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Dividends have been a very tax-efficient way of making savings in National Insurance Contributions (NIC) and Income Tax contributions for a number of years, with many business owners and shareholders choosing a smaller salary, plus an additional remuneration package paid as dividends.

However, this has now all changed from April 2016 as the income tax position of dividend income will effectively increase for most taxpayers. This may have a direct impact on the overall savings in NIC and income tax that can be achieved after 5 April 2016.

Up to 5 April 2016, no additional income tax would be due if a company paid a dividend to its shareholders, as long as the person receiving the dividend was a standard rate tax payer.

Individuals receiving dividends then only paid additional personal tax if their dividend income fell partly or wholly within the higher rate (40 per cent) or additional rate (45 per cent) bands. The following rates applied for 2015-16:

  • All dividend income in the standard rate band was taxed at 10 per cent.  As the tax credit was deductible, recipients paid no additional tax
  • All dividend income at the higher rate was taxed at 32.5 per cent (of the gross dividend, including the tax credit) less the 10 per cent tax credit
  • All dividend income at the additional rate was taxed at 37.5 per cent (of the deemed gross individual, including the tax credit) less the 10 per cent tax credit

From 6 April 2016, the way dividends are being taxed changed. The 10 per cent tax credit was abolished and each individual has a flat rate dividend allowance of £5,000.

Any dividends received by an individual in excess of the £5,000 allowance will be taxed as follows:

  • 7.5 per cent if your dividend income in within the standard rate (20 per cent) band
  • 32.5 per cent if your dividend income is within the higher rate (40 per cent) band
  • 38.1 per cent if your dividend income is within the additional rate (45 percent) band

In all cases, any tax liabilities for 2016-17 will be collected on 31 January 2018. At the same time, HMRC will also add 50 per cent of the tax liability to the first self-assessment payment on account for 2017-18, also due 31 January 2018, with a further 50 per cent due at the end of July 2018.

The new changes will also have an impact on PAYE codes for owners and directors in 2016-17. Under the new rules, HMRC will amend tax codes to automatically ‘code out’ a sum approximately equal to the amount of dividend tax due for that tax year.

 

The UK inflation rate stayed at 0.3% in February, the same as January.

The Office for National Statistics (ONS) said that the rising food prices, in particular vegetables, helped to keep the Consumer Prices Index unchanged.

Last year inflation reached zero and the annual inflation has continued to be below the Bank of England’s 2% target for the past two years. The Bank expected inflation to stay below 1% this year.

Under the separate Retail Prices Index (RPI) measure, inflation was 1.3% in February, which also showed no change from the previous month. The measure includes housing costs.

The ONS reported that government borrowing fell less than expected in February at £7.1 billion. Chancellor George Osborne is close to missing his target for cutting the budget deficit in the 2015-16 financial year. The total deficit now stands at £70.7 billion for the 11 months of the year. The chancellor’s full-year target is £72.2 billion.

What springs to mind when you think of year end? Tax of course and how to minimise the amount HMRC will take from your business! However, it is not just about the previous year, it is an ideal time to start planning for the next year. Here are some simple steps to assist you.

Get your books in order

Whether you manage your own books or use an accountant or bookkeeper, this is the first step in the preparation. There are three main reasons to keep good records; to meet tax requirements, to keep your accountancy fees down and to manage and control your business effectively. Some key transactions you need to record are:

  • Sales
  • Purchases
  • VAT input and output (if VAT registered)
  • PAYE/Payroll records
  • Establishment costs (if you have a business establishment)
  • Bank and cash accounts (many transactions are now paperless e.g. bank transfers)
  • Administration costs such as telephone, stationery, advertising, motor, computer
  • Capital expenditure on equipement, Fixed Assets & Depreciation
  • Stock/Work in progress
  • Petty Cash

How good bookkeeping will help you manage and control your business?

Accurate bookkeeping will help you identify:

  • Your cashflow position in order to help you plan ahead and meet your obligations
  • Whether your expenses are in proportion to your income
  • Which products/clients are most/least profitable
  • Whether your business is growing or shrinking

What different methods are there to keep books?

At McPhersons, we spend time with our clients to set up a robust system. This free service makes our work more efficient and gives our clients peace of mind.

