The Fizz! Blog

Going on maternity leave? Think twice about opting out of your employer’s pension scheme

When someone's about to go on maternity leave, they'll quite often look at trying to temporarily cut all unnecessary overheads.  You might think that one sensible step would be to opt out of their employer's pension scheme for a while.  Cutting this particular overhead is probably a very bad idea though.

If your employer operates their Automatic Enrolment pension scheme on the most common basis, you’ll be making a contribution each month, and so will they.  Those contributions vary according to your income, and get capped if you’re earning more than £50,000 per annum.

If you go on maternity, your income drops, and so do your contributions.  In fact, after the first six weeks of leave, from which point your salary will probably just consist of basic Statutory Maternity Pay, they’re likely to drop to zero.

But, crucially, your employer’s contributions do NOT reduce at all.  They’re obliged to carry on paying into your pension pot at the level mandated by your normal salary!  Other non-salary benefits work on the same basis, too; they can’t take away your company car or withdraw your medical insurance, for example.

So, by opting out at the start of maternity, an employee could lose nine months of employer pension contributions, whilst saving herself virtually nothing.  A very easy trap to fall into!

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Claiming Capital Losses

If you sell assets like rental properties, shares or cryptocurrency at a profit, you have to consider whether you have Capital Gains Tax (CGT) to pay for the tax year.  But you might also have sold some other assets at a loss in the year - if so, you can deduct those losses from your profits to get to a net profit or loss for the year.

If you wind up with net gains, but they’re less than the Annual Exemption - this year, £12,300 - then there’s no CGT to pay and you move on.

If you wind up with net losses, then you get to hang on to them.  If, in a future year, you have net gains over the Annual Exemption, then you can set those old losses against them, using just enough to get down to the Annual Exemption and eliminate any tax that would otherwise be due, and carrying anything left forward still further.  It might be that you never have sufficient gains in a future year to ever use them, in full or at all, but they’re there if you do.

Capital losses are about to become more valuable, because the Annual Exemption is being cut sharply.  Next year, it’ll be only £6,000, the year after, £3,000.  That means that more taxpayers will be dragged into the CGT net.

There’s an easy trap to fall into.  In order to establish entitlement to most losses, you generally have to claim them within four years of the tax year they occur in (there’s a shorter deadline for some niche cases).  That could be on your Self Assessment Tax Return, if you have to submit one for the year, or you could just do it by letter or some other way.  But you have to somehow tell HMRC before that deadline.  We recently saw a case where someone had losses in 2013-14, and gains over the Annual Exemption in 2021-22.  Unfortunately, HMRC hadn’t been told about the losses, so it was too late for the taxpayer to take advantage of them.  Fortunately, the losses weren’t enormous.

A final consideration - you might need to make a judgement about how much effort you’re prepared to put into quantifying losses that you’re not certain will be useful.  If someone is pretty sure that they’ve got losses this year, but they’ll have to put research time into establishing the history of the share transactions, or pay an adviser to work out the actual loss, should they do it when they don’t anticipate having an opportunity to use the loss in future? To begin with they can kick the can down the road, by making a note for three years’ time to look at it again.  The point will come, though, where they have to make a judgement on whether to do the work before the deadline passes.

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My customer hasn’t paid their invoice - what can I do?

Understandably, many freelancers and other small business owners are reluctant to chase payment of invoices - they fear that it might cause problems in their relationship with the client.  In honesty, we think that fear is almost always misplaced - businesses that don’t pay invoices on time generally see that as part of the general cut-and-thrust of commercial life, and are likely to think that chasing them is a perfectly reasonable thing for you to be doing!

But if you’re still not comfortable doing it, there are a couple of other routes you could consider in order to depersonalise things.  You can fire reminders out of your accounts software (we’ll discuss statements of account shortly), rather than sending them personally (Xero even has the facility to send payment reminders automatically when an invoice becomes overdue - though if you do that, you need to make sure you keep everything up to date, lest Xero remind someone who has already paid!).  Or (/and) you could create a separate email address for your “accounts department” and have financial stuff go through another account entirely.

