A summary of tax changes from April 2018

Changes to tax and NIC from April 2018

MTD

From the beginning of April 2018 the personal tax allowance will increase to £11,850 per year.   Tax rates will be:

England and Wales
Basic rate 20% On the next £34,500 above the personal tax allowance
Higher rate 40% On £34,501 to £150,000 (the personal allowance reduces once earnings reach £100,000)
Additional rate On earnings above £150,000

 

Scottish rates and bands

On the 20 February 2018 the Scottish Parliament set the following income tax rates and bands for 2018/19.

Bands Band name Rates (%)
Over £11,850*-£13,850 Starter Rate 19
Over £13,850-£24,000 Basic Rate 20
Over £24,000-£43,430 Intermediate Rate 21
Over £43,430-£150,000** Higher Rate 41
Above £150,000** Top Rate 46
Tax on Dividends

The dividend allowance of £5,000 at 0% personal income tax, will reduce to £2,000 per year from April 2018.  Shareholders will be worse off by £225, £975 or £1,143 a year depending on whether they pay tax at the basic rate, higher rate or the additional rate.   Dividend tax rates have not changed, and the rate of tax on dividends remains at 7.5% for basic rate taxpayers, 32.5% above the higher rate threshold and 38.1% for those in the additional rate band (ie. Earning over £150,000).    For many owner-directors, the dividend/salary split will still be the most tax efficient method of remuneration, but it may not suit all.

Corporation tax remains at 19%

National Insurance

Self-employed people will continue to pay Class 4 and Class 2 National Insurance Contributions (NIC).  The abolition of Class 2 NIC was scheduled for this April, but it has been delayed until April 2019.  Class 4 NIC will be 9% on profits over £8,424. Class 2 NIC will be £2.95 per week, to be added to your 2018/19 tax bill as one total for the tax year.

Other changes

The national living and minimum wage rates increase from 1st April 2018 to:

Category of worker Hourly rate
Aged 25 and above (national living wage rate) £7.83
Aged 21 to 24 inclusive £7.38
Aged 18 to 20 inclusive £5.90
Aged under 18 (but above compulsory school leaving age) £4.20
Apprentices aged under 19 £3.70
Apprentices aged 19 and over, but in the first year of their apprenticeship £3.70
Pension Contributions

Minimum auto-enrolment (workplace pension) contributions have been 1% from both the employee and employer.  From 1st April this changes to 3% contributions paid by the employee, and 2% paid by the employer.  This will change again in April 2019.

GDPR

Something not directly related to tax and accountancy, but that will affect all businesses will be the introduction of the General Data Protection Regulation (GDPR).  This is a fairly significant upgrade from the Data Protection Act 1998, which just wasn’t sufficient for the online environment that we use now.  The GDPR comes into effect from 25th May 2018.  There is no exemption for small business, and fines for non-compliance will be from 4% of turnover.

Businesses complying with the DPA 1998 shouldn’t have too much trouble preparing for 25th May, but assessing the data you hold, documenting what you do with it, rewriting policies and communicating with data subjects (customers, suppliers, employees) can be time consuming.   The ICO website is a good place to start, if you’ve not already looked at this.

Making tax Digital (MTD)

Making tax digital (aka quarterly accounting), has been delayed for a couple of years.  It will start for VAT only from April 2019.  The new rules will encompass VAT registered businesses with a turnover above the VAT threshold (currently £85,000)  From 1st April 2019 records will need to be kept using ‘functional, compatible’ software. Compatible meaning it must be able to upload information direct to HMRC each quarter.

MTD for income tax, corporation tax etc. will follow after 2019.  It will mean 5 updates to HMRC being made each year, instead of the one annual tax return.  There will be an obligation to keep records electronically.  You’ll upload sales, expenses and profit figures each quarter, then a 5th report (if necessary) will be used to claim allowances and reliefs that are not included in normal day-to-day bookkeeping.

The well-known software companies are developing solutions, as well as some of the lesser known software houses. HMRC has said it will not be providing free software, as it currently does for both VAT and personal self-assessment tax returns.

This is a very brief summary, and there could be many other factors to consider in your own business. If you’d like any help with your tax, bookkeeping or accountancy, please get in touch.

