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Limited Company V Sole Trader

There has historically been a point where having a limited company became more tax efficient than being a sole trader. This is due partly to the use of dividends and partly to the differences in how National Insurance is charged between the two models. These two factors are changing, and changing in ways that will make becoming a limited company far less attractive to many small business owners.

Dividends are a widely understood as the most tax efficient way to remove money from a limited company however as of April 16 this all changes. Dividends will be taxed above £5,000, at 7.5%, 32.5% and 38.1% depending on whether you are in the basic, higher or additional tax brackets. Whilst dividends were taxed previously, a tax credit worth the same as the tax cancelled it out. Now at basic rate tax any dividends over £5,000 will be taxed so if you draw a £10,000 dividend this will result in a £375 tax bill, not huge, but it mounts up.

Limited companies are currently able to access the Employment Allowance, this allowance, worth £2000 covers employers National Insurance up to £2000 for all employees, including single Director, one employee limited companies. As of April 2016 single employee, Director owned business will not be eligible. Companies will only be eligible if they employ more than one employee. Effectively this rules out most small limited companies where many have only the Director as the employee. On a £10,000 annual salary this will increase the costs by around £270.

Now there is another side to this, sole traders currently pay two types of national insurance. Class 2, which is a weekly payment of £2.80 and class 4 paid along with tax based on profits from your tax return. As of April 2018 the weekly payments will be abolished saving sole traders around £150 a year.

Corporation tax, currently set at 20% will reduce to 19% April 2017 and 18% in April 2020 and the personal tax allowances are set to increase to £11,000 April 2016 and £11,200 in April 2017.

So whilst there are gains and losses to those running limited companies one thing is for sure, there are far more factors to consider than how much the tax saving will be. For some small businesses they need the protection offered by becoming a limited company, and for those whatever the additional costs, it has to be. For others considering the change make sure you take advice before taking the step, the answer to which is best for you may not be a as simple as it once was!

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How to choose an Accountant

Believe it or not accountants come in all shapes and sizes. There’s the big business types and the small but perfectly formed. How do you find the one that’s right for you?

Firstly think about what you need from an Accountant. 

Do you want statutory requirements only ie just for the tax return and end of year accounts or do you want information to use in your business? 

How often do you want updates on your financial position?

Do you need payroll?

Are you happy doing your own bookkeeping of do you want to hand over a bag of receipts? 

What tax returns do you need? If you’re a limited company you’ll need personal tax and corporation tax returns.

Once you’ve a list of what you need ask around for recommendations from other business owners you know. Try Facebook, Twitter, LinkedIn and business networks you are involved in. 

When you’ve got the recommendations arrange to have meetings with your short list. Most Accountants will happily have a free chat to talk about what you need and how they can provide it. Ask them about the services they provide and see how they cross check with your list. Remember they are working for you to build your business so there shouldn’t be any ‘we don’t do that’ answers. If you need something then find someone who will provide what you need. 

Most Accountants will do packages with a monthly cost this prevents big bills and usually will give you the reassurance of a fixed amount to help you budget. Ask about the charge for any backlog, they should be clear on the charge and what you can expect for that and when. 

A good Accountant can make life immeasurably better, they can smooth the way, take a weight off your mind and free you up to run your business. They are the ones that are worth every penny. If you have an Accountant that doesn’t do that for you, think again, the right one should. They should explain things in a way you understand and give you clear information when you need to make good decisions about your business. 

You should feel confortable and trust them, it’s a gut thing, if your gut says its wrong then move onto the next. They should empower you to build your business with confidence, when you’ve found that you’ve a good partnership that will underpin the future of your business. 

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Tax year, as the end draws near 

The end of the tax year is nearly upon us which means the annual scramble for accountants, paper work and bank statements. So how can you make the year end go more smoothly? 

For the self employed and sole traders the most important thing is to keep your receipts in a logical manner and in a way you can store them for the 6 years HMRC need. Organising them by month is usually the most practical. 

