It’s a Web App

You don’t download our web app. Just visit our homepage on your mobile phone and you will be redirected to our web app. Or alternatively, from your phone visit us at m.no-worries.co.uk (our web app is a website – but it looks and functions just like an app!)

Helpful tips before use

We have put together some helpful information to get you up and running quickly with our new web app. You will be familiar with the features, but please take the time to read our Hot Tips – they will help make the user experience more enjoyable!

They went with songs to the battle, they were young.
Straight of limb, true of eyes, steady and aglow.
They were staunch to the end against odds uncounted,
They fell with their faces to the foe.

They shall grow not old, as we that are left grow old:
Age shall not weary them, nor the years condemn.
At the going down of the sun and in the morning,
We will remember them.

Summary of how this Budget affects contractors

By and large, contractors should be pleased with the announcements made as part of this Budget. In the main, it is very much a case of business as usual, however with the strong focus of this Budget on rewarding businesses and workers, contractors should at least take heart that this Budget will help kick start the UK economy, and so open up more contracting opportunities in the job market.

IR35

Nothing really has changed in relation to IR35. The legislation still stays the same, however with high profile cases of contractors holding very senior roles (such as Ed Lester, the CEO of the Student Loans Company operating through his own limited company), the Government is still looking to make improvements here. The Budget document states “The Government will introduce a package of measures to tackle avoidance through the use of personal service companies and to make the IR35 legislation easier to understand for those who are genuinely in business. This will include:

(1)    Strengthening specialist compliance teams to tackle avoidance of employment income;

(2)    Simplifying the way IR35 is administered; and

(3)    subject to consultation, requiring office holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs s deducted at source by the organisation by which they are engaged. “

Corporation tax

No changes here for all but the most highly paid contractors. The small profits rate remains at 20% (where company profits do not exceed £300,000). The main corporation tax rate for larger companies falls from 26% to 24% effective 01 April 2012, and by 2014 it will have fallen to 22%. This drop in the main corporation tax rate is faster than expected and puts the UK in a very competitive position for companies looking to base their operations in a (relatively) stable European environment.

Income taxes

Personal allowance grows to £9,205 from 06 April 2013. This is an increase of £1,100, and will mainly improve the net pay position for low paid workers.

For most contractors, this increase is offset by the lowering of the higher rate threshold to £32,245 – with the overall affect being that for the 2013/14 tax year, contractors will have about £800 less in net payments they can make to themselves (salary + dividends) before exceeding the higher rate earnings threshold.

The government also has announced plans to consult on the consolidation of income tax and National Insurance Contributions (NICs). This will probably be the most significant change in payroll taxes since the introduction of PAYE in 1944 – so we expect it will take several years before any plans are drafted for this.

Also, from 06 April 2013 the 50% additional rate of income tax will reduce to 45% , and the dividend additional rate will be reduced from 42.5 per cent to 37.5 per cent. At this stage this change is unlikely to affect many contractors, but is a step closer to making taxes for higher earning PAYE employees more competitive with the rest of Europe.

Property

A new ‘mansion tax’ has been announced to take effect immediately. Previously the top stamp duty land tax rate was 5% (on properties purchased for £1m or more). A new tier has now been added of 7% on properties worth more than £2m – mainly targeting the wealthy overseas buyers snapping up residential property in prime London sites.

Previously the top stamp duty land tax rate could be avoided by having the ownership of a house transferred to an offshore company, and then the prospective buyer of that property just buys the shares in the offshore company (not the house itself) – reducing the stamp duty land tax payable from 5% to 0.5%. Effective immediately, any transaction done in this way now incurs a new 15% stamp duty land tax – which effectively is George Osborne’s way of shutting these schemes down.

VAT

The big news of course is sandwiches.  Now, sandwiches which are not hot, but warmer than the ‘ambient air temperature’ will attract VAT. No doubt a temperature probe will be added to the VAT inspectors kit. Our advice is to allow your sandwich to cool down before purchasing it, to save yourself the VAT.

Entrepreneurs Relief, and Closing Down your Company

There have been no changes in this area. See our article here for more information relating the the changes that were made effective from 01 March 2012.

Statutory Residency Test

While a new test for determining the UK tax residency of an individual was meant to be implemented now, the consultation period hit various roadblocks that were insurmountable in the time period given. So the new Statutory Residency Test will be effective from April 2013. This is aimed to give clearer guidance, and a more robust test, to ensure the residency status of individuals can be more easily determined. For more information on this see here.

And finally – Champions League final 2013 tax relief

Some good news for all those wealthy footballers – an employee or contestant of an overseas team that competes in the final will be exempt from income tax if non-UK resident at the time of the final. There is however no tax relief on the purchasing of tickets to see the game – and sadly they remain non-deductible for tax purposes.

