Business

During the March 2022 Facebook Live, I talked about what expenses businesses can claim on their accounts and tax return.

Every business, whether they are self-employed, a partnership or a limited company, will have expenses – some of these might be related directly to sales so stock you’ve purchased for resale or perhaps a template for a client’s website if you are a website designer – and some of these will be regular overheads for running the business – stationery, advertising, software, utilities, payroll expenses, insurance etc.  Some of the expenses that businesses encounter are legitimately able to be entered into the accounts, but when it comes time to file the self-assessment or corporation tax return, they aren’t allowed for tax purposes (like depreciation, entertainment of clients, charity donations).  There are also expenses that require special treatment before you even enter them into the accounts.  I won’t be covering every type of expense as there are quite a lot, but I will touch on some of the most common ones.

Before you enter an expense into your accounts, the first thing you need to think about is whether it is “wholly and exclusively” for business use.  If it isn’t, you may not be able to claim it in the accounts, or you may only be able to claim a portion of it.

There are other transactions that aren’t as straightforward to deal with.

HMRC have very strict rules regarding what you are allowed to claim when it comes to clothing, and this is where the “wholly and exclusively” rule comes in.  A business can claim for uniforms, protective clothing needed for work and actors, or entertainers can claim for costumes.  However, if the clothes could be worn outside of work or they don’t have your logo on them – you cannot claim for them in your accounts or on your tax return.  For example, if you worked in a bank and you needed to wear a suit – you could not claim on your accounts or tax return for a suit you bought from M&S as that suit could be worn outside of work.  If you were a delivery driver for Domino’s and you had to buy a jacket or t-shirt in the business colours with their logo on it – you could claim it on your business accounts and tax return.

One of the expenses that can cause a lot of issues for businesses is utilities.  A lot of self-employed businesses, and small limited companies, are run from home which means they are using electricity, gas, water etc.  HMRC do allow businesses to claim for a portion of these costs – you can either work out a percentage of use for each item or use one of the simplified expenses methods. For self-employed businesses, the easiest way to do this is by using the simplified expenses method that HMRC has developed.  This is based on the number of hours you work from home each week and you are then able to claim a set amount for each month.  It is only able to be used by those who work more than 25 hours per month from home.  This set amount only covers things like gas, electricity, mortgage, and council tax.  If you work from home for less than 25 hours per month, you will need to calculate the proportion of business use for your home.  For a limited company, the amount you can claim for “Use of Home” is currently £6.00/week. 

The two methods mentioned above don’t include claiming for the phone or internet – HMRC has very strict rules about what you are allowed to claim for these expenses when you work from home.  The only way to ensure that you can claim for telephone and internet use 100% is to have a separate phone line, mobile phone, and internet connection for the business If you can’t do this, you will need to calculate out a reasonable percentage of business use that can be claimed – for the phones you cannot claim for the rental of the line, just for the business-related calls. 

Another type of expense where there is a lot of confusion is related to travel.  You are not able to claim mileage for travelling to your business premises, or your regular place of work, from home.  You are only able to claim for travel to meetings, events, to deliver goods and other situations.  If your journey includes personal reasons, you can only claim for the mileage related to the business portion.  If the car is in your name, and not the business, it can be difficult to accurately calculate the business portion of all car/van related expenses, so using the flat rate per mile that HMRC set, is the easiest way to claim for these expenses.  HMRC allow you to claim a flat rate per mile which covers the costs of fuel, repairs, insurance etc.  The current rate as of 01/03/2022 is 45p per mile for cars and goods vehicles.  You do need to ensure that you keep proper records that show the starting and ending mileage and location, date, and the reason for your journey.  You can check the rates that can be claimed here.

If you travel somewhere for work on a plane, train or using public transport and part of the reason for the journey is for personal reasons, you can only claim for the part of the journey that relates directly to the business.  Again, this is where the “wholly and exclusively” rule comes in.  It’s also important to note that you cannot claim for travel between your home and your main place of work.

This is only a brief overview of what expenses a business can claim on their accounts and tax returns.  The majority of expenses a business incurs are going to be allowed to be claimed without any issues on both the accounts and tax returns, other items can only be claimed on the accounts but must be removed, or added back, when it comes to the tax returns, and some items are simply not allowed to be claimed at all.

If you would like further information on what expenses are allowable for a business to claim, feel free to e-mail me.

During the February 2022 Facebook Live, I talked about why you should have a separate business bank account for your business.

When someone first sets up their business, they may start to use their own personal bank account for the business, and not even consider getting a separate bank account for the business.  It might be easy enough to keep track of the business transactions at the start, but once your business grows, it can become quite difficult. 

While there is no actual rule that says a self-employed business must have a separate bank account, it is good practice to do so as that way you can ensure you know exactly what funds the business has and it makes it easier to prepare your accounts.  If your business is a limited company, you are legally required to open a business bank account as the business is a separate legal entity.

Why should I have a separate bank account for my business?

1. It makes it easier to see exactly how much money the business has.
   
   One of the main reasons to have a separate bank account for the business, is so that you can see straight away which transactions relate to the business.  You can check the balance on the account and know straight away how much money the business has – you won’t need to try and figure out which transactions are relating to the business or which transactions are personal.
   
