In order to help you to steer clear of these pitfalls, we must receive all of the details for your accounts and Tax Returns in good time and be kept informed of any changes in your business, financial and
passing through the business. However, it is a feature of the tax system that other businesses (including all corporates) must include in their turnover for the year the value of incomplete work, of unpaid bills (debtors) and of work completed but not yet billed, all as at the end of the year. We will need to discuss with you exactly what needs to be identified and the basis of valuation. Keeping an eye on debtors and unbilled work is very important to your cash flow. Forming a limited company Forming a limited company may be a consideration if the limitation of liability is important, but it should be noted that banks and other creditors often require personal guarantees from directors for company borrowings. Profits in the company will be taxed at 19% but when paid out in the form of salaries, bonuses or dividends may be liable to top tax rates on the individual, Funds retained by the company can be used to buy equipment or to provide for pensions – both of which can be eligible for tax relief. They could be used to fund dividends or capitalised and potentially taxed at 10% and/or 20% on a liquidation or sale. Increasing your net income as an owner-director As an example, consider how much you might pay if, as an owner-director, you wanted to extract £10,000 profit (pre-tax) from your company in 2022/23 by way of a dividend rather than a bonus. We have assumed
in this scenario that the director has already taken salary in excess of the upper earnings limit for NICs, is a 40% taxpayer, and the £2,000 dividend tax allowance has already been utilised. Case Study As you can see in this case study, the net income is increased by 8% by opting to declare a dividend. Be sure to discuss this with us, as this is a complex area of tax law. Bonus £ Dividend £ Profit to extract 10,000 10,000 Employers’ NICs (15.05% on gross bonus) -1,308 Gross bonus 8,692 Corporation tax (19% - dividend is not deductible for corporation tax) -1,900 Dividend 8,100 Employees’ NICs (3.25% on gross bonus) -282 Income tax (40% on gross bonus) -3,477 Income tax on dividend (33.75%) -2,734 Net amount extracted 4,933 5,366 For Scottish taxpayers paying the Scottish Higher Rate of 41%, the net amount extracted on the bonus would be reduced to £4,846 (£8,692 less tax @ 41%
personal circumstances. Employment or self-employment?
There is no statutory definition of ‘employment’ or ‘self-employment’, so determining whether someone is employed or self-employed is not straightforward.
Instead, HMRC applies a series of ‘tests’ in order to ascertain whether someone is classified correctly. As large amounts of both tax and NICs can be at stake, HMRC often takes quite an aggressive line with regard to this issue and errors can be costly, so seeking advice that is tailored to your situation is essential. Please contact us for assistance in this matter. Unpaid bills and unbilled work Small businesses may opt into the cash basis and calculate their profits on the basis of the cash
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Business Tax
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