The Fizz! Blog

I’m about to hire someone - what are the additional costs I need to budget for?

Clients frequently ask how much they need to budget for additional employment costs (by which they generally mean National Insurance and pension contributions) above and beyond the gross salary they’re going to be paying an employee. When creating financial projections, we tend (depending on the purpose of the projections and the level of accuracy merited) to default to 10%. In real life, though, it does depend upon how your workforce is made up.

With your first employee, the best answer is often “very little - it needn’t inform any decision making”. That’s because, at present, the Employment Allowance means that almost all employers are excused from paying the first £4,000 of Employer’s National Insurance. If you make your first hire, and they’re paid £35,000, say - the NI is covered in full, nothing for you to pay on top. You’ll end up needing to operate a pension scheme in due course, but annual employer contributions will be less than £1,000 under a standard setup. There’s going to be a bit of cost in getting the payroll processed and the pension set up of course, and you’d be wise to pay someone to help you get the HR and contracts side of things set up properly, but the additional costs at this point shouldn’t really make any difference to a sensible business owner.

Once the Employment Allowance is used up, the costs are more meaningful. Because National Insurance only kicks in on income over £9,000, and pension contributions are generally only calculated on income over £6,000, for relatively low-paid part-time staff, additional costs are minimal - for someone on £10,000, NI and pension contributions add less than 3%. But if someone is on £20,000 the additional costs are about 10%. By the time they’re on £40,000 the additional costs are just under 14%. They don’t get any higher than that. So if you wanted a “worst case” number, go with 14%. But you can see how important the make-up of the workforce is, and why 10% is generally fine for projections.

None of this is intended to deter anyone from employing staff! The extra costs are a fact of life, and generally a robust and successful business will take them in its stride, and won’t try to play fast and loose with employment law and pretend that employees aren’t really employees in order to avoid them - if a business can’t be successful within the rules that’s generally a problem with the business, not the rules. At the same time, though, it’s a really smart thing to think about and budget for.

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Should I put my Buy To Let property into a company?

Owners of rental properties pay tax on the profits, and often the biggest cost associated with the property is mortgage interest. Over the last few years, the tax relief on that interest has gradually been tapered down for those with higher income, and people who might once have saved tax at 40% (or more) on that interest now save tax at a maximum of 20%.

As a result, the idea of putting a Buy To Let property into a limited company is often floated as a possibility. Is it a good idea? For most people, on balance it’s unlikely to be. Here are a few significant factors:

• If it’s a property that you already own, then transferring it to a limited company will be taxed as if you’d sold it at market value. If it’s gone up materially in value since you bought it, you’ll probably pay some Capital Gains Tax.
• There’ll also be Stamp Duty to pay on such a transfer; Stamp Duty on the transfer of a property from an individual to a company is calculated on the basis of market value, not the amount paid.
• Although the tax-efficiency of the rental income in the company might be a bit better, it’s quite likely that the tax position when you come to sell the property might be worse. An individual has a tax-free allowance for capital gains and only has to pay tax on profits above that Annual Exemption. A company pays tax on every penny. And then, as the owner, you’re likely to want to get the profits out of the company - and you’re likely to pay tax then as well. That kind of double taxation is always an issue when appreciating assets are held within a company.
• The professional fees you’ll incur in having a company’s accounts and taxes properly looked after are greater than those for an individual, so a bit of the year-on-year tax efficiency is absorbed by that anyway.
• It’s often the case that it’s more expensive for limited companies to borrow than it is for individuals.
• Fundamentally, it’s a big punt on the tax regime remaining stable for a long time, and such punts are pretty risky. It’s easy to imagine the rules changing to eat away at tax efficiency for the company ownership route - and you’ll still have paid the switching costs if you used to own the property personally, and you’ll still be stuck with double taxation on exit!

A limited company is more likely to be indicated where there are multiple properties and where there’s a really long term vision for the business. If it’s intended that a rental business will have multiple properties and it might be contemplated that it might even last generations, a limited company could well be indicated. But in 90% of situations, our view is that personal ownership is still more appropriate.

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Can I pay for private medical insurance through my limited company?

Yes you can.  It’s unlikely to make much of a difference to you financially though, so don’t get too excited!

If a company pays for private medical insurance on behalf of an employee (including a director) then it’ll save corporation tax on the cost – currently at 19%, though it could be at as much as 26.5% if corporation tax goes up as planned in 2023.

Great!  But, although there’s that tax saving, it creates two further liabilities.

