How much can I draw?

Director/shareholders of UK limited companies tend to reward themselves will a small salary and a dividend. The recommended system for 2021/22 is set out here.

However, in order to get the calculations absolutely right you need to know how much profit the company has, and you probably won’t know that until after the year end accounts have been done. So, part way through a trading year we don’t call these figures “dividends” and we suggest that you take “drawings” in the expectation that a dividend can be declared.

As a rule of thumb you can calculate your drawings using this method. It ignores some fine detail of accounting, but it will get you through to the year end.

Set up a separate company bank account for your company to hold its tax reserve. That’s for corporation tax and (if you’re VAT registered it’s also) for VAT. One savings account is enough.

When a client pays you, put aside 20% of that fee as a provision for corporation tax. Also put aside all of the VAT you charged on that invoice. OK, that ignores allowable expenses and things, and it will be a little too much, but it’s better to have too much tax reserve than too little.

What are you left with, net of corporation tax and net of VAT? Maybe knock off something for expenses as well. Then you have some idea of what the company can afford from its “distributable” profits.

Use that notional figure, and that’s the maximum drawings you can take.

At the end of each quarter, when the bookkeeping reports (and the VAT reports) are done, have a look at your balance sheet. It shows you a forecast of the corporation tax (and the VAT), along with the bank balances on that quarter end date.

In the example above, the tax reserve of £9,000 is £505 more than the total tax forecast of £8,495. This is a good thing.

To the extent that your savings account balance (on the quarter end date) exceeds your creditors balance (on the quarter end date), then you have over provided for tax. If you want to, you can take that excess and move it back to the current account to employ the funds usefully in the business. Or if it’s the other way around, please take steps to restore your tax reserve to its rightful level.

Over time, you might want to adjust that 20% rule down to 19% or 18%. It will take several quarters before you get a feel for what is the right percentage in the case of your own company, and it will depend on having like for like activity each quarter. You’ll know when you hit the right percentage when, every quarter, the excess/deficit on the savings account is consistently small enough to make little difference.

The balance sheet may also show you what the maximum available amount of “distributable” profit is (as long as your name does not already appear under creditors). Assuming that a director’s name does not feature on the balance sheet, then the example above shows that £1,554 is available. That’s just above the bottom line “total funds” figure, and it’s what the company is worth once you ignore the “share capital” line.

Do not draw out more than the company can afford. If you do, then HMRC will seek retribution, and will seek penal levels of tax. We will tell you every quarter when you’re in the danger zone.

I have too much profit, what can I do about it?

This is a fantastic question and we hear it from time to time:

“I have too much profit, what can I do about it?”

It is however a coded version of something else, and it can mean either:

• I don’t have enough profit. I know that, because I have drawn all the money out of my business and I have nothing left to pay my tax bill (and so you must magically engineer a smaller profit for me and a smaller tax bill)!

• I have ridiculously large sums of money floating around, even after paying all my tax bills, I have the home of my dreams, the car of my dreams and I fly everywhere first class, and now I’m in danger of taking up a ridiculously expensive hobby like round-the-world yacht racing!

Depending on which of those statements is the closer to the truth, then the solution is either:

• Make more profit and manage your tax reserve on a weekly or monthly basis. In the short term, borrow some money so that you can pay your tax bill. See Zopa for more details of how you can borrow modest amounts of cash at reasonable rates. We are not in the business of engineering false sets of accounts.

• Become a business angel and invest! There are entry level ways of doing this, even if the pool of cash is as low as £1,000. See Zopa for more details of how you can become an ultra cautious business angel.

If you would like to make more profit, then you need good business advice. Call us and ask about business coaching – we will start by asking you for a copy of your business plan.

Or you can start by looking at Don’t Read My Blog.

The VAT only invoice

Sometimes an application for VAT registration can be delayed, and you end up completing work after the VAT start date you asked for, but before the VAT number is known.

You cannot charge VAT to a customer until you have your certificate of VAT registration and you know the VAT number.

