Let's Get Connected!

 01626 833828

facebook-icon  twitter-icon  linkedin-icon  email-us-icon

bedtime reading accountants news from one plus one accountancy in devon

Bedtime reading

Some times all you need is a quick answer to a simple question. Our bedtime reading section has some of our most frequently asked questions along with the answers.

Bedtime reading is a great reference point but sometimes there is also no substitute for talking things through with someone. So if you would like any more information about the topics here (or you have another question you would like to ask) then contact us or by calling 01626 833828.

If you think we've missed a topic that would be useful for everyone to have some answers to then let us know and we'll see what we can do. Simply contact us with the topic and the related questions for us to consider.

The information contained within bedtime reading is for general information purposes only. Any reliance you place on this information is done so strictly at your own risk and we recommend you seek professional guidance and advice where necessary.

 

Business Basics

Once I start trading, when do I notify HMRC?

You should inform HM Revenue and Customs (HMRC) if you intend to trade as an individual or as a partnership as early as possible. If you do not inform HMRC within three months of starting to trade you may incur a £100 penalty. A significant delay may also cause you to miss filing deadlines and incur further penalties.

When commencing trade you should also start to pay Class 2 National Insurance Contributions. If you self employed income is below the threshold set by HMRC each year then you can apply for an exemption.


Do I need a book keeper?

With most businesses the proprietor would likely want to spend as much of their time as possible developing the business and generating turnover. Businesses will therefore eventually get to the stage where they would have to consider the financial benefit of paying someone to maintain the accounting records for them. The range of services a bookkeeper or accountant provides can easily be tailored to the requirements of the business.


Relevant information for sales invoices

Whenever you supply goods or services you must provide a sales invoice. This should show your details as the supplier (name and address), customer details, invoice reference, invoice date, the tax point (if different from the invoice date), a description of the items sold and the amount of the sale. It is also worth including the terms for payment.


Keeping business records

Different types of records are covered by different types of legislation as shown by the summary below:

Generally we would recommend that at least six full tax years of records are always held regardless of what they relate to.

PAYE

HMRC recommends that PAYE records be kept for at least three years after the income tax year to which they relate.

Value Added Tax

By law, VAT records have to be kept for six years, unless HMRC allows a shorter period. Any request you make to keep records for a shorter period must be accompanied by a full explanation of why it is considered impractical to keep the records.

Taxes Generally

From April 1996, all business records must be retained for a period of six full tax years.

Company Records

Under corporation tax self assessment; accounting records must be preserved for six years from the end of the accounting period.

With regard to the statutory books, there are no specific requirements, but the Companies Act states that an entry relating to a former member of the company may be removed from the Register of Members 20 years from the day he or she ceased to be a member.

Also, the Register of Directors and Secretary must include details of past directorships held within the preceding five years.

Partnerships

Partnership Agreements

A Partnership agreement will allow you to establish a working relationship in a way that suits you, your partners and the business. It will give everyone a defined role and responsibilities and should deal with the process of what happens if there is a disagreement.

As there is no “one size fits all” agreement, these are some of the key areas that should be considered when you have an agreement drawn up:

Name of the partnership

You need to decide what you are going to call your partnership. Will it be your surnames or simply a random word(s) that means something to you or sums up what your business is about, or you simply like the sound of it?

Check with Companies house to make sure that the name is not in use to avoid any problems later on.

Contributions to the partnership

It's crucial that you and your partners work out and record who's going to contribute what to the business. It could be cash, property, services or even goodwill if you are expanding an existing business. Decide exactly what percentage ownership everyone will have and do all of this before the business starts to trade

Allocation of profits, losses and draws

Your partnership agreement needs to detail the profit distribution arrangement. This is all about how the profits of the company are going to be distributed and when. You need to consider if the profits and losses will be allocated in proportion to a partner's percentage interest in the business? You and your partners may have different ideas about how the money should be divided up and distributed, and as each of you may have different financial needs this is an area to which you should pay particular attention.

Partners' authority

Without an agreement to the contrary, any partner can enter the partnership into a contract without the consent of the other partners. If you want one or all of the partners to obtain the others' consent before entering into any contractual arrangements, you must make this clear in your partnership agreement.

Partnership decision-making

This can be quite a difficult area for partnerships, especially in the beginning when everyone involved wants to have their say about everything. Unanimous votes are all well and good but they can impede business development. You could try a system where minor, everyday decisions are made by one partner but a unanimous vote is required for major decisions. There is no right and wrong way but it’s an issue that needs careful consideration when you are setting up your business. You don’t want to tie the business up in such a complicated decision making process that nothing actually ever gets decided.