   
2. It reduces the admin time required for getting the accounts completed.
   
   It makes it much easier for your bookkeeper or accountant to ensure the accounts are fully correct, as they won’t need to try and figure out which transactions are personal, and which are business related.  By having a separate bank account for the business, you will be saving a lot of time in terms of admin, and a lot of stress in trying to remember whether a transaction was a personal one or not.
   
   
3. It makes it possible to reconcile the account.
   
   Another reason is that at the end of the month, you will be able to properly reconcile the account, and easily track customer payments you’ve received so you can make sure your debtors list is up to date.  This means that your accounts will accurately reflect how much money the business has.
   
   
4. It helps to build up the business’ credit rating.
   
   Having a separate bank account for the business, can help your business to build up its own credit rating – it can be very useful if you need to apply for a loan in the future.
   
   
5. It helps to build trust with your customers and suppliers.
   
   Having a separate bank account for the business can give your business a more professional appearance as the business name would appear on your cheques and debit card, this in turn can help customers and suppliers to have more trust in your business.
   
   
6. You can connect the bank account to your accounts software.
   
   A lot of the accounts software now allows bank accounts to be connected to a bank feed, meaning that the transactions can be automatically downloaded into the accounts software, ready for categorising.  This can make getting your accounts completed more efficient, as you, or your bookkeeper/accountant, won’t have to manually enter every single transaction.
   
   
7. It makes HMRC inspections go a lot easier.
   
   If you are using a bank account for both the business and your personal items, if HMRC ever do an inspection on your business, they will go through every transaction on the bank statements and could ask to see proof that each transaction is for the business or for personal use.  It can make things very complicated and more time consuming.

All the reasons I’ve stated about why it’s a good idea to have a separate bank account, also apply to having a separate PayPal Account or credit card for the business.

What else do I need to know?

It is important that when you are looking at bank accounts for the business if you are a sole trader, you check the terms and conditions if you are going to use a personal bank account as opposed to a business bank account, as not all personal accounts are allowed to be used for businesses.

Before you choose a bank account for your business, have a think about what types of payments you will need to receive and make – will you need to accept/send foreign amounts?  If so, will you be charged for doing that?  Do you need to be able to access a branch on a regular basis, or are you able to deal with all your banking needs online or through the post?  There are so many different types of bank accounts out there, so it is very important that you research the different options that are available and choose the right one for your business.

If you would like further information on why having a separate bank account for your business is a good idea, feel free to e-mail me.

During the January 2022 Facebook Live, I talked about how to deal with late payment of customer invoices.

All businesses, unless they are taking payment for a product/service right then and there, are likely to have to deal with customers paying their invoices late at some point.  When customer invoices are paid late, this can have an impact on your cash flow, and impact on your ability to pay your invoices.  There are things you can do to help mitigate this though.

How can I prevent invoices from being paid late?

These tips aren’t a guarantee that invoices you send to your customers won’t be paid late, but they can help to ensure that it doesn’t occur as frequently.

The first thing is to work out what your payment terms will be, how you will accept payment, whether you will be applying any interest to late payments and work out your procedures for chasing for late payments.  Once you have that figured out, make sure this information is clear and concise and is stated in your terms and conditions as well as in any contracts you issue.  You will also want to include your payment terms on any invoices.   The key is to make sure that this information is communicated to all your customers before they enter into a contract with you so that they know ahead of time what your payment terms are, how they can pay you, and what happens if the payment is late.

The next thing is that once you have your policies all figured out and ensure that they are communicated effectively to your customers, is to make sure you stick to those policies.  Set up a regular reminder to check that all invoices are being paid on time, and if any are overdue, act quickly to contact the customer about the overdue invoice.  Some invoicing software will allow you to set up automatic reminders for invoices once they go past their due date while other accounting software is a more manual task – but you will still be able to send reminders to your customers about the overdue amounts.

Look at whether you could start using Direct Debits to collect regular monthly/weekly amounts from your customers if you are invoicing them on a regular basis.  You could look at something like GoCardless (https://gocardless.com/) to collect the regular payments from your customers.  You want to make it as easy as possible for customers to pay your invoices.  Some accounting software will allow you to take payment directly from customers when they receive your invoice via e-mail – they may be partnered with different payment providers like GoCardless, PayPal, Stripe, or there might be 3^rd party payment providers like Crezco (https://www.crezco.com/) that will integrate with your accounts software to put a payment link on the invoice that customers can click on and initiate payment that way.  You will need to look at the various payment providers that are out there as there may be additional charges you will need to pay to use them, and you want to find the one that works best for you and your business.

Ensure that you are sending out your invoices regularly, promptly, and that they are correct.  Part of doing this will be making sure that you have the correct contact details for your customer so that the invoices are going to the right e-mail or address.  By sticking to a regular routine for issuing your invoices, customers will know when to expect the invoice.  Not only will it help you to have a better handle on your cash flow, but it will also help your customers to be able to plan when they need to make payments.

