The introduction of Employment Allowance and the increase in the personal allowance to £10,000 has muddied the waters yet more in deciding the optimum salary to take as a director.
Last year I said
This year I’m going to keep it really simple – the optimum salary is £10,000 per annum (£833.33 per month). Any less and you will waste personal allowances, any more and you will start paying too much in National Insurance.
Please note that if the company doesn’t qualify for Employment Allowance or the Employment allowance can be utilised against other employees, £10,000 per annum is wrong.
Likewise, if you have other income (not dividends) to set against your personal allowance, then £10,000 is wrong.
P.S. The reasoning behind paying £10,000 even though it creates a personal NIC liability of £245 is as follows:
- If you wanted to avoid NIC your annual salary would have to be less than £7,956
- You would therefore ‘waste’ £2,044 of personal allowance (£10,000 – £7,956)
- The company would have to pay £408.80 corporation tax on the ‘extra’ profit of £2,044.
- Your (personal) NIC saving would be £245.28
- Overall the company and you would be £163.52 ‘worse off’.
- The company will have to pay £282 NIC on the ‘extra’ £2044 salary but this will be refunded under the Enterprise Allowance scheme.
- Once your salary exceeds £10,000 you will start paying tax at 20% and NIC at 12% (the company will have to pay a further 13.8%*) compared to the company paying corporation tax at 20% on the ‘extra’ profit if you do nothing.
* 11.04% after tax relief
The allowance can be claimed using payroll software or HMRC Basic PAYE Tools. So don’t forget to check with your payroll supplier that the necessary changes will have been made before 6 April 2014. Once made, HMRC will automatically carry the claim forward each year.
Certain employers cannot claim the allowance (e.g. if the employee is a nanny) and it cannot be claimed against deemed payments under IR35.
It’s important to remember that the £2,000 is only available to reduce the employer Class 1 NIC not employee Class 1 NIC. So don’t forget that the employees will still be paying their NIC and and the employer will have to pay the money over to HMRC.
More than 100,000 parents who were dragged into self assessment by changes to child benefit (the High Income Child Benefit Tax Charge) will miss next Friday’s deadline for filing their tax return because the sign-up process takes too long.
HMRC in view of this have relented slightly and have said provided you phone them early this week to arrange payment of the High Income Child Benefit Tax Charge by Friday’s deadline, you will have three months to complete your tax return, and you will not receive an automatic penalty of £100.
HMRC don’t set out what you should do so I suggest you:
- Phone the HMRC Self Assessment Helpline on 0300 200 3310;
- Explain that you are liable under the High Income Child Benefit Tax Charge but you haven’t registered for Self Assessment;
- Ask to register under Self Assessment;
- Ask for a call reference to prove you phoned. You won’t get one, so make a note of the name of the person you spoke to and the name of the office and the time of the call;
- Ask how you pay the tax due;
- Calculate the tax due using the Child Benefit tax calculator ;and
- Make sure you pay the tax on or before Friday, 31 January 2014.
And finally, don’t forget to complete and submit your 2013 tax return (online) within the three months.
I have just sent this letter to the chief executive of HMRC in the hope she will take notice of my concerns.
An open letter to Lin Homer, the chief executive of HMRC, on behalf of small businesses and their advisors
Your recent press release (RTI package of help for micro businesses) which proudly tells us that
almost 93% of employers …..are now using the new process[RTI] to send PAYE information about their employee in real time, and the majority are finding the new system easy to use
glosses over the issues facing small businesses and their advisors.
Yesterday morning your Colchester Debt Management Unit contacted one of my clients to ask them to pay the £609.20 still owing in respect of their Month 6 PAYE.
When we spoke to the office, on behalf of our client, we were told that they had only paid £7,311.78 but the Full Payment Submission ( FPS) showed a liability of £7,920.98. On checking our records we discovered that the FPS we had submitted showed a liability of £7,311.78. No tax was due. When we explained this to the office we were told that it was must be a fault in our software, rather than HMRC’s, and we should contact our software provider.
When we did, moneysoft, our software provider, was surprised that HMRC should suggest that it was their software at fault as there was evidence that this was a common problem affecting many different software providers. Your Colchester office had, in fact, told us the same but were still not prepared to accept that the HMRC software was at fault.
Moneysoft showed us how to extract the information supplied to HMRC in XML format which we checked and found in agreement with the paper report we had discussed with HMRC.
