7 Jul 2023
You might have received a statement from HMRC in the past few weeks reminding you that your payment on account is due by 31st July. We’re here to shed light on what a payment on account is so you can navigate this aspect of tax compliance. With the July 31 deadline approaching, it’s important to understand what payments on account entail and who they apply to.
What are payments on account?
When you’re self-employed, HMRC may require you to make payments on account of your future tax bill. These payments act as an advance payment for your tax liability and help you spread the cost over the year. They are calculated based on your previous year’s tax bill.
Who needs to make payments on account?
If your tax bill exceeds £1,000 and less than 80% of your tax liability is covered through tax deductions at source (e.g., through PAYE), you’re likely to be required to make payments on account. The first time you’re required to make a payment on account can come as a shock as you effectively need to pay 150% of your tax bill in one go so it’s essential to understand your individual tax situation and consult with a professional bookkeeper to ensure compliance.
At InterTax we always recommend that our clients file their tax returns as early as possible. Filing your tax return early offers several advantages:
- It provides a clear picture of your tax liability, allowing you to plan and budget effectively.
- Early filing also minimizes the risk of penalties for late submission and gives you peace of mind, knowing that your tax obligations are taken care of.
This month we’ll be diving deeper into the world of tax returns, bookkeeping services, and strategies for optimising your financial processes on our social media channels.
If you’d like to speak to us about how we can support you with any aspect of bookkeeping and self-assessment, book a free consultation here.
15 Mar 2023
Self-employment can be a great way to make money and have more control over your own life, but having to manage your taxes yourself can be a headache and a half.
You probably already know that you can claim tax relief for certain business expenses, which can save you a hefty amount of cash. However, knowing what you can and can’t claim tax relief on can be tricky, especially if you’re new to self-employment.
In this blog post, we’ll run through some of the most common expenses that you can claim tax relief on as a self-employed person in the UK.
We’ll also dispel some of the myths around what you can and can’t claim for, so that you can ensure you’re not missing out on any deductions while staying legally compliant.
How Does It Work?
As a self-employed individual, you are responsible for paying your own income tax and National Insurance contributions (NICs). This means that you can also claim tax relief on certain business expenses, which can reduce the amount of tax you have to pay.
You only pay tax and NICs on your profit, not your gross revenue. So if you turn over £50,000 but have £20,000 in costs, your profit is £30,000. You’ll be taxed and pay NICs on this £30,000, not the full £50,000.
This is where claiming tax relief comes in. Claiming tax relief doesn’t mean that you get the full value of the item back, as some people mistakenly believe. Instead, it means that you can deduct the cost of the item from your taxable profit.
For example, say you’re a self-employed graphic designer and you spend £500 on a new computer. You can claim tax relief on this expense, which means that it will be deducted from your taxable profit. So if your taxable profit is £30,000, it will now be £29,500. You’ll only pay tax and NICs on this reduced amount.
What Can You Claim Tax Relief On?
Now that we’ve covered the basics, let’s take a look at some of the most common expenses that you can claim tax relief on as a self-employed person in the UK.
As we mentioned before, you can claim tax relief on most business expenses. This includes the cost of equipment, office supplies, travel, and even some of your own training and development costs.
Office Equipment
Office equipment includes computers, printers, scanners, and furniture.
But let’s say you buy a laptop and use it for both work and personal purposes – what then?
You’ll need to estimate how much of the time you use it for work in order to calculate how much tax relief you can claim. For example, if you use it for work 50% of the time, you can claim 50% of the cost as a business expense.
The same goes for phone and internet usage.
Electronic Communications
If you use your personal phone or internet for work purposes, you can claim a percentage of the cost as a business expense. You may purchase an entirely separate phone for work, in which case you can claim the full cost as a business expense.
The same is true for your broadband or mobile data usage. If you use your home broadband for work, you can claim a percentage of the cost as a business expense. You can calculate this by working out how many hours per week you use it for work, and then claiming that as a percentage of the total cost.
Let’s say your broadband costs £50 per month and you use it for work 20 hours per week.
There are 168 hours in a week, so 20/168 = 11.9%
11.9% of £50 is £5.95.
