Tag Archive | "tax code"

HMRC to recoup overdue tax through PAYE system

Contractor accountants need to be aware that HMRC intends to code out employee debts of less than £3,000 through the PAYE system.

As from April this year, the Revenue will be able to change an employee’s tax code to reflect debts of up to £2,999 providing he or she pays their tax through PAYE. Pensioners owing tax to HMRC will also receive an amended tax code.

If an employee’s income or circumstances have changed during the year, he may not have paid sufficient tax. If this were to occur, the employee will receive a form P800 Tax Calculation informing them of the amount owing.

HMRC’s guidance on the use of PAYE for recouping underpayments of tax says the underpayment will normally be included in the following year’s tax code if it is less than £3,000. The money will be reclaimed in equal instalments, usually over a period of 12 months. Therefore if you did not pay sufficient tax in the 2010-11 tax year, this will be recouped in the tax year beginning 6th April 2012.

The Revenue began sending out letters to people who owed small amounts of tax last August. Tax credit claimants who owed money to HMRC started getting similar letters last October. The letters explained that this year’s tax code might be adjusted to take the amount owing into consideration and offering taxpayers the final chance to settle in full or contact the government department to make alternative payment arrangements.

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Image: Clock and tax return by Images_of_Money

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It’s one step forward and two back on tax simplification

The Association of Chartered Certified Accountants claims the government is not succeeding in its efforts to simplify the taxation system in the UK. The organisation says the coalition is taking one step forward and two steps back.

Since coming into office last year, the government has made 200 tax code changes, even though they promised to give us an easier, more streamlined tax environment.

ACCA’s head of taxation, Chas-Roy-Chowdhury, said the number of alterations that have been made means the coalition takes one step forward followed by two back in its efforts to simplify the UK’s complex tax system.

UK contractors have been affected by a number of these changes but the one change that is most sought after still remains. IR35 is still with us, although the government has pledged to overhaul it and improve its administration.

David Gauke, the Exchequer secretary, recently reiterated his commitment to improving IR35 after acknowledging that contractors in the UK are significant and important people in the business community.

Gauke explained that HMRC is going to completely overhaul the way it administers IR35. This issue has to be got right if we are to provide a fair tax system that enables professional contractors to provide their services in the best possible way.

Chris Bryce, the chairman of the PCG, said he was pleased the Minister had made this personal commitment and that he recognised the major difficulties that have faced freelancers for the past 11 years.

© 2011 All rights reserved. Reproduction in whole or in part without permission is prohibited.

Image: I Fought The Lawn … And The Lawn Won by JD Hancock

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£100 billion is washed down the drain each year in red tape

Basic administrative tasks relating to bookkeeping, invoicing and billing and filling out timesheets take the average worker in the UK 37 days every year, according to Keboko, the cloud service provider.

The cost of all this red tape amounts to more than £100 billion and could encourage freelancers to get help from a contractor accountant in a bid to reduce the amount of time they spend carrying out administrative duties.

Charlie Cowan, the CEO of Keboko, commented that companies should be trying to rebuild after the recession but instead many workers are finding it hard to do this as they are bogged down with tasks such as data input and updating reports. UK businesses are basically throwing the money spent on these tasks down the drain.

The burden of dealing with the taxman is also costing businesses dear, the IoD reported earlier this week. The Institute surveyed its members and discovered that there is still considerable room for reform to reduce the administrative burden surrounding taxes. The survey also discovered that 30% of businessmen would actually advise someone not to start up their own business because of the weight of the tax burden.

An overwhelming number of directors want to see the regulations concerning PAYE and National Insurance simplified. Business people sometimes struggle to understand the tax rules and have difficulty finding out the correct information when they contact HMRC. Only 15% of respondents said it was easy to get the right information when they called the HMRC helpline while a third said it was very or fairly difficult.

HMRC’s website does not fair any better either. 16% said they could find the information they needed easily but again 33% struggled to find what they needed to know.

Since the PAYE coding errors earlier this year, businesses have found it increasingly difficult to get through to the Revenue’s helpline. 37% of the directors who did manage it feel that the majority of HMRC officials have a poor understanding of the nature of their business.

Half of the directors surveyed said they want the OTS to simplify the PAYE and NI system and 28% said the taxation of employee benefits was the area most in need of simplification.

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Image: Red Water Pool by Charles P.

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There’s widespread confusion over personal taxation

It will probably come as no surprise to contractor accountants to learn that many people in the UK are confused by our taxation system.

According to recent research from HSBC, 53% of adults do not know that their personal tax allowance is £6,475 and 81% do not know at what income level the higher tax rates kick in. Annual earnings between £37,401 and £150,000 are currently taxed at a rate of 40% and any earnings above £150,000 are taxed at 50%. Additionally, 54% have no idea what their income tax code is and more than a third of taxpayers never check their end of tax year P60 form.

