Blog

Tax Calculation

HMRC have began their annual process of issuing P800s to PAYE employee. The P800 is a tax calculation which checks whether tax payers who pay their tax through their payslip (and are not required to submit a tax return), have paid too much or little tax during the tax year. The P800s currently being issued by HMRC relate to the 2015-16 tax year (running from 6th April 2016 to 5th April 2016).

 

Why do I have an underpayment?

Underpayments of tax can arise from a number of reasons, including:

  • The tax due on benefits in kind (eg. company car or health insurance) can’t be accuratley collected through your tax code
  • Incorrect tax code has been issued by HMRC which doesn’t take into account all of your income
  • Multiple employers where the tax code is unable to handle differing rates of tax
  • In receipt of the state pension where your tax code hasn’t taken this into account
  • Several jobs in the space of one tax year
  • Long period between leaving one job and taking another
  • You have received a bonus during the tax year
  • Your are paid irregular amounts by your employer
  • Your employer has made an error
  • HMRC have made an error

 

What to do if I have an underpayment?

The first thing to do is to check the calculation against your records. Your employer should have provided you with a P60 which shows your salary and the tax you have paid on this (if you left employment during the tax year, you should have been issued a P45). If you are in receipt of a benefit in kind, you should have received a P11D from your employer. Recipients of pensions should also receive P60s from their pension providers.

If you believe the calculation to be wrong, write to HMRC and inform them of the reason you believe it to be wrong.

If the calculation is right, contact HMRC to arrange how you wish to repay the amount. In most cases this can be done through any adjustment to your current year (2016-17) tax code and they’ll deduct the extra tax due at source.

If you’re unsure, contact a professional advisor for help.

 

I have an over payment

In the case of an over payment, you should expect to receive a cheque from HMRC within 14 days of the issue of the P800 calculation. The reasons for an over payment are very much the same as the reasons listed above for an underpayment.

 

Why isn’t my tax right in the first place?

PAYE is a method of collecting tax, not a method of assessing tax. HMRC can therefore not always collect the right amount of tax through your payslip.

 

Useful Links

The Low Incomes Tax Reform Group’s useful guidance – http://www.litrg.org.uk/tax-guides/employed/what-if-i-do-not-pay-enough-tax#toc-how-do-i-check-my-p800-calculation-

The Gov.uk guidance – https://www.gov.uk/tax-overpayments-and-underpayments

 

2 Comments  Like
Tax post Brexit

With the UK’s withdrawal from the EU on the horizon, there’s likely to be a large number of changes in how the UK does business with Europe and the rest of the world. However, the effects to tax in a post Brexit world are actually less sweeping than one may have previously considered.

 

Tax Rates are set by member states

All members of the EU have the autonomy to set their own tax rates and these have always been vastly different in the UK compared to other EU member states. In Ireland, the corporation tax rate can be as low as 12.5%, whereas in the UK it currently sits at 20% (although it will reduce to 17% in the coming years). The UK will continue to set its own rates of tax.

 

VAT

This area is where the EU has the most control over tax laws and potential changes includes:

  • Introduction of import and export rules between the UK and Europe with import VAT potentially due on the purchase of good from member states.
  • Changes to the VAT MOSS scheme in the supply of digital products to individuals within the EU.
  • The ability to recategorise the VAT rates of certain goods and services. For example petrol is standard rated, this could be changed to reduced or even zero rated.
  • EU sales lists likely to be abolished.
  • The Tour Operators Margin Scheme (TOMS) could be changed or abolished.

The UK will continue to be responsible for setting VAT rates.

 

Income Tax

There is likely to be little change in income tax rates as this continues to be a UK responsibility.

 

Corporation Tax

The UK will continue to set its own corporation tax rates and there is no reason why the proposed fall to 17% should change.

 

Dividend Tax

The dividend tax introduced to the UK on 6 April 2016 was set by the UK government and is not an EU directive.

