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New Tax Year & Budget 2011
Income Tax and National Insurance (NIC) 2011/12
The personal tax allowance for the 2011/2012 tax year will be £7,475. This is an increase of £1,000, meaning that basic rate taxpayers will pay £200 less tax. Higher rate taxpayers will not feel this benefit, because they will start to pay 40% tax on earnings above £35,000 (previously £37,400).
Employers’ and employees’ national insurance (NI) contributions are increasing by 1%. However the level at which you start to pay NI (primary rate threshold) is increasing as well. This means that an employed taxpayer on £20,000 per year will be £38 better off, while a higher rate taxpayer on £45,000 will pay £71.44 more, and someone on £60,000 will pay £221 more.
Self-employed individuals
Self-employed people will pay £2.50 per week in Class 2 NIC, an increase of 50p per week. The level at which the self-employed start to pay Class 4 NICs will rise from £5,715 to £7,225, but the rate also increases from 8% to 9%.
A self-employed person earning £20,000 will pay £12 per year more in NICs, earning £45,000 will pay £164 more, and earning £60,000 will pay £314 more.
Owner/Directors of small limited companies
If your limited company is your only source of income, continuing to pay a personal allowance salary and dividends appears to be good for the immediate future, although I always worry how long this will last. In fact with the rise in the personal allowance to £7,475 and the rise in the primary NI threshold to £139 per week ( £7,225 pa), there is room for paying up to £7,225 in salary (that’s give or take £600 per month) without incurring income tax or NICs but still preserving your basic state pension rights!
BUDGET 2011
This is a very brief summary of key announcements in the Budget on 23rd March 2011, concentrating on aspects relevant to owners of small businesses.
The full budget can be found at: www.hm-treasury.gov.uk/2011budget_document.htm.
Income Tax
The personal allowance for those under 65 will be £8,105 in 2012/13. Higher rate tax (40%) will be payable on income over £34,370. No changes to rates of income tax and class 1 national insurance have been announced.
Mileage Rates
Mileage allowance for the first 10,000 miles per year will increase from 40p to 45p per mile from 6th April 2011.
Capital Gains Tax
The annual exempt amount for capital gains tax will be £10,600 from 6th April 2011.
Business Rates
The small business rate relief scheme was due to end on 30th September 2011, but has been extended for another year.
Companies
As promised in 2010, the small companies corporation tax rate will be 20% from 1st April 2011. The widely reported 2% decrease applies only to corporation tax payable by large companies (those with a taxable profit of £1.5 million).
Over the next three years there will be no new UK regulations for companies with fewer than 10 employees, micro-businesses and start-ups.
There will be an increase in R&D tax credit to 200% from April 2011, and 225% from April 2012.
VAT
The VAT registration threshold increases from £70,000 to £73,000 from 1st April 2011.
HMRC Compliance Checks
Compliance Checks
HM Revenue and Customs Compliance Checks are now underway. In the last few years it has been unlikely that you would be selected for a tax investigation, and people have tended to assume it won’t happen to them. As long as your records are complete and accurate, and all income has been declared you should have nothing to worry about.
However, HM Revenue and Customs now has an additional £900 million to fund tax investigations, checks and inquiries. The government aims to raise £70 billion in the next 4—5 years, and has identified sole traders and small limited companies (including those with only one director), as a main group to target.
Tax investigations are now more likely than ever before, so please;
- Fully declare all of your taxable income and outgoing ;
- Keep accurate and complete books, and receipts for everything you buy, even items purchased in cash and online:
- Make sure tax returns, VAT returns, payroll returns and other required documents are filed on time;
- Pay all taxes on time;
- Remember that HMRC has access to bank accounts, property accounts and other information, so don’t assume that you’ll go unnoticed.
If you receive any communication from HM Revenue and Customs, especially if the words ‘Compliance Check’ are used, inform your accountant or tax advisor immediately for advice on your rights.