If you can delay your first invoices then that’s easier, but you may want to invoice in order to collect the fees first, and to collect the VAT later. You should keep you customer informed of this dilemma.

In situations like these, it becomes necessary to issue a later “VAT only” invoice as soon as the VAT number is known.

There are several examples of invoices on this Excel file and the final one shows you how to set out a “VAT only” invoice.

When sending it to the customer it’s best to remind them that you are simply following the HMRC rules. You have a legal duty to do it this way and they have a legal duty to pay you the VAT!

Independent Financial Advisors

Proactive is not authorised to provide financial advice, pension advice, mortgage advice, nor to make recommendations about products or companies. We can advise on the tax implications of your intention to act on any advice which you may have received.

The financial advisors you meet are in the business of running a business. They may be trying to find you a good deal, but more importantly they will be trying to find themselves a good deal. The accounting forums are littered with horror stories of advisors putting people into the wrong products, purely because that product gives the advisor a better commission. Additionally, some IFAs tend not to understand the Inheritance Tax implications of products and strategies they advocate.

They’re not doing this for your benefit, they’re doing it for their benefit.

The accountancy profession does not hold IFAs in high esteem. The running joke is “What does IFA stand for? Idiot Financial Advisor”. At Proactive we’ve met a few over the years, but none that we could recommend! It would be nice to find a reliable, ethical one.

When you choose an advisor please establish early on whether they charge you a fee or take a percentage from the Finance House (the pension company, the lender, etc). Check what that figure is. You are more likely to get independent advice if you pay the advisor’s fee, rather than the Finance House.

To give you one example, if a commission based advisor places your business with a Pension House then the commission the advisor receives is roughly equivalent to the pension contributions you pay over the first 24 months of your policy.

If you engage an advisor, expect to start with a lengthy “financial health questionnaire”. In the days of paper, these used to run from 10 to 30 pages of A4. It’s worth your while completing this fully and accurately in order that there can be no misunderstanding about the information the advisor can rely on.

For example, over the last few years there has been a lot of pension mis-selling and this could give rise to a claim for compensation. Even if the financial advisor who sold the pension is no longer trading, then the Finance House can be pursued. That means that you will need a copy of the “financial health questionnaire” if you want to prove any case of negligence.

Any financial advisor who does not start with something like a “financial health questionnaire” is well worth avoiding.

In support of your request for advice, your advisor may ask you to provide copies of your personal tax calculation (a form SA302), copies of your personal tax overview (a summary from the HMRC website), and for people who run a freelance business, copies of the formal accounts. That’s all perfectly reasonable and any accountant should be able to provide that. At Proactive we routinely prepare these documents, generally we have them ready long before they are needed, and we can then let clients have them within seconds, not hours, not days, not weeks.

HMRC has been working with the lending industry on the issue of documentation and has reported that the number of requests for additional evidence has declined significantly. But, they add, that the message has not yet filtered down to all staff in all relevant “financial advice” organisations.

If your advisor questions the veracity of the documents you/we provide, then find a different advisor or work directly with a lender . HMRC has published this useful list of lenders who accept your own documents:

https://www.gov.uk/government/publications/ . . .

Note that the HMRC page says “The lenders on this list have agreed to accept tax calculations and tax year overviews that customers, or their agents or accountants, have printed themselves.”

In the light of this information, if your advisor still refuses to accept these documents and continues to question their content, then they are in effect accusing you, or accusing us, of fraud. A properly completed “financial health questionnaire” along with the form SA302, the tax overview, and the formal accounts is all that they need.

Not since 1988 has a personal tax return had a section for “chargeable assets acquired”. As a result, we do not routinely maintain an overarching asset register of clients’ properties and investments, and we cannot answer questions about those assets. The decision to stop maintaining an asset register was a time saving measure implemented by us donkeys years ago. Subsequently, the GDPR (see below) would have forced that decision upon us anyway!

