National Insurance for the Self-Employed

In their most recent bulletin, the Office for National Statistics reported a 15% increase in self-employment since April 2017. This brings the total figure of self-employed Britons to a substantial 4.8 million, and in austere times this freelance workforce has been the mainspring of British economic growth.

Some experts attribute this dramatic hike in self-employment to the mounting ‘gig economy’. Services such as Amazon, Deliveroo & Uber further contribute to figures with their usage of short-term contracts and casual labour.

Amidst this soaring boom in auto-entrepreneurship, it hardly comes as a surprise that the post-recession trend of free agency is shortly forecast to surpass the public sector, which has been in decline since the beginning of the decade.

National Insurance Contributions for the Self-Employed

Mature business owners will be, but even if you’re still in the fledgeling stages of setting up your own micro-enterprise, the odds are you will probably be familiar with National Insurance too. NI is a contribution that helps to fund services like The NHS whilst increasing your eligibility to certain state benefits such as maternity leave, bereavement leave and state pensions.

Salaried roles use PAYE to determine how much National Insurance and Income Tax is owed to Revenue & Customs. This figure is displayed as an automatic deduction on payslips issued by your employer.

Traditionally, unaffiliated workers qualify for lower National Insurance rates, and accordingly the way your NICs are paid slightly differs.

NIC Thresholds 

In order to be considered under the employ of oneself, your business must make a minimum annual profit of £6,025. If you meet these criteria, you’ll be required to make a ‘Class 2’ NIC at a weekly, flat-rate of £2.85.

The aforementioned contribution is often paid in addition to the more substantial ‘Class 4’ NIC. Your requirement to make this payment is determined by profit thresholds. Businesses turning over profits between £8,164 & £45,000 per annum are required to disburse 9% of their yearly profit to HMRC. Furthermore, if your income exceeds the upper limit, your ‘Class 4’ contribution falls to just 2% of your annual revenue, this decretion in NI is offset by increased income tax.

However, in a climate of turbulent and unpredictable economics, it’s of the utmost importance for small businesspeople to monitor reforms in financial policy and bear the legislature in mind when paying your contributions.

National Insurance Contributions Updates and Management

Earlier this year, the government announced their budget for 2017/18, and amongst other plans to close the national deficit, the Chancellor of the Exchequer disclosed that ‘Class 4’ NICs for self-employed people are set to increase by 2% in the next two years.

It’s also hugely important for you to keep thorough records and practice good bookkeeping skills in order to accurately asses personal NICs. Individuals who are uncertain of their NI class or employment status can verify this information on the Government website or by talking to us.

Accounting for National Insurance Contributions

If you are unsure about your NIC then talk to your accountant.

At Cottons Chartered Accountants we work with our clients to ensure they are managing their National Insurance Contributions in the most effective way in conjunction with efficiently managing a combination of salary and dividends.

We have accountants and tax advisors in Northampton and throughout the Midlands with offices in Daventry and Rugby. We also have accountants in London too as Cottons Chartered Accountants expand to the South East.

Talk to us about your business tax and accounting requirements.

Research and Development Tax Relief

4 in 5 businesses that could be claiming R&D Tax Credits are not. This could be attributed to a lack of understanding among the small business community of which businesses are actually eligible for the relief.

Contrary to popular belief the HMRC Research and Development Tax Credit scheme, one of the most lucrative tax relief systems available to small business and is in place to encourage innovation here in the UK, is not just for technology-driven enterprises. In fact, relief is open to any business investing in innovation regardless of industry.

From catering to construction, small and large business alike can apply for and receive a credit if their relative project is eligible.

How the R&D tax credit claim works

In short, Research and Development Tax Credits work by allowing you to increase the amount of money you record as spent on your project by a certain percentage, thus reducing your profit (in some cases increasing a loss if your company has not made any profit). This action will reduce the amount of tax a business pays hence the relief.

The amount subject to increase (the amount of money you will record as higher) is referred to as qualifying expenditure. Currently, the rate at which qualifying expenditure is enhanced for small businesses is 230%.