Management duties

Being your own boss gives you a great sense of freedom but once you start working with someone else then you will probably need to have some guidelines in place about your respective roles within the business. For example, who will keep the books? Who will deal with customers? Supervise employees? Negotiate with suppliers? Think through the management needs of your partnership and be sure you've got everything covered.

Admitting new partners

Eventually, you may want to expand the business and bring in new partners. Agreeing on a procedure for admitting new partners will make your lives a lot easier when this issue comes up.

Withdrawal or death of a partner

At least as important as the rules for admitting new partners to the business are the rules for handling the departure of a partner. You should set up a reasonable buyout scheme in your partnership agreement.

Resolving disputes

If you and your partners do become deadlocked on an issue would you really want to go straight to court? Although you probably can’t ever imagine reaching this situation it’s a good idea to try and agree in advance a procedure for dealing with disputes. For example bringing in a mediator or going to arbitration.

If your business is run as a partnership, as a partner you'll have to complete a Self Assessment tax return (SA100) and a partnership supplementary page (SA104S or SA104F). On it you'll show your income from the partnership, as well as other personal income, gains and expenses. If you send your tax return on paper, you'll need to fill in a partnership supplementary page (SA104S or SA104F).

The nominated partner must also complete a Partnership Tax Return (SA800). This will show each partner's share of the profits or losses. All partners are jointly liable for any penalties and interest if the Partnership Tax Return is late or inaccurate.

The above information is a guideline only and is not intended to replace the services of a professional qualified in this field. A Partnership agreement should be drawn up using professional services to ensure that all legalities have been covered.

Capital Allowances

What are capital allowances?

If you buy an asset, for example, a car, tools, machinery or other equipment for use in your business, you cannot deduct your expenditure on that asset from your trading profits. Instead, you may be able to claim a capital allowance for that expenditure.

Capital allowances are also available for certain building-related capital expenditure, for qualifying capital expenditure on qualifying research and development, for donations of used business assets to charity, and certain other capital expenditure.

The aim is to give tax relief for the reduction in value of qualifying assets that you buy and own for business use by letting you write off their cost against the taxable income of your business.

Capital allowances are available to sole traders, self-employed persons or partnerships, as well as companies and organisations liable for Corporation Tax.


What is the Annual Investment Allowance (AIA)?

The AIA is a type of capital allowance, which offers tax relief at 100 per cent on qualifying expenditure in the year of purchase. The maximum you can deduct from your taxable profits has increased from £25,000 to £250,000 for a two year period from 1 January 2013. This amount is adjusted for short or long periods, and also periods that span the operative dates and rates of allowance.

Who can claim?

Virtually every entity will be eligible to qualify for the AIA provided the business activity satisfies one or more of the following criteria:

  • Trading
  • Commercial property letting
  • Office or employment
  • Leasing (excluding long funding leasing)

The only business structures which are not eligible to be part of the AIA are mixed partnerships (i.e. partnerships which are comprised of both individuals and companies) and trustees.

How does it work?

As its name suggests this is an annual allowance which is available for up to £250,000 of expenditure each year. A business can spend up to that amount on any qualifying capital assets during the period and be eligible for 100% tax relief on the full cost in the same accounting year.

In addition, any investment in so-called green technologies can be in addition to the £100,000 allowance and would also be eligible for 100% tax relief in the first year. This is known as Enhanced Capital Allowances (ECAs) and again there is a very prescribed set of qualifying technologies – visit www.eca.gov.uk for more information.

What are the exclusions?

Splitting a business with related interests into a group of companies is a well used tax planning strategy. But whilst the individual companies would be eligible for other tax benefits, in the case of AIA, they would only get a single allowance across the group. This is also the case for any related non group companies under common control and also any unincorporated businesses under common control.

In this case the definition of "Related" businesses are those that shared the same premises or carried out similar activities (including 50% of turnover) for the accounting period.

The AIA allowance also excludes purchases such as cars (unless they qualify for the ECA rules). Other exclusions include:

  • Expenditure in the period during which the business activity ceases
  • Expenditure caught by anti-avoidance rules 

Do I have to claim the allowance?

You do not have to claim the AIA allowance. If you are not generating enough profit to warrant claiming the allowance you can restrict your allowances and claim only what you need to. 

Note: maximising and minimising this relief can have long term tax implications that should be discussed with your accountant.

Property Rental and Landlords

Claiming expenses on rental income?

The rules regarding income and the allowable expenses vary depending on the type of rental (furnished, unfurnished or holiday lets). The expenses claimed can also vary between property rentals of the same group from person to person, depending on the accounting method adopted.

It is always best to consult an accountant when preparing the land and property pages of your Self Assessment Tax return.