Subject to de minimis limits, a personal tax return does have a section for “chargeable assets disposed of” and hence we do sometimes seek further information about “chargeable assets acquired” in order to calculate capital gains tax liabilities. Our record keeping strategy follows Einstein’s advice:

“Make everything as simple as possible, and no simpler than that.”

It’s simple. Banks need to lend, like birds need to fly.

Banks that do not lend will fail. Pension Houses that cannot sell pensions will fail. IFAs that cannot offer intelligent financial advice will fail. Some IFAs make the simple task of getting a loan from a lender far more complicated than it needs to be. That’s why we advocate dealing with the lender directly and cutting out the middle man.

All these financial institutions, IFAs and accountants included, need to follow the KYC rules (know your client rules) mandated by various bodies including the Financial Conduct Authority (FCA).

At the same time, we all have to comply with the GDPR. In particular, under Article 5, the amount of data that can be requested is restricted to the minimum needed to do the job.

General Data Protection Regulation 4.5.2016

If your IFA is too enthusiastic about gathering too much data, then please point them to this report on this Proactive website! If they say “it’s our policy” to ask more questions, then please respond with “may I have a copy of that policy document in order that I can fully understand the policy?” and then if the policy document does not exist, or is “for internal use only”, the IFA has something to hide.

“Article 5 – the amount of data that can be requested
is restricted to the minimum needed to do the job”

A properly completed “financial health questionnaire” along with the form SA302, the tax overview, and the formal accounts is all that is needed. If your IFA has not asked you for (or cannot interpret) a properly completed “financial health questionnaire” then you need a different IFA. Likewise, if your IFA cannot read and understand a set of statutory accounts, then you need a different IFA.

We will genuinely help in cases where it is within our power to do so. When we face questions which are outside the remit of the role of the accountant, then we genuinely cannot answer those questions.

“Make everything as simple as possible, and no simpler than that.”

I cannot afford to pay a salary

In the early days of a business, it may be advisable to pay yourself a small salary, even if your company cannot really justify the cost. The reason is tax relief. And, as tax reliefs are linked to tax years and as tax years end every 5 April, once the tax year has gone the opportunity to get the tax relief is lost.

This example uses 2020/21 figures.

Paying a salary from a company is an allowable expense. All things being equal, your company will get 19% tax relief on that. And so, for every £1,000 you pay in salary, your company tax bill is reduced by £190.

In the hands of the company director, the salary is taxable income. However, as there is an annual allowance for personal income, you may be able to take a salary and pay no income tax.

• Monthly salary £732.00
• Annualised £8,784.00
• Corporation tax relief £1,668.96
• Income tax bill £nil

It’s worth a lot of money to your company to take a salary. And if that means orchestrating a loss in the company this year, you can still carry forward the loss, and get the tax relief when the company next has a profit. You cannot carry forward unused personal allowances, and that is why you need the salary in any given tax year.

In some cases that means that the director introduces working capital to a company every month, so that it can pay the salary – in effect, moving about £750 around in circles. That’s OK. The director can receive the salary tax free, and at some point in the future (when the company has the cash) the director can recover all the multiples of £750 which have been loaned to the company.

And it has to actually happen! You cannot say “it happened” at a later stage, if it did not! HMRC have been known to ask for the bank statements to see the exact amounts and the dates on which the bank transfers took place!

It might be worth it, if it saves you around £1,700 per year overall!

Example Letterhead and Invoices

All businesses should prepare standardised documents for their correspondence and invoices. An invoice is basically a standard letterhead with the addition of a number of billing points. The examples set out here assume that your business is a limited company.

If you are a sole trader or if you operate as a partnership, you can ignore the bits about a company registered number and registered office address.

Your trading address must be included in all cases. If your company registered office and your principal place of business are one and the same, that you only need to show the address once, provided that it is clear that they are one and the same!