 

The Tax System

All in all, the UK has always had autonomy over its own tax affairs and leaving the EU will have not have any significant upon the tax system in this country. However, Brexit has far reaching consequences for the UK economy and the tax system will be an effective tool to the government in helping to manage these changes. George Osborne’s emergency budget has been parked until there is more certainty around what a post Brexit Britain will look like, but expect to see changes once the long term effects are known.

 

Independence

With Scotland and Northern Ireland not backing Brexit, there are new calls for independence. Independence for these countries will have have considerable effects on the UK tax system.

 

Dividend Tax

The introduction of the dividend tax on 6 April of this year has caused many small businesses to reassess their tax strategies. For many small businesses operating as limited companies, the salary/dividend combination had always proved to be optimal. Paying just enough salary to minimise national insurance liabilities and enough dividends to stay within the basic rate of tax has been a winning formula for man years.

 

Remain Limited

The change in the rules at 6 April 2016, makes the standard sole directors/sole shareholder limited company, taking salary upto the national insurance threshold and dividends upto the basic rate threshold, around £2,000 worse off per year. For the majority, from a tax point of view, it still pays to remain a limited company (rather than being a sole trader). Plus, the benefits of limited liability, outside of the tax advantages are still prevalent.

 

£5,000 Free

The headlines surrounding the dividend tax have focused on the uplift in the dividend tax rates by 7.5%. So whereas dividends at the basic rate of tax had an effective tax rate of 0%, this now sits at 7.5%. What is often missed is that the first £5,000 of dividends, for any individual is tax free. With some clever planning strategies, you can make the most of this dividend allowance and minimise your tax bill.

 

Planning

Calculating your optimum dividends is all in the planning. Sitting down and working out your cash needs over the next twelve months will help you plan when to take dividends and how to take them as tax efficiently as possible. If you just withdraw your dividends without planning, the likelihood is you’re going to get hit with a big tax bill come the end of the year. Planning will help you minimise any potential liability.

 

If you’d like to discuss your tax planning options, get in touch, and let’s have a chat and see how I can help you save tax.

Cloud accounting software

As we approach the weekend, for many small business owners, it’s not going to be a weekend of putting their feet up and enjoying the last quiet weekend before the summer of sport kicks off with the European Championships next week. With April VAT returns due with HMRC by Tuesday 7th June, many will be a frantic panic, pulling together their accounting records and trying to make sense of their VAT.

 

Jack of all trades

Being a small business owner means being director of operations, head of strategy, sales director and chief financial officer all in the same working day. When the day to day business stops, you put on your CFO hat and that means accounting, from the bottom up, during evenings or weekends.

 

Take back your time

The cloud can help you take back that time. Cloud accounting software such as FreeAgent or Xero work in the background, even when you’re not there, carrying out your basic accounting tasks and giving you your time back.

 

How it works

  • Sign up for a free trial with either FreeAgent or Xero
  • Link up your business bank account through secure software and your bank transactions are automatically imported into the software
  • Produce and send professional looking invoices direct from the software or on your smartphone and tablet through the free app
  • Log and track your expenses using the app
  • Complete your VAT return at the touch of a button
  • Process payroll in two easy steps
  • Chase your late paying customers through automatic reminders
  • Track your cashflow and profitability in real time

 

Interested

Get in touch with me and I’ll set you up with a no obligation free trial of either FreeAgent or Xero and help you get started in your first step to take back your time.

 

FreeAgent or Xero

FreeAgent is designed for small businesses, sole traders, freelancers and contractors and is so simple to use, you wouldn’t even know you’re using accounting software. The perfect choice for small businesses who want to keep their accounting simple.

Xero has more functionality but it is a little more complicated (but still easy) to use. The perfect choice for small businesses who need a little more oomph from their accounting software.

