Starting up in business as a sole trader

In the UK, there are four different ways you can set up your business for tax purposes. They are Sole trader, Partnership, Limited Liability Partnership (LLP) and Limited company.

In the first of a four part series, we’re looking at sole trader status and offering an outline so you can decide whether it’s right for you and your business.

Sole trader

Being a sole trader is the simplest business structure available. It’s for businesses where one individual is running the business. If your business consists of you and the tools of your trade, then this may be a suitable business structure for you.

The advantages of being a sole trader are:

The business is simple to set up and simple to run;
There aren’t as much paperwork or regulations as there are for limited companies;
You don’t have to put your address on any of your business documents except the invoices you issue to your customers, which helps keep your details private, especially if you’re working from home; and,
When your accountant works out your business’s tax, if your business makes a loss in its first few years of trading you can set those losses off against your other income in current or previous years. This means that if you paid PAYE in the preceding three years, you may get this refunded by HM Revenue & Customs, which will help with your cashflow.

But there are disadvantages to being a sole trader:

There is no legal difference between you and your business. So if the business is sued, you’re sued – which means, in the worst-case scenario, that you could be at risk of losing your home, your car, and other personal belongings; and,
If your profits exceed a certain level, you could pay more tax as a sole trader than you would if you traded through a limited company

Who must I tell that I’m a sole trader?

You must tell HM Revenue & Customs that you’re in business and you do so by submitting form CWF1 (www.hmrc.gov.uk/forms/cwf1.pdf). You have to do this within 3 months of starting your business or you could receive a £100 fine. Unfortunately you can’t register in advance of starting your business.

HM Revenue & Customs then require you to fill in a self-assessment tax return every year.

And that’s it. You don’t have to tell any other official agencies. For example, you don’t have to tell the VAT man – unless you decide your business should be registered for VAT.

What taxes do I pay as a sole trader?

You’ll pay income tax and class 4 National Insurance on the profits your business makes.

It’s similar to having income tax and National Insurance deducted from your salary when you’re an employee. However, when you’re a sole trader you only pay tax and NI twice a year.

Unless your business is very small (its profits are under £5,595 in the 2012/13 tax year ), you’ll also have to pay class 2 National Insurance, which is charged at a flat rate per week and doesn’t vary with the amount of profit your business makes. In the 2012/13 tax year the rate is £2.65 a week and this is usually paid by direct debit, on a six-monthly basis.

What we can do for you

If you’re looking at starting a business, we can advise you on whether starting out as a sole trader is appropriate for you.

If being a sole trader is right for you, then we’ll register you as self-employed with HM Revenue & Customs within the required time limits.

Every year when we prepare your accounts and Tax Return, we’ll review your position to see whether being a sole trader is still the most tax efficient way for you to trade. If there are any tax savings in another trading style we will quantify them for you and advise you of the pros and cons of that trading style.

If you’re starting up in business, contact us today to make sure you select the right trading vehicle for you.

Remember, as members of the ICAEW Business Advice Scheme we offer free initial consultations to new businesses.

Pay Less Tax

We’re pleased to present the latest edition of our newsletter, Pay Less Tax.

As the title suggests, it’s packed with topical ideas from the recent Budget that could help you and your business pay less tax.

Topics covered in this issue include:

Cash accounting for small businesses;
The employer’s National Insurance allowance, which will effectively waive up to £2,000 of Employer’s National Insurance Contributions each year;
Changes to the beneficial loan rules, which means that there are planning possibilities for business owners who can utilise a £10,000 potential interest and tax free loan; and,
Much more besides!

Follow this link to read our Pay Less Tax Budget 2013 newsletter!

Are you director of you own limited company? It’s time for a payrise!

Do you run your own company?

One of the reasons people trade through limited companies, is that they can remunerate themselves using a combination of salary and dividends, to pay themselves up £41,450 (including dividend tax credits) in 2013/2014 without incurring any National Insurance or Income Tax charges.

From 6 April 2013 onwards we recommend that you draw a salary up to a maximum of £641 per month.

This is just enough to maintain your National Insurance contribution record for state pension purposes, but it isn’t enough to make you actually pay any National Insurance.

Your salary is a tax deductible expense for your company, which will pay £1,538 less in Corporation Tax as a result.