Example Letterhead

Example Invoice (non-VAT)

Example Invoice (VAT)

The legislation is set out here and it includes a requirement that you show these details on your web site and somewhere within your emails:

The Companies (Trading Disclosures) Regulations 2008

and

The Companies (Trading Disclosures) (Amendment) Regulations 2009

Student Loan Statements

In July 2020 the Student Loans Company emailed everyone on their records to say that they will no longer send out paper statements like this example.

They claim that you can get this data from their new web site. You cannot.

Write to the Student Loans Company using a traditional paper letter, and tell them that you want to opt in to receiving paper statements because your accountant needs precise data for every tax year. Use the form of words below and (if necessary) adjust the tax year for the one just ended.

Thank you for your email dated 14 Jul 2020 which states “We’ve listened to your feedback and created a quicker and easier way to view your student loan balance, update your personal details and get information about your loan”. I logged in to the portal to get information about my loan. In order that I can complete my self assessment tax return I need an annual statement which provides a clear analysis of:

the balance on 6 Apr 2019
the monthly rates and the amounts of interest charged
credits received from HMRC
the balance on 5 Apr 2020

Your site provided me with none of the above, and no way to find that data. My accountant needs this information. Your email also states “With our new service you’ll be able to view and print a copy of your annual statement“. Your new service does no such thing.

The new portal is worse than useless. I want to opt back in to receiving paper statements. Please let me have a paper statement setting out the precise details listed in my four bullet points above. Thank you.

Feel free to copy the image file above and embed that in your letter, so that they are in absolutely no doubt about what we want.

The Abatement Dilemma

You may have to pay more income tax if your annual income exceeds £100,000 as a result of the abatement of the annual personal allowance. The allowance is gradually reduced until it is eliminated in full.

The annual personal allowance is:

2018/19 – 11,850
2019/20 – 12,500
2020/21 – 12,500

Once your “adjusted net income” exceeds £100,000 your personal allowance is reduced by £1 for every £2 of income over and above £100,000.

For example

If in 2019/20 you have income of £120,000 and make (gross) pension contributions of £5,000 then your adjusted net income is £115,000.

It’s over the £100,000 limit and so the annual personal allowance is reduced. The £12,500 is reduced by £1 for every £2 by which your income exceeds £100,000.

The reduction in the personal allowance is therefore £7,500 (half of (£115,000 minus £100,000)).

The personal allowance for 2019/20 becomes £5,000.

The 60% tax zone

When your net income falls within the zone in which the personal allowance is reduced (that’s from £100,000 to £125,000) then the marginal rate of tax is 60%. This is the combined effect of the application of the higher rate of tax and the reduction in the personal allowance. Currently for 2019/20 the upper end of the band is £125,000 but that may not be true for other years, the strict upper limit is £100,000 plus twice the personal allowance.

Stealth Tax

Abatement was introduced on 6 Apr 2010 when the threshold was set at 100,000. Almost every year the annual person allowance goes up and tax rate bands are adjusted. However, the abatement threshold has never changed. This means that over time more people are becoming liable to 60% tax. If your employment or self employment income is over 100,000 then there is  National Insurance at 2% as well. Don’t let anybody tell you that the highest rate of tax in the UK is 45%, it’s 62%.

Options

There are three options, none of which is easy:

1. Pay the tax
2. Reduce your income below £100,000
3. Increase your income so much that a mere 62% on a 25,000 tranche of your income pales into insignificance.

Don’t dismiss that last one. All you need is a plan. What does your business plan say?

Covid-19 Bounce Back Loans

From 4 May 2020 a number of UK banks are taking part in the government sponsored Bounce Back Loan Scheme (BBLS). This is the name given to the policy announced by Rishi Sunak on 27 Apr 2020 whereby small loans to qualifying businesses are subject to simpler rules than the Coronavirus Business Interruption Loan Scheme (CBILS) and these BBLs are underwritten 100% by the government.

1 of 3 Covid-19 Measures in General
2 of 3 Covid-19 Support For Freelancers
3 of 3 Covid-19 Bounce Back Loans

You cannot apply for a BBL if:

  • You’re already claiming under CBILS; or if
  • Your business was an “undertaking in difficulty” as at 31 December 2019.