£5.95 x 12 = £71.40 per year.
Professional and financial services
It’s certainly advisable that you hire an accountant or bookkeeper to help with your self-employment taxes. The cost of this service is tax deductible.
You can also claim for the cost of other professional services, such as legal advice.
If you have a business bank account, you can claim for the cost of any transaction fees. This might include overdraft fees, credit card charges or interest on business loans or lines of credit.
However, if you use your personal bank account to manage your business finances, you don’t qualify for this relief – yet another reason why you need to separate your business and personal accounts.
Staffing Costs
If you have employees, you can claim for the cost of their salaries, National Insurance contributions (NICs), and pension contributions.
You can also claim for the cost of any training or development courses that you put your staff members on. This includes first-aid training, health and safety courses, and industry-specific training.
Travel Costs
If you travel for work, you can claim the cost of your transport as a business expense. However, the travel must be wholly and exclusively for business purposes.
This includes the cost of public transport, fuel, and parking. You can also claim for the cost of accommodation and meals if you’re travelling overnight.
What Can’t You Claim Tax Relief On?
In a nutshell, you can’t claim tax relief on anything that isn’t considered a business expense.
This includes:
- Home renovations. You can’t do up your home and try to pass it off as a business cost simply because you work from home. If you operate a business out of a commercial premises, you can claim for the cost of renovations there.
- Personal travel. You can’t claim for the cost of travel that isn’t related to your business, even if you sometimes work while you’re travelling.
- Meals and entertainment. You can only claim food and drink if it’s outside of your usual working routine. If you go on a business trip, for example, you can claim for the cost of your meals. But if you entertain clients in a restaurant near your office, you can’t claim that as a business expense.
Final thoughts
Understanding what you can and can’t claim on your tax return can be tricky, especially since there are some grey areas. This is why working with an accountant is a sage investment, because they can help you to ensure that you’re claiming everything you’re entitled to while staying within the bounds of the law. In the long run, this can save you a lot more than their fee!
Discuss your needs during a free consultation, available to book here.
3 Mar 2023
At the start of a new tax year, it is important to know what changes will be made to taxes starting in April 2023. This will help you plan your business and personal finances for the coming months. We’ve made a list of the most important changes that businesses need to know about, along with some tips to help you stay on track.
Here’s a quick look at the tax changes for April 2023
- Individual Taxation, higher-income people would pay more in taxes.
- Dividend allowance lowering
- until April 2028, national insurance rates are locked.
- Corporate tax rate increases in business VAT
- reduced capital gains tax exemption amount per year.
- Frozen Norms for inheritance taxes
Individual Taxation
Higher Income people will pay more in Taxes
Starting on April 6, 2023, the income tax additional rate threshold (ART) will drop from £150,000 to £125,140. As soon as their income exceeds £125,140, more taxpayers will be subject to the higher rate of 45% of income tax.
Taxpayers in England, Wales, and Northern Ireland will be subject to the new threshold.
From April 2023, higher earnings in Scotland will also be subject to increased taxes. The top rate tax band in Scotland will similarly decrease, from £150,000 to £125,140, as stated in the Scottish Budget. After their income exceeds £125,140, Scottish taxpayers will likewise be subject to the highest rate of income tax beginning in April 2023.
The highest and higher rates of income tax in Scotland will each increase by 1p starting in April 2023. For Scottish taxpayers, the higher rate will rise to 42%, and the top rate will rise to 47%. The higher and additional rates will continue to be 40% and 45% for the remainder of the UK.
Consider tax-efficient pension saving as tax advice.
Two tax pitfalls await higher-rate taxpayers starting in April 2023:
You pay the additional rate of income tax, which is 45% (47% in Scotland) when your income surpasses £125,140.
Moreover, you are subject to an effective tax rate of about 60% if your income is between £100,000 and £125,140. This is because your personal allowance decreases by £1 for every £2 your income surpasses the £100,000 tax band.
Making charitable contributions and personal pension contributions may allow you to lower your tax exposure. You might also need to consult a licensed pension adviser for investing advice.