  • Manual bookeeping – This is the way many small businesses start.  It is cheap and generally easy to maintain.  With a little help, you can save time and keep excellent manual records.
  • Spreadsheets –   We can show you how to set up and manage your records using a spreedsheet.  This way, data can be extracted and we can set up some key reports to allow you to keep a close eye on your business.
  • Accountancy software such as Sage, Xero or Quickbooks – Your accountant can advise which program is best for you.
  • Outsource it – An accountant or freelance bookeeper can do it for you.  Make sure you choose carefully and are getting a good value, prompt, efficient service.

What can you do to cut down on the work your accountant  does in preparation for the year end?  It is obvious that the less time it takes your accountant to decipher your books, the less your accountancy fees will be.  General housekeeping tips are:

  • Rather than hand your accountant a carrier bag full of receipts, keep your receipts and purchases in date order.
  • Reconcile the bank balance to the bank statements – If you can ensure your recorded bank balance ties up with what is actually in the back after adjustments, this saves significant time.
  • If you hold stock, have a professional stock-taker record the value of stock at year end. This may be food, drink, packaging etc and can be quite significant if you operate a licensed premises.
  • Make sure your accountant has everything including paying in books, cheque books, bank statements, credit card statements, PAYE/Payroll records, VAT records and copy returns if VAT registered, stock records.

Determine your Position

You are finally ready to determine the position of your business. Your accountant will prepare the following documents for you that will assist you in making decisions:

  • Profit and Loss Account – in simple terms, this lists all your income and expenses and tells you at year end whether your business is making a profit or a loss. This is a useful tool to analyse your expenses compared to last year. Are your wages higher? Have your utility bills increased? Both things that have an impact on your bottom line. Is your gross margin less than last year? If so, you need to evaluate your cost of sales and review your suppliers.
  • Balance Sheet – this shows what your business is worth at year end. It shows your business’s assets, liabilities and equity/capital of your business.
  •  Cash Flow Statement – this complements the balance sheet and Profit and Loss. It is only necessary for companies that meet the criteria of a medium sized company. As an analytical tool, it determines the short term viability of the company, particularly its ability to pay bills.

So, how will you use these documents to help improve your business next year?

  • Compare your results against your business plan. If you had a business plan and set goals, compare these to what was actually achieved and determine what worked and what didn’t.  This will assist with your planning for the following year.
  • Consider ways to not only increase your revenue but also to increase your profitability. This could be reviewing your suppliers and buying better or investing in marketing.
  • Evaluate your tax strategies – for example, could you have maximised your capital allowance claim? Would you benefit from changing the structure of your business? Your accountant/tax advisor can help you identify all the areas where you can minimise your tax liabilities.

We hope you have found this article interesting. Tax can be a complex issue and we are here to help. Simply email Ainsley Gill info@mcphersons.co.uk or call our Head Office on 01424 730000 for a free consultation at McPhersons’ Hastings, Bexhill or London offices.

Chancellor George Osborne announced that corporation tax will be reduced by 17% by April 2020 and hopes this will lure more companies to Britain.

The tax was already cut from 28% to 20% previously and Osborne believes the extra cuts will provide a boost to local firms. This should save British firms around £15 billion a year by 2020.

A reduction in corporation tax would make Britain the country with the lowest rate in the G20, which will encourage more people to start, run and grow businesses in the UK.

The deficit will also be eliminated over the next 4 years and the government will be running a surplus. There will be a further £3.5 billion of savings from departmental spending in 2019-2020 to help achieve this.

Osborne announced in the Budget that there will be a longer school day for 25% of secondary schools and every school will become an academy by 2022.

The new Lifetime ISA will allow people to save for retirement or to buy a first home as from April 2017, any adult under 40 will be able to open one. Each year up to £4,000 can be saved and savers will receive a 25% bonus from the government.

The current Personal Allowance rate stands at £10,600 before workers start paying tax, but this will change from £11,000 in 2016 to £11,500 in April 2017.

 

 

George Osborne has unveiled a tax on sugary drinks in the 2016 budget.  The tax will be levied in two bands one for total sugar content above 5g per 100 millilitres and a second higher band for most sugary drinks with more that 8g per 100 millilitres.