As £641 a month is less than you probably want to live on, additional funds can be drawn as dividends. These should only be paid from profits (after Corporation Tax) so you do need to have confidence that sufficient profits are available. If there are insufficient profits the surplus funds withdrawn could be classed as an “unlawful distribution”. These are potentially repayable to your company.

Assuming you have no income other than the £641 per month salary, then you can receive £30,382 in dividends in the tax year commencing on 6 April 2013 without incurring any personal tax liability.

If your circumstances are more complex, or you would like to discuss this in more detail, then contact us today.

Pay Less Tax – Spring 2013 newsletter

The latest edition of our newsletter, Pay Less Tax, is available to download.

Topics covered in this issue include:

the increase in the Capital Gains Tax annual exempt amount;
the forthcoming cap on unlimited tax reliefs (very relevant to people to offset trading losses against other taxed income);
changes to Employer childcare schemes;
disincorporation relief for businesses that want to cease trading as limited companies; and,
that current favourite, Real Time Information.

Pay Less Tax – Spring 2013

Pay Less Tax – 2013 bonus edition

The latest edition of our news letter looks at issues including the yo-yoing limits for Annual Investment Allowance and how this might affect your business, changes to the tax reliefs available for pension contributions, the cap on other tax reliefs, and changes to the Capital Gains Tax exempt amount.

Why not check it out and get in touch if any of the issues effect you?

Pay Less Tax – 2013 Bonus Edition

A birthday present from the Taxman

It’s nice to be given a present, and even better if you can claim a tax deduction on it! HM Revenue & Customs says that you can as long as you use them in your business. But as they cost you nothing, how much can you claim?

If you spend money on your business, you can expect HM Revenue & Customs to allow the cost against your tax bill. But as with all tax reliefs it comes with conditions. One of these is that the expense isn’t for a capital item, i.e. equipment lasting more than a year or two. If it is, there are special rules that still allow you to claim relief, but potentially spread over a number of years. These are called capital allowances. A claim for capital allowances is subject to a long list of rules and restrictions.

Most importantly, you can’t claim capital allowancess unless the equipment is to be used in the business.

If you own equipment in a personal capacity and decide to use it in your business, you can claim capital allowancess on the “market value” of equipment at the date you first put it to use in your business. The market value for tax purposes means the amount that you could expect to sell it for.

But what if you haven’t paid for a something because it was given to you as a present?

The Capital Allowances Act 2001 says that where a person receives a gift of some equipment which they subsequently use for business they can also claim capital allowancess. Again, the amount claimable is the market value at that date.

The problem is that as soon as you, or the person making a gift to you, walks out the shop with the equipment its value decreases.

If you receive a gift of an asset you intend to use for business, do it straightaway. The longer you hold onto it for non-business purposes, the less it will be worth and so the tax relief you can claim will also fall.

If you delay bringing the equipment into business use, you could end up waiting for tax relief a lot longer than you expect.

Have you been given equipment in the last four years that you have used in your business but not claimed tax relief for? If so, whether it’s a car or a computer, it’s not too late to make a claim under the “overpayment relief” rules.

If you are unsure about what assets you can claim tax relief on or would like help introducing them into your business to maximise your tax relief, then please contact us today.

Reducing the income tax you have to pay on 31 July

If you are in the self-assessment tax system then you may be due to pay your second Payment on Account for the year-ended 5 April 2012 by 31 July 2012. That’s just under two months away.

Dependent on you circumstances, it may be possible to reduce that payment, or avoid it all together.

If any of these apply to you, then we can look at reducing your payment:

1. If you have done your tax return to 5 April 2012 and the actual liability is less than the previous year.

2. You do not need to make a Payment on Account at all if the tax liability on the 5 April 2011 tax return was less than £1,000, or if at least 80% of the tax due for 2010/2011 was paid at source.

3. If you have not done your 5 April 2012 tax return but expect the liability to be less than it was last year, then you can ask the HM Revenue & Customs to reduce the Payment on Account. But beware, if you should have paid the original amounts after all, you will have to pay interest and possibly penalties if HM Revenue & Customs think you didn’t have a good reason to reduce the payments.

4. It is too late to make pension contributions for the year to 5 April 2012, but if you have made a loss in a business since 5 April 2012, you may be able to carry those losses back to the 2012 tax year and reduce the tax liability and payments. Note that this applies only to sole trader and partnerships (including LLPs), NOT limited companies.