1. The company has to tell HMRC the amount paid for the director’s cover (and, if applicable, their family’s) each tax year – the Benefit in Kind - on a form called a P11D.  The company has to pay Class 1A National Insurance on the cost at 13.8%.  It’s going to save corporation tax on that payment, but it’s already wiped out more than half of the tax saved. 
2. Then the director has to pay income tax on that Benefit in Kind too.  The rate depends upon how the person’s income is made up, but though it’s just about possible that it could fit into their 0% tax band without shifting anything else up into a higher rate of tax, it’s far more likely that it’s going to effectively be taxed at 7.5%, 20%, 25%, or maybe some other rate.

 So it’s actually pretty unlikely that the arrangement is going to save any tax overall (and it’s also likely to involve paying your accountant to do the paperwork, or be implied in whatever overall fee you’re paying them).  If you can get a much better deal if the company pays, fine.  Otherwise it’s not going to make much difference to you whether you pay personally or through your company.  In practice, it’s really quite rare to see an owner-managed company paying for medical cover for its directors – most people keep it simple and pay for themselves.

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Are staff flu jabs tax-free for them? It depends

Many employers pay for their employees to have a flu jab each year.  They figure that the expense will be worth it for a combination of a) reducing sickness absence and b) being kind to their team.

Historically, they’ve most commonly done it by giving the employees vouchers that they can take to a provider to cash in for a jab, or arranged for the jabs to be done at the workplace.  There’s no tax bill for the employee (the voucher or jab will have cost less than £50 and will be covered by the “Trival Benefits” exemption).  

Apparently, in the last year or so demand has increased and vouchers have been harder to get, and many people haven’t been in their workplace to get it done there.  Consequently, many employers have asked the staff to arrange the jab and reclaim the cost on expenses.  That, however, *is* a taxable benefit, and the employee is supposed to be taxed on it - expense claims lie outside the Trivial Benefit rules.

Think about how you’re doing things, not just what you’re doing!

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You buy things to pay MORE tax, not less

You quite often get asked by clients “should we buy some more equipment to save some tax”?  It’s an understandable question - but we’d say it’s exactly the wrong perspective to look at things from.  You should spend money in your business with the intention of paying *more* in tax, not less.

If you buy some bit of machinery or other, then probably it’s because it’s going to make your business more productive, or it’s going to maintain productivity by replacing something else that’s knackered.  If paying £10,000 for this thing ends up making your company an extra £80,000, then it’s better off by £70,000 overall.  The machine hasn’t saved you any tax at all.  In fact, it’s cost you £14,000 of corporation tax!  But that was the whole point of buying it - you bought it to maintain or increase profits, and bigger profits lead to bigger tax bills.  Bigger corporation tax bills are good because they mean profits are bigger and dividends available to owners are bigger.  Anyone who is disappointed that their company’s tax bill has gone up year-on-year probably hasn’t fully grasped how the pieces fit together.

Imagine taking on a new marketing person and paying them £40,000 a year.  In their first year, they bring in enough new business to pay their salary AND contribute another £250,000 of profit on top.  You’re hardly going to fire them because they’ve cost you £50,000 of corporation tax, we hope?  If you look at it from a tax saving point of view, then perhaps you’d prefer that they brought in nothing at all, thereby saving you £8,000 of tax on their salary!  But that’s probably not what you really want.  Actually you’d love them to cost you even more in tax!

Of course, there can be broader “value” than just stark financial benefits.  The value in a purchase might be in making your working life more enjoyable or fun, perhaps.  When we first moved into our current offices, we paid £3,000 or something for a big table and some benches.  Did we do it because we thought it’d directly lead to £3,000+ of extra profit?  No.  But did we do it because it would save us £600 of tax?  Also no.  We did it because we thought it looked cool and it would be quite functional in our workplace and we really liked it.  We still do!  We’re content it’s paid for itself - and would have done regardless of any tax saved or not saved.

So next time, think about asking yourself “Is this purchase going to increase my tax bill?”.  And if the answer is yes, go ahead and make it!

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The VAT Flat Rate Scheme, and why it’s fallen more or less into disuse

From its creation in 2002, the VAT Flat Rate Scheme (FRS) was flawed.  The aim of it sounded alright on paper.  Rather than taking the trouble of figuring out how much VAT you’d paid on costs, deducting that from the VAT you’d collected from customers, and giving HMRC the balance (which is how you’d normally prepare a VAT return), you could forget about costs, and just give HMRC some of the VAT you’d collected from customers and keep the rest as a proxy for the VAT you could have deducted if you totted it up.  The amount of VAT you could keep depended upon the industry you were in - the table of rates attempted to approximate the typical VAT incurred on costs in various industries.  The scheme wasn’t intended to make anyone better or worse off - it was intended to put them in the same position that proper VAT returns would, with a bit less work.