You also want to ensure that you are sending out late payment reminders promptly and in accordance with the policies you will have set out to the customer.  There might be a simple explanation for why the payment is late – sometimes all it takes is a single professional and polite reminder e-mail for the customer to realise they missed paying your invoice.

Can I charge interest on late payments?

If you are invoicing another business or the public sector, you are legally entitled to charge statutory interest, which is 8% plus the Bank of England Base Rate, on all late payments.  You may decide to charge a much lower interest rate though and will need to charge the interest rate that is in your contracts – but as long as you communicate this effectively to all of your customers before you invoice them – you can charge them interest.  You can find the Bank of England Base Rate here. You are also entitled to claim back compensation for any debt recovery costs if you go down that route.  The government has set out the rates you can claim back on their website.

The rules and regulations about what you are entitled to charge on late payments and what you can claim back are all outlined in the Late Payment Legislation.

If you do charge a customer interest on any late payments, you will need to issue them with a new invoice for the late payment charges.  If you are a VAT registered business, there is no VAT charged on the interest.

It is important to note that you are not able to charge interest on late payments until the invoices are late according to your payment terms, or 30 days have passed since the customer received the invoice or you have delivered the goods/service.

What do I do if the customer doesn’t pay on time?

Your first step will be to send the initial payment reminder and see if that gives your customer a gentle nudge to pay the invoice.   If that doesn’t work, you need to follow the procedures that you set out in your terms and conditions – so this might be that you will issue 3 statement reminders and then start charging them interest.

If despite your best efforts and following your procedures, the invoice remains unpaid, you could look at going to a Debt Recovery Service, getting a solicitor’s letter, or even using the Money Online Service. (https://www.gov.uk/make-court-claim-for-money) You will need a government gateway account to use the Money Online Service.  Once you’ve filled out the forms, the courts will send a letter to the customer asking for payment, and if payment isn’t made within the time frame stated, a CCJ will be issued.  Just bear in mind that going down the formal route, is likely to sever any relationship you have with your customer.

Every situation is going to be different, and you will need to deal with each one on a case-by-case basis.  Proper communication with the client is the key.  It may be that the customer has had issues getting paid by customers themselves, or they have lost a big contract – contact the client, preferably by phone, and talk to them.  You might be able to sort a payment plan with them or resolve the situation without any bad feeling.  If that doesn’t work, follow your procedures, and then take it further if necessary.

If you would like further information on how to handle customers paying late invoices, feel free to e-mail me.

During the December 2021 Facebook Live, I talked about VAT, how your business and tax return are affected by it. I did cover this topic in January 2021, but I wanted to go over it again just in case anyone had missed it. I talked about – what the threshold is, the basics of it and how it affects your tax returns. I didn’t cover It won’t cover how to use the different VAT codes, go into detail about the different VAT schemes or how to file your VAT return.

What is VAT?

VAT stands for value-added tax and it’s charged on pretty much everything you buy within the UK.  Most prices will be displayed including VAT, or it will state whether it is excluding VAT.  Different products/services can have different rates of VAT.  It only affects the consumer in terms of the price they pay for the products/services.  If you are a business, it can create additional work for you and the records you need to keep. You might have to register for VAT if you reach the threshold, track the VAT you charge and pay, submit your returns to HMRC on a regular basis, and then pay them the VAT that is owed.  The VAT that is charged on your sales does not belong to you – it is a tax that you are collecting on behalf of HMRC.

When do I need to register for VAT?

Most businesses won’t need to register for VAT unless they expect their income (total sales that are not VAT exempt) to reach the VAT threshold in the next 30-day period or they met the threshold during the last 12 months. The current threshold as of 31/12/2021 is £85,000, and it will remain at that amount until 31/03/2024.  It is calculated on a rolling 12-month period, so you need to be aware of what value your sales are at continuously so you can register if you need to.  Once you reach the threshold, you will have 30 days after the end of the month in which you reached that threshold, to register with HMRC.

What happens once I register?

There are several different schemes, but the main ones are the Accrual scheme where you would record the VAT for all your sales and purchases as of the invoice date, the Cash VAT scheme where you would record the VAT for all of your sales and purchases as of the date they were paid, and the Flat Rate Scheme which is where the amount of VAT a business pays is a fixed rate and is only based on your sales.

After you are registered, you will receive your VAT registration number from HMRC and you must display this on all your invoices and sales receipts that you issue to your customers, record the VAT on your sales and purchases, add VAT to your prices, file your VAT returns as instructed and pay any VAT due to HMRC, keep digital VAT records and a VAT account. You will need to ensure that you are charging the correct VAT rate on all products/services that you sell.

The amount of VAT you will pay to HMRC each time you submit your VAT return will depend on which scheme you are using and whether you charged more VAT on your sales than you reclaimed on your purchases.

It is advisable that when you register for VAT, you set up a business savings account so that you are holding back 10-15% of the amount you are paid for sales, and you will then be able to pay any VAT you owe to HMRC.  This is because the amount of VAT you are paid by your customers doesn’t belong to you, it is money that is owed to HMRC that you are collecting on their behalf.  Normally, you would charge your customers 20% VAT which is the standard rate, but you would also have purchases that you have paid VAT on, so by setting aside 10-15% of the amount you are paid for sales, you won’t then be scrambling at the end of each quarter to find the money to pay HMRC as you will have saved at least some of what you may owe to them.

