Category Archives: Tax Questions and Answers

Why am I still paying monthly Class 2 NI?

A couple of months ago a self-employed client asked me why he was still paying his monthly direct debit to HMRC for Class ” National Insurance.

As a reminder of the changes from 6 April 2015 the main changes are:

  • Self-employed people no longer need to apply for an exception from paying class 2 National Insurance due to low self-employed profits or due to the maximum National Insurance being paid through employment. If your profits are below the Small Profit Threshold (£5,965 for 2015-16), you won’t be asked to pay
  • Any class 2 National Insurance that is due will be calculated when the tax payer sends in their 2015-16 tax return. It will be added to their self-assessment tax bill
  • If the tax payer pays class 2 National Insurance, but they are not in self assessment (e.g they work full-time abroad), HMRC should contact them to make arrangements for continuing to pay class 2

In answer to my self-employed clients’ question about still paying Class 2 National Insurance by direct debit, I pointed out that he is actually paying four months in arrears. This means that his direct debits would continue for four months into the 2015/16 tax year, i.e. until 10 July 2015 – in order to pay the 2014-15 contributions owed.

From August 2015, he will have no automatic deductions made by direct debit. His full year’s contributions will be due for payment by 31 January 2017, along with any income tax and class 4 National Insurance calculated based on his tax return for year-ended 5 April, 2016.

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My profits are low, should I take advantage of no Class 2 NI to pay?

Following my previous blog Class 2 National Insurance from April 2015 a client asked me a question:

“Should I take advantage of paying no Class 2 National Insurance as my earnings are below the £5,965 small profits threshold?”

Answer:

As Class 2 National Insurance counts towards the state pension (and some other state benefits such as maternity allowance), it would be advisable for her and other self employed people with small profits and not having any employment income, to take up the option of making voluntary Class 2 NI payments.

There may be exceptions and one would be anyone who reaches state pension age on or after 6 April, 2016 who has already reached the 35 years’ contributions needed to earn the maximum new flat-rate state pension.

If you don’t know how many years’ contributions you have made, you can go onto the Governments Future Pension Centre page and follow the instructions and download and complete the PDF Form BR19 or complete an interactive PDF version of form BR19 online and download it.

The form should be sent to the address on the form which is:

Newcastle Pension Centre, Futures Group
The Pension Service 9
Mail Handling Site A
Wolverhampton
WV98 1LU

I know, the Newcastle Pension Centre is in Wolverhampton!

Alternatively, you can call them on 0845 3000 168 or 0345 3000 168.

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Utilising the Employment Allowance

I was asked a question by a client, who had a company and she was the only director/employee (‘one-person company’) – “Can I pay myself a salary above the £8,060 you suggest in your blog tax efficient salary & dividend mix to make full use of the £2,000 National Insurance Employment Allowance?”

Anwer:

In 2015/16 the Employment Allowance of £2,000 is equal to employers’ National Insurance on earnings of £22,605. At this salary level the Employers’ National Insurance payable would be £2,000 but after taking advantage of the Employment Allowance of £2,000, there is no Employers’ NI to pay.

This is not worthwhile doing as the additional tax and Employees’ NI deducted from the salary would total £4,146.40 which exceeds the additional Corporation Tax relief of £2,909, so she and her company would be worse off by £1,237.40.

Summary

  • For a company with one director shareholder and no other employees, it’s better to pay a salary equal to the personal allowance and lose part of the Employment Allowance than to pay a higher salary to utilise it in full.
  • A company with up to five director shareholders and no other employees can pay each director a salary up to the £10,600 personal allowance and still make use of the Employment Allowance (the Employers’ NI saving per director is £343.34 so five times this is £1,716.70 – all within the £2,000 National Insurance Employment Allowance.
  •  Other factors may affect yourself, such as pension contributions, so take advice from your accountant before taking action based on this blog.
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Tax efficient salary and dividend mix 2015/16

At this time of year owner managers of limited companies “what is the most tax efficient split of salary and dividend in the new tax year?”

Provided your company is not caught under the IR35 rules (your accountant will have told you if you do), from 6 April, 2015 the tax factors to consider are as follow for the 2015/16 tax year:

  • You have a tax free personal allowance (if you are allowed it all) of £10,600 (£883.33 per month);
  • As a director, you start paying Employees’ National Insurance when your salary reaches £8,060;
  • Although Employers’ National Insurance is payable when, as a director, your salary reaches £8,112. Since April, 2014 businesses have been able to take advantage of the Employment Allowance meaning no Employers’ National Insurance is payable to HMRC until it reaches £2,000;
  • Level of company retained profits after tax that a dividend can be paid out of;
  • Who else has shares in the business;
  • If you have set up your business during the tax year and received salary from another company in the year then you need to speak to your accountant as my calculations will not apply to you as they are;
  • Consideration needs to be taken of any pension contributions you want to make;
  • Any redundancy payments you want if your company ‘closes down’ or is sold and you are made redundant;
  • Similarly, some unemployment and state benefits are based on your salary (i.e. higher benefit if your salary was higher)

If the only consideration is the most tax efficient remuneration from the company and you will not be wanting more than £100,000 in total, a tax efficient salary/dividend split would be:

Salary £10,600 PA (£883.33 per month)

This salary level would result in Employees’ National Insurance being deducted of £304.80 PA (£25.40 per month). The good news is that the additional tax relief the Company gets on the part of the salary above the National Insurance threshold of £8,060 is £508.00 PA (£42.33 per month) resulting in £203.20 less tax to pay each year after the National Insurance paid is taken off.

The balance of remuneration can be paid as dividend (subject to the retained profits after tax of the company).

The first £31,785 of dividend above the £10,600 salary would attract no additional tax on the director/shareholder as total income reaches £42,385 which is the 40% higher rate band threshold.

Any dividend you pay yourself above the £31,785 is subject to additional tax. The tax you pay on it is 25% of the net dividend providing it does not exceed £150,000 (basically you need to put away £250 for each £1,000 of dividend to cover the tax).

Any dividend you pay yourself above the £150,000 is subject to additional rate tax. The tax you pay on it is 30.556% of the net dividend (basically you need to put away £305.56 for each £1,000 of dividend to cover the tax).

This is a general summary of the tax efficient remuneration for owner managers of limited companies. It is essential to speak to your accountant before acting on the above as everyones circumstances are different and there may be other factors to consider.

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How to Pay HMRC

Close up of Female Hands Making Online Payment

I am often asked how businesses and individuals pay HMRC the tax and VAT they owe.

Tax payers can pay by direct debit or by debit or credit card through BillPay). Their is a fee for paying by credit card of 1.4% as at 16 January, 2015 but may change in the future.

Below are links for paying VAT, PAYE and other taxes:

Pay your Self Assessment tax bill

Pay your Corporation Tax bill

Pay your VAT bill

Pay employers’ PAYE

Pay employers’ Class 1A National Insurance

Full list of links for paying other taxes and penalties

When paying HMRC you will need your reference number for the tax you are paying and follow HMRC’s instructions and information requests.

You will also have to allow 3 working days for your payment to reach HMRC’s bank account to avoid late payment.

If you can’t pay the tax owed there is an HMRC Business Payment Support Service you can call on 0300 200 3835. This service is for individuals as well as businesses. For information you will need before you call click the following link:

When you call about your tax bill

Speak to your accountant for further help on paying HMRC or requesting time to pay your tax bill.

 

 

 

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