So, Boris Johnson has finally announced his plan for Social Care funding.
From April 2022 National Insurance contributions and dividend tax rates will increase by 1.25 percent, with the projected £12bn annual income to be ring fenced to pay for health and social care.
The increase will apply to employed (including deemed employees) and self-employed individuals and partners earning above the class 1 primary threshold / class 4 lower profits limit (currently £9,568 in 2021/22).
Employers will pay the additional 1.25% for employees earning above the class 1 secondary threshold (currently £8,840 in 2021/22).
All existing reliefs and allowances from employer’s secondary class 1 NIC will apply to the levy including the £4,000 employment allowance, reliefs for employers of apprentices, newly employed veterans and new employees in freeports.
From April 2023:
The increases will be legislated separately as a “health and social care levy” and NIC rates will return to 2021/22 levels. The levy will be hypothecated in law, meaning that the revenues will be ringfenced for health and social care. From that date, the legislation will also extend the revenue raising measure to individuals over state pension age in employment, who are currently exempt from paying NIC.
Alongside the levy,
which will be paid by employees, the self-employed and businesses, the government has announced a 1.25% increase in dividend tax rates from 1 April 2022, taking rates to: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. The £2,000 dividend allowance will remain.
The Chancellor has also announced the date for the spending review to be published with the 21st October 2021 as the release date and a budget to follow on the 27th October 2021, so watch this space!!!
I hope you have found this useful, however please get in touch if you have any questions!
In my experience of working with people who have just set up their own business, something that causes a lot of unnecessary stress and sleepless nights is tax.
How is it calculated?
How much will I need to pay?
When do I need to pay it?
The truth is that you probably didn’t start your new business to worry about tax!
You likely did it because you are good at what you do and felt you could get paid more if you set up on your own. So, you put your tax on the back burner. Then, in January, you need to do something! If you speak to an accountant at this point, they may tell you that you need to pay thousands of pounds over to HMRC by the end of the month. Sorry, what…?
Well, let me explain how it all works, to hopefully help you prepare!
When you are employed, your employer deals with the tax each month by deducting it from your pay and they then pay it over to HMRC, usually each month. This is called PAYE (Pay as you earn) So, you are paying tax, but you don’t have to do anything yourself, your employer deals with it on your behalf.
When you are self-employed:
You pay tax on your trading profits. This is made up of your taxable income, less your business expenses.
Normally, you would take your trading profits for the period from 6th April to 5th April the following year. The start date might be different if you set your business up part way through the year – that’s fine. There are other circumstances where you might have a different accounting year but let’s keep it simple for this purpose.
Once you have your profit, it is this figure that goes onto your Self-Assessment Tax Return. Sometimes, tax adjustments might be required, if you have business expenses that are not tax deductible, such as entertaining customers, but again, let’s keep it simple and keep these out for now.
The tax you then need to pay is based on how much taxable profit you make.
Each individual has a personal allowance. This is currently £12,500 for 2021/22. Which means you can have annual income of up to this amount before you start paying tax. You then pay tax at 20% on income from £12,500 to £50,000 and then 40% on income over this (up to £150,000 – speak to me if you’re a sole trader expecting profits of over £50,000!!!)
Any tax payable will be due for payment by 31st January
So, it is always a good idea to understand what this figure might be as soon as you can, so that you can better plan for it.
You need to be aware that, the first time your tax bill exceeds £1,000, you will also be required to make a ‘payment on account’ (in advance of next tax year) and HMRC estimates this as being 50% of the tax for this year.
You would also then be required to make a second payment on account by the following 31st July, again, in advance of next tax year.
Also, take into consideration
That in your first year of business, some or all of your personal allowance may have been taken up by your employment income. Or you may have overpaid tax on your employment income so might be entitled to have some of that refunded.
I need to mention National Insurance too, but ill leave it there with just a mention and talk about it in another blog.
There’s so much to take into consideration, no wonder people try to ignore it. I want to ignore it after writing all that!
What I suggest is to talk to an accountant early.
Make sure you’re talking to one who is proactive. You want someone to help you understand how the profit you made last month translates into tax so they can advise how much to put to one side to save for the tax bill, so you don’t get caught out the day before it is due to be paid!
If you have any questions on the above, or would like help with planning for your future tax bills, please get in touch.
Martin Crooke is a Partner at Kilby Fox, we are friendly Chartered Accountants based in Northampton, sorting out the accounts for businesses in the Northamptonshire area and further. Martin has over 15 years’ experience working as an accountant for small businesses.
Some employers may wish to give a small gift to their employees, good on them! As long as the employer meets the relevant conditions, your employee won’t incur tax.
A tax exemption is available which should help employers ensure that the benefits provided are exempt and do not result in a reportable employee ‘benefit in kind’.