Tax Investigation Insurance
There is insurance cover available to protect against accountant’s fees charged for dealing with tax investigations (compliance checks). There can be significant work and costs involved in a tax investigation, which could put unnecessary strain on your finances.
Pleaseget in touch if you would like to find out more.
But before considering tax investigation insurance check if you’re already covered. It may be included in your business insurance policy, or as a benefit of membership of the Chamber of Commerce, Federation of Small Businesses, or your trade organisation etc.
Record-keeping and tax update
Record-keeping
HM Revenue and Customs expect taxpayers and businesses to keep good records. Later this year they will be launching a Business Record Checks programme, which will impose financial penalties for significant record-keeping failures.
HM Revenue and Customs can ask to see your business records at any time, but they are providing some help to ensure you get it right. In advance of the programme launch they have introduced two basic fact sheets: one for business bookkeeping http://www.hmrc.gov.uk/factsheet/record-keeping.pdf, and another for records relating to tax returns, http://www.hmrc.gov.uk/sa/rk-bk1.pdf
Free bookkeeping advice is available from Businesslink, and can be accessed here: http://www.businesslink.gov.uk/recordkeeping. Businesslink also provides an online tool to help you decide what information you need to keep. http://www.businesslink.gov.uk/recordkeepingcheck
Offshore Bank Accounts
From 6th April 2011 anyone avoiding tax by keeping money in offshore accounts could face penalties of up to 200% of any tax that should have been paid. You must ensure that all income and capital gains arising offshore is declared, and the tax paid.
Corporation Tax
From 1st April 2011 all companies will have to file their corporation tax returns online for any accounting period ending after 31st March 2010. Accounts and computations must be submitted with the tax return in iXBRL format. Most companies will not notice any difference; many accountants file online already, and the rules for calculating corporation tax remain unchanged. Tax payments will need to be paid electronically.
Class 2 NIC and Child Tax Credits December 2010
Class 2 National Insurance Payments
Self-employed people need to be aware of forthcoming changes to payments of Class 2 NIC. From April 2011, payments for your Class 2 National Insurance contributions will become due on 31 January and 31 July, the same as a Self Assessment tax bill.
If you currently pay quarterly the change will mean you will receive just two payment requests from HM Revenue & Customs (HMRC) in the year (instead of four bills), in October and April, showing payments due by 31 January and 31 July respectively. You do not need to wait until the due date to make payment.
If you pay monthly by direct debit, your payments will stop temporarily, then resume with the payment for April 2011 being taken in August 2011, and monthly thereafter. There will be an option to pay 6 monthly (January and July),for those who do not want to spread their payments.
Changes to childcare costs
HM Revenue and Customs has issued a reminder to tax credits claimants, that they must let HM Revenue & Customs (HMRC) know within one month of their childcare costs falling or ending. Deliberately failing to let HMRC know when renewing a claim could constitute criminal fraud and result in prosecution.
HMRC will be using credit reference agencies and data matching to spot patterns of fraud. They are also employing more investigators and will investigate each claim in high-fraud areas.
The Equality Act 2010
The Equality Act 2010 has introduced a number of provisions, 90% of which came into force on 1st October 2010.
Over the last four decades, discrimination legislation has played an important role in helping to make Britain a more equal society. However, the legislation was complex and, despite the progress that has been made, inequality and discrimination persist and progress on some issues has been stubbornly slow.
The Equality Act 2010 provides a new cross-cutting legislative framework to protect the rights of individuals and advance equality of opportunity for all; to update, simplify and strengthen the previous legislation; and to deliver a simple, modern and accessible framework of discrimination law which protects individuals from unfair treatment and promotes a fair and more equal society.
One aspect of this legislation is that employers are no longer able to ask questions about an applicant’s health before offering work, nor can they send out questionnaires containing questions about general health and medication issues with application forms. They cannot require applicants to have a medical assessment before they make a job offer.