Budget 2013

The Budget 2013 introduced a new National Insurance for employers. The increase in personal allowance to £10,000 has been brought forward a year, to 2014. There will be very few changes to tax rates.

Employer’s NI (National Insurance) Contributions 

A completely new measure introduced in this budget is the employment allowance.  This will be a deduction in employer’s NIC of £2,000 per year for all businesses and charities from April 2014. It is intended that this will be easy to administer, and the Government will be consulting with stakeholders on the practical aspects. It should be easy to administer, and be done through the normal payroll and RTI (Real Time Information) reporting process.

Currently employer’s NI contributions reduce profit and business tax liability.  If all else is equal, employers will pay £400 more tax (at a rate of 20%). So the true saving for many employers will be £1,600.

Income Tax

The increase in the personal allowance to £10,000 is being introduced a year earlier than anticipated and will come in from April next year. When there is a rise in the personal allowance this usually means the Chancellor lowers the threshold for the higher rate of tax, so that it only benefits people on lower incomes. There have been no changes to income tax rates.

The basic personal allowance is available to people born on or after 6 April 1948. In the current year, 2012/13, it is £8,105; in 2013/14 (as previously announced) it will be £9,440. Once the personal allowance has reached £10,000 in 2014/15, it will then increase in line with inflation based on the Consumer Prices Index (CPI) in future years, starting from 2015/16.

VAT

The annual turnover threshold for VAT registration will go up from £77,000 to £79,000 from April 2013. The deregistration turnover limit will go up from £75,000 to £77,000.

Corporation Tax

The main rate of corporation tax is already scheduled to decrease to 23% from 1 April 2013. From April 2014 it will go down to 21%, and from April 2015 to 20%. There is no change to the rate for small companies, which remains at 20%.

Capital gains tax

The annual exempt amount in 2013/14 will be £10,900, increased from £10,600 in 2012/13. The exemption for most trustees will be £5,450.  There are no changes to capital gains tax (CGT) rates.

Small Company Shareholder/Directors’ Loans

The Government will close three loopholes to counter attempts to avoid the tax charge on loans from close companies to individuals with a share or interest in the company. The measures will have effect from 20 March 2013 and are expected to bring in just under £70m annually in the four years beginning 2014/15.

Later this year the Government will consult on the structure and operation of the tax charge on loans from close companies to their participators (shareholders). If legislation is needed it will be in the Finance Bill 2014.

The full Budget can be accessed at hm-treasury.gov.uk

If you would like any help with budget 2013 changes please contact us.

Management accounting, bookkeeping and forecasting.

All of the above can help to avoid liquidation of limited companies.

It has been announced that Rangers FC is to be liquidated by HM Revenue and Customs (HMRC), after an attempt to reach a CVA(Company Voluntary Arrangement) failed.  HMRC’s decision is based on it’s policy of “not agreeing to a CVA where there is strong evidence of non-compliance by a company with its tax liabilities.”

A CVA is a legally binding agreement between an organisation owed money (creditor), and the company that owes the money.  It means that the company can continue to trade, while paying off an agreed proportion of the debt regularly. Any company reaching this stage is likely to have been trading involvently, and there is a risk that the directors could face disqualification, or even prosecution.

In rejecting the arrangement, HMRC is forcing Rangers into liquidating its assets to pay the debt. To do this and continue a football club Rangers is set to reform as a new company, buying the assets from the old. The proceeds of which will be used to partially settle the debt. There are no winners in cases like this. The company’s creditors lose out, as the debts are much higher than the value of the assets. Taypayers lose out, as the goverment will not receive the money owed to the state. HMRC is not the only creditor, and many creditors will not receive a penny of the money owed to them. The former owner of Rangers has the burden of admitting he waited too long to put the company into administration.  The owners of the new company have a great deal of work ahead to turn Rangers into a financially viable proposition.

The situation is not restricted to prominent companies, with millions of pounds passing through their bank accounts. Any company, of any size, can drift into insolvency. If your limited company owes more out that it can generate, it could be insolvent.  If you run a limited company, you need to keep track of its financial health.