Broadly, businesses tend to pay invoices based on one of three triggers:

• The invoice (either paying it immediately or in some sort of scheduled pay run).  In an ideal world, you only have this type of customer!  Obviously the important thing with these customers is just to get an accurate invoice out on time to the right person.  If you’re dealing regularly with repeat customers, you might also consider getting something in place to just collect money from them automatically without their needing to lift a finger.  We use GoCardless for 95% of our invoices; it collects them automatically by direct debit on the due date and does the Xero reconciliation of the payments for us, saving time and effort all round.
• A statement of account.  This is a periodic (usually monthly) document summarising what a customer owes at a given point in time.  Big businesses are very used to issuing and receiving them.  They’re very easy to generate and send out via any mainstream accounting software.  If you have multiple customers owing you money at any point in time, you might want to just diarise sending out statements of account every month to anyone with an overdue invoice (we do), as this will quite often prompt payment of a forgotten invoice, or a request for a duplicate of one that’s gone astray.
• A legal threat!  It’s actually obviously highly unusual for that to be someone’s literal trigger, though we have been aware of a couple of local businesses over the years who routinely wouldn’t pay a bill until they got a threat of legal action.  Again, for them it just seemed to be part of the game of business.  Fortunately we were not amongst their suppliers!   We have seen clients have success getting payment of overdue invoices simply via a lawyer’s letter, either from a low-cost online provider like Thomas Higgins, or a firm they have a broader relationship with.  Of course, we’ve also seen clients who’ve had to go further down the legal process.

Something else to consider - if an invoice is paid late, you’re entitled to charge interest.  This is another thing that businesses are understandably reluctant to do - but which in reality we’ve never seen cause a problem.  Another part of the game for late payers.

The Small Business Commissioner has some more useful suggestions about how you might go about making sure invoices to your customer are received, processed and paid properly.  Try to get past any reluctance to assert yourself, especially once invoices are actually late - from that point, most customers will genuinely recognise you’re just doing your job!

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Can I make pension contributions for family members through my limited company?

The rules on how much money can go into someone’s personal pension in a tax year aren’t intrinsically complicated - there are just lots of them. Broadly:

• Almost anyone (even an infant) can have up to £3,600 go into a pension scheme or schemes in a tax year.
• The cap each tax year (the Annual Allowance) on what can go in is £40,000.
• However, unused Annual Allowance from the prior three years can be used too (if you had a pension pot of some sort in place at the time).
• Personal contributions in any year are capped at earned income.
• Employer contributions aren’t capped in that way (so a director with a small salary isn’t limited to contributions equivalent to that salary - their company can contribute more).
• Annual Allowance may be reduced for those with income over £200,000.
• The Lifetime Allowance may prohibit or penalise contributions for those with very big pension pots.

All simple individually, but the synthesis of them can be complex!

There’s another consideration involved where contributions are being made via one’s own limited company. For the company to get tax relief on the contributions, the same standard must be met as for any other overhead - is the cost incurred wholly and exclusively for the purpose of the company’s trade? In practice, that means - does the bundle of PAYE salary, pension contributions and other benefits that the director is receiving represent a reasonable bargain for the work being done, or is it excessive?

For a typical fee-earner, generating the company’s income, it’s almost certainly going to be fine. If your company is making enough money to sustain £12,000 of salary plus £40,000 of pension contributions a year, a £52,000 “package” is unlikely to be excessive and there should be no trouble with the company getting tax relief.

A fairly common question from people already doing that is - can I do the same for my spouse or partner too? That’s much more problematic. If they’re doing no work for the company, then a package of £1 would be excessive, let alone any greater amount! If they’re doing some work, you’ll have to take a position on whether the proposed contribution would meet that “wholly and exclusively” test, when considered alongside any PAYE salary also being paid.

In practice, this tends to mean that for fee-earners, big contributions are fine, whereas for a spouse doing some admin support, say, material contributions aren’t really defensible (and there would instead be an argument for their being taxable as income on the director instead!). It’s easy to get confused about the mechanical “how much can go into the pot” rules, and overlook that aspect.

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Why you should raise sales invoices on your accounting software

It’s very surprising how many businesses don’t create their sales invoices on their accounting software. It’s far from uncommon to take on a client and find they create sales invoices elsewhere, send them out, and track whether or not they’ve been paid using either a spreadsheet - or even via some more informal system. This is a shame, for a few reasons:

• It doesn’t save any work at all - it probably creates more work, as a VAT registered business is going to have to recreate the invoice in its accounting software anyway.
  It could mean confusion. They might send out an invoice, amend the invoice, and give the old invoice to their accountant for accounts or VAT prep, meaning there’s work to be done to figure out why the amounts coming into the bank don’t match what’s being paid.
  As a worst case scenario, it could mean they lose out financially. For example, they might send out an invoice, forget to track it, never be paid, and never notice.