How often you have to file your VAT return and when by will depend upon the scheme you are using and when you registered, usually it is once every quarter and you will have 1 month plus 7 days to file and pay your return.  For example, if you had to file a VAT return that covered April to June, you would have until August 7^th to file the return and pay any amount due to HMRC.

How do I record the VAT on sales and purchases?

The easiest way to record your VAT and to be able to submit your returns is to use MTD compliant software like QuickBooks Online to help you to track the amount of VAT you owe to HMRC and to submit the return.  All VAT returns must be submitted online using MTD compliant software.  This will also help you with recording your transactions digitally as you will be able to attach proof of what each transaction is for.  You can do this within QBO or use third-party software like AutoEntry to help with entering the information into QBO and storing your digital receipts.

How does VAT affect my self-assessment and corporation tax returns?

As VAT is money you are collecting on behalf of HMRC and it is owed to them, if you are VAT registered the VAT portion of your sales and purchases are not included within your tax returns and are not included in the calculations of how much tax you owe.  These figures are actually shown on the balance sheet as money owed to a creditor.

What else do I need to know?

The majority of products and services will have the standard VAT rate charged, but there are also items that are zero-rated or even exempt, which you will need to be aware of.  You will also need to be aware of how to record any items that are bought or sold to people who live outside of the UK, as the way they are treated is different – especially now that Brexit has happened.  HMRC have many pages about the different VAT rates and how to treat items, so you can read about the different rules on there. However, if you are VAT registered, it is a good idea to have an accountant who can help you to know how to deal with anything that does not follow the standard VAT rules, especially if you are dealing with importing/exporting products with the EU.

While I am a bookkeeper and understand the fundamentals of VAT and how it is to be dealt with, some areas like dealing with importing/exporting products with the EU are quite specialist areas, so I always work closely with a client’s accountant to make sure we are recording the information within the accounts correctly.

If you would like further information on VAT and whether you need to register, feel free to e-mail me.

During the November 2021 Facebook Live, I spoke about whether you are required to file a self-assessment tax return if you are employed and set up a small self-employed business.

Normally, if someone is employed and is paid through a PAYE scheme, they don’t have to file a self-assessment tax return, as the information will be submitted to HMRC by their employer every time they are paid, and the tax taken at the time.  However, if your income isn’t straight forward you may be required to submit a yearly self-assessment tax return.

Who needs to submit a self-assessment tax return?

At the end of every financial year, every self-employed person in the UK who has earned more than £1,000 in income (this is sales only), needs to file a self-assessment tax return with HMRC.  There are others who also need to file SATRs and they include all directors of limited companies, partners in a business partnership, if you have foreign income, money from renting out a property and a few other reasons.

If you are self-employed and you have less than £1,000 in trading income (the amount you have received in sales before any deductions are made), you do not need to file a self-assessment tax return.  There is a page on the HMRC site that has a helpful tool to check if you need to file a return.

However, it is important to note that if you received any of the Self-Employed Income Support Scheme Grants, during the pandemic, no matter what the level of your trading income is (total sales before any deductions), you must file a self-assessment tax return.

What happens if I am employed and set up a self-employed business?

If you are over the threshold of £1,000 in your self-employed business, you will have to file an SATR. You fill out the employed section – most of the figures should be pulled through due to the employer filing payroll through RTI every time you are paid, but it is important that you compare the information to your P60 and verify the information is correct.  You may also have additional information to fill in like the “working from home” allowance that has been provided due to the pandemic or maybe benefits in kind.

Under the self-employed section of the return, you would fill out all the information for your business from your accounts.

You may also have other sections of the return that need to be filled out.  For example, any interest received on savings, pension income or contributions, income from shares etc.

Once you have entered all the information into the return, all the income amounts will be added up together, and your personal allowance will be applied.  The personal allowance from 06/04/2021 to 05/04/2022 is £12,570.  If you have already used up your personal allowance, you will be taxed on all income over the personal allowance.  The amount you will have to pay will depend on which tax bracket your total income is in.

Here is an example of how your tax would be worked out if you were both employed and self-employed.  The names and figures are fictional and for illustration purposes only.

Sarah is employed by a company and in the 2021/2021 tax year she earned £35,000 as her salary.  Sarah is also self-employed and earned a profit of £20,000 for the 2021/2022 tax year.

Her total income for the year was £55,000.

After her personal allowance of £12,570 was deducted, her total taxable income was £42,430.

Sarah would have to pay 20% tax on all income up to £37,700 – a total of £7,540.  She would then pay 40% tax on the remaining income of £4,730 – a total of £1.892.

Sarah’s total income tax owed for the 2021/2022 tax year would be £9,432.

During Sarah’s employment, tax would already have been deducted from her salary and this will show on her P60.  She will need to ensure that this information is entered into her tax return, and she would then need to pay the remaining amount owed for income tax.