What is a Rent a Room Relief?

This relief is for individuals who let furnished residential accommodation within their only or main home. The amount of income received must fall below the exemption limit to apply, currently £4,250 (£354 per month). The individual will be exempt from income tax on profits if the rent is below the limit. 

However, the taxpayer can elect for the rent-a-room rules not to apply. In that case the usual balance of income less expenditure would be used. The taxpayer might want to do this, for example, where there was a loss.


Landlord's Energy Saving Allowance (LESA)

The LESA is a tax allowance which lets landlords claim on their income or corporation tax against the cost of buying and installing certain energy saving items. Tax relief is for a maximum of £1500 per dwelling house.
You can claim for installing the following items:

  • Draft proofing
  • Loft insulation
  • Floor insulation
  • Cavity wall insulation
  • Solid wall insulation
  • Insulation for hot water systems

This allowance is available on qualifying expenditure incurred before 6th April 2015.


Holiday Lets

To comply with the current rules for furnished holiday lettings your property must be:

  • In the UK or European Economic Area
  • Furnished
  • Available for commercial letting to the public, as holiday accommodation, for at least 210 days a year
  • Commercially let as holiday accommodation for at least 105 days a year (the rent must be charged at market rate - not as cheap rates to friends and family)
  • A short term letting of no more than 31 days - see more below

Lets to the same person

You can let to the same person more than once as long as each let is less than 31 days. All of these lets together can total more than 31 days and still count as furnished holiday lettings.

Lets for periods longer than 31 days

You can let the property out for periods longer than 31 days in one stretch but none of the days will count towards your qualification. This is known as 'longer term occupation'. However if the total of all or any 'longer term occupation' lets is more than 155 days in the tax year, your property will no longer qualify as a furnished holiday letting.

If your property doesn’t qualify

If your property doesn't qualify as a furnished holiday letting, you will be taxed under the residential property lettings rules.

 

VAT

Becoming VAT registered?

It is compulsory for your business to register for VAT if your taxable supplies, distance sales, or acquisitions are expected to exceed the VAT registration threshold in the next 30 days, or if you are already trading, and they have exceeded the threshold in the past 12 months. The current VAT registration threshold is £83,000.

Note: "Taxable Supplies" are any goods and services that are subject to VAT at any rate, including zero rate.


What are the VAT rates?

Rate of VAT

Also known as...

Applies to taxable supplies of ...

20%

standard rate

most goods and services

5%

reduced rate

examples: fuel and power used in the home and by charities, renovation and alteration of dwellings, women's sanitary products

0%

zero rate

certain goods and services on which you do not need to charge VAT (examples below)


Zero-rated supplies

Below are examples of taxable supplies where the VAT rate of 0% is applied.

  • Most food, but not HOT food prepared in restaurants, take-aways, or any other food outlets. The only exception to this rule is if the food is heated but not with the intention to be consumed hot. E.g., Bread from a baker will often be sold hot or warm. Also pasties can fall under this exemption.
  • Books;
  • Newspapers;
  • Young children's clothing and shoes;
  • Exported goods (For further information see Notice 703 Exports and removals of goods from the UK.);
  • Most prescriptions dispensed to a patient by a registered pharmacist;
  • And most public transport services.

VAT is not charged (therefore it cannot be reclaimed) on goods and services that are:

  • exempt from VAT
  • outside the scope of VAT

Exempt items

There are some goods and services that are exempt from VAT. Exempt goods and services are not taxable for VAT.
Items exempt from VAT include insurance, some services from doctors and dentists and some types of education and training.

If you sell or otherwise supply exempt items, you cannot register for VAT and you cannot charge VAT. If you buy exempt items, you cannot reclaim any VAT.

If you sell some exempt items and some VATable items, your business is 'partly exempt' and you will only be able to reclaim VAT related to the VATable items you sell.

There's an important difference between goods and services that are exempt from VAT and those that are zero-rated. If you sell or otherwise supply zero-rated items, you can claim the VAT back on your purchases.


Items outside the scope of VAT

Some goods and services aren't covered by the UK VAT system at all - they're outside the scope of VAT.

You do not charge nor reclaim VAT on goods or services that are outside the scope of VAT including any items that you:

  • Sell or otherwise supply when you're not registered for VAT - and you do not need to be registered
  • Buy and sell outside the UK
  • Do not sell or otherwise supply as part of your business
  • Buy and sell for your own personal use such as a hobby

Other items outside the scope of VAT include:

  • Donations to charity freely given by a business where the giver does not receive anything in return
  • Statutory fees and services, e.g. MOT testing, congestion charge
  • Tolls for bridges, tunnels and roads operated by public authorities
  • Low cost welfare services provided by charities

Goods or services you supply within the European Union (EU) can be inside or outside the scope of UK VAT, depending on the particular transaction.


