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R&D – impact on director remuneration

It’s generally more tax efficient for a director shareholder to extract the majority of profit from a company as dividends rather than salary. But what if the company is undertaking R&D? Is this still the optimum remuneration strategy?

Example

You are the sole director in a company that undertakes some R&D.  The annual profit is estimated at £140,000 for the year ended 31 March 2016 before taking into account the director’s remuneration.

You might think that the most tax-efficient remuneration package is £10,600 for 2015/16 to cover the personal allowance and then net dividends of £28,606 to take the director up to the basic rate band. You also need to consider whether the company can make an R&D relief claim and, if it can, how this might affect your decision.

Salary vs Dividends

If the director takes a typical remuneration package, then the net tax and NI savings over taking a salary of £39,206 would be £5,265, assuming the £2,000 employment allowance is available.  This saving is made because dividends received within the basic rate band attract no further income tax plus no NI for the director or the company. This more than outweighs the additional corporation tax suffered on profits retained for dividends.

Taking R&D relief into account

From 1 April 2015 the R&D tax credit for SMEs increased from 225% to 230%.  There is no R&D uplift on dividends received – only on salary. This means that paying a £39,206 salary would actually result in a saving over taking a small salary and dividends of £1,208.

What about a larger salary? In fact, if the client wanted to take out more than the basic rate band, then the salary may become even more tax efficient.  A £70,000 salary would result in net tax/NI due of £1,366 after the R&D relief (assuming there was sufficient profit to offset the CT relief), whereas a salary of £10,600 and net dividends of £59,400 would result in net tax/NI of £5,883 – so the saving by taking a salary over dividends is £4,517.

HMRC will generally not accept 100% of a director’s salary costs within the R&D claim unless it can be clearly demonstrated that the director was exclusively involved in R&D activity.

Pension contributions

While dividends don’t qualify as eligible staff costs for R&D claims, company pension contributions do.  New pension freedoms make pension contributions a much more attractive option, so you might want to consider this as part of your remuneration package.

If a company makes pension contributions of £40,000 for the director and they spend 60% of their time on R&D, the R&D relief on this will be £55,200 (£40,000 x 60% x 230%). This means that the overall CT saving on the pension contribution will be £14,240 (((£40,000 x 40%) + £55,200) x 20%). As there’s no NI due on pension contributions, this is an even more efficient option than taking additional salary.

The default response of a dividend being more tax efficient than salary may not be applicable if the director undertakes R&D work for the company as there’s no R&D uplift on dividends. So it’s vital to crunch the numbers before agreeing the most tax-efficient remuneration strategy.

Get the best deal for yourself

For advice on the best split between salary and dividends or help with setting up a limited company and registering for VAT, please contact Alterledger.

How does Principle Private Residence Relief work?

One family house for sale

Principle Private Residence Relief (PPR) is useful relief that saves you capital gains tax (18% for basic rate tax payers and 28% for higher rates tax payers) on your main residence, but how does it work, lets take a basic example

Property Purchase Date 30/04/2001
Property Purchase Price £100,000
Date Moved Out 30/10/2010
Letting Start Date 01/11/2012
Date Sold 31/10/2014
Sale Price £200,000

Capital Gains tax calculation

Sale proceeds 31/10/2014 £200,000
Cost (assuming no improvements) -£100,000

Gross capital gain £100,000

Reliefs available
Principle Private Residence Relief

Actual Occupation 9.5 Years
Started 30/04/2001
Ended 30/10/2010

Plus last 18 Months of Ownership 1.5 Years
The Property was empty prior to letting
Up to 18 months could be by ‘absence for any reason’

Total period where private residence relief is
available 11.0 Years

Total Period of ownership 13.5 Years

Principle private residence relief
£100,000 x (132 mths/162 mths) £81,481

Gain after principle private residence relief £18,519

Letting Relief
01/11/2012 to 31/10/2014 2.0 Years

Lettings relief is to lower of
£40,000 statutory maximum
£81,481 the principle private residence relief in this example
The gain for the letting period

Gain attributable to letting 2/13.5 x £100,000 £14,815
This is the lowest figure

Capital gain after reliefs £3,704

Annual Exemption for 2014/15 £11,000

So in this example there is no tax to pay

For further details see the HMRC Helpsheet 283

For gains on sales prior to 6 April 2014, PPR is available for the last three years of ownership of a property that has been a main residence at any time.  This is the case regardless of whether or not it has been occupied during the last three years of ownership.

But as a result of the 2014 Budget, from 6 April 2014 the automatic exemption from tax on gains in relation to the final years of ownership is now restricted to cover the last 18 months rather than three years.

steve@bicknells.net

New Childcare Vouchers from Autumn 2015

Childcare vouchers to be withdrawn for new employees

The existing benefits available in the form of childcare vouchers to employees will be withdrawn to new entrants in the Autumn of 2015.  The current scheme  saves National Insurance contributions for both employers and employees.  Employees also save income tax.

English: British National Insurance stamp.

