Business advice

[DaveT]

We all have choices and make our decisions with the best information and prospects in mind at that time. When the time changes, the decisions that were right then, might no longer be the best-fit today. One thing for sure, self-employed (not Limited Company Directors) who have been keeping profit declaration low and VAT low by taking cash-in-hand payments without full invoicing will feel the pressure now. They certainly don't get any sympathy from me.

I think you already said that several pages ago. We get the picture.

 

[cheshiremaserati]

You are also forgetting the sneaky tax increase for those earning between £100k and £124k. The personal tax-free allowance is reduced by 50p for every pound earned over £100k. which means any income over this is marginally taxed at 60% until income over £124k, whereby the marginal rate reverts back to 40%.

I thought the personal allowance was reduced to zero for earnings over £100k. I never took much interest on these figures are they are well out of my range!

 

[Wanderer]

This is bothering me, still.

Many limited company directors may not be 'the worst off in society' but they are small business people basically working for themselves in tiny companies, and they have incorporated mainly because they have been required to by their clients or quite reasonably seek to avoid unlimited personal liability.

The choice to pay themselves partly or mostly through dividends is not some 'fat cat' scheme dreamed up by lawyers in the Cayman Islands, but a legitimate option made available to them by normal UK legislation and HMRC rules.

The tax advantage is certainly NOT 'pay 7.5%' vs 'pay 40%', but it is complicated and I don't know the details. I seem to recall my accountant saying it was 'pay 21%' or 'pay 25%'.

Any such tax advantage is a tiny privilege for going without sick pay or holiday pay, and bearing loads of personal income risk. If the proposal I have been working on all month is not accepted, then I make no money. Big company employees in PAYE tend to get paid whether they work or not.

And I am not taking advantage in other ways as some do. I have not declared Verbier as a suitable place to go on a February business research trip (unlike 80% of those on a recent 'boys' ski trip), I have not made my wife redundant to collect £30,000 tax free (as a friend of mine did, twice), and my children's mobile phones are not company phones.

It seems to me ridiculous if a, say, a painter & decorator with billings of £26,000 per year, which he has been taking out of his company through PAYE can get £1,700 a month, but if he has been taking it out through £10,000 of salary and £16,000 of dividend he gets £600. (I suppose you could think of that as a 65% tax rate on the payouts - doe that seem fair?) And if he and his wife work together in the business and were billing £52,000 a year between them, then they get nothing.

Agree, this method was forced on us by the Tories, the Agencies Act, forget the year that forced an incorporated body to stand between client and contractor.

The killer is NI not the PAYE, as directors EENI and ERNI is uncapped, as as directors we pay both, which amounts to a tax of roughly 25% on gross, then normal PAYE, means potentially a tax of nearly 70% over the thresholds, 45% plus 25%, and no sick pay of holiday pay. It is grossly unfair. And the new but now postponed IR35 rules make it impossible to survive, when you consider most contractors are mobile, could expense travel and accommodation, but won't be able to in future. Daft. A huge flexible workforce of very experienced and able people taxed out of existence.

 

[D Walker]

Agree, this method was forced on us by the Tories, the Agencies Act, forget the year that forced an incorporated body to stand between client and contractor.

The killer is NI not the PAYE, as directors EENI and ERNI is uncapped, as as directors we pay both, which amounts to a tax of roughly 25% on gross, then normal PAYE, means potentially a tax of nearly 70% over the thresholds, 45% plus 25%, and no sick pay of holiday pay. It is grossly unfair. And the new but now postponed IR35 rules make it impossible to survive, when you consider most contractors are mobile, could expense travel and accommodation, but won't be able to in future. Daft. A huge flexible workforce of very experienced and able people taxed out of existence.

Yep....I enjoyed the flexibility of short term contracts; 6 months to a year, was quite happy to make sure I provisioned for a rainy day etc.... but with all the changes etc I went staff...
Taxi drivers, window cleaners etc......they will all be fooked with their lack of declaration...

 

[cheshiremaserati]

I think you already said that several pages ago. We get the picture.

Really? Well it must have been a ghost post 'cos I cannot see it back in the trail and not in reply to MarkMas post.
Curious......

 

[DaveT]

Spot on. No sympathy in fact.....

3 days ago. There you go...