Check your business account bank statements, make sure you have the all of them for full year 6th April 14 – 5th April 15. If you are missing any download and print them or request copies from your bank. Cross check the items to your receipts, if you do this and organise the receipts you are likely to be charged less by an accountant. 

Make arrangements with an accountant to do your tax return and agree deadlines with them. Accountants can get very busy and it takes time to do agent authorisation. Come January you may also find you end up paying a premium so make arrangements sooner rather than later.

Set up an end of year file, as documents arrive over the next few weeks put them in the file ready for your return.

If you work make sure you keep your P60 safe in your ‘year end’ file, these are hard to replace and are the definitive evidence of your income. If you’ve had more than one job in the period make sure you have a P45 or P60 for each one.

Keep interest statements as they arrive and check you have one for each account you have. If it’s a joint account photocopy it and keep a copy each.

The more preparation you can do now while everything is fresh in your mind the better. If you can make arrangements to do your tax return over next few months you’ll know what your tax bill will be without the last minute January surprise. Tax still isn’t due until January 31st even if the return is done earlier in the year.

When it comes to tax this really is a situation where prior planning prevents panic, maybe that should be the small business owners 4 P’s……. 

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Budget 2015 – The death of the tax return?

Today in the Budget Chancellor George Osbourne has announced the ‘death of the tax return’, to those of you who have the annual January panic it sounds great, but is all as it seems…..

The Chancellor has announced that from the next Parliament instead of submitting an annual self assessment our tax affairs will be managed by online accounts. We are promised these will allow direct debit payments, access to see the tax you owe at any time, the end of penalties for late filing and time taken dealing with tax affairs will be greatly reduced.

I expect the reality will be very different. Apparently much information will be collected directly, how will the happen? HMRC could inform them of payroll easily enough but what about all the transactions that run through the average business every year? If the calculation is to be on a rolling basis the information will still need to entered onto the account. You will still need to ensure the information is accurate and you have records to back that up, apart for very small businesses, more on that later. If you want to ensure you have the correct allowances and all your expenditure is viable you will still need an accountant to do that for you before the information is somehow uploaded onto this magical system. Or are they going to access our bank accounts to collect this information, that seems a completely different proposition and one that many people would be reluctant about!

For very small businesses it seems likely that there will be a removal of the requirement to hold accurate records of expenditure, though there has already been a move towards that with the small earnings exception and flat rate allowances.

Whilst this all sounds great, almost the holy grail of tax affairs my prediction is that as usual the headline information hides a multitude of detail yet to come making the reality very different. Bearing in mind the problems the Government have had in the past with IT systems there will be the inevitable delays and teething problems. That, however, won’t matter to the Government if it attracts them the votes of the self employed community. By the time reality hits the votes will be counted and the election long gone!

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National insurance, income tax and corporation tax changes for small businesses in the budget

Today’s budget held a couple of surprises for small business owners which along with income tax changes will make a significant difference to the smallest businesses.

The surprise announcement was the new Employment Allowance which will reduce the national insurance contributions of businesses by £2000 a year. Starting in April 2014 no business will pay national insurance contributions until their bill is greater than £2000. For small employers and especially for limited companies with one or two employees this will lift them out of National Insurance altogether.

The previously announced £10,000 starting band for income tax has been reinstated and will start in April 2014 too. For an individual with a limited company this will result in savings in National Insurance paid by the company. In addition the increase on the first tax band will mean that when paying themselves a wage of just under £10,000 nearly £1500 can be assessed on income tax prior to any tax being paid.

These two measures will reduce the profit earned by the business leaving less to be subject to corporation tax which has also been reduced by 1% to 20%. This three pronged approach will have most benefit to our smallest owner run business but larger businesses will also benefit. There will also be a simplified tax return system for small unincorporated businesses. Whilst there is considerably more than could have been done to support small business growth such as increasing access to finance,

For individuals there is little to get excited about with public sector pay frozen, caps on benefits and smaller mid income tax bracket however the income tax threshold increasing will make an impact on the lowest paid.