English: British National Insurance stamp. (Photo credit: Wikipedia)

New scheme to start in Autumn 2015

The new scheme for childcare vouchers will not be as good for many employees who currently benefit from the current scheme, but where both parents work and are self employed, they can get the government to pay £2,000 towards registered childcare.

How do I set up childcare vouchers?

Childcare vouchers are set up through your payroll scheme and must be available to all eligible employees to receive the tax benefit.

Alterledger can help

For more information on saving employer’s national insurance and preparing for changes to childcare vouchers, contact Alterledger or visit the website alterledger.com.

New ‘Starter Homes’ scheme gives 20% discount!

Group of construction workers. House renovation.

The 20% discount is achieved by waiving local authority fees for homebuilders of at least £45,000 per dwelling on brownfield sites.

At the heart of the Starter Homes initiative is a change to the planning system. This will allow house builders to develop under-used or unviable brownfield land and free them from planning costs and levies. In return, they will be able to offer homes at a minimum 20% discount exclusively to first time buyers, under the age of forty.  Under the proposals, developers offering Starter Homes would be exempt from those Section 106 charges and Community Infrastructure Levy charges. The homes could then not be re-sold at market value for a fixed period – making sure that the savings are passed onto homebuyers.Gov.uk

To qualify first time buyers must be under the age of 40 and living in England

steve@bicknells.net

Letters for under 21s

Changes for employees under 21

From 6th April 2015 employer national insurance contributions will be abolished for under 21s.  If you employ anyone over 16 and under 21 years old you will need to use one of the new letters for under 21s in the national insurance category setting of your payroll software.

English: British National Insurance stamp.

English: British National Insurance stamp. (Photo credit: Wikipedia)

Secondary contribution rates

This table shows how much employers pay towards employees’ National Insurance for tax year 2014 to 2015.  The contribution rate calculated by your payroll software is set by the category letter.

Category letter £111 to £153

a week

£153.01 to £770

a week

£770.01 to £805

a week

From £805.01

a week

A 0% 13.8% 13.8% 13.8%
B 0% 13.8% 13.8% 13.8%
C 0% 13.8% 13.8% 13.8%
D 3.4% rebate 10.4% 13.8% 13.8%
E 3.4% rebate 10.4% 13.8% 13.8%
J 0% 13.8% 13.8% 13.8%
L 3.4% rebate 10.4% 13.8% 13.8%

National insurance categories

Most employees will have a category letter of A or D depending on whether or not they are in a contracted-out workplace pension scheme.  There are categories for mariners and deep-sea fisherman; the more common categories are shown below:

Employees in a contracted-out workplace pension scheme

Category letter Employee group
D All employees apart from those in groups E, C and L in this table
E Married women and widows entitled to pay reduced National Insurance
C Employees over the State Pension age
L Employees who can defer National Insurance because they’re already paying it in another job

Employees not in contracted-out pension schemes

Category letter Employee group
A All employees apart from those in groups B, C and J in this table
B Married women and widows entitled to pay reduced National Insurance
C Employees over the State Pension age
J Employees who can defer National Insurance because they’re already paying it in another job

Employees in a money-purchase contracted-out scheme

This kind of scheme ended in April 2012 but some employees might still be part of one.

Category letter Employee group
F Tax years before 2012 to 2013 only: all employees apart from the ones in groups G, C and S in this table
G Tax years before 2012 to 2013 only: married women and widows entitled to pay reduced National Insurance
C Employees over the State Pension age
S Tax years before 2012 to 2013 only: employees who can defer National Insurance because they’re already paying it in another job

How to claim zero rate of employer contributions

You should already have proof of age for all your employees.  A copy of a passport, driving licence or birth certificate will be required to show that your employee qualifies for the new zero rate of employer’s contribution.  The seven new categories are valid from 6th April and must be applied from the first salary payment after 5th April 2015 to benefit from the new zero contribution rate for employers.

What does this have to do with Auto Enrolment?

You need to have proof of age for all your employees aged under 21 to claim the zero contribution rate for employer’s National Insurance.  By the time of your staging date you must assess all your workers, based on their earnings and age.  To help you prepare for Pension Auto Enrolment you can make sure that all your employee records are up to date and that your payroll software has the full details for all workers including their date of birth.  This is a good opportunity to clean up all your employee data.

Alterledger can help

For more information on saving employer’s national insurance and preparing for Pension Auto Enrolment, contact Alterledger or visit the website alterledger.com.

 

Say goodbye to small earnings

Say hello to small profits

HMRC has changed the name of the threshold for paying Class 2 National Insurance from the Small Earnings Limit to the Small Profits Threshold.  If you earn less than £5,965 in 2015-16 you won’t need to pay Class 2 NI, but if you do, it will be calculated as part of your 2015-16 tax return and due with the rest of your tax by 31st January 2017.

English: British National Insurance stamp.

English: British National Insurance stamp. (Photo credit: Wikipedia)

Alterledger can help

For more information on filling in your tax return, contact Alterledger or visit the website alterledger.com to see if you can organise yourself better and cut your tax bill.
 

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