 

[CatmanV2]

I thought the personal allowance was reduced to zero for earnings over £100k. I never took much interest on these figures are they are well out of my range!

Well that's why the rate goes up....

C

 

[Ebenezer]

I've been forced into going umbrella and the tax is eyewatering. But mustn't complain.
Eb

 

[Silvercat]

The actuarial data shows that few people survive to consume their pension pot to depletion level zero. That means the pension fund retains your unused pot and even aftre paying out for a 50% spouse pension, there is still money left in the pot after the second death.
The message therefore would be to consider taking your 25% sum tax free in favour of reduced pension today and invest that cash wisely with equities for capital growth (as equities have hit a real ,low point which is always the best point to buy them), some investment grade fixed term bonds, gilts (underwritten by Government) and a spread of cash holdings to create a diversified portfolio. Consider the use of a discretionary wealth management service (though check the fees (typically annually around 1.5% - 2.25% of funds) that will manage the stocks and pickings on a discretionary basis - either as shares purchased for you such as offered by DeVere Chase or as collective investment unit trusts. The data shows that markets WILL recover over the long-medium term (at least a 5 year horizon, preferably a 10 year horizon). Sadly too many people bail out of shares at stock markets fall and buy when the stock markets are high and rising very rapidly (just ripe for levelling off for a dramatic fall). Don't invest in equities if you need the cash in the 5 year period (and I'm not talking about penny shares or buying 250,000 shares today at £10 and selling in the 48 hours at £10.50 (bed and breakfast).
Use up your ISA allowance by putting the shares into a S&S ISA wrapper so that returns and cash are free from CGT and Income Tax. Your discretionary wealth manager can do this for you. Initially you ill take a hit from charges for investment. But the markets will pick up - history bears it out.

Well I recieved all of this same advice last year from Close Brothers before I retired after 36 years but I decided to ignore it because I wanted the security of a guaranteed company pension without having to worry about the fluctuations in the market plus I didnt need the capital having also taken a voluntary redundancy option. For now at least it looks like it was a good decision. My brother who manages his own pension portfolio is sitting on a 33% paper loss right now. OK to manage this in your 60's but by the time you get into your 70's or even 80's, you really dont need the mither or the worry, especially if your investment returns need to be part of your pension income. But at the end of the day it all depends on everyones individual circumstances so there is no wrong or right answer TBH.

 

[rockits]

I am also one of those caught in this a little bit with low salary and the rest made up of dividends. To be honest the 80% contribution from the govt isn't the total issue for me as I have saved for a rainy day in the business and personally so have the ability to weather the storm for a few months. If the business has continued interruption to be able to function and revenues fall due to this then that situation may change. Like most we will monitor this regularly and ride/react to the scenery as it changes.

There are a couple of reasons for this.

1. N.I. places a massive burden on a small business. For every PAYE employee the employer has a burden of 13.8% as an employer. If you are a classic and common owner/Director this in effect works out almost doubled with 13.8% as the employer then 12% as an employee. When you add Corporation Tax, then personal tax it becomes an awful lot of tax. I have no issue with paying a fair level of tax but this is getting ridiculous. It smarts even more when both the employer and employee/Director is offered little no support by the Govt. during these tough times.

2. You don't how profitable the business will be so I only take money out of the business as and when it can easily sustain it. Always keeps us on the right side of things. However I don;t take money out of the business as soon as it arrives and take all I can as son as it arrives. This is different to a PAYE salary which is very much on a month to month basis. You don;t know if you can afford next month's payroll the following month often until the end of next month. If It took a fixed salary every month like a conventional employee we might end up dipping in and out of cash-flow/overdraft etc. so it is never always smooth. What happens if you pay yourself a fixed salary and pay yourself too much than the business can afford and have paid all the employer and employee N.I.'s? It would get messy.

3. Sometimes a month or year is good and sometimes bad. Working this way allows me to flex for the business.

If you take any profit in a business the tax levels for small business are pretty staggering if you run it in e totally conventional way. You earn some profit then need to take all this out of it before you can have a little bit yourself to put food on the table for your wife and children. Give or take:
Corporation Tax @ 19%
Employer NI @ 13.8%
Employee @ 12%
Income Tax @ 20% (I don't hit higher rate!)