When can I Deregister for VAT?

Deregistration can be considered when annual turnover falls below £81,000.


Taking over a business as a going concern, when do I register for VAT?

If you buy a VAT registered business as a going concern, you must be registered for VAT when you buy that business - at the time of sale.

If you are not registered for VAT, the seller must add VAT to the price you pay for the business as if you were buying the assets alone and you will not be able to reclaim this VAT.


VAT errors and omissions 

If you have made errors on a previous VAT return you can correct these on the next return you submit. 

If the net value of errors is greater than £10,000 or 1 per cent of turnover, subject to an upper limit of £50,000, (the 1 per cent is based on box 6 of the VAT return in which the error was found)the errors will need to be reported to HMRC separately and in writing.


Information required for VAT invoices

If you are VAT registered you must generally provide a VAT invoice to your customer. If your customer is also VAT registered they can only reclaim the VAT they have paid if they have a valid VAT receipt from you.

A VAT invoice must generally show:

  • Your name or trading name and address.
  • A sequential invoice number.
  • Your VAT registration number. (if not known at point of sale enter “Applied for”)
  • The invoice date and the tax point (the time when a sale is treated by HMRC as taking place, if different from the invoice date.
  • The customer's name or trading name and address
  • A description of the goods or services

For each different type of item you sell, you must show the:

  • Unit price or rate, excluding VAT
  • Quantity of goods or the extent of the services
  • Rate of VAT that applies to the items being sold
  • Total amount payable, excluding VAT
  • Rate of any cash discount
  • Total amount of VAT charged 

If you issue a VAT invoice that includes zero-rated or exempt items, you must:

  • Show clearly that there is no VAT payable on those items
  • Show the total of those values separately.

What is a Road Fuel Scale Charge?

If you use a motor car in your business and claim back VAT on the road fuel then you must consider whether to pay scale charges or not. These charges are to cover any private element of the fuel bought e.g. getting to and from work in the vehicle is considered to be private and not business. By paying the scale charge you can recover ALL of the VAT on the road fuel both business and private. You do have the option not to pay the scale charge, but if you do so then you cannot recover the VAT on fuel on ANY vehicles used by your business. A charge is applied to each vehicle owned by the business.


Road Fuel Scale Charge Rates

The basis of the fuel scale charge is the Co2 emission rating of the vehicle. For vehicles that do not have valid emission ratings, a set figure based on the engine size is used. 

Engine size 1,400cc or less use emission level 140. 
Engine size 1,401cc to 2,000cc use emission level 175.
Engine size over 2,001cc use emission level 225 or more.

Businesses must use these VAT fuel scale charges from the start of their next accounting period which begins on or after 1 May 2016.

VAT fuel scale charges for 12 month periods

CO2 band

VAT fuel scale charge, 12 month period, £

VAT on 12 month charge, £

VAT exclusive 12 month charge, £

120 or below

467.00

77.83

389.17

125

699.00

116.50

582.50

130

747.00

124.50

622.50

135

792.00

132.00

660.00

140

841.00

140.17

700.83

145

886.00

147.67

738.33

150

934.00

155.67

778.33

155

979.00

163.17

815.83

160

1,028.00

171.33

856.67

165

1,073.00

178.83

894.17

170

1,121.00

186.83

934.17

175

1,166.00

194.33

971.67

180

1,214.00

202.33

1,011.67

185

1,259.00

209.83

1,049.17

190

1,308.00

218.00

1,090.00

195

1,353.00

225.50

1,127.50

200

1,401.00

233.50

1,167.50

205

1,446.00

241.00

1,205.00

210

1,495.00

249.17

1,245.83

215

1,540.00

256.67

1,283.33

220

1,588.00

264.67

1,323.33

225 or above

1,633.00

272.17

1,360.83

 VAT fuel scale charges for 3 month periods

CO2 band

VAT fuel scale charge, 3 month period, £

VAT on 3 month charge, £

VAT exclusive 3 month charge, £

120 or below

116.00

19.33

96.67

125

175.00

429.17

145.83

130

186.00

31.00

155.00

135

197.00

32.83

164.17

140

209.00

34.83

174.17

145

221.00

36.83

184.17

150

233.00

38.83

194.17

155

245.00

40.83

204.17

160

256.00

42.67

213.33

165

268.00

44.67

223.33

170

279.00

46.50

232.50

175

291.00

48.50

242.50

180

303.00

50.50

252.50

185

314.00

52.33

261.67

190

326.00

54.33

271.67

195

338.00

56.33

281.67

200

350.00

58.33

291.67

205

362.00

60.33

301.67

210

373.00

62.17

310.83

215

384.00

64.00

320.00

220

396.00

66.00

330.00

225 or above

408.00

68.00

340.00

 


Working out VAT

Taking-off VAT (Tax) from a price.
This is the calculation you need to use when you know a price after tax (the Gross price) but want to find out the price before tax (the Net price).