There are several stages to this:

1. Regular bookkeeping, weekly or, at the very least, monthly. With bank accounts reconciled, supplier statements checked, petty cash checked as a minimum.

2. Management accounts, monthly or quarterly. Get them done as soon as possible after the period end. Relying on your accountant to give you the good/bad news up to 9 months after your company’s year end is not good enough.  Management accounts can be simple or complex, but add value by giving you valuable information about your business.

3. Acting on the information in your management accounts. Prepare financial forecasts. If you don’t like them, or it looks like your business is going down hill, make changes. Save costs, use your management accounting information to identify poor performance of products and services, and improve them or drop them.

4. Keep reviewing, keep making changes. Employ others when you need to. Outsource if it’s easier or cheaper.

5. Don’t be afraid to make difficult decisions. Large organisations are often criticised for making redundancies quicky, but by acting fast, and losing 1,000 jobs they could be saving the remaining 30,000. Fail to act and all 31,000 could go.

6. Pay creditors on time. They do notice if you’re late, and good payers will be treated well when a problem arises.

The same principles apply to small and large companies. However good you are at your core business activity, don’t overlook the value of managing your finances and accounts.

If you would like any help with bookkeeping, management accounts or forecasting, please get in touch.

Bookkeeping Terms and Definitions

Bookkeeping terms and definitions can be confusing.  Especially the debits and credits.  Accountants and bookkeepers, like many tradespeople and professionals use jargon. Sometimes we get so used to it that, again like other business people, we forget it’s jargon.  So if you’re wondering what it all means, maybe this will help.

Bookkeeping is done (or should be) by any type of business, charity, company and organisation. The words organisation, company and business are used interchangeably in this post, just because I get bored typing the same word repeatedly.

List of Bookkeeping Terms

Amortisation Similar to depreciation, but applied to intangible assets
Balance Sheet A financial snapshot of your organisation’s assets (things you own and money owed to you)and liabilities (money you owe to others), at a   particular date, prepared under UK accounting rules.
Bookkeeping recording, organising and filing financial documents. Does not include preparing accounts, tax computations or tax returns.
Capital This can have several meanings. Capital expenditure is money spent on fixed assets. Capital introduced is money input to a business by owners, investors, or shareholders etc. Working capital is the excess of current assets minus   current liabilities, or the amount of cash available to run your business.
Credit A credit is the opposite of a debit.
Creditors People and organisations you need to pay in the future.
Current Assets Stock, bank balances, amounts due to your company within one year. Assets  that are not long-term features of your business, and can be coverted to cash relatively quickly.
Debit A debit decreases your profit/surplus, or increases the assets on your balance sheet (statement of financial position).
Debits and credits The 2 sides of double-entry bookkeeping.  In   your accounts, think of it as the opposite of what you see on your bank  statement (ie. A credit in your bank account, will be a debit in your accounts). This is because the bank statement shows debits and credits from the bank’s point of view, not yours.
Debtors People and organisations that owe your company money. These are assets to your company.
Depreciation A proportion of the cost of a tangible asset, deducted from profit over a  number of years. The idea is to spread the cost of the asset over the period that it is used in running the business. Eg. A machine expected to last 5 years would be recorded as an asset, then written off to the P& account (deducted from profit) over 5 years.
Double-entry bookkeeping Recording the full nature of a transaction. For example, if you buy pens   for £5.00 cash, the first bookkeeping entry is to increase your costs by £5.00 (the debit entry), the second is to decrease your petty cash balance by £5.00 (the credit entry).
Fixed Assets Tangible or intangible property belonging to the business, and used to run the business activities.
Goods Items bought and sold.
Goodwill A value in incorporated companies that represents the value of the   company over and above the net value of assets minus liabilites, ususally   arising when a company is bought by another.
Income statement Equivalent to a P&L account, but compiled under different accounting   rules.
Intangible asset Something the organisation owns, but is not a physical item eg. A patent,   goodwill.
Liabilities Amounts owing to third parties, current liabilities are due within 12   months of the balance sheet date.
National Insurance Let’s face it, it’s just another tax.
Profit and loss account AKA P&L account. A statement of your income (sales, grants received   etc.), less costs and expenses, showing your profit for a particular period of time. Prepared under UK accounting rules.
Statement of Financial Position Equivalent to a balance sheet, but compiled under different accounting   rules.
Stock Items bought for resale, but not yet sold.
Tangible asset An asset with physical substance, eg. Stock for resale, money in a bank   account, buildings, machinery, equipment etc.
Tax Money you, and/or your company, have to pay even though you don’t want to.
Third party A person or organisation not connected to your own organisation.
Transaction An exchange of goods, services, money etc. with a third party, eg selling   a chair for cash is one transaction, selling a chair on credit is one   transaction, receiving a cheque for the credit sale is another transaction.
UTR Unique taxpayer reference.  A 10   figure number used by HM Revenue and Customs to identify the tax record of an individual (self-assessment tax system) or business.
Working capital The amount of money available to your business. Current assets less   current liabilities.
Written off Deducted from profit