Of course, the qualifying expenditure is only recorded as such when tax computations are being made. The amount is recorded as so that it does not affect your company’s performance records (balance sheet) e.g. the qualifying expenditure is only enhanced by the 230% when you come to do the company tax return to give an enhanced tax-deductible cost.

The result, as mentioned, will reduce the company corporation tax bill if the company is profitable, however, if the company has made a loss in that year it can elect to receive a cash credit. In that case HMRC pays cash into your account at a current rate of 14.5%.

Example of R&D Tax Relief Calculation

Here is a simple example of the R&D Tax Credit system in action using £100 of qualifying expenditure for a loss-making company:

  • Cost in your accounts:                                                                                     £100.00
  • Cost in your Corporation Tax return (£100 x 230%):                                  £230.00

Tax credit:

  • Company making a trading loss (£230 x 14.5%):                                        £33.35

This means for every £100 spent on R&D a company which has made a loss can receive £33.35 back in cash.

A profit-making company who’ve spent £100 on research and development will simply record the cost as £230 on their Corporation Tax return and receive a reduction in their owed tax liability as a result.

 Is your business eligible for R&D tax credits?

The department of HMRC responsible for R&D Tax Credits provides the following information about eligibility:

“Your company can only claim for R&D tax relief if an R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability.”

Put simply, if a business is taking a risk [spending money] attempting to create or develop an idea, product or service through its own research into something that is not simply to advance a method or product currently in place and used by them, then the business may be carrying out a qualifying activity thus eligible for R&D Tax Credits. 

Here are some examples of activities which have been successful in R&D Tax Credit applications: 

  • A new flavour in the snack industry
  • Changing the fermentation process in the brewing industry
  • Modifying the internal production process in the health and beauty industry
  • Modifying a car engine; this was undertaken by a construction company hence eligible as it was not deemed to simply be enhancing their own capability

Qualifying Expenditure: What costs can be claimed?  

The main examples of costs that can be listed as qualifying expenditure for R&D enhancement are:

  • Staff costs, including salaries, employer’s national insurance and pension contributions
  • Freelancers and subcontractors engaged in R&D projects
  • Relevant software used
  • Materials and consumables used in the R&D process. Namely heat, light and power

Because R&D claims often result in refunds, the claim should be as detailed as possible to avoid HMRC investigations. Each expenditure should ultimately be wholly and exclusively for use of the project if the entire amount is being claimed.

Assistance with Research and Development Tax Credits 

If you are embarking on a project to research and develop a product then you should always consult an experienced tax advisor to find out if you are eligible. If you are eligible you will need a knowledgeable accountant to ensure that your records are detailed enough to provide information on qualifying enhancement.

You should note that, if you have only recently come across the relief but have been working on an eligible project for a while, you are able to claim R&D tax relief for your last two completed accounting periods.

Cottons Chartered Accountants are experienced accountants and tax advisors. Our experienced partners lead teams capable of ensuring that our clients are always operating in the most tax efficient manner.

If you would like to know more about R&D Tax Credits and if your project is eligible then talk to us today. We have offices in LondonNorthampton, Daventry and Rugby and offer a full range of tax and accounting solutions for small businesses. We are also audit certified and can provide businesses with standard and specialist audit reports if required.

Cottons, Chartered Accountants in London

Hot on the heels of our move to a new, larger home in Northampton, Cottons Chartered Accountants are pleased to announce, we have further expanded to London.

In a move which sees the introduction of new Associate Partner, Oliver Warne ACA, the brand will now be focusing on growing a presence in The Capital, extending our tax, accounting and audit services to businesses in the city.

Small Business Accountants in London

Our new London branch is situated in East London between trendy business hub Shoreditch, Old Street and the financial district.

Like our other branches, Cottons Chartered Accountants London will offer support to a variety of industries and companies of all sizes. From freelance designers to high growth fintech companies, we are able to provide robust accountancy services and expert tax advice suited to each business individually.