You will also need to ensure that you are keeping accurate records for your self-employed business.  You need to keep all sales and purchase receipts for 5 years from January 31^st after the tax year ends.  For example, for the 2021/2022 tax year, your tax return doesn’t need to be filed until 31/01/2023.  In that instance, you would then be required to keep your financial records for 5 years from 31/01/2023.   This doesn’t necessarily mean that you need to keep the paper receipts, as HMRC are now accepting digital records for certain items – so if you have any of your sales/purchase receipts in pdf or jpg format, you can simply keep those for your records.  It is a great idea to attach these receipts to the transactions on your accounting software if it will allow you to do so, as this will help you in terms of being compliant for Making Tax Digital.

It is important to note that all self-employed businesses, and those with rental income, with a trading income of £10,000 or more will be required to file information quarterly with HMRC from April 2024 in line with Making Tax Digital (MTD).  You will need to do this using MTD compliant accounts software.

When do I submit the return to HMRC?

Your self-assessment tax return must be submitted online by January 31^st following the end of the tax year.  For the tax year 2021/2022, your tax return must be filed with HMRC by midnight on January 31^st, 2023.  You will also need to make sure you make any payments to HMRC for any money owed to them for tax and NI.

If you are allowed to submit paper returns (only very specific businesses are allowed to do this), you would need to submit the return by midnight October 31^st, 2022.

If you are looking more for someone to provide you with tax advice and help with forecasting and submitting your year-end tax returns, you may want to look for an accountant.

Here is the page on the HMRC website about the deadlines for submitting your tax return and making payments.

If you have any questions about whether you need to submit a self-assessment tax return, or how to keep accurate records for your business, feel free to e-mail me and I will get back to you!

During the October 2021 Facebook Live, I spoke about the differences between an accountant and a bookkeeper.

While the jobs they do are quite similar, they are quite different, but having a bookkeeper and an accountant working together with you on your business, can make a huge difference.

The work that bookkeepers and accountants do often overlaps, and this is because bookkeeping is an essential part of the accounting process.

What does a bookkeeper do?

A bookkeeper helps businesses to process all the financial information that is generated (sales, purchases, bank transactions) and gets all of it entered into your accounts accurately.  They will be able to make sure that the transactions are recorded properly – for example, funds transferred from your main bank account to the savings account is recorded as a transfer and not as income – and show in the right place on the financial reports, so that you as a business owner, are able to see a clear picture of where your business stands financially.  Your bookkeeper will help to ensure that you are following all the legal requirements you must follow in terms of submitting regular information to HMRC and the records that you keep.  Depending on your bookkeeper, they can also help with running the monthly payroll, and even file your self-assessment tax return at the end of the year.

Your bookkeeper will work on your accounts on a regular basis, and the frequency will depend on your specific business needs – so it could be monthly or even weekly.  This will allow you to have “real-time” information about the business, instead of having to wait until the end of the year when you pass it all over to the accountant.  You will be able to make better-informed business decisions in a timelier fashion.

At the end of the tax year, the bookkeeper can help to ensure that all the year-end financials are completed and ready to pass onto the accountant who can then prepare any adjusting entries and file your end of year tax returns.  The accountant should then provide these adjusting entries to the bookkeeper so that the accounts software reflects exactly what the accountant has filed with HMRC and/or Companies House, and you have a more complete picture of the business.

With a lot of bookkeepers now using cloud-accounting software, as they use it daily within their job and assisting their clients, they can also provide you with training on how to use the software, and often have a better working knowledge of it.  A lot of the cloud-accounting software does allow you to provide access to the accounts to both the bookkeeper and accountant.

What does an accountant do?

Some accountants are involved in the day-to-day processing of the business transactions, but this is generally done by their own in-house bookkeeping team, or they outsource the work to other bookkeepers.  The accountant will be more into analysing the information presented within the accounts, to help you to grow the business.  This could involve providing you with tax advice, making financial forecasts, performing audits, filing the end of year returns with HMRC and/or Companies House, and providing you with any tax planning services you may require.

Should I have a bookkeeper and an accountant?

This is such a personal choice, and it really does depend on the size of your business and the complexity of it.  Different businesses will have different needs. 

If you are looking for someone to help take away the stress of trying to ensure that your accounts are kept up to date on a regular basis, are being kept accurately, and you are meeting all of the legal financial deadlines, starting with a bookkeeper to help free up your time so that you can focus on the business may be the best place to start.

If you are looking more for someone to provide you with tax advice and help with forecasting and submitting your year-end tax returns, you may want to look for an accountant.

However, you shouldn’t be afraid to have both of these valuable professionals on your team.  Having both a bookkeeper and an accountant can really help your business to run smoothly, help it to grow and help you to achieve your goals. It is important that whether you have a bookkeeper and an accountant, or one or the other, that you are working closely with them to ensure that they are provided with all the information they require to help keep your accounts up to date regularly.  It is a collaboration between you, the business owner, and the bookkeeper and/or accountant, with each person bringing their skills and knowledge to the table and working together.

I love working with my clients, and their accountants, as it allows me to focus on putting all of the bits of information together into a completed picture for the accountant to file the taxes, but also because it really does help my client to see exactly where their business stands and allows them to make those all-important business decisions and grow their business.