The government has said that the sugar tax will be introduced in 2018 giving companies enough time to modify their product mix and promote low sugar items.Fizzy Drink

George Osborne said “I can announce that we will introduce a new sugar levy on the soft drinks industry.  We all know one of the biggest contributors to childhood obesity is sugary drinks” he said “ I am not prepared to look back at my time here in this parliament, doing this job and say to my children’s generation, I’m sorry.  We knew there was a problem with sugary drinks.  We knew it caused disease but we ducked the difficult decisions.”

The government has said that the sugar tax will be introduced in 2018 giving companies enough time to modify their product mix and promote low sugar items.

The move has been hailed by campaigners as a significant step to the fight against child obesity

The Chancellor said that the estimated £520 million a year raised from the sugar tax will be spent on double funding for sport in primary schools.

 

On Wednesday 16th March Chancellor George Osborne will deliver the Budget plans to members of Parliament in the House of Commons.

Although the Autumn Statement happened back in November 2015, it was another update on the Chancellor’s economic forecasts. The Budget this week will contain more detail and will happen at 12:30pm and last approximately an hour.

Pension changes were not covered in the Autumn Statement, so some expect changes to this in the Budget on Wednesday. Some have said Osborne may reduce the amount that people can save into their pension.

Although nobody knows what George Osborne will deliver in the Budget, many think that it could be possible for him to introduce a new flat rate on tax relief on contributions of between 25% and 33%.

The Chancellor has admitted that he may have to impose further austerity measures. This could mean more reductions in the budgets of non-protected government departments. He also warned that more savings will be needed due to the worsening of the economic backdrop.chancellor

In the Autumn statement last year, George Osborne believed it was his priority to rebuild Britain.  He conceded that world growth forecasts had been revised, in part because of ongoing problems in the Eurozone. In the UK, the economy is expected to grow a little faster than originally predicted over the next two years, before slowing down somewhat towards the end of the decade.

Higher than expected tax revenues and lower interest payments on government debt handed the Chancellor more flexibility than many analysts expected.

Business, enterprise and employment in 2016/17

In a boost for SMEs, the Chancellor confirmed that the small business rate relief scheme would be extended for another year. Around 600,000 firms are expected to benefit as a result.

The apprenticeship levy is expected to raise £3billion a year. This will be set at 0.5 per cent of the payroll bill, although the Chancellor has claimed that only two per cent of employers will be eligible to pay.

Pushing ahead with his plans to devolve greater spending powers to local authorities, Mr Osborne said that 26 new or extended enterprise zones were being created around the country.

The Government will be doing away with uniform business rates and devolving power to set the rates to local councils. The local authorities will soon also be able to keep this revenue, rather than having to hand over money for ministers to reallocate.

The continuing economic recovery is expected to facilitate the creation of “more than a million” extra jobs during the next five years.

There is, however, likely to be concern that the Department for Business budget is to be slashed by 17 per cent.

Tax

A new, increased rate of stamp duty land tax is to be introduced for buy-to-let and second homes. This will be three per cent higher than the normal rate and takes effect from April 2016. The Chancellor said this will raise £1 billion by 2021, although there are concerns it will have a significant impact on the buy-to-let sector. There will also be a consultation on accelerating the stamp duty land tax on transactions from 30 days to 14.

From 2019, Mr Osborne announced that Capital Gains Tax (CGT) will need to be paid within 30 days of selling a residential property.

It was proposed that the rate of cooperation tax will continue at 20% from 1st April 2016.

Tax evasion, avoidance and aggressive tax planning

Mr Osborne pledged to tackle tax avoidance and announced that the Government would work to create one of the most “digitally advanced” tax systems on the planet.

By the end of this Parliament, everyone in the UK will have digital tax accounts. The reduction in administration costs form part of £1.9 billion savings for HMRC. 

Need more help?

This feature aims to give some informal hints and tips.  McPhersons are offering businesses free advice so get in touch now to arrange your meeting. Simply email Ainsley Gill info@mcphersons.co.uk  or call our Head Office on 01424 730000 for a free consultation at McPhersons’ London, Bexhill or Hastings offices.

The recent Budget contained good news for pension investors. The amount of tax relief that can be received on pension contributions has just increased for some.

What is pension tax relief?

To encourage everyone to save for retirement, some pension contributions receive up to 45% tax relief:   The government automatically pays 20% of your contributions, regardless of your tax rate and higher and top-rate taxpayers can reclaim more through their tax return, up to an extra 20% or 25% depending on individual circumstances.