We have uploaded some pictures here for your own personal enjoyment! Maybe next year we will see a few clients on the race track!!??!!

Big or small, every bit of sponsorship we receive will help people living unimaginably tough lives, both on our doorstep in the UK and across the world’s poorest countries.

So if you want to sponsor the whole team – brilliant! Or you can sponsor an individual and boost their total. We’re competing with each other to see who can raise the most! Thanks for your support.

Save some tax!

(1) Give directly from your company, and enter the donation as an expense. Its fully tax deductible against your company profits! (PS, Don’t tick the GiftAid box – this only applies to personally paid donations)

(2) Give personally, and enter the expense in your personal tax return. The earnings threshold at which the higher tax rate kicks in is increased by an amount equal to the gross value of your donation! (PS, Do tick the GiftAid box)

Giving!

Its really easy to do – just visit our Sport Relief page here, and click the red “Sponsor Us” button on the right hand side. Thanks!

Just as a quick refresher, the current 2011/12 tax year started on 06 April 2011, and will finish on 05 April 2012.

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 2011/12, 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 2011/12, and bank interest from your personal bank accounts. If your total gross earnings from ALL sources exceeds £42,475, then you will face a personal tax charge on any dividends you received from your limited company above the £42,475 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 2011/12” 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 up to your most recent statement we hold – 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 £42,475, it will calculate what personal tax charge you face on the dividends you received;

If you have earned over the £42,475 threshold, and want to limit the dividend tax charge you face, you can;
– Stop paying yourself altogether from your ltd company until 06 April 2012;
- If you can’t live without some personal cashflow, then consider loaning yourself money from your ltd company, and then after 06 April 2012 repay the loan back to the company;
- If you can’t live without some personal cashflow, then you could also consider drawing some hard earned goodwill from family / friends until 06 April 2012;

(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 £42,475, then it will calculate how much more you can pay yourself before you reach the £42,475 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 £42,475 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 profits
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 profits to pay out a dividend.
Your retained profits is not simply the money left in your company bank account – some of that will be needed to pay your company tax bills.
- Dividends can only be paid out of after-tax profits;
- Your company retained profit 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 £42,475.

For our Club Gold clients if you are at all unsure about your level of retained earnings 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 £42,475 threshold, you need to ensure the dividends are ‘paid’ on or before 05 April 2012. We say ‘paid’ because you can vote a dividend payment before 05 April 2012 (by preparing a set of board minutes and a dividend voucher before 05 April 2012), but actually PAY the dividend to yourself after 05 April 2012.

For simplicity though, we recommend any dividend payment that you want to count towards the 2011/12 tax year, actually leaves your business bank account on or before 05 April 2012.

(5) Using your pension
Making contributions into your own pension fund is a good way of tax efficiently extracting funds from your company. The downside of course is the funds are tied up in a pension fund for a long time. If you are thinking about making pension contributions, ensure this is done before 05 April 2012. And if you have been thinking about doing this for some time, please get in touch with your portfolio manager to put the wheels in motion.

Prior to the screening, Ngāti Rānana London Māori Club will be performing, and the NZ High Commissioner will be speaking.

Tickets are now very limited, but they can still be purchased online from http://www.eventelephant.com/christchurchayearon. For more information regarding the event, take a look at the official website http://www.ayearon.co.uk/

The accounting service offered by Capital City Accountancy is very similar to the existing No Worries accounting service we operate. Our excellent taxation and accounting advice remain the same across both services. Capital City Accountancy however is geared toward the longer term contractor who will remain freelancing for more than, say, 3 years, and who anticipates living and working in the UK long term. We consider tax planning for the longer term, and our fee structure is more attractive longer term.

To celebrate, for three months (until 15 April 2012) we are offering a 15% referral discount on our monthly fee for each client who is referred to our Capital City Accountancy service. The only small print we could think of is;

(1) This offer only applies for new clients you send to us. An existing client of No Worries switching across to our Capital City Accountancy service is not eligible;

(2) This offer applies for new clients you send to Capital City Accountancy. For any new clients you send to No Worries, you will enjoy our usual 10% referral discount offer;

Check the full results of the Contractor UK Reader Awards 2011 here, and here for a full commentary on the meaning of these results.

The change will affect your personal tax position when closing down your company.

A Quick Background

When you close down your company, any final dividend payments you make to yourself get taxed as dividend income in the normal way within your personal tax return. You can however apply to have these dividend payments taxed as a capital gain, by applying for the concession ESC C16 with the HMRC. This carries significant tax advantages if you are a higher rate taxpayer (earn over £42,475 in gross salary/dividend income in this current tax year), AND have traded through the company for more than one year.