In short:

  • There is no cap on turnover for a micro business applying for a BBL;
  • Loans will be from £2,000 up to 25 per cent of a business’ turnover or £50,000, whichever is the lower;
  • Banks will no longer require forward financials or business plans;
  • You should have access to the funds within days;
  • Loans will be interest free for the first 12 months; and
  • Thereafter the annual rate of interest is capped at 2.5%.

The loans will be easy to apply for through a short, standardised online application, and you will be required to self-certify that you are eligible for a Bounce Back Loan.

The government announcement is here.

A list of participating banks is here and that page will also lead you to a summary page about your bank which leads you to the start of loan application.

Apply directly to your bank. This is a Government initiative and not an HMRC initiative. Consequently, Proactive can not apply on your behalf.

Self Assessment Tax Return

A Checklist

Self assessment tax returns require an extensive amount of personal information.

They encompass income, capital gains, outgoings, residence status, student loans, child benefit and more. They are no longer called income tax returns and you need to take care to include everything that a self assessment tax return requires.

With very few exceptions, the self assessment tax return requires a full disclosure of your worldwide income. There are checks and balances to ensure that you are not subject to double taxation. As your accountant, we need you to make a full disclosure of everything. We would rather have too much information than not enough. Nobody wants HMRC to start an enquiry because something was omitted from a tax return.

You should remember that in UK law the final responsibility for submitting a full and complete tax return (and for paying the tax on time) rests with you, the taxpayer.

Please follow this guide carefully and let us have the information and the documentation detailed below. For self assessment purposes the tax year started on 6 April (more than one year ago) and ended on the 5 April which has recently passed.

Tax Return Notice

In order that we can keep track of tax offices and reference numbers, please let us have either a copy of page one of your tax return, or the “Notice to File”.

Student Loans

A copy of the Student Loan account statement showing the transactions between 6 April last and 5 April just gone.

Tell us if an old loan has been fully paid off since 5 April just gone as we will need to make an adjustment to ensure that you do not overpay.

You cannot get this data from the Student Loan Company web site. Yes, ridiculous, we know! Send them a paper letter as set out in this report and ask them for a paper statement.

Residence and Domicile

Is your Domicile outside the UK?

In UK law the word “domicile” does not mean your address, it means your natural home. This is especially important for people who were not born in the UK or whose parents were not born in the UK, or for people have moved away from the UK and have permanently elected (and proven) that they have established a natural home elsewhere.

There are complex tax rules for people who have a non-UK domicile and who have foreign income or gains. Regardless of your “domicile”, UK residents are taxed on their worldwide income or gains. However, if you do have a non-UK domicile, you may be entitled to claim tax relief on foreign income which is not remitted into the UK. If this applies to you please discuss the situation with us.

If you are not resident in the UK, then we need to consider the Statutory Residence Test which determines residence status for tax purposes. This link is just for information . . .

https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt

. . . and we will work through the process with clients who are affected.

Bank Interest and other Investment Income

Please provide copies of certificates of Bank Interest Received, dividend vouchers and other documents showing amounts of investments received.

Some banks pay “rewards” and do not pay interest. Check the year end certificate from your bank to see precisely what sort of income you have. Some deduct tax at source, whilst others do not. Different rules, rates and allowances apply to different types of investment income so it’s therefore vital that you provide full and accurate information for every different account and every different type of investment.

Employees and Directors

A copy of form P60 for all roles held as at 5 April.

A copy of form P45 for all roles that ended during the tax year.

Employers are required by law to issue forms P60 by 31 May following the relevant 5 April. Forms P45 are issued when you leave an employer, normally within 7 days of your leaving date.

Student Loan Repayments via Payroll

As the forms P45 and P60 do not always show student loan repayments, we need a copy of the final payslip for each employment.

That means the 31 March payslip for jobs you had at the year end, or the last payslip they gave you if you left any job(s) part way through the tax year.