If you took say circa 120k or 30% gross profit for example on £400k turnover an average business of this size would have
Office & Rates @ £25k
Balance = £95k

So out of that £95k you have to pay some other staff and yourself. Then pay Corporation Tax and then your personal NI & tax. We don't have offices now as I have a detached office in our garden the business gets for free. We wouldn't find it so viable to pay for an office really.

We are hardly ripping it out of the ballpark with these numbers! Then with the current issues the govt give us no help other than an interest free loan. Then expect us to carry on as before and hopefully better than before then grow to help pull us out of the quagmire.

That is why to me it smarts a bit. We aren't rich Directors making off with all the lolly.....clearly.

 

[cheshiremaserati]

Well I recieved all of this same advice last year from Close Brothers before I retired after 36 years but I decided to ignore it because I wanted the security of a guaranteed company pension without having to worry about the fluctuations in the market plus I didnt need the capital having also taken a voluntary redundancy option. For now at least it looks like it was a good decision. My brother who manages his own pension portfolio is sitting on a 33% paper loss right now. OK to manage this in your 60's but by the time you get into your 70's or even 80's, you really dont need the mither or the worry, especially if your investment returns need to be part of your pension income. But at the end of the day it all depends on everyones individual circumstances so there is no wrong or right answer TBH.

It depends if you retired on a 'defined benefits scheme' or a 'defined contribution scheme'. Either way, and especially in a defined benefits scheme, even after a second death with a spouse pension (typically 50% of the pension earner), the pension pot is not depleted. And so it goes remains in the pension pot. If you had 5aken out the msx 25% tax free out of the pension pot in exchange for a reduced pension, there is s view the money is better with you. But it is down to the person taking the pension to decide whst is right for him or her.

 

[doodlebug]

I thought the personal allowance was reduced to zero for earnings over £100k. I never took much interest on these figures are they are well out of my range!

No, as I found out to my cost a couple of years ago. First world problems and all that. Still paying HMRC for my ignorance on this matter.

 

[doodlebug]

I've been forced into going umbrella and the tax is eyewatering. But mustn't complain.
Eb

I agree Steph, I am not in difficulty but it seems that some of us are shouldering more than our fair share. It looks like I'll never be able to afford that replacement Maserati coupe that they've been promising us for the last couple of years.

 

[Silvercat]

It depends if you retired on a 'defined benefits scheme' or a 'defined contribution scheme'. Either way, and especially in a defined benefits scheme, even after a second death with a spouse pension (typically 50% of the pension earner), the pension pot is not depleted. And so it goes remains in the pension pot. If you had 5aken out the msx 25% tax free out of the pension pot in exchange for a reduced pension, there is s view the money is better with you. But it is down to the person taking the pension to decide whst is right for him or her.

Agreed...its all down to "do you need the 25% to self invest and take the risk... vs the security of the maximum pension benefit". I was very lucky to still have a final salary pension after 36 years and I didn't need the lump sum. Also got a 10 year life insurance thrown in at x3 my final salary which was also a factor in deciding what to do.

 

[Phil the Brit]

There is no such thing as free loan. After this is all over the loans that the UK government have taken must be paid back - and printing money (quantitative easing) has to be accounted for in the economy. By logic, taxes will have to rise to pay off these bail-out measure. Corporation Tax? Inheritance Tax? NICs? Direct Income Tax. There will be a levelling of the playing field for the self-employed and the employed (Rishi Sunak already highlighted that anomaly in treating self employed the same as PAYE employees). That is a BIG hint that self employment NICs and tax treatment is likely to be aligned to PAYE terms. Otherwise why mention it?

Both direct and indirect taxes will rise? Remember pre-Margaret Thatcher? What was the basic rate of income tax then? And inflation? I remember mortgage interest rates of 17% with LTV of maximum 90% subject to 2.5 times salary or 3.0 times joint salaries. We may even see a Tory Government consider hypothecated taxation for the NHS to ensure capacity and appropriate funding (people and accountants have swung to and fro on this one). Corporates will likely question decisions to off-shore manufacturing to China and elsewhere - what if there was another pandemic with lockdown of flights. Many airlines will be insolvent, save for a handful that the Government may bail-out.