To say the least, there were some problems with this:

1. It was based on the idea that keeping basic, accurate accounting records is somehow red tape that you only do because you’re legally obliged to.  It’s not.  It’s how you know what’s going on with your business, what you could be doing better, and whether you’re throwing your life away and should get a job instead.  The fact that it helps you discharge your tax compliance obligations is a happy by-product.
2. People got very confused about what they should apply the percentage rate to.  Since you work out the VAT to charge on your invoice based on the net invoice amount, many taxpayers quite reasonably assumed you worked out your flat rate payment based on the net also.  You don’t, it’s on the gross amount, including VAT.  Countless businesses underpaid VAT as a result, and more than once the first thing we had to tell a new client was that they owed a load of VAT to HMRC.
3. Crucially, the table of rates was totally rubbish.  There were some big winners from the scheme, but it wasn’t intentional.  It was because they could claim to be part of a category that wasn’t intended for them.  For example, the vehicle repairs category was very generous, as it was modelled on a garage paying  for loads of parts and so on.  But there was nothing to stop a labour-only contractor maintaining aeroplanes and incurring virtually no costs from using it.

In the end HMRC addressed that last problem.  They created a new category called a “Limited Cost Trader”, basically for service businesses that weren’t buying or selling goods or using up a meaningful quantity of consumables in their work.  If you fell into that category, you didn’t get to look at the industry rates.  You just had to use a rate of 16.5% when working out your FRS payment. 

Still, you got to keep 3.5% of the VAT, right?  No.  Remember point 2 above - the FRS payment is based on the *gross* collected from customers, not the net.  So if you receive £20,000 plus £4,000 VAT in a quarter, you apply the 16.5% to the £24,000 total.  That means you give £3,960 to HMRC, which is effectively all of the VAT - you’re only getting to keep £40 as a proxy for the VAT on your costs.  More or less any business like that is going to be incurring more than £40 a quarter in VAT on its costs.  That means that for Limited Cost Traders (which was probably a majority of businesses in the scheme), overnight the FRS really did just become something you’d only rationally do if you simply couldn’t bring yourself to keep proper records of VAT incurred on costs.  But for anyone willing to keep basic, conventional VAT records, coming out of the scheme was obviously best.

From our perspective on accounting, this is good!  As we said, keeping accounting records isn’t something you should do for tax purposes, it’s something you should do for information purposes, and for most small businesses things can really be set up pretty efficiently to get that done without too much manual effort.  But if you remained on the FRS, do check if it’s the right thing to do.  You can guarantee that there are lots of Limited Cost Traders who don’t realise they’re Limited Cost Traders, and HMRC are quite likely to catch up with them in the end.

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December is for December things, January is for January things

We were talking with a potential client a few weeks ago.  We’d closed the door to accepting new limited company clients with 31 March 2021 year-ends at that point – they need their accounts and tax returns done by the end of December, and we’re comfortable that we’ve enough to fill the month as it is.  We’ve some existing clients with that year-end where everything still needs to be finished and signed off before the end of the month.  We’ve clients where we need to help them prepare for their approaching 31 December year-end.  There are Self-Assessment Tax Returns to do (we’re pretty good at getting those done well before the 31 January deadline, but end up doing plenty in December and January anyway).  And we’ve got other underlying work too.  So, if we took anything new on, we’d have to drop or delay something that we’re currently intending to do in favour of the new commitment, or work overtime, and we don’t want to do either of those things.

In this case, the potential client didn’t mind if we didn’t do his accounts in December.  He was happy for us to do them late, in January, and he was willing to pay any fines that arose as a result.  The problem is, we’ve January things to do in January.  Self-Assessment Tax Returns are a big thing of course.  Well, can’t we do it in February or March?  We’re doing February and March things in February and March (the first week of February is very committed to VAT return work because of the tax return focus in January, and then we’re spending a lot of time both on preparing our clients with 31 March 2022 company year-ends (which is most of them) for their year-end, and checking in on their tax planning for this year to check that they’re going to be where they want to be by 5 April.

And in April, guess what?  We’re doing April things, and so on and so on.

From the outside, it’s a completely understandable and reasonable request to chuck a bit of work into the machine at a point where it doesn’t naturally fit.  There are certainly accountants who do see their work as more of a transactional conveyor belt where the work is the work, and you can just add it to the queue.  But for firms like us, accompanying clients through the year in a considered way, then – unless the firm happens to be running below capacity - it unfortunately just doesn’t work.  You need to try and jump into the machine at the right time (which, for a limited company, is very likely to be before its year-end, not after it!).