If the invoice is created in accounting software in the first place, and emailed out from there, there’s one unambiguous source of truth about how much the invoice is for (if you amend it, you’ll amend it in the software), and one unambiguous source of truth about whether it’s been paid or not - amounts coming into the business bank account must be logged against the invoices they’re settling, so if everything’s up to date you can generate a list of outstanding invoices at the click of a button.

The most common objection to generating invoices using accounting software - particularly amongst businesses in creative industries - is that they won’t look precisely as the business would like them to look. That’s true - but they really do look fine, and are quite customisable, and you’ll also know for sure that they include everything that’s legally mandated to appear on an invoice. Businesses are very used to receiving invoices generated from all the major accounting platforms and are unlikely to judge the appearance of a Xero or FreeAgent invoice with your logo on harshly. Ultimately, the important thing about an invoice is that it gets paid!

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What accounting records are for

Usually when keeping records, sole traders are focussed purely on capturing things that will be tax deductible. This is a perfectly understandable perspective. However, although accounting records are necessary if you’re to eventually complete a robust tax return, that’s really a by-product - really their main purpose is to give you some useful information as you go along.

For example - you might capture the costs of all your tax-deductible travel and meals through the year. You’ll then include them in the costs you record on your tax return, to reduce your tax bill. Great. But maybe you might also look at the amounts and think - “How much?? I’m going to start cycling/taking a packed lunch in/whatever”.

That’s what accounting records are for. It’s nice to save tax on costs if you’ve incurred them and they’re tax deductible. There might be as much or more benefit, though, in reviewing and contemplating the records. As well as saving a few hundred pounds in tax for last year, you might save thousands of pounds of actual expenditure in future years.

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HMRC pushing back on early furlough claims

In Spring 2020, a company called Carlick Contract Furniture Ltd furloughed much of their workforce, and began claiming funds from HMRC under the Job Retention Scheme to cover the cost. As part of that process, they did something that a lot of other employers will have done. They included a couple of new employees, who had been taken on in February 2020, but hadn’t been paid that month - as is often the case with people who start late in the month, it was agreed that they’d just be paid for their February hours on their March payslip.

However, the JRS rules were actually unambiguous on this point. Although people were quite understandably wanting to stretch those rules in the interest of fairness, it was made quite clear that to come under the scheme, an employee had to have formed part of a formal payroll report to HMRC prior to 19 March 2020. For most monthly-paying employers, that meant the person had to have been paid at the end of February. It wasn’t enough to have been an employee, you had to have had salary actually reported to HMRC. This isn’t something that emerged later on - it was widely discussed on accounting and payroll forums and everyone advising on claims and making them knew or should have known about it.

HMRC picked up the point, and demanded Carlick repay the money. The First Tier Tribunal has ruled (whilst expressing some regret) that they’re within their rights to do so, despite the claim having been in the spirit of the rules. This is obviously very unfortunate for the employer, who hasn’t benefited from the money and was really being kind to the employees, who otherwise they’d have simply cut loose. But it was always clear that the claim was not permitted by the letter of the law, so if you made a similar claim you should expect there to be a good chance that HMRC will come and ask for the money back at some point, and that if they do then you’ll have to pay.

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It's party time! Tax at Christmas 2022

After a party-free 2020 and a party-light 2021 perhaps it's going to be a party hard 2022!  If you're hoping to get the party started, here's a reminder about the tax rules around work Christmas parties and gifts.

If an employer provides a Christmas party that's available to all of its staff (note that this really applies to PAYE employees, as opposed to, say, freelancers), where the cost is less than £150 per head, then it can reclaim all of the VAT and deduct the entire remaining cost from its profits before working out its tax bill - effectively, if a normal VAT-registered limited company holds its party at a normal VAT-registered venue, every £100 spent on the party ends up costing the company £67 in the long run, once they've got the VAT back and saved corporation tax on what's left.  Actually, those allowances apply to annual events, not specifically Christmas ones - so you could have, say, a summer barbecue *and* a Christmas party costing less than £150 a head in total and still reclaim all of the VAT and get tax relief on the balance.

If you want to give a Christmas gift to staff, then in practice HMRC consider a relatively small item like a turkey or a fairly normal bottle of wine to be trivial, and won't try to tax the employee on the value of the gift (as we've written before, sporadic gifts and benefits each valued at £50 or less are explicitly considered trivial by HMRC). Assuming there's VAT on the gift when you buy it, then once more the ultimate cost of £100 of staff gifts to a normal VAT-registered limited company employer will be £67. Anything more valuable the employees will have to pay tax on - and you'll have to pay National Insurance too.