What is ESC C16?

Once you have ceased trading, ESC C16 allows for any final dividend payments you make to yourself to be taxed personally on you as a capital gain, rather than as normal dividend income. This is useful if you have a substantial amount of retained earnings, and want to extract it in the most tax efficient means.

Under the current rules, there is no limit to the size of the final dividend payments you can make that get treated in this way, and so long as your company has traded for more than one year, you will pay a maximum of 10% tax on the final dividend payments (taxed as a capital gain and using Entrepreneurs Relief). Without this concession, and if you are a higher rate tax payer, any final dividend payments would get taxed at 25% – so it’s a worthwhile concession for our clients who have a significant amount of retained earnings in their company.

The New Rules

With effect from 01 March 2012, ESC C16 will disappear, and it will be replaced with legislation that will treat the first £25,000 of all final dividends payments made once striking off action has commenced, to be taxed as a capital gain. Any distributions made in excess of this threshold, will be taxed as normal dividend income.

As an approximate guide, we suggest that clients who anticipate having UP TO £50,000 in surplus funds when they close down, take this route.

The alternative is to engage the services of a Licensed Insolvency Practitioner, and take your company through a Members Voluntary Liquidation. When closing down via a liquidation, ALL final distributions are treated as a capital gain for personal tax purposes, and there is no upper limit. In terms of tax, this solution is on par with the current ESC  C16 regime. The only differences being a Members Voluntary Liquidation is a different process, and engaging a Licensed Insolvency Practitioner will cost in the region of £3,500 + VAT.

We suggest any clients who anticipate having MORE THAN £50,000 in surplus funds when they close down take the formal liquidation route. We have established a relationship with a very good Licensed Insolvency Practitioner firm experienced with small contractor companies.

What can you do right now?

Very little. This tax change will be implemented on 01 March 2012. If you have ceased trading AND are currently closing down your company AND have more than £25,000 that you intend to extract as a capital gain using ESC C16, we will do our best to ensure the concession is approved before 01 March 2012. Remember however, that it’s a CONCESSION – the HMRC do not have to agree to it, and notification of agreement from the HMRC usually takes between 4 to 12 weeks, so for most clients it is too late to commence ESC C16 proceedings. Keep in mind the HMRC will be aware of these things – the timing of their announcement is no coincidence.

If you want to close down your company right away to take advantage of ESC C16, AND resume trading through a new company, then unless you have a good commercial reason for changing the company, you will be caught by the new Transactions in Securities rules. Ignoring these rules amounts to tax evasion – we will always advise you against doing this.

However, even with this change, working through your own limited company is still by far the most beneficial form of working in the UK for contractors. And for those clients fortunate enough to have over £50,000 in surplus company funds, any additional liquidation fees paid are still minor in relation to the significant capital gains tax benefits when winding up your company

Example 1: Old Rules

Pete has finished trading on 30 Nov 2011 after three years of contracting, and has £15,000 of surplus funds in his company. He has taken on a new permanent role, and his total earnings from the new role plus the salary and dividend he drew from his company for 2011/12 will exceed £42,475. During the close down process, he decides he wants us to apply to the HMRC for ESC C16. Once the concession is approved by the HMRC, Pete pays his final dividend payment of £15,000 on 01 Feb 2012. After allowing for entrepreneurs relief, and also the annual exempt amount for capital gains, Pete will face an overall personal tax liability on the £15,000 payment of just £440. If this had been taxed as dividend income, he would have faced a personal tax liability of £3,750.

Example 2: Old Rules

Pete has finished trading on 30 Nov 2011 after three years of contracting, and has £65,000 of surplus funds in his company. He has taken on a new permanent role, and his total earnings from the new role plus the salary and dividend he drew from his company for 2011/12 will exceed £42,475. During the close down process, he decides he wants us to apply to the HMRC for ESC C16. Once the concession is approved by the HMRC, Pete pays his final dividend payment of £65,000 on 01 Feb 2012. After allowing for entrepreneurs relief, and also the annual exempt amount for capital gains, Pete will face an overall personal tax liability on the £65,000 payment of just £5,440. If this had been taxed as dividend income, he would have faced a personal tax liability of £16,250.

Example 3: New Rules (assuming 2011/12 tax rates for a fair comparison)

Pete has finished trading on 30 July 2012 after three years of contracting, and has £15,000 of surplus funds in his company. He has taken on a new permanent role, and his total earnings from the new role plus the salary and dividend he drew from his company for 2011/12 will exceed £42,475. After Pete commences striking off action for his company, he pays himself his final dividend payment of £15,000. As this is below the £25,000 threshold, the entire amount is treated as a capital gain and Pete will face an overall personal tax liability on the £15,000 payment of just £440. If this had been taxed as dividend income, he would have faced a personal tax liability of £3,750.