Reduced Dividend Allowed
Every year, people are given a dividend allowance, which means they only pay tax on dividend income that exceeds it.
From April 2023 through April 2024, the dividend limit will decrease from £2,000 to £1,000 and then to £500 in April 2024. Your income tax bracket determines how much tax you’ll pay on dividends beyond the dividend allowance.
Starting in April 2023, the following rates will be in effect:
Taxpayers at a basic rate of 8.75%
Taxpayers at the higher rate are contributing 33.75%.
Taxpayers at a higher rate, 39.35%
Make sure your compensation method is tax-efficient, according to tax advice.
Due to the decreased allowance, those who get dividend investment income and business owners who distribute profits will now pay greater taxes.
Stagnant Tax Rates
Taxpayers with low incomes will also have to pay more in taxes as a result of inflation due to the freezing of several tax breaks until 2028. Since the income tax personal exemption of £12,570 is frozen until 2028, basic rate taxpayers will be impacted since more of your income will effectively be taxed.
Does moving assets make your tax situation better?
You can avoid paying taxes by giving your spouse or civil partner any income-producing property you own in part or in full. Typically, for this to work, your gift must be an unconditional one made to your husband or civil partner, from whom you haven’t separated. Always seek professional guidance so that your unique circumstances can be examined before acting.
To reduce their tax liability, basic rate taxpayers may also be able to transfer £1,260 of their unused personal allowance to their spouse or civil partner. Only in cases where neither of you is a higher-rate taxpayer does this apply.
Until April 2028, National Insurance Rates are Locked
After last year’s rollercoaster, when the National Insurance Contribution (NIC) rates were altered in the middle of the year, they should be steady starting in April 2023. Both the Class 2 Lower Profits Threshold and the NIC Primary Threshold for employees will be frozen until April 2028.
Companies typically begin deducting 13.25% of Class 1 Secondary NICs from employee salaries of around £9,100. Moreover, this cut-off will stand until April 2028.
Can you claim the Employment Allowance? This is tax advice.
As qualifying enterprises can claim the Employment Allowance to lower their employer’s annual National Insurance bill by up to £5,000, you should check if this can be claimed.
In general, if you are a business and your employers’ Class 1 National Insurance liabilities were less than £100,000 in the prior tax year, you may be eligible to claim Employment Allowance. There are certain exclusions, the most significant of which is that you cannot make a claim if your business has just one employee who is paid more than the Class 1 National Insurance secondary threshold and who also serves as a director of the business.
Business Taxes Increase in the Corporate Tax Rate
The increase in corporate tax beginning in April 2023 will be the single biggest tax increase faced by UK firms.
The following rates will rise:
Where profits surpass £250,000, the primary corporation tax rate will rise to 25%.
Where profits are £50,000 or less, a new 19% “small profits rate” of corporation tax will be in effect.
Businesses with profits between £50,000 and £250,000 are eligible for marginal relief, which reduces their effective tax rate to 26.5% for profits in the margin (those between the upper and lower limits).
According to the number of companies that are related for tax purposes, the upper and lower tax limitations are decreased. Businesses will join forces if one controls the other or if both are controlled by the same party.
VAT
Beginning on April 1, 2024, the VAT registration and deregistration criteria will likewise be locked at £85,000 and £83,000, respectively, for an additional two years.
Reduced Capital Gains Tax Exemption Amount Per Year
The average person’s exemption from capital gains tax (CGT) will drop from £12,300 to £6,000 in April 2023 and then again to just £3,000 in April 2024. Anybody selling assets that are subject to CGT must account for any potential additional tax that results from the reduction in the allowance.
Use tax-efficient investing options as a tax-saving strategy.
It’s possible that you’ll have to pay CGT on any gains you make over the allowance if you hold qualifying investments outside of an ISA. The time is now to think about starting future savings in an ISA and possibly moving some investments there as well. Moving investments into an ISA, can count as a taxable event for CGT purposes, so you should assess your status before acting.
You should seek independent investment advice from a qualified financial adviser.