Having proved our figures we contacted your Colchester office who were unable to explain why the figures differed. We were told to write to your Customer Operations Employer Office, enclosing a paper copy of the XML submission report, asking for the difference to be investigated.
All in all, we spent an hour and a half investigating an error caused by a fault in your computer system. Our client will not pay us for this work. HMRC will not reimburse us. Why should small businesses and their advisors be penalised for faults in a system which has been forced on us?
Your press release mentions giving micro businesses up to two years to adapt. Leaving aside the problem of adapting to a system which doesn’t work, why should businesses yet again have to change their ways, at considerable cost, to fit in with HMRC?
Paul Aplin, in this year’s Hardman Lecture (I understand you were a guest) asked why the one-in-two-out rule for business red tape does not apply to HMRC?
Small and micro businesses cannot be expected to be the government’s unpaid tax collectors and administrators. The time has come to call a halt to the red tape.
The tax tail has to stop wagging the business dog.
I’m not a big fan of industry awards. Very few firms enter and I’m convinced that the winners are better at winning competitions than “doing the job properly”. Too many of these awards don’t test what is most important to clients – technical knowledge and competency.
We recently lost a client to a multi-award winning firm, who managed to send me an e-mail showing all their awards above their e-mail disclaimer. Unfortunately the disclaimer had been borrowed from another firm and they had forgotten to remove that firm’s name from the wording.
Unusually, they insisted on preparing the accounts despite us having already prepared draft accounts, which immediately put them under pressure because of a looming deadline at Companies House. What amazed me in this digital age was that they didn’t file the accounts electronically, relying instead on Royal Mail.
Finally, despite having sent them a copy of the last corporation tax return which showed a £nil (s445) liability they e-mailed me and asked
Could you also confirm that no s445 tax was paid in respect of the overdrawn director’s loan account?
A case of all mouth and no trousers?
Over the next few weeks, despite being up to my neck in tax returns, you’ll notice me mentioning Xero Online Accounting Software more and more often.
And this isn’t just because I’m now a Xero Bronze Partner, it’s because I believe for the first time ever an accounting program exists which will change the way small businesses do their bookkeeping and run their businesses while at the same time allowing their accountants to do what they should always have been doing
helping their clients grow their businesses and minimise their tax liabilities
For too long, accountants have been forced to offer advice and solve problems using information which is either out of date or inaccurate and sometimes both.
Xero, because it makes record keeping fun, ensures that the information is current and correct. And because it’s online the accountant can access it over the internet without having to ask for print outs or backups.
I believe Xero is the future for small and micro businesses.
If you want to know more, before I mention it, phone me (01539 721002) or email me (email@example.com) and I’ll share the future with you.
My immediate reaction is
If this is support then I’m a Dutchman
Their support is restricted to businesses with nine or fewer employees and only consists of allowing these businesses to report PAYE information on or before the last payday in the month, rather than, as HMRC would prefer,every payday.
And it is only effective until 5 April 2016.
Interestingly, it doesn’t affect the situation I faced at the end of last month.
The “value” of this support is easier to understand when HMRC tell us
The package was developed with employer, agent and payroll software representatives and the Department for Work and Pensions, to help micro employers as they move towards reporting PAYE information in real time.
I wonder how many micro businesses were consulted?
HMRC has recently launched a new blog
I just wondered if the photo on the first page represents the position of tax agents in relation to HMRC.
HMRC are at their most dangerous when they say they are helping businesses!
Recently they have “improved” RTI by introducing a series of electronic customer service notifications aimed at helping employers manage their Real Time Information (RTI) PAYE tax affairs; these notifications will be called generic notifications.
In plain English, HMRC will warn businesses who have submitted their RTI return late or not submitted the expected number of RTI returns for the relevant tax month or have not paid the expected full amount of their PAYE and CIS liability on time.
Not all of these will generate penalties (yet) but it’s HMRC’s way of saying “We told you” if you try to dispute a penalty.
Last week we received one of these generic notifications because our Full Payment Submission (FPS) was “late”.
I’m not sure how we could have avoided it being late though. And this is the crux of the problem facing small businesses and the RTI rules.
We paid our salaries on the last day of the month (30 November). A Saturday, but we didn’t submit the FPS until the next working day (Monday).
And it was therefore late because we should have submitted it on the Saturday even though we weren’t at work.
HMRC are meant to be addressing this problem. I’m not holding out too much hope for a sensible work around for small and microbusinesses.