This pandemic has taught us one thing - that infections can be highly contagious and bring countries and continents to a grinding halt and kill many people at a stroke as well as economically and socially kill countries. Viruses mutate, a vaccine for Covid-19 may not be enough if there is a surge of a mutation (like there is with flu). Perhaps Governments that allow wet markets must shut down all such operations wherever they are in the world (Cambodia, Vietnam, Indonesia etc). Some might even claim that China must pay for economic damage inflicted on other countries - the virus started from the wet market where civets were piled on top of pangolins were piled on top of rabbits, were piled on top of bats and each of them urinating and cr&apping on those below in the cages with cross-zoonotic transmission (that is a fancy word for cross animal transfer). Then a guy crudely slaughters the live animal throwing splatter of the animals body fluids and blood in an aerosol that is inhaled by him and customers walking around. They go home and infect others. Those infected individuals (with and without symptoms) then become tourists and spread it outside of China and the chain of infection grows and grows.

https://www.dailyexaminer.com.au/news/chinas-wet-markets-should-be-banned/3983469/

https://www.foxnews.com/world/what-are-the-wet-markets-coronavirus

Well that paints a real tasty picture! Sometimes you read something and can't get the picture out of your head.

 

[MarkMas]

Things are looking bad for small businesses. It is with great sadness that I have to mention the loss of a few businesses in my area. A local bra manufacturer has gone bust, a submarine company has gone under, a manufacturer of food blenders has gone into liquidation, a dog kennel has had to call in the retrievers, a company supplying paper for origami enthusiasts has folded and the local baker is desperately in need of some dough.

 

[cheshiremaserati]

Well that paints a real tasty picture! Sometimes you read something and can't get the picture out of your head.

Be under no illusion: The death toll and infection rates will be higher than predicted. We are unlikely to see a return to life as it was before Covid-19. But economies will recover - history bears that out.

 

[DavidL]

We don't have offices now as I have a detached office in our garden the business gets for free.

I'm sure you probably do but wouldn't it be better to charge the business rent for the office, you being the landlord?

 

[cheshiremaserati]

No, as I found out to my cost a couple of years ago. First world problems and all that. Still paying HMRC for my ignorance on this matter.

Well, as my accountant says to me, "if you're earning it, you can afford to pay the tax". There was a time in the distant past he told me when if you earned £100k, it wiped out your personal allowance so you had no nil-rate-tax income whatsoever. Now there is a reduction of £1 of personal allowance for every £2 earned above £100,000 and he goes on to tell me that therefore you don't get a personal allowance on taxable income over £125,000 based on this tapered reduction in personal allowance.

Personal Allowances
The Personal Allowance is the amount of income a person can get before they pay tax.

Allowances	2019 to 2020	2018 to 2019	2017 to 2018	2016 to 2017
Personal Allowance	£12,500	£11,850	£11,500	£11,000
Income limit for Personal Allowance	£100,000	£100,000	£100,000	£100,000

The Personal Allowance goes down by £1 for every £2 of income above the £100,000 limit. It can go down to zero.

Things get complicated for many people. Anyone have Director status of limited company, shareholders, partners in a LLP or similar company structure, offshore investments, Dividend earners, interest income over £1000, foreign investment income, foreign witholding tax, rental income (domestic and foreign) etc. etc. A good accountant is worth his/her weight in gold to ensure tax returns are compliant and to know that the tax man is not gonna be knocking on our door for unpaid tax or any illegal avoidance or evasive practice.

I should add that my remarks are based on HMRC rates in England before someone jumps in to say it is b&ll&cks and not the case for Scotland or Wales or NI as different territories in the Union. As I have never lived outside of England, I have no clue as to such things in other parts of the Union.

 

[rockits]

I'm sure you probably do but wouldn't it be better to charge the business rent for the office, you being the landlord?

I used to with my old office at the old house as had others involved in the business so it was the only way to make it fair.

For the last 5 years since I moved I haven't as have had others involved in the business so it is kind of neutral. Either the company pays less tax if the rent cost is levied to it. However I pay more tax as the rent is income and taxed. There or thereabouts my accountant tells me it is pretty neutral. If others become involved in the business the rent cost could be reinstated again.

Unless anyone has any different thoughts and my accountant is not 100% correct or doesn't have a better more efficient way to deal with it

It is 100% business only use with zero personal use/gain as detached from the house and completely separate to private/personal use. In addition some of my garage and stable block is used for business/work storage.