 

Constant collaboration

With cloud accounting software being exactly that and in the cloud, it’s available for you to use 24 hours a day, 7 days a week. That means it’s also available to me. I can view your data in real time, allowing me to give you more relevant advice when it matters.

SEIS

The Seed Enterprise Investment Scheme (SEIS) is a valuable tool for startups, allowing them to raise a seed round of investment of upto £150,000 whilst giving investors tax benefits on their investment.

 

Requirements for Startups

  • Cannot be a listed company
  • Must have fewer than 25 employees
  • Gross assets must be less than £200,000
  • Maximum raise is £150,000
  • The trade must be less than 2 years old
  • Must be a UK resident company
  • Must carry out a qualifying trade

 

Benefits for Startups

  • Extra incentive to give to investors
  • £150,000 is a good seed amount for most startups

 

Requirements for Investors

  • Maximum investment is £100,000
  • Shares must be held for three years
  • Shares must be fully paid up in cash
  • Shares must be full risk ordinary shares and not carry any preferential rights
  • Can’t own more than 30% of the company’s issued share capital
  • Cannot be an employee of the company

 

Benefits for Investors

  • Tax relief at 50% on investment
  • Can carry relief back to previous tax years
  • Disposal of SEIS shares exempt from capital gains tax

 

If you’d like to find out more about SEIS and see if it can benefit your startup, get in touch with Paul.

VAT Schemes

The method described under the reporting VAT section is the way the majority of businesses report their VAT to HMRC. There are however a number of VAT schemes which may be beneficial to certain businesses. The most common schemes are:

 

The Annual Accounting Scheme

Typically VAT is reported on a quarterly basis. Under the annual accounting scheme, it is reported on a yearly basis.

Benefits

  • Less reporting to complete throughout the year;
  • Can help with cashflow as VAT is paid over in one lump sum at the end of the year.

Drawbacks

  • May have a repayment position and have to wait longer to receive the cash back from HMRC;
  • Twelve months of accounting records to complete in one go and could be a time-consuming process
  • One large VAT payment at the end of the year could hinder cashflow.

 

Useful Links

VAT Part 1: The Basics

VAT Part 2: The Flat Rate Scheme

FreeAgent’s handy VAT guide

Xero’s handy VAT guide

Flat Rate

VAT Schemes

The method described under the reporting VAT section is the way the majority of businesses report their VAT to HMRC. There are however a number of VAT schemes which may be beneficial to certain businesses. The most common schemes are:

 

The Flat Rate Scheme

Under the flat rate scheme, businesses charge VAT at the standard rate (currently 20%) on their supplies of goods and services. However, upon reporting to HMRC, the total amount of sales, inclusive of VAT is multiplied by the flat rate percentage for that industry (as directed by HMRC). This amount is paid over to HMRC. Any VAT paid to suppliers or on other expenses is disregarded from the calculation. This scheme is often used by consultants, contractors and builders.

Benefits

  • Advantageous to businesses with low value expenses;
  • Less administration and easy to calculate;
  • Can claim back VAT paid to suppliers on capital goods greater than £2,000;
  • 1% discount on the flat rate on the first year of registration.

Drawbacks

  • The flat rate is applicable to all sales, including zero rated sales so a business could end up paying more VAT than it collects;
  • Only available to businesses with turnover of less than £150,000.

 

Useful Links

VAT

What is VAT?

Value Added Tax (VAT) is a tax on the supply of goods and services. It is charged by VAT registered businesses on these goods and services, typically at the standard rate of 20%. VAT is applicable to all standard rated goods from sweets in your local newsagents to a new car.

 

VAT Registered Business

Any business with a turnover of greater than £83,000 is required to register for VAT. Upon registration, a business is given a VAT number and the business must charge VAT on all its sales. Business with turnover of less than £83,000 are able to register voluntarily.