Asking an applicant questions about past health, previous absences and sick days lost to work prior to any job offer being made is unlawful.
Before taking on any new employees, employers need to:
- review recruitment and promotion processes and ensure they comply with the new requirements.
- Update staff on the new requirements and make sure that all are aware of the prohibition on asking heath questions (apart from the few listed exceptions) and that they do not ask unlawful questions at an interview or initial meeting.
- Remember that the prohibition on asking such questions applies even if the applicant raises the issue of their disability at the interview.
(source Croner Consulting)
Budget June 2010
George Osborne’s first budget announced a number of changes, including a prediction that the UK economy will grow at a slower rate than suggested by Alastair Darling in March this year. The forecast for 2011 was 3.25%, but has been revised to 2.6%.
This summary concentrates on the main tax issues that may affect you.
The good news points for small businesses are the reduction in the corporation tax rate and the increase in the threshold for employer’s NIC.
Bad news includes a reduction in capital allowances, and an increase in the standard VAT rate.
Business Tax
Capital Gains Tax The much reported change in capital gains tax has been confirmed, but is not as bad as anticipated. The rate of 18% will remain, but there will be a second rate of 28% for higher rate taxpayers. The tax-free limit has remained at £10,100.
The lifetime limit for entrepreneur’s relief will rise from £2m to £5m, and the effective rate will remain at 10%. Corporation Tax
The small profits rate will reduce by 1% to 20% for the financial year that runs from 1 April 2011 to 31 March 2012. The small profits rate applies where a single company has profits of no more than £300,000.
The main rate of corporation tax will also be reduced from 1st April 2011 to 27%. There will be reductions of 1% in the main rate in each of the years 2012/13, 2013/14 and 2014/15.
Capital Allowances
Capital allowances on plant and machinery will be reduced from 20% to 18% for items in the main pool.
The maximum amount of the Annual Investment Allowance is also being reduced to £25,000 per year. This is unlikely to affect very small businesses, that don’t spend more than £25,000 per year on assets.
VAT
The standard VAT rate will increase to 20% on 4th January 2011. There is no change to the lower 5% rate, zero rated or exempt supplies.
HM Revenue and Customs have issued a detailed guide for VAT registered businesses
Income Tax and NIC
Employer’s NIC
From 6th April 2011 the threshold at which employers start to pay Class 1 NICs will be increase by the rate of inflation plus £21 per week. The level of inflation will be confirmed following the publication of the retail price index in September 2010.
New Employer NIC holiday
New businesses set up in certain regions from 22nd June 2010 will benefit from a scheme in which they will not have to pay the first £5,000 of employer’s NIC. The North East of England is one of the regions covered by the scheme.
Income Tax
The government’s intention is to reduce the tax liability of lower paid workers, have no effect on employed and self-employed higher-rate taxpayers, and to help employers.
The personal tax allowance for those under the age of 65 will increase on 6th April 2011 by £1,000, to £7,475. For many people this will mean paying around £170 less tax during the tax year. Others who earn less than the value of the personal tax allowance will not pay tax.
The basic rate limit will be lowered so that higher rate tax payers do not benefit from the increase in the personal tax allowance. The limit will be confirmed once the September retail price index figure is known. This change will see more people becoming higher-rate taxpayers.
The personal allowance provides an amount of tax-free income for individuals earning money through employment or self-employment. Tax is then paid at basic rate on ear
nings above the personal allowance, up to the basic rate limit. Higher rate tax applies to earnings above the basic rate limit.
Pensions
The state pension is to be re-linked with earnings from April 2011. Basic state pension will rise every year by the highest of earnings, inflation or 2.5%.
Tax Credits and Child Benefit
Families with an annual household income of more than £40,000 will have their eligibility to tax credits reduced from April 2011. Some elements of the tax credits system have been removed, and child benefits will be frozen for the next three years.