Freezing Thresholds for Inheritance Taxes
The £325,000 nil-rate band for inheritance tax (IHT) will remain unchanged until April 2028. The dwelling nil-rate band will also be locked at £175,000 in addition. A £2 million cap will be placed on the residence nil-rate band taper.
Consider an IHT review as tax advice.
Discuss your needs during a free consultation, available to book here.
22 Oct 2020
If you are a self employed construction worker you are probably raising your invoices.
Below are reminders for you, what should be included on your CIS invoice.
As any invoice, it should have all basic information that we can find on any other invoice, that includes:
- Unique invoice number
- Invoice Date
- Invoice Due Date
- Name of your company
- Your UTR number (unique tax reference)
- Your contact details
- Description of services you provided for client
- Subtotal (the amount due before taxes)
- Total due to be paid (the amount due after taxes and other deductions)
Without this information, your invoice is not considered as an official, legal document, so double-check that every invoice contains all of the necessary details.
There is an extra catch coming with CIS invoices, you need to provide details of CIS deduction.
We have three rates of CIS deduction:
- 20% – registered subcontractors
- 30% – unregistered subcontractors,
- 0% – subcontractors with ‘gross payment status’.
You need to qualify for gross payment status, it means that contractor you work for doesn’t need to make deductions from your pay, so you don’t have to add information about CIS to your invoices.
However, if you use either the 20% or 30% rate, you need to ensure that your invoice templates include:
- The CIS deduction rate
- The total amount that is eligible for CIS deductions (i.e. the cost of labour)
- The total amount to be deducted
VAT & CIS invoices
Let’s have a look at this tricky part.
- If you have just registered for VAT and you are CIS contractor, you’re probably wondering how do you include VAT element on CIS invoices.
- You need to remember that CIS is calculated based on the net price of labour only.
- You also need to know that VAT applies to both labour and supplies; you should therefore calculate VAT using the total price of materials and labour before CIS deductions.
21 Oct 2020
It’s the time of the year when you need to file your self assessment and the deadline to do it is quickly approaching. Here are a few tips to take into consideration while preparing to file your return.
The deadline for the online returns is 31st of January and for paper ones it is 31st of October. After submitting your return you will need to pay the tax you owe. The deadline for it is usually 31st of July. However, due to the COVID, the government postponed the deadline for tax payments till January 2022.
1. Who needs to file a tax return?
- Every self employed trader, earning above 1,000 a year
- directors of a limited company have to file their tax returns before the deadline, being 31 of January each year.
2. You also need to file a return if you have income from:
- Renting out a property
- Tips and commissions
- Savings, investments and dividends
- Foreign income
3. What tax will I need to pay from self assessment?
- Income Tax – you pay this tax along with National Insurance contributions through self assessment
- Tax on dividends – if you’re a director of limited company
4. There is some basic information you’ll need to complete your return.
- Your UTR number (this is a reference number that’s assigned to you, when you register as self employed
- All information about your total earnings for a year
- Information about your business expenses
It’s important that you keep a record of all your income and expenses such as invoices and receipts.
You can file your return using your HMRC Gateway or using one of the bookkeeping software that is integrated with HMRC.
Allowable expenses:
- office costs such as stationery or phone bills
- travel costs such as fuel, parking, and some train or bus fares
- clothing expenses such as uniforms
- staff costs such as salaries or subcontractor costs (CIS)
- things you buy to sell on such as stock or raw materials
- financial costs such as insurance or bank charges
- costs of your business premises such as heating, lighting, and business rates
- advertising and marketing such as website costs
You can still claim business premises costs, but only as a percentage. You can claim back for things like:
- heating
- electricity
- Council Tax
- mortgage interest or rent
- internet and telephone use
There are some upcoming changes on how we’ll be filing our tax returns. As part of the Making Tax Digital initiative, in 2022 the government will introduce quarterly tax returns and remove the paper copy returns. It is worth starting to think now about how to keep all your records efficiently (bookkeeping) and invest in software integrated with HMRC. That will allow you to keep all your records digitally and be in line with the government requirements for MTD.
5 Oct 2020
It’s hard to keep up with all new legislation, when you’re busy running your business. Below are key points to the upcoming changes. Take advantage of the next few months and prepare for change that will affect you.