If you give gifts to customers, then they'll only save you tax in full if:

• The total value of gifts in a year to the customer is less than £50,
• The gift has a clear advert for your business on it, and
• You can't eat, drink or smoke it!

If you want to give a customer, say, a bottle of whisky then that's still completely fine, and may well make great business sense! But a) you can only claim the VAT back on the gift if it costs less than £50 and b) you won't save corporation tax on it however much it costs. So a £49 bottle will cost a company £41 in the end (it can get the VAT back but can't save any corporation tax) and a £100 bottle will cost it £100 - it can't reclaim any VAT or reduce your corporation tax or income tax bill at all.

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Should I make pension contributions personally or via my limited company?

Generally, via your limited company.  An exaggerated example explains why.

Imagine it’s the evening of the last day of your company year, and you’re so keen to get your year-end accounts done that they’ve been drafted already.  You can see you’ve got £10,000 of profits.  You’d like to get that into your pension pot.  There are two ways you could achieve that.

The first is for your company to make an employer contribution directly to your pension fund of £10,000.  That reduces the company profits and tax bill to zero (if you do it before midnight, anyway!), and gets £10,000 into your pension pot at a cost of £10,000.

The second is to take a dividend and make the pension contribution yourself.  If you decide to do that, you know that the company will have £1,900 of corporation tax to pay on its £10,000 of profits, so you take the maximum legally permitted dividend of £8,100, once more leaving the cupboard bare.  You contribute that £8,100 to your pension personally.  There’s basic rate tax relief on it, which means that the government gives the pension company another £2,025.  You’ve got £10,125 in your pension fund - that’s better, right?  It is until you do your tax return and have to pay tax on the dividend.  Assuming it sits in your basic rate tax band you’ll pay £700 of tax on it, so actually it’s cost about £10,700 to get that £10,125 into your pension pot (and there’s a similar marginal cost if the dividend is taxed at higher rates too, as higher dividend tax and greater tax relief cancel each other out).

One small caveat.  If you’re thinking of applying for a mortgage or a remortgage, you might choose to take higher dividends and make personal contributions, even though you’ll wind up a bit poorer that way.  That’s because it will maximise your personal taxable income, and that’s what a lender looks at when deciding how much to lend to you. But if you’re looking for the biggest pension pot at the lowest cost, company contributions are the way to go.

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Should my company buy stuff before 31 March 2023, or after?

At present, companies buying plant and machinery (computers, machinery, furniture, vans, that kind of thing - not cars, though) can claim the Super-deduction.  This means that for every £1 they spend, they save tax as if they’ve spent £1.30.  Since corporation tax is currently 19%, this means they effectively save tax at 24.7% on those purchases this year.

This was put in place because corporation tax is going up in April 2023, and if nothing was done then companies would have deferred those purchases until then.  The Super-deduction was designed to put companies in a broadly similar position whenever they bought stuff, so as not to discourage investment.

So, with corporation tax going up in April, and the Super-deduction being withdrawn, does that mean it’s not worth thinking about when you buy new assets?  Not necessarily!  There are actually going to be three corporation tax rates in place:

• Companies with profits under £50,000 will still pay tax at 19%.  If you know your company will have profits of less than £50,000 each year, you should invest before the end of March.  You’re effectively saving 24.7% this year, not 19% next year, a big saving.
• Companies with profits over £250,000 will pay tax at 25%. If you know your company will have profits of more than £250,000 each year, it doesn’t really matter when you invest.  A 24.7% tax deduction this year and a 25% tax deduction a year later are more or less the same.
• Profits in between £50,000 and £250,000 will effectively be taxed at 26.5% - a “catch up” rate to go from 19% to 25%.  If you know a purchase will reduce your profits from less than £250,000 to more than £50,000, arguably you might want to wait until next year to invest, as saving 26.5% is better than saving 24.7%.  But it’s only a bit better, so you might as well just buy whatever it is as soon as it’ll be useful to you!

(Things are a bit more nuanced for companies that don't have a 31 March year-end, who won't get the full 130% deduction - but they'll still get more than 100%).

Of course, you should never buy anything solely to save tax!  You buy things to ultimately pay MORE tax, not less.  But if you’re going to buy something, the good news is that you’re not going to go far wrong by just getting it as soon as your company needs it.

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