20% (from Jan 4th 2011)

If we assume that VAT is at a rate of 20%...

Gross price is divided by 1.2= Net price or price before tax


VAT schemes

VAT accounting schemes: the basics

In contrast to standard VAT accounting, there are several alternative ways you can account for VAT that could save you time and money.

Some of these VAT accounting schemes have been designed for specific trade sectors. Others have been designed to deal with more general business issues. Some of the schemes can be used together. This is an overview of each of the schemes and you should discuss with your accountant which is available to you and which is the most appropriate.

Annual Accounting Scheme

Using the Annual Accounting Scheme, you pay VAT on account throughout the year in nine monthly or three quarterly installments. These installments are based on the VAT you paid in the previous year. If you have been trading for less than a year, the installments are based on an estimate of your VAT liability.

You only need to complete one VAT Return at the end of the year. If you have not paid enough VAT on account you make a balancing payment to HM Revenue & Customs (HMRC). If you have overpaid, you claim a refund from HMRC.

Annual accounting can reduce your paperwork because you only need to complete one annual return instead of four quarterly returns. It can also make it easier to manage your cash flow. However, it does not remove the requirement to keep all required VAT records and accounts.

Annual accounting is not suitable for businesses that regularly reclaim VAT as you would only get one repayment at the end of the year.

Another disadvantage of annual accounting is that if your turnover decreases, your interim payments may be higher than under the standard VAT accounting.

Cash Accounting Scheme

Usually VAT is payable when an invoice is issued. In contrast, using the Cash Accounting Scheme, you do not need to pay VAT until your customer has paid you. But you also cannot reclaim VAT on your purchases until you have paid for them.

Cash accounting can be beneficial for your cash flow especially if your customers are slow to pay. It is even more useful if you have bad debts. Under standard accounting for VAT, you have to pay the VAT on the debt even if you never receive the payment from your customer (although it could be claimed later). Using the Cash Accounting Scheme, you do not pay the VAT if your customer never pays you.

The Cash Accounting Scheme may not be for you if you regularly reclaim more VAT than you pay, or if you buy a lot of goods and services on credit.

Flat Rate Scheme

The Flat Rate Scheme was introduced to help small businesses reduce the amount of time they spend accounting for VAT.

Using the Flat Rate Scheme you do not have to calculate the VAT on each and every transaction. Instead, you simply pay a flat rate percentage of your turnover as VAT. This gives you the following benefits:

  • Easier record-keeping - no need to separate out the gross, VAT and net in your accounts
  • More time for you - less work doing the books so you can get on with running your business
  • Fewer rules to follow - no more problems about what VAT you can and cannot reclaim on     your purchases
  • Peace of mind - less chance of mistakes, so fewer worries
  • Certainty - you always know how much of your takings you will need to pay to HMRC

The percentage is less than the standard VAT rate because it takes into account the fact that you are not reclaiming VAT on your purchases. There is a range of flat rate percentages - the one you use depends on your trade sector.

Although the Flat Rate Scheme can reduce your paperwork, one downside is that you cannot reclaim VAT on the majority of your purchases. If you buy a lot of goods and services from VAT-registered business, you could end up paying more VAT. Also, if you make a lot of zero-rated or exempt sales, you could end up paying more VAT because you will still pay the flat rate percentage on your turnover for those sales, even though you are not charging VAT on those sales.

VAT schemes for retailers

If you sell to the general public, especially high quantities of relatively inexpensive items, it can be difficult, time-consuming and costly to record the VAT on every sale in your accounts. There are several VAT accounting schemes that retailers can use instead of accounting for VAT in the standard way. These can help simplify your retail VAT accounting.

There are a number of different standard retail schemes, or depending on your business, you may be able to agree a bespoke VAT retail scheme with HMRC, if your turnover is over certain limits.

The standard retail schemes are:

  • Apportionment schemes
  • Direct calculation schemes
  • The point of sale scheme

These schemes are suitable for most retail businesses.