In order for the benefit to be exempt it must satisfy the following conditions:
the cost of providing the
benefit does not exceed £50 per employee (or on average when gifts are made to
the benefit is not cash or a
the employee is not entitled to
the benefit as part of a contractual arrangement (including salary sacrifice)
the benefit is not provided in
recognition of particular services performed by the employee as part of their
where the employer is a ‘close’
company and the benefit is provided to an individual who is a director, an
office holder or a member of their household or their family, then the
exemption is capped at a total cost of £300 in a tax year.
If any of these conditions are not met then the benefit will be taxed in the normal way subject to any other exemptions or allowable deductions, so check before you gift!
more than £50
One of the main conditions is that the cost of the benefit does not exceed £50. If the cost is above £50 the full amount is taxable, not just the excess over £50!
The cost of providing the benefit to each employee, and not the overall cost to the employer determines whether the benefit can be treated as a trivial benefit. HMRC examples consider various gifts including turkeys, bottles of wine and gift vouchers, you can check out the list for gift ideas!
We absolutely want you to be kind to your employees, so give gifts willingly! But do make sure they won’t be stung on their tax bill after. Get in touch to discuss before you buy.
Each year, accountants get asked all kinds of questions about what expenses can get put through their business. This year was no different for Kilby Fox!
I thought it would be useful to give some examples of the kind of questions I’ve been asked, and their answers. In the hope that it helps other business owners to gain an understanding of the type of thing they can, and can’t, put through their business.
Can I claim the cost of my wife’s Master’s Degree?
In most cases, no. Put simply, the cost of keeping your current skills updated is tax-deductible, however, the costs of training to acquire new skills are not tax-deductible.
In most cases, obtaining a Master’s Degree would come under the ‘acquisition of new skills’ rule and so you wouldn’t be able to get tax relief.
This is all assuming the Master’s degree is not actually “wholly and exclusively” for the purposes of the trade; a phrase that HMRC likes to use.
If the skill being learned/updated isn’t relevant to the business, it won’t be tax-deductible.
As an example:
My client was an IT consultant and their wife’s Masters Degree was in dentistry. I mean there’s pushing it, and then there’s this…
Can I claim my personal car insurance as a business cost, as I use my car for business?
You use your car for business so why can’t you put through at least a percentage of your car insurance? The answer is that you probably already are claiming this, although you perhaps don’t realise it:
If you are charging your business for business mileage traveled in your personal car, then the 45p/25p allowance set by HMRC is designed to cover, in addition to fuel, the wear, tear, and other costs of running your car. The ‘other running costs’ bit includes the insurance costs, as well as MOTs, etc.
Can I claim the costs of lunch, coffees, etc?
Again, another good question.
It’s perhaps not as straightforward as you would like though. HMRC says “everyone must eat in order to live and such costs are normal costs of living incurred by all and not incurred for the purpose of trading”.
So, because you need to eat and drink to stay alive, it cannot be “wholly and exclusively” for the business, therefore, not tax-deductible.
There are some instances where it can be claimed, however. These are:
If you’re staying away overnight for business. In this instance, you can claim ‘reasonable’ costs for the evening meal and breakfast.
If you make a journey that is outside your normal pattern of business activity. So let’s say you work from home but needed to travel several hours to attend a course, the cost of your lunch would an allowable expense.
Or, if your business, by its nature, has lots of temporary workplaces. Like a party entertainer, everyone loves clowns right? 🤡
If you have any questions about what expenses you can put through your business, please get in touch!
An important question for any new business owner, but what does it mean?
Put simply, the ‘Break-even point’ is the point where your income equals your costs. At this point, your business is no longer loss-making. Hoorah!!!
But why is it important to know what the break-even point is? Why should I care?
Again, in simple terms, understanding where your break even point is, will help you to reach profitability more quickly. Let me try to explain…
You’ve just set up your business, selling the old classic – ‘widgets’ (does anyone know what a widget is? Is it even a real thing?)
You already know how much rent will be, what the business rates are, you have a good idea of utilities, insurance, miscellaneous bits and bobs and the all-important accountancy fee. These are your fixed costs, or ‘overheads’. They should stay pretty much the same month on month, regardless of how many widgets you sell.
You also know the costs involved in making your mighty widget. You know how much it costs to buy the materials for one widget and how much labour costs go into building that widget. These are your variable or direct costs. This is because they vary depending on how many you sell. If you sell more, your variable costs will increase.
For this example, let’s say your fixed costs are £1,000 per month and each widget will cost £50 to make.