 Example 4: New Rules (assuming 2011/12 tax rates for a fair comparison)

Pete has finished trading on 30 July 2012 after three years of contracting, and has £65,000 of surplus funds in his company. He has taken on a new permanent role, and his total earnings from the new role plus the salary and dividend he drew from his company for 2011/12 will exceed £42,475. Pete has two options;

(a)     Liquidate his company. Although costing (say) £4,500 incl VAT, Pete’s his final dividend payment of £65,000 is taxed completely as a capital gain. After allowing for entrepreneurs relief, and also the annual exempt amount for capital gains, Pete will face an overall personal tax liability on the £65,000 payment of just £5,440. Adding the Insolvency Practitioner’s fee, the overall ‘cost’ of this transaction is £9,940;

(b)     Strike off the company. There is no Insolvency Practitioner’s fee with this option, but Pete’s final dividend payment of £65,000 will be taxed as £25,000 capital gain, and the rest as dividend income. Pete will face an overall personal tax liability on the £65,000 payment of £11,440.

Liquidating the company using an Insolvency Practitioner is the best option in this case.

Questions

(1)     I already have the ESC C16 concession from the HMRC. What happens to any dividend payments I make after 01 March 2012?

Any dividends payment made before 01 March 2012 will be treated under the old rules, and any dividend payments made after 01 March 2012 will be treated under the new rules. We suggest you make all your final dividend payments before 01 March 2012 to ensure they are treated under the ESC C16 rules.

(2)     Do I need to apply to the HMRC under the new system to treat my final dividend payments as capital distributions for tax purposes?

No. Any dividend payments made after an application to strike off the company has been sent to Companies House, will be treated as capital gains under this new regime up to £25,000. Any dividends paid over this threshold will be treated as dividend income.

(3)     Can dividends paid after striking off action has commenced be treated as dividend income for personal tax purposes?

No. Once striking off action has commenced, all dividends paid will be treated as capital gains up to the £25,000 threshold. If it suits your personal tax circumstances to have some of these final dividend payments treated as dividend income, then we suggest you make these dividend payments before you cease to trade.

(4)     I have a very large amount of surplus funds in my business. Can I close down my company now under the old rules, and start up a new one? It will save me a lot of tax.

No. HMRC may seek to counteract any tax advantage if they consider that the process if being undertaken to avoid tax in an abusive way. They can do this using the Transactions in Securities rules. In practice, HMRC will use counteraction when particularly large sums are at stake and there is evidence of “phoenixing” – that is setting up new companies to do exactly the same activities as the previous one with no apparent trade motive. We suggest this action only be taken when you have a genuine commercial reason for doing so.

(5)     I think I will have about £10,000 in surplus funds when I close down my company. Will these changes affect me?

No. This change will only affect clients who expect to have £25,000 or more in surplus funds when they close down their business. In fact, if you have less than £25,000 in surplus funds, this change will give you greater flexibility with regards to your options for optimising your personal tax position due to the ease with which final dividend payments can be treated as capital gains.

(6)     I will have about £20,000 in surplus funds when I close down my company. Can I pay myself out two dividend payments of £10,000 each over a two year period, and so avoid capital gains tax altogether? (each year all individuals get an allowance for tax free capital gains. In 2011/12 for example, capital gains tax only arises on gains exceeding £10,600).

We don’t think so – we suspect this will be viewed as too aggressive, and the HMRC may look to counteract the tax advantage using the Transactions in Securities rules mentioned in (5) above.

(7)     I intend to close down my company shortly, and take on a permanent role in the UK. What is my best option?

In nearly all cases the best option will be to have as much of your final dividend payments as possible treated as a capital gain. Ask your account manager to explain this option to you as individual circumstances means the one-size fits all approach does not usually work.

(8)     I intend to close down my company shortly, and permanently leave the UK. What is my best option?

Usually your best option is to pay all surplus funds out to yourself before you leave the UK. This will help avoid these payments being taxable in your new country of residence. Each country has differing rules however on taxation of dividends and capital gains, so please contact your account manager for advice regarding this.

(9)  When I close down my company I will only just have enough money to pay all my company taxes. I will also have a £4,000 director’s loan – what happens to that?

On closing the company, the director’s loan will be settled as a final dividend payment of £4,000. This is a bookkeeping exercise – no actual funds change hands. So long as this is done after the application to strike off your company has been filed, this £4,000 dividend payment will be treated as a capital gain.