There are special arrangements and rules for:

  • Caterers and catering
  • Chemists (retail pharmacists)
  • Florists 

Margin schemes for second-hand goods, art, antiques, collectibles

Normally you charge VAT on your sales, and reclaim VAT on your purchases. However, if you buy or sell second-hand goods, works of art, antiques or collectibles you may be able to use a margin scheme. These schemes enable you to account for VAT only on the difference between the price you paid for an item and the price at which you sell it - your margin. There is no VAT to reclaim on the item you buy, and you won't pay any VAT if you don't make a profit on a deal. You can still use normal VAT accounting for other sales and purchases such as overheads.

There are special margin schemes for auctioneers and global accounting.

Tour Operators' Margin Scheme

Tour operators often buy goods and services from businesses in foreign countries, and cannot often reclaim their input tax. The Tour Operators' Margin Scheme solves this problem by allowing tour operators to calculate the VAT on just the value that they add.

Capital Gains Tax

Capital Gains Tax

Capital Gains Tax (CGT) is a tax on the profit or gain you make when you sell, give away, transfer or exchange ('dispose of') something of value - ‘an asset’. You don’t pay Capital Gains Tax on some assets, for example personal possessions worth £6,000 or less, or in most cases, your main home. The first £11,100 (2015/2016 and 2016/2017) of qualifying gains is exempt from CGT.

CGT applies to UK resident individuals, executors or administrators ('personal representatives) responsible for a deceased person's financial affairs and trustees of a settlement. 

For limited companies capital gains form part of the total profits of the company on which they pay Corporation Tax.
Special Capital Gains Tax rules may apply if you don't normally live and work in the UK.

Common assets that attract Capital Gains Tax when they are sold or disposed of include:

  • Land
  • Buildings, for example a second home
  • Personal possessions such as a painting worth more than £6,000
  • Shares or securities

Business assets, for example business premises or goodwill.


Capital gains tax rates

 

2015-16

2016-17

Standard rate of CGT

18%

10%

Standard rate of CGT – residential property

18%

18%

Higher rate of CGT

28%

20%

Higher rate of CGT – residential property

28%

28%

Rate for Entrepreneurs (from 23/6/10)

10%

10%

Employing Staff

Employing Staff

Your business will need to register with HMRC as an employer, however a payroll scheme is not required if your employees are paid below the lower earning limit (LEL) and have signed a P46 stating that they have no other job. If you plan to run the payroll yourself then it is worth receiving some training on your responsibilities as an employer and making arrangements to ensure you keep up to date with payroll legislation. Many employers instruct their accountant to run the payroll on their behalf due to the software, knowledge and time required. A payroll scheme can be set up online by visiting www.hmrc.gov.uk.


Real Time Information

From 6 April 2013, if you are registered as an employer with a PAYE scheme set up, you must report PAYE information in real time. You may see this referred to as Real Time Information - or RTI.

Unless HM Revenue & Customs (HMRC) has already notified them otherwise, all employers report PAYE in real time. Each time you pay an employee you must submit details about employees' pay and deductions to HMRC using payroll software.

You still operate PAYE in the same way but you must submit the payroll information you keep to HMRC on or before the day you pay your employees. You use a Full Payment Submission (FPS) to do this.

Your payroll software will generate the new reports you need and submit payroll information online. These include details of:

  • The amount you paid your employee(s)
  • Deductions, such as Income Tax and National Insurance contributions (NICs)
  • Starter and leaver dates if applicable

You need to include the details of all employees you pay, including those who earn below the NICs Lower Earnings Limit (LEL), for example students.

You no longer submit end-of-year forms P35 and P14 and the starter and leaver process is simplified. You continue to give your employee a form P45 (employee parts) when they leave but you no longer send forms P45 (part 1) or P46 to HMRC. Instead you must report all starter and leaver information via your payroll software each time you pay someone.


Minimum Wage Levels

There are five levels of minimum wage, and the rates from 1 October 2016 are: 

  • £7.20 per hour for workers aged 25 years and older
  • £6.95 per hour for workers aged 21-24 inclusive
  • £5.55 per hour for workers aged 18-20 inclusive
  • £4.00 per hour for workers under 18
  • £3.40 per hour for apprentices aged under 19 or 19 and over in their first year of apprenticeship

Employers will face a penalty if HM Revenue & Customs (HMRC) discover they have failed to pay the national minimum wage and workers will be entitled to have arrears of wages repaid at current rates.


Statutory Holiday Entitlement

The statutory holiday entitlement is 5.6 weeks, the holiday entitlement can include bank holidays. Please note the minimum entitlement is capped at 28 days.

Calculation Example 1:-

Tom works 3 days per week.
3 days x 5.6 weeks = 16.8 days holiday per year minimum

Calculation Example 2:-

Sue works 25 hours per week and has no set working days.
25 hours x 5.6 weeks = 140 hours holiday per year minimum.