Employees are just as confused as to what they actually pay income tax on. Over 50% did not realise that employee benefits are taxable and slightly under a third did not know that income from pensions was classed as taxable income. We fare little better when it comes to understanding income tax on our savings. 20% of adults didn’t know that the majority of savings were taxed and an additional 10% thought that cash ISAs, which are tax-free, did get taxed.

The results of the bank’s research were highlighted in the BBC Panorama programme on Monday, 11th October. Christine Foyster, HSBC’s senior manager of investments and savings told viewers that it was important for the British workforce to realise how much tax they should currently pay and the amount they have paid in previous years.

Taxpayers and limited company contractors in the UK should make sure they understand all aspects of the finances, including their tax allowances, if they want to make the most of their money, she added.

HMRC has admitted that more than a million taxpayers were charged too much tax last year, but if we do not understand the tax system, how many cases could have slipped through the net?

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As a contractor, what is a reasonable mix of salary, expenses and dividends?

Choose a Name: The name has to be unique, obviously, and not likely to be confused for someone else’s existing name. The best reference point is the Companies House website – www.companieshouse.gov.uk – which has a simple search facility so you can check your chosen version. Also, try to avoid names that are specifically related to your line of work, just in case you want to change careers later: imagine selling cars though a company called Al’s Bakery.
Decide on Share Ownership: Is this just you, or you and your spouse, or you and two or three other people? This is important, because it defines how to allocate the Ordinary Shares In the company. Dividends are paid in direct proportion to numbers of shares held. A husband and wife typically have 50% each, for example, but if one is already earning money, be aware of the impact of the share income on their tax position. Share allocation can be changed after the event. There are several variations on share management; but for anything other than a simple allocation of ordinary shares, get expert advice.
Register at Companies House: There is an online system you use to set up your company and pay the registration fee. It is fairly simple to use. One question it will ask is who the directors are. For a typical small contractor company you only need one but there’s no reason not to have more. Although not strictly necessary any more, it also helps to nominate a Company Secretary: this could be the same person, but it’s more sensible to have someone else, a partner or relative for example.
Register a Memorandum of Association: Something else to do while you are at Companies House. At its simplest this is a document describing what your company is for and how you wish to run it. You can do it yourself, but the document can have legal implications in a tax investigation so do some online research for a suitable template from sites such as www.simply-docs.co.uk or www.clickdocs.co.uk.
Set up a Bank Account: This has to be a business bank account. Banks are increasingly wary of new business accounts, so you will have to answer some detailed questions and it will help if you have some professional references and a signed contact to demonstrate you actually will have an income.
Register for VAT: You have to do this if your annual income is in excess of a set amount (currently £67,000 pa) but it Is advantageous to register anyway. VAT and the Flat Rate Scheme are discussed in more detail elsewhere.
And that’s it. It sounds complicated but is in fact quite straightforward. You can also take the easy way out; either use a company formation agent, or there are several accountants who specialise in contractors who will set up all if the above for you for a small fee, or even for free, as well as providing expert support. Finally keep track of all your various expenses setting the company up, since you can reclaim these once you start trading.

If you are in business on your own account and working through a limited company, how you take money from the company to pay your bills is entirely up to you. There are no set rules you need to adhere to about how you do it.

However, how much tax you pay will depend very much on how you structure the payments from your company to you. This can get complicated, especially if there is more than one shareholder to consider, so it is best to get professional advice at first and to review that advice as the taxation landscape changes. However, there are some broad guidelines.

You can take any salary you like or none at all. You need to think about your personal tax-free allowance though; this is the amount you are allowed to earn before tax becomes due and is set by your Tax Code.  Therefore you can take that amount of money as salary and not pay any income tax on it. You should also remember that a range of state benefits depend on you paying National Insurance contributions. These are due once you exceed the earnings threshold (currently £110 a week). So the absolute minimum to pay yourself is £5720 a year, or your personal tax-free allowance, which ever is the higher.

Dividends are payable from net profits after Corporation Tax. You can take them at any time, and as often as you need to, provided the financial status of the company is such that it can afford to pay them. Because dividend payments attract a tax credit – to offset the Corporation Tax already paid by the company – dividends up to the upper-earnings limit – the point when the higher rate of income tax kicks in – will not be liable to further income tax. Once you go over that limit, tax is due at the higher rate less the tax credit; at the time of writing this means an effective tax rate of 22.5% (this is because the tax rates for dividends are 10% and 32.5%, both reduced by the 10% tax credit; hence zero extra tax at lower rate and 22.5% at the higher). Dividends are not liable to NIC payments.

Despite what some umbrella companies claim, expenses are not income. In fact, if properly calculated they are income neutral. Provided you have actually spent the money and that you spent it wholly and exclusively as a result of your work, you can reclaim it tax free. It is not, however, tax-free income, and if you are making money on expenses you are probably doing something wrong.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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