For help with these matters, or other tax and accountancy matters please contact us at www.collinsaccounts.co.uk/contact
PAYE/National Insurance Late Payment Penalties
HM Revenue and Customs (HMRC) have issued a guide to late payment penalties for all employers and contractors. The penalties apply to periods starting on or after 6th April 2010. The full guidance is available on their website at www.hmrc.gov.uk/paye/problems-inspections/late-payments.htm.
The penalties will be a percentage of the total amount that is late in the tax year. The first overdue payment is excluded from this calculation, so if you only make one late payment, and it is less than 6 months overdue you shouldn’t be charged a penalty. Subsequently the charges are 1% if 2 to 4 payments are late, 2% for 5 to 7 late payments, 3% for 8 to 10 late payments, and 4% for 11 or more. Additional charges apply to payments over 6 months late.
To avoid a penalty you can pay on time, notify HMRC if there is no payment due, or contact them if you will have difficulty paying.
Accounting Glossary
Accounting – the practice of recording income and expenditure, keeping accurate records of payments and receipts and reporting those records in standard formats.
Accrual – A cost or expense that has been incurred during the period, but not invoiced or paid as at the period end. An accrual is shown as a liability in the balance sheet.
Amortisation – the cost of using an intangible fixed asset. Similar to depreciation, it is a calculated value which reduces the value of the asset over its useful economic life. Amortisation is reported as a cost in the profit and loss account.
Annual Return – a form filed each year by limited liability companies. The form includes details of directors, shareholders, the company’s registered address, SIC code and information on the types and numbers of shares. It is filed independently of the company’s accounts, and does not contain any accounting information other than share capital.
Assets – these provide the potential for monetary or economic gain, or enable the company to carry out its core business.
- Tangible Fixed Assets – Property, equipment, plant, machinery, fixtures and fittings or vehicles that are owned, or in some cases leased, by the business for the purpose of carrying out work, providing services, manufacturing goods or generating profit. Fixed assets have a useful life of over one year.
- Intangible Fixed Assets – these are long-term beneficial assets that do not have physical form, they include goodwill and patents.
- Current Assets – items that the company expects to use or sell within a year. They include stock for resale, money in bank accounts and money owed by trade debtors.
Audit – the independent checking of a company’s accounts by external auditors. Not legally required for small companies.
Balance Sheet – this shows the company’s assets (what it owns and is owed), liabilities (how much it owes to others), and how it is funded.
Bookkeeping – the process of recording income and expenditure.
Capital Expenditure (Capex) – the amount spent on purchasing, building or manufacturing fixed assets for the company’s own use.
Company Secretary – the person responsible for ensuring that an incorporated company meets its legal requirements. Small companies no longer need to appoint a company secretary, in which case someone else must carry out the company secretarial obligations.
Cost of Sales – the direct costs associated with purchasing stock, manufacturing stock or providing the services sold by the company.
Credit – A bookkeeping entry which represents income in the profit and loss account, and a liability in the balance sheet.
Debit – A bookkeeping entry which represents payments in the profit and loss account, and assets in the balance sheet.
Deferred Tax Charge – An amount of tax that will become payable in future, but relates to revenue earned in the current period.
Deferred Tax Credit – An amount of tax that will become due to the company in a future period, but relates to activity in the current period.
Depreciation – the cost of using a tangible fixed asset, spread over its estimated useful life. Depreciation reduces profit and the value of the asset.
Direct Cost – a cost which directly relates to the manufacture of a product, or provision of a service. Direct costs usually vary with activity.
Distributable profits – the amount of profit that is available to be paid to shareholders. The company must be able to meet its obligations to pay creditors and tax before distributing profits.
Dividend – an amount of money paid from distributable profits to shareholders of limited companies.
Liabilities – Current liabilities are amounts that the company will need to pay within one year. Long-term liabilities are those that will be payable after one year.
Profit and Loss Account (P&L) – a periodic report showing the company’s sales, costs, taxation and profit or loss generated.