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HMRC in year business records checks, on book keeping, and tax, impact on small businesses

HMRC, will today restart their business record checks, after a break where they reviewed the initial implementation. Business Record Checks will target small and medium sized businesses but their impact is most likely to be felt in small businesses. The checks are focused around ensuring your records are adequate to meet your legal responsibilities including filing accurate tax returns and making the correct tax payments.

If your business is selected for a records check you will receive a letter from HMRC followed by a 10-15 minute phone call assessing your record keeping. If the Assessor believes you can meet your legal responsibilities from your records then that is the end of the process and you’ll receive written confirmation.

Following the call, if the Assessor feels you could do with some additional help to put your records in order, your details will be passed to the HMRC Business Education and Support Team who will contact you with information about self help, provide guidance and training. In real terms this is likely to mean another chat and some information as to how to keep records that meet your legal responsibilities.

The third outcome is that the assessor feels you are at risk of keeping inadequate records, and they will arrange to visit your business. At the visit the Assessors will look at a sample of records from the last 4 months and discuss how you keep your records. You are entitled to have an Accountant or Professional Advisor at the meeting, this is useful especially if they have been involved in preparing for the visit.

From the visit are two outcomes, the first is no further action, where you receive a letter saying your records have been checked and are believed to be adequate. The second is where you are believed to be keeping inadequate records, a penalty will be applied however this will be cancelled if you have improved your records so that at a follow up visit within 3 months they are found to be adequate. If you don’t improve your record keeping by the second visit the penal would stand and a further penalty can be applied.

In real terms if you have your records kept by a book keeper or accountant, especially if done on a monthly basis, you are very unlikely to have any more involvement that the initial phone call. If you keep your own records its worth having a professional do a mock in year records check for you to ensure your records are adequate to meet your legal responsibilities. If you do get the call and believe you are at risk of having inadequate records, contact a professional without delay, if you can show you have put things in place prior to the meeting then HMRC will look more favourably at penalties.

In all this the best way of ensuring compliance with all these checks is to demonstrate good financial housekeeping at all times so, keep receipts and invoices in order, record these accurately in a timely fashion in appropriate records and then from these prepare accurate tax returns, submitted by the deadline.

Money spent on keeping your business records is money well spent, in addition to record keeping a good book keeper will support the development and smooth running of your business. They can provide you with reports and information to help you when making capital purchases, starting to pay wages, profitability, stock turnover, credit control, tax efficiencies and more, all explained in a way you can understand.

When working out if your business can afford professional record keeping consider the cost of your time spent in carrying out book keeping, for example, and offset that against the cost, it will usually be favourable, and in addition there is the added value such a professional can provide to your business.

For a chat about mock business record checks and our range of book keeping, tax and accountancy services, contact Gill Friday on 0191 580 1303 or

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Coalition family reforms

So the coalition has announced their reforms for parental leave, from 2015, on the whole they are positive and will provide a framework for more flexibility for parents.

The crux of the reform to maternity leave is that parents can share the year that used to be available to new mums, this used to only be an option after their baby was 5 months. Families are different now, fathers are main carers, mums are more frequently the main breadwinner, both parents often work and juggle complex childcare arrangements between them. To be able to split the parental leave between parents in a way that suits them, even swapping back and forth is a real step forward. Unfortunately the barrier to extended leave no matter who takes it, is often money, until statutory pay increases parents will still be having to make choices based on financial reasons rather than on what’s best for their family. I would like to see a right to minimum period in addition before birth, those last few weeks are hard on any pregnant woman and trying to work as long as possible to give more time after the birth is physically very demanding, leaving mums exhausted before they start!

The right to attend ante natal appointments, for Dads, is also a new addition, the reforms give the right for Dads to attend two ante natal appointments, albeit unpaid, these scans and appointments are important for Dads to see their baby and also support their partners, remember scans are for medical reasons not the pretty pictures. However, it doesn’t go far enough, the right to attend all appointments with pay would be the ideal solution but a step forward.