We are also audit certified and can provide businesses with both statutory and specialist reports depending on their needs.

Corporate Finance for Businesses in London

Furthermore, not only will our new London branch provide small business in London with tax and accountancy services, we will also be extending our corporate finance services there too.

Our corporate finance department works with small businesses to help them achieve the funding they require to start-up or grow their businesses.

Experience

At Cottons our partners are experienced accountants and business people who can offer you support beyond annual compliance.

If you are starting or running a business in The Capital then talk to our exciting new team of London accountants to find out how we can work with you on your journey assisting you in organising and growing your enterprise in a profitable way.

Our team will be hosting regular events throughout the city for you to come along to so keep an eye on our social platforms to find out when and where they will be.

And don’t forget, if you aren’t in London we have four other locations for you to choose from.

Cottons Chartered Accountants have been established in the UK for almost three decades. Our partners and accountants deliver a comprehensive range of accounting and tax services for small businesses from payroll and bookkeeping to corporation tax and VATContact us today to get a quote for the services your business needs.

Effective Pensions Contributions for Consultants and Freelancers

Over the last couple of years, the amount of tax free dividends available to small business owners and freelancers with Ltd Companies has reduced significantly.

The reduction, which has seen the amount of dividends which can be extracted from a company without tax free go from £30k to just £2k (starting April 2018), has left some business owners switching how they extract cash from their business; one of those ways is pensions.

Not only are pensions now handy for extracting cash efficiently from a business, of course they are also there to serve their purpose in later life too.

In this article we look at how pension contributions can be tax-efficient, how to make them and how much you should be looking to pay in from your company.

Tax saving on pension contributions

You may or may not know that extracting money from a Ltd Company to pay straight into a pension comes with no tax liability.

In comparison, if a freelancer in a one man company or a small business owner, decided to extract cash from their business as a dividend they would accrue taxes charged at 0% (first £2,000), 7.5% (basic rate) or 32.5% (higher rate).

Therefore, if you do not need to use the money you would like to extract from the company you may wish to take it out and put it straight into a pension pot where it will only be taxed on extraction.

The benefits of doing this are that your pension fund will grow and you will be reducing the amount of corporation tax your business will pay as pension contributions are taken before tax is calculated; like salaries, pensions are a tax deductible expense.

The only down side to this approach is that you cannot take advantage of the governments matched contributions that are available if you make contributions to your pension pot from the salary you pay yourself from your company.

Government Contributions

When you make contributions to a pension from your salary the government will contribute an additional 20% of what you put in. This applies to up to 100% of your salary or £40,000, whichever is less.

For example, someone on a £25,000 salary who contributes £30,000 into a pension in one year would receive a top up from the government of 20% of £25,000 but nothing on the additional £5,000 they have contributed as that is more than their salary.

Another example which illustrates where the limit impacts is someone earning £60,000 who wanted to contribute £50,000. In this scenario government contributions would only be input up to £40,000 leaving £10,000 that wouldn’t be subject to a benefit.

Salary vs Dividends

Small businesses tend to pay their directors a low salary (to take advantage of the tax free personal allowance) and then pay the balance of their allocated payment from the company as dividends. While this makes sense for income tax purposes it does mean that directors/shareholders miss out on Government added pension contributions which are limited to the salary amount which is paid.

This is because dividends are not factored into your income figure when being considered for pensions.

We should always remember that you can effectively contribute as much as you like in to a pension but as Ltd Company owners are able to do so in different ways they should ensure they take advantage of the all ways of contributing available. Consideration should be given to those which are suitable for what they would like to achieve; that may be reducing your corporation tax and saving for the future, receiving the government top up, or both.

Government Contributions vs Income Tax

You could up your salary to gain more contributions from the government but this would mean that you have to pay income tax on the salary, however, your limited company could step in and make the contribution on your behalf.

You can talk to your accountant about how your limited company can make pension contributions for you. You can also discuss your Limited Company tax and compliance obligations too if you’re unsure of those.

