Tax on ‘drawings’ Directors of a company will normally be paid a salary and this is taxed under PAYE as for all employees. The cost of this, including the employer’s NICs, is generally an allowable expense of the company. Shareholders of the company in contrast may be rewarded by the payment of dividends on their shares. Tax Tip Inmost small companies the directors and shareholders are one and the same and so they can choose themost tax efficient way to pay themselves. Using dividends can result in savings in NICs. This requires planning and needs to take account of the Dividend Allowance, which taxes dividends within the allowance at 0%, and dividend rates of tax. The Dividend Allowance is currently £2,000 so careful planning is required. Please talk to us to decide what is appropriate for you.
such as statutory maternity pay. It also details the income tax, national insurance contributions (NICs) due together with other deductions such as student loan repayments. The PAYE and NICs on salaries is payable monthly (or quarterly where the amount due is less than £1,500 per month). Penalties apply to employers who fail to make returns on time. These penalties range from £100 to £400 per month depending on the size of the employer. Interest and penalties also apply for failing to pay on time. The employer must also report details of expenses and benefits provided to employees. More information on the valuation of benefits is contained in the Working for Others section of this guide. Pensions Auto Enrolment (AE) AE obliges employers to automatically enrol ‘workers’ into a work based pension scheme. Duties include: • assessing the types of workers in the business • providing a qualifying automatic enrolment pension scheme • automatically enrolling all ‘eligible jobholders’ into the scheme and • paying employer contributions. All employers generally need to contribute at least 3% of the ‘qualifying pensionable earnings’ for eligible jobholders. If the employer only pays the employer’s minimum contribution, employees’ contributions are generally
5% to meet the overall minimum 8% contribution rate. There are different ways of calculating minimum contributions and the employee contributions may be paid net of basic rate tax depending on the type of pension scheme. Practical Tip All employers have to comply with Auto Enrolment from when they first take on an employee. We can help you to deal with Auto Enrolment. Companies Unlike sole traders and partnerships who pay tax on profits only (and drawings are ignored), companies have two layers of tax. The first is tax payable by directors and shareholders on money they take out of the company and the second is corporation tax which is due on the company’s profits. Practical Tip If you operate as a limited company, there is a legal separation between you as the owner and the company itself. Thismeans you cannot use the company bank account as if it were your own! This requires a certain amount of discipline without which all kinds of legal and tax related difficulties can occur. Corporation Tax Companies currently pay corporation tax at 19% and it will remain at that rate until 1 April 2023 when the rate will increase to 25% for companies with profits over £250,000.
Warning - close company loans to participators
A close company (which generally includes owner managed companies) is taxed in certain circumstances when it has made a loan or advance to individuals or their family members who have an interest or shares in the company (known as participators). The tax charge is currently 32.5% of the loan if it is outstanding nine months after the end of the accounting period. The tax charge is repaid to the company nine months after the end of the accounting period in which the loan is repaid.
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Running a Business
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