Your research leads you to believe that you will sell 50 widgets a month. You now have all the information to work out your break-even point. Your fixed costs are going to be £1,000 per month and your variable costs will be £2,500 (£50 x 50). Total costs are £3,500 which means, in order to break even, you will need to sell the 50 widgets for £70 each. If you sell 50 widgets at £70, you will cover all of your costs, but won’t make any profit.
But now you are armed with some really important information. You now know that if you can sell the widgets for any more than £70, you will be in profit. From here, you can review your sales price and anticipate how much profit you will make each month based on anticipated sales.
But I don’t know how many I’ll sell!!
Firstly, calm down!
Ok; you don’t know how many widgets you’ll sell, but you know that a competitive price is £100 per widget.
With this information, you know your gross profit, or ‘contribution’ (selling price – variable costs), from each sale, is £50 (£100 selling price – £50 cost to make).
If you’re making £50 gross profit on each widget, we know that, in order to cover our fixed costs of £1,000 per month, we need to sell 20 widgets to break even.
Again, armed with this information, we can set monthly selling targets.
Too many business owners don’t monitor their costs, and so they set selling prices that don’t help them cover their costs. They end up being busy fools, working really hard and earning little or no money from it. Then someone comes along to explain all this and they get scared to put their prices up for fear of upsetting their current customers. It happens so often!
Understanding your break-even point early on will help you set more profitable selling prices and enable you to set goals to help you drive the business to profitability as quickly as possible.
Now that you know what ‘Break-even’ is and how important it is to understand this within your business, why don’t you get in touch to discuss further.
For years, I asked myself this question. Management Accounts were always something that accountancy firms I worked at offered, but they were rarely taken up by clients and prospective clients. They just didn’t see any value in them.
I never really questioned it until I started working more closely with small business owners and began to understand the challenges they face on a regular basis.
So, to explain why management accounts are so useful, I’ll use a gaming analogy. I like to play video games and these actually provide a great analogy for the importance of management accounts… as strange as that may be!
Bear with me…
When you start playing a new game, you need to know what the objective is. Why are you playing the game? This is where goal setting is so useful. Set your goals! Understand the point of the game! Is there an income target you want to achieve, a new product or service you want to develop?
When you understand the objective, you begin working away to achieve that objective. However, it’s not a quick win and eventually you get side tracked along the way with side quests – doing the smaller tasks that can sometimes be fun, sometimes be boring, but ultimately don’t help you progress towards the main objective.
I think we’ve all been there in business!
Suddenly, you’re so bogged down in hundreds of side quests that you can’t remember what the main mission was.
So, after a few wasted hours, you pause the game, visit your list of objectives and remind yourself of the most important thing you need to do in order to get closer to the end goal.
You identify the destination you need to get to and begin to make your way there. However, you need to keep checking your in-game map to make sure you haven’t run off course, until you finally arrive.
Management accounts provide the same functionality.
If you haven’t set business goals, I suggest you do that first, so you know the point of the game. What will your sales be after year 1, 2, 5, etc? How much profit will that generate? How much will you pay yourself?
Once you have your goals set, you can go off on your merry way to achieve them! Just make sure you review your goals against your performance on a regular basis so you can make sure you’re still on the right track and haven’t been side tracked too much. If you realise you have been side tracked, a review of your performance against goals will help focus your mind and pull you back on the right path to achieving your goals.
But more than just a quick progress check:
Management accounts done correctly, can provide so much more for a business owner.
Here are a few questions and comments I hear that can be answered by preparing regular management accounts:
I’ve had a really good month, what will that do to my tax bill?
I offer lots of products / services, but don’t know which ones make me the most profit. What should I focus on?
I’ve just landed a great deal and I think Ill need to take on more staff. What can I afford to pay them and how much profit will be left?
I’m a new business and don’t know if I should be VAT Registered or not. How will I know? And what will I need to do?
Profit and Loss
Now, I’m not talking about having someone run a Profit and Loss report on your accounting software with a ‘Here you go. See you next month!’. The likelihood is that this won’t mean much to you, and you may not even look at it. The above questions don’t get answered this way. The questions get answered by having someone dig deeper into the numbers. Splitting out different income streams in your accounts so that they can be monitored; comparing month by month variances; tax calculations and forecasting; monitoring actual results against budgets.
Having someone really delve into your numbers and then explain everything to you in a way that you understand is so important to obtaining financial freedom.
Now that you understand how important management accounts are to running a successful business, why don’t you get in touch to discuss further.
If you’re here for the meaning of life you’ve got the wrong link. Try here
If you want to know about IR35, let’s go!
It’ll be coming on the 6th April:
The idea is to stop workers from being disguised employees. This isn’t just a tax scheme from the taxman, it’s also to help people claim their rightful benefits. For example maternity and sick pay, which self-employed people don’t get.
