The budget was announced by the Chancellor, Alistair Darling, on Wednesday 24 March 2010. For small businesses, the Budget had very little real effect and there were only minor changes from what had previously been announced. Here is a summary of the changes we think apply to our customers.

Corporation tax rate for small companies

The corporation tax rate for small companies (companies with annual profits lower than £300,000) remains at 21%. There is still a proposal in place to change this to 22% next year, but this will depend on the outcome of this year’s general election (and the Conservative party has promised to reduce this rate to 20% as soon as possible, if elected).

Annual Investment Allowance

The Annual Investment Allowance (AIA) has been doubled to an annual spend of £100,000. In practice this measure will not impact our clients. The Annual Investment Allowance is currently £50,000, and enables businesses to claim full tax relief on capital expenditure in the year the capital items were purchased. Very very few of our clients have ever spent more than £50,000 on capital items in a single year.

Personal tax rates and allowances

There are no changes to the personal allowance or rates of tax. The only addition is the new tax band of 50% that applies to income over £150,000. The personal allowance remains at £6,475, and any income above this is taxed at;
£0 to £37,400 – 20%
Then up to £150,000: – 40%
Then over £150,000 – 50%

Entrepreneurs’ relief

This is relief from capital gains tax resulting from the disposal of a business – and is very useful of a number of our clients when they decide to wind up their business. The relief currently applies to permit a maximum 10% capital gains tax charge on gains of up to £1 million (the lifetime allowance). This life time allowance has now been increased to £2 million.

VAT Changes

While no changes to the standard VAT rate of 17.5% were made (and none were expected), there have however been small adjustments to the VAT registration thresholds. From 1 April 2010 the taxable turnover threshold increases to £70,000 from its current threshold of £68,000 – this is the threshold above which you MUST register for VAT, calculated on a rolling 12 month basis. The threshold which determines whether you may apply for VAT deregistration increases to £68,000 (from £66,000).

If you have a UK student loan, there are some important points you need to keep in mind as there will be implications on your personal tax liability.

Student loan repayments will start on the 6th of April after you leave your course. You are required to pay 9% of your income towards your student loan, once your total gross income for the tax year exceeds £15,000. As most of our clients are a Director of their limited company and required to complete a personal self assessment tax return, the student loan repayments will be calculated when you complete your personal tax return for the year. You will be required to make the payment to the HMRC and they will forward this to the Student Loans company. An example of how this could impact on you is as follows:

If you gross earnings for the year are £40,000 (from dividends and salary through your limited company)
- £40,000 – £15,000 = £25,000 (earnings over the repayment threshold)
- £25,000 x 9% = £2,250 (approximate student loan repayment required based on earnings of £40,000)

So, in this situation you would be required to pay £2,250 towards your student loan. As this a personal repayment, the money must be paid from your personal bank account, not your company bank account.

Criminals like to use the HMRC in an attempt to steal identities, and access details. The methods fraudsters use to obtain the information they want is constantly changing, so HMRC provides regular updates on the type of scams it is aware of. The main risk involves the stealing of identity or access details.

To protect yourself from these attacks please ensure you;
(1) Delete any emails you receive from the HMRC requesting any personal details, credit card details, user ID’s, and/or passwords;
(2) Delete any emails you receive from the HMRC that requires you to visit a webpage to complete any personal details, credit card details, user ID’s, and/or passwords;

Often the email scams will attempt to convince you that you are due a tax refund. Others will say that due to new security measures, you need to supply your HMRC user ID and password. Please delete these emails as soon as you receive them.

There is more information on this at;
Reporting HMRC related phishing emails
HMRC related scam examples
What you can do to protect yourself online

With the end of the tax year approaching, now is the perfect time to ensure you minimise the amount of personal tax you need to pay. This article explains how you can do this, to avoid an unexpected tax bill when you come to complete your personal self-assessment tax return for 2009/10, and will also explain how to make the most of the tax planning opportunities you have available.

Just as a quick refresher, the current 2009/10 tax year started on 06 April 2009, and will finish on 05 April 2010.

Most of our clients receive personal income from their business in the form of salary and dividends. Any personal tax payable on the salary is deducted by your ltd company through the usual payroll channel, but dividends are not taxed at source like this. For the most part, if our clients do face a personal tax charge for 2009/10, it will most likely be due to dividend payments received – and this is where the tax planning opportunities lie.

