helping and supporting limited company owners and self employed people throughout the UK, they regularly help clients grow their business providing tailored advice and support. Their support has been considered invaluable by many clients and key to their success.

For more information visit www.taxaffinity.com. To read more interesting articles like this visit www.taxaffinity.com/blog. Please feel free to comment and share this with your friends.

Why go Limited?

We have all heard about IT contractors and consultants working through a limited company but so many more people could be saving themsleves a lot of tax also, just working this way.

And as we get asked this question all the time, we've compiled a helpful list below:

1. If you are earning more than £43,000 a year then financially working through a limited company means your will pay less tax. Because the corporation tax rate is currently 20% and will fall 1% each year by 2020 dropping down to 17%, far lower than the basic 20% personal tax rate and much lower than the 40% higher rate due after £43,000.

2. A limited company means you have limited liablility and are legally seperate from your company and safer from any legal issues that may arise in the future.

3. It sounds much more professional if you are limited company to prospective clients and adds much needed credibility when working in most industry sectors.

4. You can sell shares in your company to investors and raise funding if required by approaching lenders for finance.

5. Protecting your business and brand name, a limited company registered at Companies House UK gives you the legal right to prevent the same name being used by any other business.

6. Pensions can be paid as an expense from your limited company. A big tax advantage over a self employed / sole trader business.

7. Selling a limited company, when you want to retire or move on, is far easier because it has physical presence and usually worth much more than a sole trader business. 

By Anni Khan at Tax Affinity Accountants

Tax Affinity Accountants are experts in Tax and Accountancy. Based in Worcester Park and Kingston upon Thames they are considered in the Industry to be expert accountants and advisors for small businesses. Helping and supporting business throughout the UK, they regularly help clients grow their business providing tailored advice.

For more information visit www.taxaffinity.com. To read more interesting articles like this visit www.taxaffinity.com/blog. Please feel free to comment and share this with your friends.

The importance of budgeting for income or corporation tax for self-employed people
 
A lot of of us dream of running our own business, and with hard work and careful planning, self-employment can be hugely rewarding and fun. But due to the fluctuating incomes many self-employed people face, running your own business requires careful money management. 

Whilst you may have a strong overall income, the flow of money may not always be regular and it can take weeks and even months between pay cheques. It is therefore very  important to manage your money carefully. Running out of cash before you get paid again could mean living on credit and interest payments may prove to be very costly.

Income tax is paid by sole traders and partnerships and corporation tax is paid by limited companies. Regardless of whether you are a sole trader, partnership or work via a limited company it is particularly important to budget for the tax due on 31 January each year.

Unlike employment income, your tax is not deducted at source and as you receive your income untaxed it is easy to assume that all of this is yours. However, some of this income will be paid in tax and should be budgeted for in order to avoid the shock of a high tax bill. It is worth noting at this point that if income or corporation tax has not been budgeted for and you delay payment, you may have to pay fines for late payment (as highlighted in more detail in the previous blog post).

A good accountant can help you with budgeting by calculating how much of your income will be paid to the taxman and can also advise on how to minimise this.

You can also use the 'Self-employed ready reckoner' tool on the HMRC website for an estimate of how much money to set aside. And this is usually around a 80:20 split between you and HMRC.

Furthermore, you can also set up a 'budget payment plan' which lets you make regular weekly or monthly payments in advance. These methods will save you a lot of stress and will help you better manage your money, especially during the Christmas period.

If you need any further help please do not hesitate to contact us and we'll be sure to offer you bespoke advice depending on what best suits you.

By Hamza Habib at Tax Affinity Accountants

Tax Affinity Accountants are experts in Tax and Accountancy. Based in Worcester Park and Surbiton in Kingston upon Thames they are considered in the industry to be experts accountants for small businesses. Helping and supporting business throughout the UK, they regularly help new and established businesses to succeed.

For more information visit www.taxaffinity.com. To read more interesting articles like this visit www.taxaffinity.com/blog. Please feel free to comment and share this with your friends.

