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National insurance contributions (NICs)
Leaving profits in the company may be tax-efficient, but you will of course need money to live on, so you should consider the best ways to extract profits from your business.
A salary will meet most of your needs, but you should not overlook the use of benefits, which could save income tax and could also result in a lower NIC liability.
Four key NIC-saving strategies:
y Increasing the amount the employer contributes to company pension schemes. Care should be taken however as there are limits on the amount of pension contributions an individual can make both annually and over their lifetime.
y Share incentive plans (shares bought out of pre-tax and pre-NIC income).
y For some companies, disincorporation and instead operating as a sole trader or partnership may be beneficial.
y Paying dividends instead of bonuses to owner-directors. Planning for the year end
Tax and financial planning should be undertaken before the end of your business year, rather than left until the end of the tax or financial year. Some of the issues to consider include:
y the impact that accelerating expenditure into the current financial year, or deferring it into the next, might have on your tax position and financial results
y making additional pension contributions or reviewing your pension arrangements
y how you might take profits from your business at the smallest tax cost, and how the timing of payment of dividends and bonuses can reduce or defer tax.
Minimising the risk of late filing penalties
It is important to keep your personal tax affairs in order so that you avoid incurring any Tax Return late filing penalties. The cut-off dates are shown in the calendar but the penalties can be substantial.
The timetable for making tax payments is relatively straightforward for the self-employed:
y 31 January in the tax year, first payment on account
y 31 July after the tax year, second payment on account y 31 January after the tax year, balancing payment.
A system of interest and penalties applies. For example, if any balance of tax or NICs due for 2020/21 is not paid within 30 days after 31 January 2022, further penalties may apply as HMRC will seek to charge a 5% late payment penalty as well as the interest that will be charged from 1 February 2022, with further 5% penalties chargeable on 31 July 2022 and 31 January 2023, plus interest on any outstanding liabilities.
If your business is incorporated, it will be liable to corporation tax. Corporation tax is usually payable nine months and one day after the end of the company’s accounting period.
If there are cash flow issues, HMRC might be persuaded to accept a spreading of your next business tax payment – you will have to pay interest at the HMRC rate, but keep to the agreed schedule and late payment penalties will be waived. Arrangements need to be put in place before the due date for paying the tax, so talk to us in good time if you wish to apply.
Payments on account
Payments on account are normally equal to 50% of the previous year’s net liability and are due on 31 January in the tax year and 31 July following the tax year.
A claim can be made to reduce your payments on account, if appropriate, although interest will be charged if your actual liability is more than the reduced amount paid on account. There is no equivalent mechanism to make increased payments on account when the year’s tax will be higher, so you should ensure that you build a reserve of money to pay the balance of tax due.
Don’t wait until it’s too late if you have difficulties! Please tell us in good time about any issues facing your business, as we may be able to offer solutions.
Payments on account are not due where the relevant amount is less than £1,000 or if more than 80% of the total tax liability is met by income tax deducted at source. In these cases, the balance of tax due for the year, including capital gains tax, is payable on the 31 January following the end of the tax year.
Case Study
Peter is self-employed. His accounts are made up to
31 August each year. When we prepare the 2021 Return we will be including his profit for the year ended 31 August 2020, and that is the profit which will be taxed for 2020/21.
Peter’s payments on account for 2021/22 will automatically be based on the 2020/21 liability.
Your next steps: contact us to discuss...
y Starting up a new business
y Raising finance for your venture
y Timing capital and revenue expenditure to maximum tax advantage
y Minimising employer and employee NIC costs
y Improving profitability and developing a plan for tax-efficient profit extraction
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