Calculation Example 3:- 

Clare works 6 days per week. (IMPORTANT CASE)
6 days x 5.6 weeks = 33.6 days. However, the entitlement is capped at 28 days. So Clare’s minimum entitlement is 28 days.

A holiday entitlement ready reckenor can be found at www.businesslink.gov.uk


Statutory Maternity Leave

All pregnant employees, regardless of their hours of work or length of service, are entitled to 52 weeks' maternity leave; 26 weeks of Ordinary Maternity Leave (OML) and 26 weeks of Additional Maternity Leave (AML) – making one year in total. Provided the employee meets the notification requirements, she can take this leave regardless of how long she has been with the employer, how many hours she works or how much she is paid.


Statutory Maternity Pay

To qualify, employees must have been continuously employed for a period not less than 26 weeks, ending with the week immediately preceding the 14th week before the Expected Week of Confinement (EWC) and must be earning at least the lower earnings limit, currently £112 per week.

Maternity pay will be: 

  • Paid for a maximum of 39 weeks
  • Paid for the first six weeks at 90% of the employee's average weekly earnings (with no upper limit) 
  • Paid for 33 weeks at a flat rate of £139.58 or 90% of the employee's average weekly earnings, if that is less than the flat rate. 

For more information, go to Her Majesty's Revenue & Customs' (HMRC) website www.hmrc.gov.uk and download booklet E15 'Employer's Guide to Statutory Maternity Pay and Leave' from the publications section. This contains easy-to-use information with examples. 


Alternatively, call the Employer Helpline on 0300 200 3200. Employees who are not entitled to Statutory Maternity Pay (SMP), but meet qualifying conditions based on their recent employment and earnings records, may claim up to 39 weeks' Maternity Allowance (MA) from their Job Centre Plus office.


Maternity Allowance

If the employee does not qualify for SMP, she might be eligible for MA if she: 
worked for at least 26 of the 66 weeks before the week the baby was due (a part week counts as a full week); and 

  • Earned an average of £30 over any 13 of those 66 weeks. 

The standard rate of MA is £139.58 or 90% of the employee's weekly earnings, whichever is less, and it is paid for up to 39 weeks. 
MA is not liable to income tax or National Insurance (NI) contributions. 
The Department of BERR's 'Pregnant and Work' booklet has more information on this. It can be obtained from the Job Centre, Department of Work & Pensions and Citizens' Advice Bureau.

Construction Industry Scheme (CIS)

What is the CIS Scheme?

The Construction Industry Scheme (CIS) sets out the rules for how payments to subcontractors for construction work must be handled by contractors in the construction industry.

The scheme applies mainly to contractors and subcontractors in mainstream construction work, however businesses or organisations whose core activity isn't construction but have a high annual spend on construction may also count as contractors and fall under the scheme.


Contractor responsibilities under the CIS Scheme

If you're a contractor under the Construction Industry Scheme (CIS) there are certain rules you'll need to follow. For example, you have to tell HMRC each month about all the payments you've made to your subcontractors within the scheme. You do this by making a monthly return.

Your monthly return must always reach HMRC no later than the 19th day of each month. The return must be sent each month and if necessary a Nil return should be sent. You will automatically face a £100 penalty if the return is not sent, regardless of whether it is Nil or not.

If you're a construction industry contractor HMRC expect you to keep certain records. You'll need to keep details of:

  • The gross amount of each payment you make to a subcontractor - excluding any VAT
  • The amount of any deduction you made from a payment before you gave it to the subcontractor
  • If you made a deduction, the amount of any materials costs - excluding any VAT

These records should be kept for at least three full tax years.

Income Tax & National Insurance

Personal Income Tax Allowances

Income Tax allowances

2014-15

2015-16

2016-17

Personal Allowance for people born before 6 April 1938(1)

£10,660

£10,660

£11,000

Personal Allowance for people born between 6 April 1938 and 5 April 1948 (1)(2)

£10,500

£10,600

£11,000

Personal Allowance for people born after 5 April 1948(1)

£10,000

N/A

N/A

Personal Allowance for people after 5 April 1938 (1)

N/A

£10,600

£11,000

Income limit for Personal Allowance

£100,000

£100,000

£100,000

Married Couple's Allowance (born before 6th April 1935 and aged 75 and over) (2)(3)

£8,165

£8,355

£8,355

Income limit for age-related allowances

£27,000

£27,700

£27,700

Minimum amount of Married Couple's Allowance

£3,140

£3,220

£3,220

Blind Person's Allowance

£2,230

£2,290

£2,290

  1. The Personal Allowance reduces where the income is above £100,000 - by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age or date of birth.
  2. These allowances reduce where the income is above the income limit by £1 for every £2 of income above the limit. This applies until the level of the personal allowance for those aged under 65, or from 2013-14, for those born after 5 April 1948, is reached. For married couples allowance this applies until it reaches the minimum amount
  3. Tax relief for the Married Couple's Allowance is given at the rate of 10 per cent.