Sole Trader v Limited Company

A difficult question that the self-employed face is whether to trade as a sole trader/partnership or to trade as a limited company. However, the answer isn’t definitive and is dependent on many factors ranging from the type of business you are running to the type of person you are. Whichever one you choose has different implications for tax, legal and financial responsibilities. The aim of this article is to give you an insight to the advantages and disadvantages in terms of tax purposes of being a sole trader/in a partnership or forming your own limited company. Hopefully it will inform you on the structure most beneficial to you.  

Legality

As a sole trader, you are the business. You have full control and ownership of the business and are able to manage it in any way you like. On the contrary, a limited company is its own legal entity. Instead you serve the company as a director of the company and act as a shareholder. In most cases, you are considered as an employee but this status is not automatically granted in terms of Employment Law, the National Minimum Wage or for Tax Credits.

Tax – Sole Trader

You are subject to income tax on the taxable profits of your business. For the tax year 2013/14, you pay 20% tax on income between £0 - £31,785 and 40% tax on income between £31,786 - £150,000. Income above £150,000 is taxed at 45%. The personal allowance amount for persons aged under 65 is £10,600. You are also required to pay Class 2 & 4 National Insurance contributions (NIC). Class 2 NIC are at a flat rate of £2.80 per week. However, you may not need to pay Class 2 NIC if your earnings are below £5,725 for the whole year. Class 4 NIC is calculated based on your profits for the year. For 2013/14, you pay 9% on annual profits between £8,060 and £42,385 and then 2% on any amount over that.  Any trading losses you incur on your business can be offset against other your income to reduce your tax liabilities.

Tax – Limited Company

For a limited company, it pays corporation tax on its taxable profits. Company tax rates are lower than the higher rates of income tax. If you are employed under your company and taking a salary, your earnings from that employment are subject to income tax and Class 1 NIC due through PAYE (Pay As You Earn). The amount you pay is dependent on your earnings. Shareholders of the company who are on a higher tax bracket may have to pay higher a higher tax rate on any dividend income they receive.  Losses from the company can only be offset against its other income but not against your income as an individual.

What does it all mean?

Now for most people, the above two paragraphs may have confused you further. But here is a scenario that will make things easier to understand and hopefully give you enough information to aid you in that important decision.

You have a trading income of £30,000 pre tax and wish to extract all the profits for yourself. As a sole trader, you will be taxed at around 29% for any income and NI in excess of your personal allowances. The total tax liability including the Class 2 & 4 NIC amounts approximately to £6,000.20 (assuming normal personal allowance of £10,600). This leaves you with £23,999.80 in real terms after taxes.

The tax calculation for a limited company is slightly more complex as you have more flexibility in how you distribute the income. For simplicity sake, you take the minimum annual wage that is not liable for PAYE tax or NIC which is around £7,956.  Company profits under £300,000 are taxed at a rate of 20%.

Taxable profits are again at £30,000 which amounts to a corporation tax liability of £4,408.80 (after tax free wages). This leaves you with £25,591.20 in real terms taken as tax free dividends because it’s below the current earnings threshold of £31,785 (you only pay tax once under current rules).

So in this scenario, it is better to work as a Limited Company because you pay much less tax. However, calculations may differ depending on the trading income and how much salary you take. The general idea is that as your trading income increases, its becomes more and more beneficial to trade as a limited company than as a sole trader (40% income tax versus 20% corporation tax).

Just a Final Note

The Government has announced that the corporation tax rate will fall in 2017 to 19% and in 2020 to 18%. But in some cases you can be better off trading as a sole trader for tax purposes if your annual trading profits are not high or if you want to have losses brought forward from a previous year.

However, many businesses opt to form limited companies for reasons that extend past tax issues. A limited company status adds prestige and makes a trader appear more established and reliable.  Also should the business fail, you will not be personally liable for its debts if you were a limited company.

If you plan to sell the business after a few years then limited is again a better choice. Also if you plan to expand the business then getting finance for your business may be easier if you were a limited company. There are many varying circumstances that makes being one more appealing than the other but if you still appear unsure then feel free to contact us and we’ll be sure to offer you tailored expert advice.

By Andrew Khan at Tax Affinity Accountants

Tax Affinity Accountants are experts in Tax and Accountancy. Based in Worcester Park and Surbiton they are considered in the Industry to be experts accountants for small businesses. Helping and supporting business throughout the UK, they regularly help new and established businesses to succeed.

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