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It's party time! Tax at Christmas (2021 edition)

We generally publish a reminder about this stuff every year, but for obvious reasons we skipped writing about Christmas parties in 2020.  But if you are going to be holding a staff Christmas party this year, here's a reminder about the tax rules around 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 £71 in the long run, once they've got the VAT back and saved corporation tax on what's left (normally that'd be £67, but this year the venue will be charging you the temporarily reduced hospitality rate of VAT of 12.5% rather than 20%, just to add another little complication to thing, so there won't be as much VAT to reclaim). 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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Tax-Free Childcare

Tax-Free Childcare doesn’t have anything to do with tax at all.

You set up an account with the government, save into it, and the government adds £20 (up to a maximum of £2,000 a year per child) for every £80 you save, if the money’s to be used on qualifying childcare costs. The tenuous link to tax is that the 20% top-up claimants receive happens to match the basic rate of income tax (and even that’s not true if you’re in Scotland!).  It’s really just called “tax-free” so that governments can claim they’re collecting less in tax, which tends to play better with the public than the reality, which is that they’re paying out more in state benefits.  But it does provide extra funds for some childcare costs for working households (that aren’t claiming Working Tax Credit, Child Tax Credit or Universal Credit) where nobody earns over £100,000.  If that could be helpful to you, look into it:

https://www.gov.uk/tax-free-childcare

Most parents of 3 or 4 year old children also qualify for up to 30 hours of free childcare each week.  Applying for that forms part of the same process (and still has nothing to do with tax!).

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I'm a limited company owner - how do mortgages work?

One of the most common concerns that people have when starting to work through a limited company is mortgages. In particular, they worry that the typical way in which limited company owners get paid - a relatively small PAYE salary with most income coming from dividends - will mean they can only take out a tiny loan based on the salary part. If you’ve obtained a mortgage before and the lender principally wanted to see your payslips, that’s quite understandable!

The good news is - that isn’t the case. No lender looks at a company owner’s salary and their salary alone.

Historically, when looking at the borrowing capacity of a limited company owner, lenders would disregard entirely how much money the owner was extracting from the company, by whatever mechanism. Instead, they’d look beyond the owner, and look at the underlying profitability of the company and how much the owner *could* take out. The amount they’d lend would be based on the underlying profits of the company, not the tax-planning decisions of its owner.

Then came the financial crash of 2007-08. Lenders panicked, and decided that any profits you were sheltering inside your company for the future were technically at risk if your company went bust, and so they’d only lend based on how much you were actually taking out. They didn’t care about the split between salary and dividends in the slightest, so that mix of a small salary and bigger dividends wasn’t affected, but it did mean that there was a period when some company owners did have to take bigger dividends out of their company than they really wanted to in order to satisfy the requirements of a bank or building society.

For a long time now, we’ve been on an even keel again. The vast majority of lenders have gone back to the old basis and are interested in how much you *could* take from your company, not how much you *do* take. There are one or two who still consider only what you’ve actually taken, but they’re few and far between and it only really matters if you’re with one of them already and are keen to remortgage with them. And none of them care about the split between salary and dividends.

It’s admittedly generally a slightly more time-consuming process for a limited company owner (or any other self-employed person) to get a mortgage offer than it is for a PAYE employee.
Lenders all cleave to the idea that an employee is inherently a less risky proposition than a business owner and ask for less evidence of income from them. This is clearly preposterous - a full time employee’s income could disappear overnight if they lose their job or their employer goes out of business, whereas many people who work for themselves are getting income from multiple customers, which is clearly less perilous. On the other hand, to be fair to lenders, assessing the stability of each applicant’s job and employer robustly would be unfeasible.

And for a self-employed person to be able to choose from a wide range of lenders and deals, you’re probably going to want to have a couple of years of business under your belt - one set of accounts will get some lenders interested, but two will increase the number. That can sometimes rationally lead to people staying in PAYE employment (or as a sole trader), a little longer than they might otherwise do, so as to be able to get a mortgage or remortgage before beginning to work through a limited company and restarting that two year clock.

But that’s just the way it is. It does mean that a limited company owner is generally well advised to work with a mortgage broker who is experienced in working with self-employed people. They’ll know which lender is interested in which kind of borrower right now, and what kind of evidence of income each is looking for. You can’t prepare some kind of standard “pack” that’ll be presented to any lender. Most of them are likely to require a certificate or reference from your accountant vouching for the numbers - and they all have their own format!

But there’s no need to worry that a limited company owner is at a serious disadvantage when it comes to mortgages. They get them every day.

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