You will often find that when you hire a bookkeeper or accountant, they will be able to recommend or put you in touch with the other person.

If you have any questions about how a bookkeeper differs from an accountant or how a bookkeeper can help you with your business, feel free to e-mail me and I will get back to you!

During the September 2021 Facebook Live, I spoke about National Insurance Contributions – what they are, how much you have to pay and when.

The rates mentioned through this blog post are the rates that are for the tax year 06/04/2021 to 05/04/2022 unless otherwise stated.

What are National Insurance Contributions?

National Insurance Contributions (or NICs) are a tax that is paid by the worker, and by the employer, to the government which helps to pay for some state benefits when individuals need help.  For example, state pensions, statutory sick pay or maternity leave.  Everyone over the age of 16 pays mandatory National Insurance if they are either an employee earning more than £184 per week, or self-employed and have a profit equal to or greater than £6,515 per year.  If you are an employee and earn between £120 and £184 per week, you receive a National Insurance credit without having to pay the contribution.

People can voluntarily pay NICs to help avoid gaps in their contributions.  If you don’t have enough NI credits, you may not be able to get the full State Pension.  You can read more about voluntary contributions on the HMRC website.

In order to pay National Insurance Contributions and receive the NI credits, you must have a National Insurance number.  It is normally sent to you automatically within 3 months of your 16^th birthday if you live in the UK and a parent has filled out a Child Benefit form for you.  However, you can apply for an NI number if you don’t have one.

There are different types of classes of NICs, and the type you pay depends on your employment status and how much you earn.

Class	Description
Class 1 NICs	Paid by employees who are earning more than £184/week and are under the State Pension Age. These are automatically deducted from your wages by the employer and paid on your behalf to HMRC.
Class 1A or 1B NICs	Paid by employers on any employee expenses or benefits and paid directly to HMRC.
Class 2 NICs	Paid by self-employed business owners who earn £6,515 or more in profits for the year.
Class 3 NICs	Voluntary contributions that you can pay to fill or avoid gaps in your National Insurance Record.
Class 4 NICs	Paid by self-employed business owners who earn £9,568 or more in profits for the year.

Not all contributions count towards the same types of benefits.

Class 4 NICs do not usually count towards any of the state benefits.

Class 1, Class 2 and Class 3 contributions all count towards the basic state pension and the new state pension.

Class 1 and Class 2 contributions count towards contribution-based employment and support allowance, maternity allowance and bereavement support payments.

Class 1 contributions count towards the additional state pension and contribution-based jobseeker’s allowance

How much will I have to pay in NI Contributions?

From April 6th, 2022 to April 5^th, 2023 all Class 1, Class 4 and secondary Class 1, 1A and 1B NICs will increase by 1.25%.  Those who are over the State Pension age will not be affected.  This is an increase that was announced on September 8^th, 2021 by the Government and is being used to pay for the NHS and Social Care.  From April 6^th, 2023 it will be moved to a separate tax and will be shown as the “Health and Social Care Levy”.

Class 1 National Insurance Contributions:

• If you are earning between £184/ week and £967/week (£797/month to £4189/month) you would pay 12%
• If you are earning over £967/week (£4189/month) you would pay 2%

You might pay less in NICs if you are a married woman or widow with a valid “certificate of election” or you are deferring NI because you’ve got more than one job.

Employers pay NI Contributions depending on the employees’ category letters.  The category letter is not related to a person’s National Insurance Number – but are used to determine the NI liability of the company and the employee.

Letter	Description
A	This is the default category for employees if they do not fall under any other category and the standard rate of NI is paid.
M	This is for employees under the age of 21 and means the Employer NICs are reduced or there aren’t any.
C	This is for employees who are over the state pension age and they would not have any employee contributions.
H	This is for apprentices under the age of 25 who are following an approved apprentice framework and the Employer NICs would be nil or reduced.
J	This is for employees who are deferring their NI because they are paying it in another job.
Z	This is for employees under the age of 21 who are deferring it because they are paying it in another job.
B	This is for married women and widows entities to pay reduced NI. It is quite a complex category and is rarely used.
X	This is for employees who don’t pay any NI – for example, anyone under the age of 16.

Class 2 and Class 4 National Insurance Contributions:

These are both based on the profits of the business.  If your profits are £6,515 or more a year, you would simply pay Class 2 NICs.  If your profits are £9,568 or more a year, you would also pay Class 4 NICs.

Class 2 NICs are calculated at £3.05/week and are a set rate.

Class 4 NICs are a percentage based on your profits – if you earn between £9,568 and £50,270 you would pay 9% of your profits for NICs and for any profit over £50,270 it would be 2%.

How do I pay my National Insurance Contributions?

If you are employed, your NICs are deducted from your pay and paid to HMRC on your behalf by the employer.  The employer will also pay the Employer NI contributions.  These figures will be shown on your payslip so that you know how much the contributions were.

If you are self-employed, the NI Contributions you pay will be calculated at the time you submit your self-assessment tax return.  However, you can get an idea of whether you will need to pay Class 2 if you keep your accounts up to date on a regular monthly basis, as you will be able to see what your profit is for the year, so if you can see that your profit for the year is £6,516 or more, you know that you will need to pay £3.05 per week for 52 weeks which is £158.60.