Vat reverse charge starts on the 1st of March 2021
It’s a major change that will affect the construction industry. It will affect you if you are VAT registered and if you supply or receive services under the construction industry scheme. What does it mean to you? In short:
- You will no longer pay VAT to HMRC, it will be the end customer who will pay the VAT directly to HMRC instead of paying it to the supplier. Customers will be able to recover the VAT under the normal VAT recovery rules. Your VAT returns will change.
- This will reduce the money coming into your business and directly affect your cash flow, so plan ahead if you require extra funding.
- Your invoices will need to show the right information, and you will need to collect additional paperwork from your clients.
When to apply the reverse charge
As mentioned before the new rules start on 1st of March 2021, after that day you will need to apply to the new rules. All services carried out before 1st of March 2021, should be charged accordingly to normal VAT rules.
Only apply new reverse charge if you provide specified services under construction industry that includes:
- Constructions, altering, repairing or demolishing buildings
- Internal cleaning of buildings – if part of constructions
- installing heating, lighting, air-conditioning, drainage or similar systems
- Internal or external painting or decoration of buildings
- If your clients are not the end user or intermediate supplier, you will need to apply new VAT reverse charge
- You’ll need to apply reverse charge if you provide your services at standard or reduced rate
However, as there are exemptions, do not apply new rules if:
- If you apply 0% VAT charge for your services.
- If your client is not VAT registered in UK
- It will not affect all the services you supply, if you provide employment services, you will not have to apply new rules to your invoices.
- If your client is not registered for CIS
- If your client is an end user of the services, in this case you will need a written confirmation from the customer, that they are end users.
Here, you will find a handy flowchart provided by HMRC: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/878587/Annex_1_-_VAT_domestic_reverse_charge_for_building_and_construction_services.pdf
How the reverse charge will affect your business?
As you no longer charge VAT on your services, that means it will reduce the amount of the money coming into your business, at this point you will need to consider your cash flow. You will no longer have to pay the VAT to HMRC, that was due usually on your sales invoices. It also means that you may become a frequent VAT repayment trader if you usually buy substantial amounts of materials to carry out work for main contractors. If that’s the case, you may want to consider preparing your tax return on a monthly basis instead of usual quarterly to improve your cash flow.
What to show on the invoice?
There are specific conditions to meet on your invoicing after 1st of March 2021 to reflect the changes and you may need to consider upgrading your accounting software to meet new requirements.
Your invoice should show the percentage of the VAT due, but you also need to show on the invoice, that VAT is a subject to reverse charge. You also need to make clear that customers need to pay VAT to HMRC, not to you. Do not show the amount of the VAT that is due to HMRC.
ERROR?
Don’t worry, for the first six months from the beginning of the new rules, HMRC will apply a light touch period if any genuine errors occur and you act to correct them and act in good faith to comply with new rules. You will be charged penalties if you deliberately take advantage of new rules and not account for them. As soon as you find out about any error, act quickly as it will be very difficult to correct and recover any overpayments made to HMRC. For that reason, upgrading your software will help you to comply with new rules and send your VAT returns in a timely manner.
- Will my subcontractors apply the VAT reverse charge? Will I have to pay the VAT to HMRC instead of them?
- Yes, if all conditions are met subcontractors are required to apply the reverse charge. If the subcontractor does not apply VAT or is not registered for VAT.
- What if I’m not registered for VAT? What if my customers not registered for VAT
- Do not apply the reverse charge unless both of you are registered for VAT.
- Do I apply the VAT reverse charge even if I’m paid gross for CIS?
- Yes, whether the constructor is paid gross or net, it doesn’t affect the VAT reverse charge. If all conditions are satisfied constructor apply vat reverse charge.
- What if I use the VAT cash accounting Scheme or VAT Flat Rate Scheme?
- Apply usual rules for VAT reverse charge. Do not use the above.
- How do I know my customer is an end user?
- Ask them and get confirmation in writing (via email or paper), you may want to prepare template with specific wording on the confirmation
For more details please refer to the HMRC website: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services