If you employ freelancers or contractors:
And you’re using contractors on a project-to-project basis, and they can work elsewhere and choose their hours, not much will change, however:
If your worker:
Is working for you as their only client for a long-term basis.
Have you ever saved up to buy something you really wanted?
It seems that everyone is so impatient these days, and with it being so easy to buy things using credit cards or credit accounts, no one seems to save up for things.
However, if you can think of a time when you did save for something, maybe you created a spreadsheet to work out how long it would take you to reach the savings goal, based on putting certain amounts to one side each week or month – a cash flow forecast. Maybe you had to make an adjustment in December because you would be spending more on presents that month, and so couldn’t put as much into savings then?
Cash Flow forecasting follows the same principals really. You are looking ahead at your expected income and expenditures, in order to be prepared for what’s coming.
Just bringing awareness to what’s coming up will do wonders for your business.
However, it is particularly important if you have quieter periods that eat into your cash reserves, or maybe you want to plan for your tax bill. You’re looking ahead to understand what needs to happen now, to prepare. Whether that’s putting money aside each month, speaking to lenders for finance, etc.
I thought a case study might help show why cash flow forecasting is important.
Bob has just won a large contract with a major customer. It’s his biggest contract yet and could potentially be life changing.
Bob knows that he will need to take on 2 additional team members to help fulfil this contract and, because of the customer payment terms being 90 days, he will need to fund their wages, and the cost of materials until he gets his first payment from the customer.
Luckily, Bob has a great accountant who tells him he should prepare a cash flow forecast to see if he will need any help financing the project until he gets paid. They sit down together and work out the cost of having 2 members of staff working full time. They write down the estimated cost of materials that will be needed each month and make a note of the amount that will be invoiced at the end of each month.
Now, Bob knows how much he will have to spend in month 1, 2, 3 and 4, before he gets his first payment. (Remember, the customer will pay 90 days after the invoice is issued, and Bob will likely raise his first invoice at the end of month 1, so the first payment will actually come 120 days after Bob has started the work! – Bob’s so lucky to have a great accountant!!)
Bob can now compare the total cash outlay for those first 4 months against what he currently has available. He now knows if he’ll need to speak to any lenders to help him fund the project.
Now imagine what would have happened had Bob not planned ahead!
I do hear, ‘but I don’t know how much I’ll earn each month; it’s never consistent’. To that I say, it’s never going to be spot on so don’t worry too much about it. What’s your best guess? What were your sales for the same month over the past few years? Are there any patterns there that could help you get a more reliable estimate?
Most businesses have an idea of when they will be busiest and when they will be quieter.
Plan for what you know and make your best guess for what you’re not sure about.
The most important thing to do is to start!
Now that you understand how important cash flow forecasts are to running a successful business, why don’t you get in touch to discuss further?
On 8 July, Chancellor Rishi Sunak announced
a three-point plan to support jobs in the wake of the COVID-19 pandemic when he
delivered a Summer Economic Update to Parliament.
Mr Sunak confirmed the Coronavirus Job
Retention Scheme (CJRS) will end as planned this October. The Chancellor said
furloughing had been the right measure to protect jobs through the first phase
of the crisis. The second phase will see a three-point plan to create jobs,
support people to find jobs and to protect jobs.
The CJRS will be followed by a Job
Retention Bonus, which will be introduced to help firms keep furloughed workers
in employment. This will see UK employers will receive a one-off payment
of £1,000 for each furloughed employee who is still employed as of 31 January
2021. To qualify for the payment, employees must earn above the Lower Earnings
Limit (£520 per month) on average between the end of the Coronavirus Job
Retention Scheme and the end of January 2021.
The Chancellor also launched a £2 billion
Kickstart Scheme that will aim to create subsidised six-month work placements
for young people aged 16-24 who are claiming Universal Credit. Funding
available for each placement will cover 100% of the National Minimum Wage for
25 hours a week, plus the associated employer national insurance contributions
(NICs) and employer minimum automatic enrolment contributions. Employers will
be able to top this wage up.
In order to support the UK’s tourism and
hospitality industry, the Chancellor announced a cut in the rate of VAT from
20% to 5% for the sector. This applies to supplies of food and
non-alcoholic drinks from restaurants, pubs, bars, cafés and similar premises,
as well as supplies of accommodation and admission to attractions, including
theme parks and zoos, across the UK.
Additionally, the Eat Out to Help Out
scheme will entitle every diner to a 50% discount of up to £10 per head on
their meal at any participating, eligible food service establishment from
Monday to Wednesday. Participating establishments will be fully reimbursed for
the 50% discount.
Mr Sunak said:
plan has a clear goal: to protect, support and create jobs. It will give
businesses the confidence to retain and hire. To create jobs in every part of
our country. To give young people a better start. To give people everywhere the
opportunity of a fresh start.’