What are the Income Tax Bands?

Income Tax, Taxable Bands:

The rates available for dividends are the 10 per cent ordinary rate, the 32.5 per cent dividend upper rate and the additional rate is 37.5% up to 5 April 2016. From 6 April 2016 the first £5,000 of dividends will be taxed at 0% and any further dividends paid will be at a rate of 7.5%.

 

2014-15

2015-16

2016-17

Starting rate for savings: 10%*

£0-£2,880

£0-£5,000

£0-£5,000

Basic rate: 20%

£0-£31,865

£0-£31,785

£0-£32,000

Higher rate: 40%

£31,866-£150,000

£31,786-£150,000

£32,001-£150,000

Additional rate: 45%

Over £150,000

Over £150,000

Over £150,000

*only available if non savings income is less than this amount


National Insurance Contributions, Rates and Allowances

£ per week

2014-15

2015-16

2016-17

Lower earnings limit, primary Class 1

£111

£111

£112

Upper earnings limit, primary Class 1

£805

£815

£827

Upper accruals point

£770

£770

N/A

Primary threshold

£153

£155

£155

Secondary threshold

£153

£156

£156

Employees’ primary Class 1 rate between primary threshold and upper earnings limit

12%

12%

12%

Employees’ primary Class 1 rate above upper earnings limit

2%

2%

2%

Class 1A rate on employer provided benefits (1)

13.8%

13.8%

13.8%

Employees’ contracted-out rebate

1.4%

1.4%

N/A

Married women’s reduced rate between primary threshold and upper earnings limit

5.85%

5.85%

5.85%

Married women’s rate above upper earnings limit

2%

2%

2%

Employers’ secondary Class 1 rate above secondary threshold

13.8%

13.8%

13.8%

Employers’ contracted-out rebate, salary-related schemes

3.4%

3.4%

N/A

Employers’ contracted-out rebate, money-purchase schemes

N/A

N/A

N/A

Class 2 rate

£2.75

£2.80

£2.80

Class 2 small earnings exception

£5,885 per year

N/A

N/A

Special Class 2 rate for share fishermen

£3.40

£3.45

£3.45

Special Class 2 rate for volunteer development workers

£5.55

£5.60

£5.60

Class 3 rate

£13.90

£14.10

£14.10

Class 4 lower profits limit

£7,956 per year

£8,060 per year

£8,060 per year

Class 4 upper profits limit

£41,865 per year

£42,385 per year

£43,000 per year

Class 4 rate between lower profits limit and upper profits limit

9%

9%

9%

Class 4 rate above upper profits limit

2%

2%

2%

Additional Class 4 percentage where deferment has been granted

2%

2%

2% 


National Insurance for the Self Employed

If you are self-employed:

  • You pay 'Class 2' National Insurance contributions at a flat rate weekly amount of £2.80
  • You also pay 'Class 4' National Insurance contributions as a percentage of your taxable profits - you    pay nine per cent on annual taxable profits between £8,060 and £43,000 and two per cent on any taxable profit over that amount

If your earnings in the 2016-17 tax year are expected to be less than £5,725 then you may be entitled to the Small Earnings Exception, meaning you don't have to pay any Class 2 National Insurance contributions - you can apply for Small Earnings Exception certificate for the 2013-14 tax year on form CF10.


Making National Insurance Payments

Class 1 NIC (employed)

It is the responsibility of the employer to calculate and deduct this from the employee’s gross wage and pay the amount to HMRC together with tax and employers Class 1A NIC. This should be paid by the 19 th of the month following the end of the tax month/quarter (or by the 22nd if paid electronically).

 Class 2 NIC (self employed)

Self employed individuals previously paid Class 2 National Insurance Contributions (NIC) via direct debit. However, as of 11 April 2016, payments of Class 2 NIC were no longer accepted via direct debit, all Class 2 NIC contributions are now collected by HMRC through the annual self assessment tax return.

 Class 4 NIC (self employed/Partnership)

This is calculated on the taxable income of an individual and is paid together with the tax liability through the annual self assessment tax return.


 

 


a few of our clients ... 

one plus one accountants merristem logo

one plus one accountants rb engineering logo

one plus one accountants cutting room creative logo

one plus one accountants teignmouth logo

one plus one accountants remedies logo