 

Easy Business Record Keeping

Easy business record keeping.  Possible, or an oxymoron?  Are you running a business on the go?   If you’re using a smartpone, iPod Touch or iPad, there could be an easy way to record your business expenses.

Several companies have recognised that keeping paper records is a chore you don’t want to face at the end of a busy day, and developed apps to help.  Some of these have been around for a while, some are free, and some are simpler than others. You can choose which is best for you.

So, if your business is not VAT registered and you want a simple solution for recording income and expenses, why not try them out?

HMRC lists a few on their website here:  http://www.hmrc.gov.uk/softwaredevelopers/mobile-apps/record-keeping.htm

There are many others including https://www.expensify.com/, which can be used by employees to record expenses and submit claims.

Whichever you use, remember to download, back-up or save your data regularly.

 

 

Accounting Glossary

Accounting – the practice of recording income and expenditure, keeping accurate records of payments and receipts and reporting those records in standard formats.

Accrual – A cost or expense that has been incurred during the period, but not invoiced or paid as at the period end.  An accrual is shown as a liability in the balance sheet.

Amortisation – the cost of using an intangible fixed asset.  Similar to depreciation,  it is a calculated value which reduces the value of the asset over its useful economic life. Amortisation is reported as a cost in the profit and loss account.

Annual Return – a form filed each year by limited liability companies.  The form includes details of directors, shareholders, the company’s registered address, SIC code and information on the types and numbers of shares.  It is filed independently of the company’s accounts, and does not contain any accounting information other than share capital.

Assets –  these provide the potential for monetary or economic gain, or enable the company to carry out its core business.

  • Tangible Fixed Assets – Property, equipment, plant, machinery, fixtures and fittings or vehicles that are owned, or in some cases leased, by the business for the purpose of carrying out work, providing services, manufacturing goods or generating profit. Fixed assets have a useful life of over one year.
  • Intangible Fixed Assets – these are long-term beneficial assets that do not have physical form, they include goodwill and patents.
  • Current Assets – items that the company expects to use or sell within a year. They include stock for resale, money in bank accounts and money owed by trade debtors.

Audit – the independent checking of a company’s accounts by external auditors. Not legally required for small companies.

Balance Sheet – this shows the company’s assets (what it owns and is owed), liabilities (how much it owes to others), and how it is funded.

Bookkeeping – the process of recording income and expenditure.

Capital Expenditure (Capex) – the amount spent on purchasing, building or manufacturing fixed assets for the company’s own use.

Company Secretary – the person responsible for ensuring that an incorporated company meets its legal requirements.  Small companies no longer need to appoint a company secretary, in which case someone else must carry out the company secretarial obligations.

Cost of Sales – the direct costs associated with purchasing stock, manufacturing stock or providing the services sold by the company.

Credit – A bookkeeping entry which represents income in the profit and loss account, and a liability in the balance sheet.

Debit – A bookkeeping entry which represents payments in the profit and loss account, and assets in the balance sheet.

Deferred Tax Charge – An amount of tax that will become payable in future, but relates to revenue earned in the current period.

Deferred Tax Credit – An amount of tax that will become due to the company in a future period, but relates to activity in the current period.

Depreciation – the cost of using a tangible fixed asset, spread over its estimated useful life. Depreciation reduces profit and the value of the asset.

