Accountancy

Tax efficient remuneration through pension contributions.

Tax relief is generally available on pension contributions at the taxpayer’s highest rate of income tax paid, meaning that basic rate taxpayers get relief on contributions at 20%, higher rate taxpayers at 40%, and additional rate taxpayers at 45%. In Scotland, income tax is banded differently, and pension tax relief is applied in a slightly different way.

Pensions are a particularly tax-efficient form of savings since nearly everyone is entitled to receive relief on contributions up to an annual maximum regardless of whether they pay tax or not. The maximum amount on which a non-taxpayer can currently receive basic rate tax relief is £3,600. So, an individual can pay in £2,880 a year, but £3,600 will be the amount actually invested by the pension provider.

The total amount of tax relief available on pension contributions is calculated with reference to ‘relevant UK earnings’. Unfortunately, dividends do not count towards ‘relevant UK earnings’ for pension contributions purposes. This means that where a director takes remuneration by way of a small salary and a large dividend, the dividend will not count and the individual’s pension tax relief limit may be restricted. Moreover, tax charges will apply if the limit is exceeded.

A director looking to increase their tax-free contributions limit could consider either increasing the amount of salary taken from the company (to increase ‘relevant UK earnings’), or (more likely) by making the pension contribution directly from the company as an employer contribution. Making an employer contribution has additional advantages.

Qualifying employer contributions count as allowable business expenses, so the company could currently save up to 19% in corporation tax. In order to qualify for a deduction, the pension contributions should be ‘wholly and exclusively’ for the purposes of business. HMRC will check for evidence that this is the case, for example whether other employees are receiving comparable remuneration packages.

Another advantage of making a company contribution is that employer National Insurance Contributions will not be payable, saving the company up to 13.8% on the contribution amount.

This means that the company can potentially save up to 32.8% by paying money directly into the directors pension rather than paying money in the form of a salary. Depending on circumstances, this may or may not be more beneficial than paying personal pension contributions.

Q & A. Tax back following Gift Aid donation.

Q. My child’s school is asking parents to make a one-off donation to help with much-needed school funds. If I complete a gift aid form for my donation, will I be able to can claim tax back on the payment?

A. If the school is a registered charity, either registered with the Charity Commission or with HMRC, you can make gift aid payments to them – both regular and one-off payments.

Under gift aid your donation is treated as being made net of basic rate tax (at 20%) tax and the charity claims the tax back from the government. So, if you make a donation of £100 under the Gift Aid scheme and you’re a basic rate taxpayer, the charity is able to claim back tax of £25 from the government, which means the charity receives £125, but it costs you only £100.

However, a higher rate taxpayer can claim 20% (the difference between the higher rate of tax at 40% cent and the basic rate of tax at 20%) as a tax deduction on the total value to the charity of the donation. So, on a gift of £100, a higher rate taxpayer can reclaim £25 (20% of the gross donation of £125). The claim is usually made via the individual’s self-assessment tax return.

Tax Free Childcare – don’t miss out!

HMRC are currently running a campaign to remind people that they could get up to £2,000 per child, per year, towards childcare costs. Broadly, eligible parents/guardians may receive government top-ups of £2 for every £8 that they pay into a tax-free childcare account, up to a maximum of £2,000 per child (or £4,000 for disabled children). There is an overall maximum limit of £10,000.

The scheme is open to all working parents across the UK with children under 12, or under 17 if disabled. Under the scheme, the parent/guardian opens an online account and decides how much to pay in. Circumstances are re-confirmed online every three months. Anyone can pay into the account, including grandparents, other family members or employers, giving flexibility to pay in more in some months, and less at other times. Money can be withdrawn at any time but in doing so, the government contribution will be lost.

To qualify for the government contribution, account holders will usually have to be in work, expecting to earn at least the National Minimum Wage (NMW) or Living Wage (LW) for 16 hours a week on average, over the next 3 months. Self-employed people who do not expect to make enough profit in the next 3 months can use an average of how much they expect to make over the current tax year. Additionally, the earnings limit does not apply to self-employed individuals who started their business less than 12 months ago.

Unlike the previous childcare scheme, tax-free childcare does not rely on employers offering it. Any working family can use a tax-free childcare account, provided they meet the eligibility requirements.

The Childcare Choices website includes a childcare calculator for parents to compare all the government’s childcare offers and check what works best for their families, including the 30-hour free childcare offer, tax-free childcare or universal credit.

Specialist Accountants for Ecommerce Businesses

Over recent years the number of ‘online traders’ or ‘Ecommerce’ businesses has grown considerably and in the next ten years we believe the market will at least double!

Hanley & Co began advised several substantial eBay traders over ten years ago and due to the significant growth of Amazon FBA (and many other markets) we have been very fortunate to have attracted a significant number of these businesses as clients from across the UK (and overseas).

We consider ourselves to be ‘the specialists’ in this area. We are regularly contacted by businesses whose accountants just don’t handle (or understand) this sector. 

Most of these businesses need (and expect) an online bookkeeping system that caters for the complex reports flowing from Amazon, PayPal, Stripe etc.  They also need confidence that their VAT and taxes are being properly handled.

If you know of an Ecommerce business proprietor that is struggling for advice from their advisors and accountants or need certainty about their bookkeeping, VAT registration requirements (including EU / international), VAT calculations and schemes (and of course MTD) please ask them to contact us for a chat!

New VAT rules for the Construction Sector

Under new rules due to come in on 1 October 2019 builders, sub-contractors and other trades associated with the construction industry will have start using a new method of accounting for VAT.

Under the new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the reverse charge, a main contractor would account for the VAT on the services of any sub-contractor and the supplier does not invoice for VAT. The customer (main contractor) would then account for VAT on the net value of the supplier’s invoice and at the same time deduct that VAT from the payment to the sub-contractor.

This is intended to ensure that VAT is correctly accounted for on supplies by sub-contractors.

The new reverse charge will apply to a wide range of services in the building trade, primarily those activities covered by the construction industry (CIS) payment rules. Note that normal VAT invoices will continue to be issued to domestic customers.

Please contact us if you are likely to be affected by these changes and we can work with you to ensure you are ready for the new system.