If you are both employed and self-employed, the Class 1 NI contributions will be deducted from your wages and the Class 2 and 4 NI Contributions on your self-employed work.

There are different rules for directors, landlords and share fishermen – but you can find information about how National Insurance is calculated for those particular sectors by going to the HMRC website.

If you aren’t sure whether you have enough National Insurance Credits to receive the State Pension or want to ensure you don’t have any gaps in your National Insurance record, you can check it online. 

If you have any questions about National Insurance Contributions, feel free to e-mail me and I will get back to you!

During the August 2021 Facebook Live, I spoke about the pros and cons of running a limited company and what you need to do in terms of your accounts.

If you are running a business in the UK, there are a few options that you can choose for the business structure.

1) You can set up as self-employed where you are responsible for all debts etc relating to the business and you are personally responsible for the taxes etc.   The whole profit/loss of the business belongs to you.

2) You can set up as a partnership, where you and your business partner(s) are responsible for all debts and taxes relating to the business as per your partnership agreement.

3) If you are a not-for-profit business you could look at setting up as a Charity where a board of trustees are then legally responsible for all debts and taxes.

4) You could set up as a Limited Company where all directors and shareholders are responsible for the business in terms of debt, taxes and reporting.

You should seek proper advice from a tax advisor or accountant before choosing the legal structure for your business.

There are pros and cons to each of the types of businesses you could set up as, but I am just going to talk specifically about Limited Companies.

Pros of running a Limited Company 

• Any debt that the company has belongs to the company and not to you personally as a Limited Company is a separate legal entity
• The company’s finances are separate to your personal finances – your personal assets are protected if the business fails
• Your company name is protected and no other business can use your company name; You must register the name of your business with Companies House
• Limited Companies are often given more credibility by suppliers and customers as it provides them with a sense of confidence in the business – this seems to be due to the fact that Limited Companies are more rigorously monitored due to having more complex accounting and reporting requirements.  Their details and accounts are also available to the public.
• More tax effective if you are earning £25,000 or more as a limited company can pay a lower tax rate than a self-employed person – Corporation Tax for the 2021/2022 tax year is 19%; once a sole trader is earning between £12,571 and £37,700, they will pay 20% tax on their income
• You can reduce your Income Tax and National Insurance Contributions by taking a salary and dividends
• As a Limited Company can have multiple owners, additional capital can be raised by selling shares to new investors; some banks will also only lend money to limited companies.

Cons of running a Limited Company

• More paperwork is involved in running a limited company as you will have to file a Corporation Tax Return, accounts with Companies House, an annual confirmation statement with Companies House, and depending on whether you are set up for director’s to take their salaries through PAYE, you would also need to register as an employer and submit regular payroll information; directors would also need to submit an end of year tax return
• As mentioned above, every year you must submit your accounts to Companies House for the business and this information is available to the public.
• Even though your business name is protected with Companies House, names are subject to certain restrictions, also if the business name you want to use is already registered, you would need to come up with another name
• If you have been disqualified as a director before you cannot set up a limited company
• Due to the accounting and filing requirements being more complex, you may need to appoint an accountant
• There are strict procedures that must be followed when withdrawing money from the business – it isn’t as simple as just taking the money out of the business the way a sole trader can
• Limited companies must follow strict record keeping guidelines – all meetings must have the minutes recorded etc

What impact does having a Limited Company have on my accounts?

As a limited company is a completely separate legal entity, you would need to ensure that you have a separate bank account in the company’s name and that all business and personal transactions are kept separate.  You would also be required to keep your accounts for the limited company separate to any self-employed businesses you may have.

A limited company is required to keep all of their financial information for a minimum of 6 years from the end of the last company financial year they relate to.  You can store the majority of the information digitally instead of having to store the paper copies now, and it is actually advisable that you attach your receipts and invoices to the actual transactions in your account’s software.

As mentioned above, there are more documents that limited companies must file in terms of their accounts.

Every year, a Corporation Tax Return must be filed with HMRC 12 months after the end of the accounting period it covers.  For example, if your tax year runs from 01/04/2021 to 31/03/2022, you would then need to file your Corporation Tax Return by the end of March 2023.  However, the payments for your Corporation Tax are actually 9 months and 1 day after the end of the accounting year, so it is best to get the Corporation Tax Return filed as soon as you can after the tax year ends.

The directors of a Limited Company will also be required to file personal tax returns with HMRC, and these must be filed by the 31^st of January of the following year.  The return for the directors would include any salary they have taken, dividends, and any other types of income they’ve had (income from shares, pensions, rental income), as well as any expenses that they can claim tax relief on – for example, pension contributions they’ve made.

You would also need to submit your accounts to Companies House, and this must be done 9 months after the accounting period ends.  Depending on the size of the limited company, it may be possible for abbreviated accounts to be submitted to Companies House.s an example of how your tax would be worked out if you were both employed and self-employed.  The names and figures are fictional and for illustration purposes only.