Notes

• The tax rules state that you must pay an estimate of your tax liability for the year to 5 April 2012. Half is payable on the 31 January 2012 and the other half on 31 July 2012.

• The total amount you have to pay is equal to tha actual liability for the year to 5 April 2011, although if the total liability for that year was less than £1,000, you don’t have to make any Payments on Account.

• Once you have worked out your actual tax liability to 5 April 2012, you can get an immediate refund of any overpayment (with interest). Any balance payable over and above the Payments on Account does not need to be paid until 31 January 2013.

• The Payment on Account applies only to income tax, not to any Capital Gains Tax (that’s payable on 31 January 2013).

• If you have done your 5 April 2011 tax return and you are due to make a Payment On Account on 31 July 2012, you should have been sent a payment reminder with a payslip by HMRC in late June/early July.

• Details of how to pay your Income Tax liability can be found on HM Revenue & Customs website.

• If you pay late, you will be charged interest.

Taking money out of your company (with no personal tax bill)

For the 2012-13 tax year we advise director/shareholders to take the following ‘optimum’ monthly amounts out of their personal company:

• Salary £624 a month

• Dividend £2,624 a month or £31,488 a year

This will mean that your company will now save Corporation Tax of £1,497 on the salary.

This gives a total amount of £38,976 from 6 April 2012 and you will pay no personal tax provided you have no other income.

You can of course take more from your company but each additional £1,000 of dividend taken will cost you £250 in personal tax up to the first £59,000 of net dividend. It becomes more complicated once your gross income exceeds £100,000 in a tax year because you start to lose your personal allowances.

Working from Home Allowance increased

In addition, the tax free working from home allowance is increased to £4 per week (from £3 a week in 2011/12). This amount can be paid in addition to the above amounts.

Avoiding the 50% Income Tax charge

The 50% tax bracket for incomes over £150,000 isn’t here for stay. After 5 April 2013 it will be replaced with a 45% bracket.

So what does this mean?

If you might be liable for the 50% tax rate in the current tax year, and can control the timing of your income, then you can avoid paying tax at this rate.

Limited companies

Companies intending to pay bonuses or dividends in 2012/13 for employees or shareholders potentially liable to the 50% rate should consider deferring until after 5 April 2013.

Unincorporated businesses

Owners of unincorporated businesses who are in the 50% tax bracket* should consider shifting profits from 2012/2013 to 2013/2014 by changing their accounting date to one which ends shortly after the start of the next tax year.

* They should also consider incorporating their business or introducing a corporate partner. Give us a call and we can quantify the potential tax savings of either scenario for you.

Are you a limited company director? Time for a pay rise!

Many people who trade through a limited company pay themselves a basic salary as a director and take out the rest of their income as dividends.

Salary

The salary typically takes you up to the lower earnings limit for National Insurance purposes. This means that you maintain your National Insurance Contribution record for state pension purposes without actually having to pay any National Insurance!

For the year-ended 5 April 2013, the optimal salary for owner-directors to pay themselves from their limited company is £624 per month.

The only downside is that you have to register as an employer with HM Revenue & Customs and submit an annual payroll return to them. We can help you with that!

Dividends

The balance of the owner-director’s income is taken from the company in the form of dividends.

These are paid out of post-tax profits, so be sure your company has profits it can distribute.

While you are within your basic rate tax band, no additional Income Tax is payable on dividends.

From 6 April 2012, the higher rate threshold is £34,370.

Assuming that you no other income* besides your salary of £624 per month, your company can pay you a cash dividend of £31,488 before you would have any Income Tax liability.

This may vary depending on your individual circumstances. Please check with us to see what’s best for you. This information is intended for guidance only.

* Other income includes bank interest, dividends, rent, etc

Starting up in business as a sole trader

Sole trader

Pay Less Tax

Are you director of you own limited company? It’s time for a payrise!

Pay Less Tax – Spring 2013 newsletter

Pay Less Tax – 2013 bonus edition

A birthday present from the Taxman

Reducing the income tax you have to pay on 31 July

Taking money out of your company (with no personal tax bill)

Avoiding the 50% Income Tax charge

Are you a limited company director? Time for a pay rise!

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