(1) Paying yourself too much

If you have received dividends from your company for the current tax year, you need to consider your overall personal earnings from ALL sources, to determine if you face a personal tax charge on those dividends. Other earnings sources can include salary from other employers for 2009/10, and bank interest from your personal bank accounts. If your total gross earnings from ALL sources exceeds £43,875, then you will face a personal tax charge on any dividends you received from your limited company above the £43,875 threshold.

We have developed a simple but effective way of tracking your personal earnings position. What you need to do is;
(a) Go to your ‘My Expenses’ page within your No Worries online account, and ensure all your expenses are up to date;
(b) Go to your ‘My Earnings’ page, and complete/update Section 2 “Personal Income from other sources for 2009/10” with any personal earnings you received OTHER THAN from your own limited company;
(c) Also ensure Section 5 “Last 6 payments recorded as made to your personal account” is completely up to date with all payments you have made to yourself for the tax year (if you are a Club Gold client, and your bank statements are sent to our office, we will have this up to date for you to within a month – you may still need to add in any recent payments you have made to yourself);
(d) Section 1 of your ‘My Earnings’ page will then calculate an assessment of your personal tax position, and if your total earnings from all sources exceeds £43,875, it will calculate what personal tax charge you face on the dividends you received;

If you have earned over the £43,875 threshold, and want to limit the dividend tax charge you face, you can;
- Stop paying yourself altogether from your ltd company until 06 April 2010;
- If you can’t live without some personal cashflow, then consider loaning yourself money from your ltd company, and then after 06 April 2010 repay the loan back to the company;
- If you can’t live without some personal cashflow, then you could also consider drawing some hard currency goodwill from family / friends until 06 April 2010;

(2) Paying yourself too little

Paying yourself too little can sometimes be as bad as paying yourself too much (from a tax planning perspective). So long as you have followed steps (a) to (d) above, your ‘My Earnings’ page will produce an accurate calculation of your total gross earnings from your limited company. If your total income from all sources DOES NOT exceed £43,875, then it will calculate how much more you can pay yourself before you reach the £43,875 threshold. You should aim to pay yourself up to the threshold every year if you can afford to (see Retained earnings, below). If your total gross earnings from all sources does not exceed £43,875 you will face no tax charge on any dividends you have paid to yourself – so its best you maximise this tax planning opportunity each year.

(3) Retained earnings

This is very important – don’t skim read this section. The above two sections talk about taking dividends from your company. You can ONLY do this if your company has sufficient retained earnings to pay out a dividend.

- Dividends can only be paid out of company retained earnings;
- Your company retained earnings is your company bank balance less any tax liabilities it faces to date, such as Corporation Tax, VAT, and PAYE/NI.

If you follow the pay advice emails we send out each time you raise an invoice, and provided you have no company paid expenses other than our accounting fee, then your retained earnings is likely to be small, but you may still have enough to make a dividend payment worthwhile.

If however you have always paid yourself less than our payment advice emails, then you may have significant retained earnings, which you can use to make dividend payments to yourself if your total gross earnings to date does not exceed £43,875.

For our Club Gold clients, we issue a P&L statement every quarter showing your company retained earnings. However, if you are at all unsure about this, then please just call/email us.

For our Gold clients, the company retained earnings is only calculated once a year (at the company year end) which makes this form of tax planning very difficult. If you think this would be useful, we recommend you switch up to our Club Gold service.

(4) Actual payment of dividends

If you are wanting to plan your dividend payments to ensure you get as close as possible to the £43,875 threshold, you need to ensure the dividend payments LEAVE your business bank account on or before 05 April 2010. Any dividend payments that are made AFTER 05 April 2010 cannot be retrospectively applied to the 2009/10 tax year, and instead will apply to the 2010/11 tax year.

Often our clients find themselves doing a small amount of administration from home – not really substantive duties – just a bit of paperwork in the evenings, and checking emails.

With the world turning digital the tax office recognises that you can in fact do some effective work from home, and there is a small but useful tax-free claim you can utilise.

The HMRC will allow you to claim £3 per week (or £39 a quarter, or £156 per year) with no receipts needed. It doesn’t sound like much, but for the sake of putting four quarterly entries into your ‘my expenses’ page, you will save yourself £33 in company tax. And if you are a higher rate tax payer, you will also reduce your personal tax liability by £39. All for less than five minutes work in updating your expenses within your No Worries online account.

What we suggest you do is claim this expense every quarter (£39) and call it “Homeworking £3 per week allowance” within your expenses page. Easy.