Direct Cost – a cost which directly relates to the manufacture of a product, or provision of a service.  Direct costs usually vary with activity.

Distributable profits – the amount of profit that is available to be paid to shareholders.  The company must be able to meet its obligations to pay creditors and tax before distributing profits.

Dividend – an amount of money paid from distributable profits to shareholders of limited companies.

Liabilities – Current liabilities are amounts that the company will need to pay within one year. Long-term liabilities are those that will be payable after one year.

Profit and Loss Account (P&L) – a periodic report showing the company’s sales, costs, taxation and profit or loss generated.

Prepayment – an amount paid at the period end, but relating to the following period. A prepayment is shown on the balance sheet as a current asset.

Revenue – Transactions relating to running the company’s core business activities.  Often taken to mean sales, this term can also be used to distinguish costs of running the business from capital expenditure.

Share Capital – a balance sheet amount showing the value of shares issued and paid, as part of the funding of the business.

Tax – A amount of money payable to the government which is always seen by business owners as too high.

Transaction – a sale, purchase, payment, receipt or bookkeeping entry.

Turnover – the value of sales.  Does not include any other income such as grants, income relating to anything other than the company’s core business activity, sales of assets, or interest earned.

Working Capital – the amount of money a company has tied up in its day-to-day activities.

Simple Bookkeeping

Simple Bookkeeping

Bookkeeping for self-employed traders, contractors and professionals, and for those who are sole directors of limited companies should be easy and quick.

Unfortunately, it’s also a chore.  The easy option is often to pile receipts in a corner, put bank statements to one side and shuffle it all off to the accountant at the end of the year.   The problems with this approach are:

  1. your accountant will charge more to sort out the paperwork at the end of the year,
  2. you don’t have confidence in your finances, and find it difficult to keep track of money,
  3. receipts, invoices and other documents are easily lost,
  4. if you lose paperwork you could end up paying more tax than you should,

There is an easy solution, with just a little commitment from you.  Make it part of your working routine and get on top of your business finances for good.

Daily tasks

  1. Put ALL receipts, bills and invoices in an envelope as soon as you get them.  Keep an envelope, or bulldog clip in your van, car or desk drawer so that you always know where it is.
  2. Keep records of business mileage, the date of the trip, destination, mileage and reason for the journey.
  3. Keep all business related documents such as bank statements, insurance documents, rental and loan agreements in a safe place.  Use document wallets or envelopes to organise them.

Recipe for monthly bookkeeping  

Set a time to do this, such as the last day of each month, and stick to it.

Ingredients

1 bank statement

1  spreadsheet, or analysis book (eg. Cathedral Analysis Book)

1 pen or pencil

Several purchase receipts, bills and sales invoices

A pinch of patience

A little time

 

Method

Separate sales invoices (income) from receipts and bills (outgoings).   Sort each pile into date order.

Write in Analysis Book (or spreadsheet) as below;

Income
Date Ref Payer/Customer Name Description Amount Received Sales Loan Received Bank Interest Received
28/4/10 1 Sample Ltd 300 Gadgets 600.00 600.00
30/4/10 2 My Bank Plc Interest earned 3.00 3.00
Totals 603.00 600 3.00
Costs
Date Ref Supplier Name Description Amount Paid Raw Materials Rent & Rates Stationery & Postage
19/4/10 17 EG Supplies 1,000 brackets 200.00 200.00
25/4/10 18 CC Printers Business cards 95.00 95.00
Totals 295.00 200.00 95.00

Add columns as required to analyse your income and costs.  Total up each column for the month.

Check each item against your bank statement.  It there’s anything missing, and you know it’s correct write it onto your page or spreadsheet and add it into the total (then go and look for the receipt – you did get one didn’t you?).

There could be some items on the bank statement from last month, and some that have not yet appeared on the bank statement.  These are your unreconciled items.  Check any other differences, as these could be errors on your part, or bank errors.

Carry the totals forward to the top of next month’s columns:  this helps you keep a running total so that for your year-end accounts and tax return half the work is already done.

Alternatives:

Omit the analysis book, and use a software package.  These automate the calculations for you, and make it easy to reconcile the bank statement.

Use the same principal for credit card statements, cash withdrawals and payments.