Every year, limited companies are also required to submit an annual return to Companies House – this is usually around the anniversary date of the incorporation of your company.  The statement just confirms that all of the information held on the public records by Companies House are still valid.  There is a cost for filing this statement and it is currently £13.00 if you file it online.

The information I have covered within this months’ Facebook Live is really just an overview as to Limited Companies.  It is advisable that before you set up a Limited Company, you discuss all of the responsibilities and tax implications with a tax advisor or a qualified accountant.  

If you have any questions about how to keep accounts for a Limited Company, feel free to e-mail me and I will get back to you!

During the July 2021 Facebook Live, I spoke about how having multiple self-employed businesses affects your personal allowances and tax returns.

Everyone in the UK has a personal allowance which allows them to earn a certain level of income before they must pay tax.

Each year, HMRC outlines what the tax-free personal allowance is and for this tax year the standard personal allowance – from 06 April 2021 to 05 April 2022 – is £12,570 in England, Wales, and Northern Ireland.  That means that each person can earn an income of up to £12,570 before they will pay any tax on it.  The personal allowance is different for those living in Scotland as they pay Scottish Income Tax.  You can read more about the Scottish Income Tax here.

Sometimes your personal allowance can be bigger if you claim Marriage Allowance or Blind Person’s Allowance, or it can even be smaller if your income is over £100,000.  You can find out more by going to the HMRC website and looking at the Income Tax Rates page. 

Once you have earned more than your personal allowance, you will start to pay Income Tax.  There are three rates.  I have given the rates after the personal allowance has been accounted for:

• Basic Rate which is 20% and charged on income between £12,571 and £37,700 for England, Northern Ireland, and Wales
• Higher Rate which is 40% and charged on income between £37,701 to £150,000 for England, Northern Ireland, and Wales
• Additional Rate which is 45% on all income over £150,000 for England, Northern Ireland, and Wales

The rates for Scotland are different due to the different tax they pay, and you can find the information about those rates by going to the income tax rates and allowances page on the HMRC website.

Whether you are self-employed or employed, the personal allowance and tax bands apply to everyone who is earning an income in the UK.

What if I am employed and self-employed?

When you file your tax return with HMRC, you will need to fill out the Employed section as well as the self-employed section of the return.

For the employed section – the information may already be partially filled in due to payroll being submitted through RTI, but it is important that you compare the information to your P60 and verify the information is correct.  You may also have additional information to fill in like the “working from home” allowance that has been provided due to the pandemic or maybe benefits in kind.

Under the self-employed section of the return, you would fill out all of the information for your business from your accounts.

You may also have other sections of the return that need to be filled out.  For example, any interest received on savings, pension income or contributions, income from shares etc.

Once all the information is entered into the return, all of the income amounts will be added up together, and your personal allowance will be applied.  If you have already used up your personal allowance, you will be taxed on all income over the personal allowance.  The amount you will have to pay will depend on which tax bracket your total income is in.

Here is an example of how your tax would be worked out if you were both employed and self-employed.  The names and figures are fictional and for illustration purposes only.

Anne is employed by a company and in the 2021/2022 tax year, she earned £35,000 as her salary.  Anne is also self-employed and earned a profit of £20,000 for the 2021/2022 tax year.

Her total income for the year was £55,000.

After her personal allowance of £12,570 was deducted, her total taxable income was £42,430.

Anne would have to pay 20% tax on all income up to £37,700 – a total of £7,540.  She would then pay 40% tax on the remaining income of £4,730 – a total of £1.892.

Anne’s total income tax owed for the 2021/2022 tax year would be £9,432.

During Anne’s employment, the tax would already have been deducted from her salary and this will show on her P60.  She will need to ensure that this information is entered into her tax return and she would then need to pay the remaining amount owed for income tax.

What if I have more than one self-employed job?

If you have more than one self-employed job, you will need to ensure you keep proper records.  If the two businesses are entirely different, this will mean you need to keep two separate sets of accounts as you will need to show the two businesses on the tax return separately.  If the businesses are of a similar nature, you would only need to keep one set of accounts.

When you submit your tax return, under the self-employed section, you would fill out the information for each business if they are different from each other.

All the income from both self-employed businesses will be added together and the tax owed will be calculated based on the taxable income after the personal allowance has been deducted.

Here is an example. The names and figures are fictional and for illustration purposes only.

Jim is a self-employed taxi driver.  He also makes and sells wooden toys.  Jim is registered with HMRC as self-employed.

In the 2021/2022 ta year, Jim has earned a profit of £15,000 from being a taxi driver and £6,000 in profit from selling wooden toys.  His total profit for the 2021/2022 tax year is £21,000.

After his personal allowance of £12,570 is deducted, his total taxable income is £8,430.

Jim would pay 20% tax on the £8,430 meaning his total tax for the year would be £1,686.

In both examples used, there would still be National Insurance contributions for the self-employed income that would need paying, so that is something to bear in mind.

There are other factors that can affect the amount of tax you pay and you can find out more about these on the HMRC website.  These include things like pension income, benefits in kind if you are an employee, interest on savings, income from shares, rental income or income from a trust.

If you have any questions about personal allowances or how to deal with your accounts if you have more than one self-employed business, feel free to e-mail me and I will get back to you!