Benefits in Kind and Expense Allowances

If you have a company car or van, or if your salary package includes private medical insurance or gym membership, then you will always be issued with a form P11d. These are taxable benefits in kind.

There are a few other cases where forms P11d are issued to employees who receive expense allowances. This is less common than it used to be, because HMRC has introduced more exemptions.

For example, a situation where you have paid for business travel, claimed the exact figure, and were reimbursed the exact figure, is exempt from the P11d reporting rules. However, round sum allowances are reportable. Check with your employer if you are not sure about the expense allowances you received.

We will need a copy of form(s) P11d issued “as at” 5 April for all roles held in the last tax year (whether they were still active on 5 April, or not).

Employers are required by law to issue forms P11d (to relevant employees) by 6 July following the relevant 5 April. However, if a P11d is not relevant to you, the employer is under no obligation to tell you that you’re not going to get one. Check!

Receiving an Occupational Pension or a Private Pension Annuity

A copy of the form P60 (or other statement from your pension provider) as at 5 April, showing the gross pension received by you, and the tax deducted.

Pension providers (other than the State Pension) are required by law to issue forms P60 by 31 May following the relevant 5 April.

Receiving a State Pension

Letters detailing State Pension rates and entitlements are normally issued in March and April setting out what your individual rate is. Almost no-one gets the standard rate of State Pension as it is often enhanced by the level of your national insurance contributions. Hence we cannot rely on headline rates, and we need a copy of that letter setting out the rate specific to your case.

Child Benefit

Please let us know how much Child Benefit was received during the tax year. Child Benefit may be restricted in some cases where your income exceeds £50,000 and in all cases where your income exceeds £60,000.

If you (or your spouse/partner) have children aged 18 or younger then,  regardless of whether you receive Child Benefit or have disclaimed it, please let us have a note of each date of birth for those who were aged 18 or below on 5 April just gone. Child Benefit may still be paid in connection with 18 year olds until 30 September following their 18th birthday. Having this information allows us to accurately establish two types of situation:

– Claimants where a claw back becomes due;
– Non-claimants who may now become entitled to claim.

There are complex rules in cases where you or your partner move out or move into the family home part way through a tax year. If this applies to you, please talk to us on a one to one basis.

Self Employed Trades and Partnership

Please consider the Annual Accounts Checklist

Rental Income

Please consider the Lettings Accounts Checklist

Personal Pension Contributions

By “personal pension” we mean a pension policy agreed by you directly with a Pension Provider and paid for using your own private funds.

Personal pensions agreed with a Pension Provider because you are a company director (and your company pays the contributions) are not reportable on a personal tax return – ignore these.

Pension Providers normally issue a certificate PPPC (for each policy) just after 5 April each year.

Please provide a copy of each certificate PPPC or set out an analysis of dates and amounts paid under each separate pension policy, stating whether these were paid gross or paid net.

Auto-enrolment Pension Contributions

Under auto-enrolment in the UK, you may have an employer pension where contributions are taken by deduction at source from your pay. There are four ways of doing this and your employer will have elected for one of them when the pension scheme started.

Check with you payroll office, and tell us which “Pension Contribution Basis” applies to these deductions:

• After tax and NI with basic rate tax relief
• After tax and NI with no tax relief
• Before tax and NI
• Before tax and after NI

Please provide us with copies of all your payslips for the tax year as that’s the only way to see the full pension deductions for the year.

Gift Aid Contributions

Please provide two analyses showing the name of each gift aid scheme, the commencement date, and the amounts paid. One list is for your regular contributions. The second list is for one off payments for that year only.

Sundry

Lastly, please consider if any of the following items need looking at more closely:

• New sources of income in that tax year.
• Job Seekers Allowance or other taxable benefits.
• New stock options.
• Capital gains or losses on shares, securities and other assets.
• Purchases and sales of “second” properties.

If you are unsure about any of these points please feel free to call us.