Prepayment – an amount paid at the period end, but relating to the following period. A prepayment is shown on the balance sheet as a current asset.
Revenue – Transactions relating to running the company’s core business activities. Often taken to mean sales, this term can also be used to distinguish costs of running the business from capital expenditure.
Share Capital – a balance sheet amount showing the value of shares issued and paid, as part of the funding of the business.
Tax – A amount of money payable to the government which is always seen by business owners as too high.
Transaction – a sale, purchase, payment, receipt or bookkeeping entry.
Turnover – the value of sales. Does not include any other income such as grants, income relating to anything other than the company’s core business activity, sales of assets, or interest earned.
Working Capital – the amount of money a company has tied up in its day-to-day activities.
Simple Bookkeeping
Simple Bookkeeping
Bookkeeping for self-employed traders, contractors and professionals, and for those who are sole directors of limited companies should be easy and quick.
Unfortunately, it’s also a chore. The easy option is often to pile receipts in a corner, put bank statements to one side and shuffle it all off to the accountant at the end of the year. The problems with this approach are:
- your accountant will charge more to sort out the paperwork at the end of the year,
- you don’t have confidence in your finances, and find it difficult to keep track of money,
- receipts, invoices and other documents are easily lost,
- if you lose paperwork you could end up paying more tax than you should,
There is an easy solution, with just a little commitment from you. Make it part of your working routine and get on top of your business finances for good.
Daily tasks
- Put ALL receipts, bills and invoices in an envelope as soon as you get them. Keep an envelope, or bulldog clip in your van, car or desk drawer so that you always know where it is.
- Keep records of business mileage, the date of the trip, destination, mileage and reason for the journey.
- Keep all business related documents such as bank statements, insurance documents, rental and loan agreements in a safe place. Use document wallets or envelopes to organise them.
Recipe for monthly bookkeeping
Set a time to do this, such as the last day of each month, and stick to it.
Ingredients
1 bank statement
1 spreadsheet, or analysis book (eg. Cathedral Analysis Book)
1 pen or pencil
Several purchase receipts, bills and sales invoices
A pinch of patience
A little time
Method
Separate sales invoices (income) from receipts and bills (outgoings). Sort each pile into date order.
Write in Analysis Book (or spreadsheet) as below;
Income | |||||||||||
Date | Ref | Payer/Customer Name | Description | Amount Received | Sales | Loan Received | Bank Interest Received | ||||
28/4/10 | 1 | Sample Ltd | 300 Gadgets | 600.00 | 600.00 | ||||||
30/4/10 | 2 | My Bank Plc | Interest earned | 3.00 | 3.00 | ||||||
Totals | 603.00 | 600 | 3.00 | ||||||||
Costs | |||||||||||
Date | Ref | Supplier Name | Description | Amount Paid | Raw Materials | Rent & Rates | Stationery & Postage | ||||
19/4/10 | 17 | EG Supplies | 1,000 brackets | 200.00 | 200.00 | ||||||
25/4/10 | 18 | CC Printers | Business cards | 95.00 | 95.00 | ||||||
Totals | 295.00 | 200.00 | 95.00 | ||||||||
Add columns as required to analyse your income and costs. Total up each column for the month.
Check each item against your bank statement. It there’s anything missing, and you know it’s correct write it onto your page or spreadsheet and add it into the total (then go and look for the receipt – you did get one didn’t you?).
There could be some items on the bank statement from last month, and some that have not yet appeared on the bank statement. These are your unreconciled items. Check any other differences, as these could be errors on your part, or bank errors.
Carry the totals forward to the top of next month’s columns: this helps you keep a running total so that for your year-end accounts and tax return half the work is already done.
Alternatives:
Omit the analysis book, and use a software package. These automate the calculations for you, and make it easy to reconcile the bank statement.
Use the same principal for credit card statements, cash withdrawals and payments.