Imagine you pay £8,000 into your pension, the government will add £2,000 to make it £10,000 in your pension. A higher-rate taxpayer can reclaim up to a further £2,000 and a top-rate taxpayer up to a further £2,500. £10,000 in a pension can in effect cost as little as £5,500.  To receive the full 40% or 45% tax relief you must pay enough tax at that rate.

Who can now receive more pension tax relief?

A £40,000 maximum annual allowance untaxed usually applies to pension contributions each tax year, from all sources into your pension pot. Contributions over this allowance effectively do not receive tax relief.

In the budget, a new £40,000 allowance was introduced for contributions made from 9 July 2015 to 5 April 2016.  This means anyone who made contributions from 6 April 2015 to 8 July 2015 might be able to invest more this tax year as they have the £40k allowance starting again from 8th July 2015 and receive more tax relief. Anyone who hasn’t made contributions still has the same allowance – £40,000 for contributions up to 5 April 2016.

Contributions registered from 6 April 2015 to 8 July 2015 will reduce this new allowance, but only if they exceeded £40,000.  Pension contributions made in the previous tax year could also count; your provider should be able to inform you.

Qualifying for extra tax relief

To receive tax relief, the total value of your contributions this tax year should not exceed your earnings. For instance, to contribute £60,000 in total this tax year you should earn at least £60,000.

If you wanted to invest more than your earnings in any tax year, you could ask your employer to make an employer contribution, possibly set off against future earnings.

If you decide to use your new allowance, remember money in a pension can normally only be accessed from age 55, rising to 57 from 2028, usually 25% of this pension pot is tax free and the rest taxed as income.  Tax rules can change in the future

Need more help?

This feature aims to give some informal hints and tips. Our tax department and McPhersons Financial Solutions are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk or call our Head Office on 01424 730000 for a free consultation at McPhersons’ London, Bexhill or Hastings offices.

Chancellor George Osborne announced the spending plans for the next four years in the Spending Review and the current state of the economy in the Autumn Statement.

According to the Office for Budget Responsibility, public finances are set to be £27 billion better off by 2020.

It was revealed that the government is expected to borrow £8 billion less than forecast due to it hoping to secure £10.1 billion budget surplus by 2020.

The statement brings disappointing news for transport, energy, business and the environment as resource budgets will fall by 37%, 22%, 17% and 15% respectively.

In terms of policing in England and Wales, there are not any plans to make any cuts but the government aims for a rise in spending by £900 million by 2020.

From April 2017 there will be a two-child limit on child tax credit claims and the family element of tax credits will be scrapped for new claimants.

Healthcare is vital for any country and so the health budget will rise to £120 billion by 2020-21, which now stands at £101 billion. The NHS in England will receive an upfront cash injection of £3.8 billion next year as part of £8 billion added funding between next year and 2020-21.

The education budget will rise by £10 billion by 2020 and there will be a new 30-hour free childcare subsidy for parents of three and four-year-olds but this will be limited to parents working more than 16 hours each week.

From April 2016, there will be a 3% surcharge on stamp duty for buy-to-let properties and second homes however, there are plans to hand £2.3 billion to private developers to build 400,000 new homes in England.

State pension will rise by £3.35 a week to £119.30 next year and each individual and small business will have their own digital tax account by the end of the decade.

Transportation could be on the mend with capital funding of transport projects set to rise by 50% by 2020 and £250 million to make sure motorways and other roads in Kent are supported.

The brand new McPhersons table tennis team have held their own for the first few games of the season with a strong team including directors, associate directors, accounts seniors and tax trainees.

Peter Watters, the director who put the team together said: “The team of directors place great importance on activities outside of work and encourage staff to keep fit and healthy as well as have fun in and outside the office. Hopefully our team will enjoy this season and many more to come without humiliating ourselves!”

Indeed, two weekly deliveries of fresh fruit for the staff is a good start for keeping fit and healthy. The annual summer party, whether it’s a visit to the greyhound stadium or a game of mini golf always helps with team bonding.

Not to mention other activities that the team have been involved in such as Lashings Cricket and It’s a Knockout. It also helps that the firm operates a flexi-day, which enables staff to start later or finish earlier in order to make time for themselves.

Watch your backs, Division three, this go-getting team is determined to put their stamp on the league. Talking of backs, let’s hope the new kit doesn’t cause any distraction.