How make Contributions

As a small business owner you can either make pension contributions from personal bank account (the balance in which may predominately be made up of your income from your limited company) or directly from your limited company bank account.

As discussed, contribution from personal funds (your own bank account) will attract a government top up of 20% but remember this is only available up to 100% of your income or £40,000.

Contributions made straight from your limited company’s income are invested before-tax, the contribution is a tax deductible business expense and so reduces the amount of corporation tax your company pays but the contribution will be limited to the amount itself; there are no Government top ups this way.

Does “Auto-Enrolment” impact on this?

Auto-enrolment makes it compulsory for employers to enrol their employees into a pension scheme and to make additional pension contributions for them. However, if you are the only employee in your business you can opt to be exempt from the scheme by contacting the Pension Regulator.

Tax and Accounting for Pension Contributions

Every individual’s pension contribution is unique to their circumstance and while these are the rules, your method will be dependent on your income, business structure and your own pension aspirations.

If you would like to discuss your pension contributions or auto-enrolment for your employees then talk to us. Cottons Chartered Accountant’s experienced partners, knowledgeable accountants and tax advisors are best placed to guide you through pensions and ensure you are investing your money to be maximised in a tax efficient manner.

We offer a comprehensive range of tax and small business accounting services; we are also audit specialists. We have offices in Northampton, Rugby, Daventry and in London too. We are here for your business journey.

Taxes and Compliance for Ltd Companies

Incorporating a Limited Company and operating the new legal entity can bring with it many advantages, however, there are compliance obligations that you must be aware of to ensure you that your business is organised and stays on the right side of HMRC and Companies House.

New companies who are not compliant run a risk of being fined by HMRC and being struck off or dissolved by Companies House. Being unaware or disorganised could also mean that your business operations are at risk of falling into disarray while you are playing catch up thus hindering your progress and likelihood of success.

Did you know, businesses most likely to succeed are those who are organised in terms of administration? Here’s everything you need to know to make your company year run smoothly…

Limited Company Taxes

The tax advantages of Limited Companies are often regarded as the most attractive benefit.

Limited Companies pay Corporation Tax presently at a flat rate of 19%. This is in comparison to taxes for a sole trader which are presently 20% for PAYE at the basic level with incremental rises to 40% then 50% of all income. Sole traders must also account for class 4 National Insurance of 9%.

Taxes for Directors and Shareholders of Limited Companies

Following the tax treatment of a Limited Company, directors and shareholders will need to extract from the company. As individuals they are treated similarly to sole traders, however, the flexibility of profit extraction from a Ltd Company is better.

Sole traders are taxed based on the profit made in their financial year. If they turnover £100k and have £20k of costs they will pay tax rates of 20%, 40% and national insurance on the £80k profit. If a Ltd Company has the same year it would pay 19% tax on the entire profit.

However, a Ltd Company can further reduce the level of profit subject to tax by paying directors and shareholders a salary up to the tax-free allowance. As this is counted as a cost the profit can be reduced by up to £11,500 for each director or shareholder registered as an employee of the company therefore eligible to receive a salary.

As an example, if a Ltd Company has a turnover of £100k and one director/shareholder and it incurs costs of £20k (including other employee’s salaries) and furthers the salary of the director/shareholder of up to £11,500 it would be subject to tax at 19% on £68,500.

Furthermore, the after-tax remainder can be left in the company until directors and shareholders wish to extract it as dividends, however, they need not take the entire amount therefore only paying tax on the amount they wish to receive unlike a Sole Trader who needs to pay tax on the entire amount left whether they wish to use it or not. Dividends carry a tax-free allowance of £2k and have a much lower rate of income tax for amount after £2k.

Limited Company Compliance

All businesses have administrative responsibilities in terms of accounting for and declaring the amount of money they brought in, spent and owe tax upon. Failure to file this information with the relevant bodies will result in fines and could see directors struck off and the company dissolved.