These new leave arrangements will provide logistical difficulties to employers, especially smaller ones and a realistic framework of notice periods will need to be provided to enable employers to make appropriate cover arrangements.

Nursery provision is also covered in the reforms, the option to have 15 hours of free nursery from 2 rather than 3 is being extended to more low income families. This will reduce the cost of nursery provision for children in longer than 15 hours a week for a greater number of low income families earlier than at 3 as it is currently. Good early years education is has been proven to improve the life chances of children so the more children that can benefit the better, and from as young as possible, if that’s the choice their parents make.

Another strand is the rolling out of the right to request flexible working to all employees. Whilst this right doesn’t extend to a right to have the flexibility it does give employees the right to ask and to have that request considered and to receive a written response. There are many reasons why people may request flexible hours, illness, disability, caring responsibilities either for parents, or children or grandchildren, particular hobbies, sports or even just so you can slow down a little amd improve you work life balance. In the end it’s about gaining the appropriate balance of work and life for everyone, and this reform will hopefully allow more people to have the balance they want.

I think what is clear with all of this is that no one family solution suits all, parents and families need choices, about whether to work, and who will do so, for how long, who is best to take time off and what childcare if any is best for their child. This reform whilst not going far enough in some areas still gives more choice for parents in how they bring up their children and support their families, that has to be a good thing…… I never thought I’d say that about a coalition policy!

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Top tips for book keeping and tax returns

All small business owners recognise that feeling of dread when looking at the pile of receipts and invoices that really should be a set of books. This is the time to get them sorted, tax return time is coming up and without accurate books you could end up overpaying on tax or even worse paying a penalty.

Keep it simple
A set of books needs to be such that a tax inspector can easily find the data used in a tax return and match it to the original documents. Whilst computerised accounts systems are effective they maybe more complicated than you need. If you are set on doing the books yourself make sure the tools are up to the job by running it past an accountant or ask them to set you up a pro forma.

Don’t leave it until the last minute
There is nothing worse than Christmas having gone and the accounts still aren’t a set of books never mind ready to do the tax return. Do it now and if you can’t, accept that and find someone who can do them for you.

Have an expert calculate your tax
The tax calculators online aren’t always accurate (shock horror) think how many people over or under pay each year. Having your tax calculated by an expert is a double check to ensure you are paying the correct tax and claiming all the allowances you are eligible for.

Look for qualifications
If you are going to bring in an expert check they are qualified, anyone can do bookkeeping but those who are members of the AAT (Association of Accounting Technicians) are qualified to do this work and have met the requirements you need for membership of this body. They are skilled in bookkeeping, tax matters and end of year accounts. Always ask the question which professional body they are linked to, and check it out!

Doing the books is such a common gripe of small business owners, the question to ask is ‘how much could I earn in the time I’m doing the books?’ You’ll usually find that your time is better spent elsewhere as you’d pay a book keeper less than you’d make! Remember they can do it all quicker than you too, as its their area of expertise. As soon as you hand over your carrier bag, box file or ring binder you can stop worrying and get on with running your business!

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So what’s this Gill Friday all about

Well a blog, who’d have thought it! I have loads of self employed friends and from chatting to them the one thing they all bemoan is the lack of time they have. I’d been made redundant and following diagnosis of Chiari Malformation, a neurological condition, I was reassessing my future career. From this Gill Friday was born, a business that exists to support small business owners in making time. Time for holidays, time to develop the business or just time where you aren’t worrying about the books!

An extra pair of hands is often in short supply for small businesses but that’s exactly what Gill Friday does, an extra pair of hands, where they will make the most impact.

So far we are doing the books of a copywriter and shop owner, virtual reception and admin support for a therapy centre and covering in a shop so the owners have a day off together. This blog is about my life, my business and ways to make life easier for small businesses.

I’m a mum with two kids, a cat and constantly dying fish living one of the most beautiful place in Britain, the north east coast. I live with Chiari and its effects on my life, but I want to live my life to the full!