Reporting to HMRC

VAT registered businesses charge VAT on their sales and collect this from their customers. A business will also pay VAT on its purchases from suppliers and other expenses. The amount of VAT charged to customers is reported to HMRC along with the VAT it has paid to suppliers. The net of the two is paid over to HMRC. If the business has paid suppliers more VAT then it has charged to customers, the difference is due back from HMRC. This is typically reported on a quarterly basis.

 

Rates of VAT

The standard rate of VAT in the UK is 20%. This rate is applicable to the majority of good and services. There is however a reduced rate of 5% which applies to goods such as children’s car seats and domestic electricity. There is a 0% VAT rate which is applicable to goods such as children’s clothing and motorcycle helmets and services such as new build homes.

 

Exempt from VAT

Certain goods and services are exempt from VAT. This means that are not subject to any VAT charge. Goods and services which are exempt from VAT include insurance, education and training and subscriptions to professional bodies.

 

Useful Links

Part 2: VAT Schemes

 

Tax Rebate

If as part your job, you pay a membership fee or a subscription to a professional body, you could be eligible for tax relief on that payment. HMRC will adjust your tax code to increase your tax free allowance to take into account the payment, or if you haven’t claimed for previous years, they may even get a tax rebate of anything you have overpaid.

 

Who’s eligible?

Professional subscriptions are paid by many employees. The payment must be made personally by you and not reimbursed by your employer. HMRC’s list of professional bodies eligible for tax relief details all bodies and institutes which are eligible.

 

I’m a PAYE employee

You can use HMRC form P87 to make your claim with HMRC. You’ll need to have your employment details and national insurance number to hand.

I submit a tax return

If your self employed and submit a tax return, your professional subscription is treated as a deductible expense against your profits and you get tax relief that way. If you submit a return and your not self employed, details of professional subscriptions paid can be included on the employment pages.

 

I trade through a limited company

If you trade through a limited company, a professional subscription for an employee or director can be paid for the by the company on behalf of the employee or director. There is no benefit in kind tax on the payment and the company receives corporation tax relief on the payment.

 

A third party has contacted me

There are a number of organisations who will make these claims on your behalf and will often approach you if they know you are a in a profession where you pay subscriptions. These organisations can recover any tax paid on your behalf, but they’ll usually take a percentage of the rebate. It’s relatively easy to make the claim yourself and recover all the tax due back to you.

Tax Code

As we reach the middle of April, you should have received your PAYE tax coding notice for the 16/17 tax year. This will be the code your employer uses to work out the tax deducted from your salary. While most will put this on their ‘to file’ pile without a second glance, it’s worth taking note of what the notice is telling you.

 

£11,000 – personal allowance – 1100L

 

As of 6th April 2016, the personal allowance – the amount which can be earned without paying any tax – was increased to £11,000. For tax coding, that means a standard tax code will be 1100L.

 

If your tax code isn’t 1100L then there’s something else in your tax code. This is usually explained on the notice but deciphering what this is can often be a tricky task.

 

Non-standard tax codes

 

The following are common reasons why your tax code may not be the standard 1100L:

 

  • Benefits – you received healthcare, a company car or dental insurance from your employer. That’s taxed as a benefit in kind and the tax is collected by restricting your personal allowance.

 

  • Underpaid tax – if you’ve underpaid tax in previous years, HMRC will seek to collect it through this year’s tax code. Again, that means a restriction in your personal allowance.

 

  • Other income – if you have another source of income (such as a state pension), your personal allowance be restricted through your tax code to account for the other income using up a portion of the personal allowance.

 

  • Property income – if you receive income from property, you can elect for the tax relating to this to be taken from your tax code. Again, the personal allowance is restricted.

 

  • Tax liability – if you submit a tax return, you can elect for the liability to collected through your PAYE coding in the next tax year.

 

Getting it right

 

There are a lot of variables which can be into your tax code. It’s important to check it and make sure it’s right. HMRC don’t always get it right and if it results in an underpayment of tax, it’s up to you to make good on that.

 

Don’t just put it in your pile, make sure your code makes sense.