Limited Companies must be aware of the following:

  • Statutory Accounts: Accurate accounts must be submitted to Companies House each year. You have 9 months after the company’s financial year to file these accounts before you are subject to penalties. For smaller companies (under the Audit Threshold) you may submit abbreviated accounts; these will be unpublished.
  • Tax Returns: A Corporation Tax return and iXBRL accounts must be submitted to HMRC annually. You must return these within 12 months of the company’s financial year ending.
  • Confirmation Statement: Also known as an annual return you must submit an annual confirmation statement to Companies House on each anniversary of incorporation.
  • All directors and shareholders must file self-assessment tax returns to declare income extracted as dividends. As an individual you need only file one self-assessment no matter how many companies you are extracting cash from; all income is announced on one document.
  • You will also be responsible for PAYE taxes and payroll administration for any employees and should consider P11D’s for taxable benefits.
  • If you have multiple shareholders you should have a shareholder agreement

Limited Company Tax and Compliance Assistance

To ensure your company is accounted for and that you are extracting cash in the most tax efficient way you may want to ask for assistance.

Cottons are chartered small business accountants we offer affordable packages for Limited Companies from start-up to audit level so wherever you are we can assist you.

Our experienced team of accountants and bookkeepers offer a full range of services from Limited Companies from corporation tax returns and VAT services to payroll and bookkeeping.

If you would like our assistance keeping your Limited Company compliant then talk to us today.

How to Set Up A UK Ltd Company: The Definitive Checklist

Once you have decided a Limited Company is the way forward for your business you need to incorporate the new entity at Companies House.

Naming Your Company

Your business will need a name. Ideally this will be the same as that you trade under but does not have to be. Be careful not to trade under a protected name as this can cause issues.

Company Structure and Shares

Choosing the company structure is important, especially for those with multiple owners. The allocation of shares to a shareholder needs to reflect their value to the company. The person with the ownership over 50% effectively controls the company.

Setting the nominal value of a share is important. Most new limited companies will keep this simple at set the book value of 1 shares as £1 but it is possible to have a share worth £0.0001.

Companies mistakenly set up shares with very high nominal value thinking this is the value of the company but this can have ramifications, for example, if a company is unable to pay its debts the owners of the business are legally required to pay for any unpaid shares immediately.

Company Taxes and Compliance

Once the company is incorporated you will receive a unique tax reference within a few weeks to the registered office you select. It is important to keep this number as this is required to submit the company tax return.

Ensure you have read up on Limited Company obligations.

Limited Company Bank Account

You need a separate bank account for your Ltd Company from which to make and receive payments.

Once you have your company incorporation documents you will be able to have a limited company bank account put in place which will be an asset of your new company.

Approaching the branch you bank with personally can help you keep everything in one place but you should shop around for the best rates. Santander offers excellent business banking rates and Barclays offer brilliant support for small businesses.

Director and Shareholder Obligations

As a shareholder of the company if you have not been in self-assessment, this the processing of announcing and calculating tax on income which has not been taxed at source, aka PAYE.

By registering for self-assessment you will receive a personal unique tax reference number. You have the responsibility to report to HMRC the income you extract from your Limited Company via salary and dividends.

Bookkeeping and Administration

Once the company is formed, the bank is in place you are ready to start invoicing clients, remember you will need to quote the limited company registered number and registered office within the invoices.

Using accounting software such as XERO means that you can keep your invoicing, income and expenditure in one place. This means that you know how your company is performing, what’s outstanding and how much your spending whenever you need to know. Being organised in terms of admin is the key to success.

Finding an Accountant

If you have managed to make your way through company formation and initial administration you may want to hire an accountant to manage your ongoing tax and accounting obligations.

Each year your profit will be subject to tax treatment. An accountant will ensure you are paying the correct rate of tax on the correct amount of profit whilst managing your costs as well as keeping you organised and supporting you as you grow.

We are small business accountants. If you would like to talk to us at Cottons Chartered Accountants about working with you then call us today, we have offices in Northampton, Rugby, Daventry and in London too. We offer a full range of affordable tax and accounting services for businesses of all sizes. It is our business to ensure that your business continues to function once it’s up and running.

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