The Fizz! Blog

The problem is often domestic consumption, not business profits

“Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery” - Wilkins Micawber

A frequent frustration for accountants (at least, accountants like us who try to help people form a holistic view of their finances, rather than just preparing legally-mandated accounts and returns for signature) is that you generally only really get to assess and consult on 50% of a client’s position. You see the income coming into their business, you see the costs going out, and you see the profits. You’ll have conversations about how the income might be increased, or the costs decreased - or the costs increased so that the income might be increased even more, or the costs increased so that the owner’s life might become happier or more satisfying (or the income decreased so that the owner’s life might become happier or more satisfying!). You’ll see the year-end snapshot of the position of the business (i.e. its balance sheet), and talk about the liquidity of the business, its resilience to short and medium term adversity and the “runway” it has to continue stably paying its owners and workers without persistent worry about short-term cashflow. This is all really useful and important.

However, there’s a similar picture in everyone’s personal life, and you often get little or no insight into that. If an individual or household kept and assessed similar records, they could consider all those same issues, which are just as important in a domestic context - and, for a business owner, considering the interaction of the finances and their own could bring an extra layer of insight. It doesn’t matter so much if there’s little runway in a business if there's masses of it in the owner’s own life, and it doesn’t matter so much if the owner has minimal personal savings if there’s a big reservoir of profits to draw on in her business.

When there’s an incompatibility between income and outgoings, it’s actually often not between the income of a business and the outgoings of the business - it’s just as likely to be between the income of a business and the domestic outgoings of its owner! Often the owner might be fixated on relatively trivial costs in the business and trying to drive them down a bit. But a bigger question than “can I reduce the £50 a month business mobile phone contract?”, and one that would probably unlock greater revelations and behaviour changes, might be - “what’s happening with the £100,000 that’s being drawn out of the business by its owner each year?”.

Unfortunately, we don’t have much of a culture in this country of that kind of personal financial record-keeping, and there’s no outside mandate forcing anyone to do it. On top of that, people often seem to have a more fatalistic attitude about personal and household finances than business ones, and may feel that they simply can’t be materially changed. If you’re a business owner, though, it pays to think about business finances and personal finances as two sides of one coin, not two entirely separate systems.

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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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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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Investing in cryptocurrency? Here’s how the tax side works

Cryptocurrency and tax has fast gone from being a largely theoretical subject to a quite practical one. Buying and selling them has become both more popular and more easy, and far more people are having to address the consequences of the activity now.

So, how are profits on selling cryptocurrencies taxed on an individual?

For 99.99% of people it’s a Capital Gains Tax (CGT) matter. CGT is fundamentally a tax on disposals (i.e. sales) of assets. The principles and calculations are the same ones you’d follow when figuring out CGT on profits from selling shares. Most people seem to assume that the fluctuating value of their cryptocurrency during the year has some impact, but it doesn’t. Similarly, often people think that the value of what they hold at the end of the tax year makes a difference, but it doesn’t. If you don’t sell any cryptocurrency, there’s nothing to declare and no gain to tax. It doesn’t matter if you bought it for £10,000 and it’s now worth £200,000. It’s not until you actually sell something that tax becomes a consideration.

A useful thing to bear in mind is that we can all make some capital gains free of tax each tax year. For 2021-22, your first £12,300 of capital gains are tax-free and it’s only the surplus above that amount that’s taxable. If your gains are below £12,300 and the total proceeds are less than four times that amount - £49,200 - then you don’t even need to tell HMRC about the transactions at all.

So, what are those principles?

Let’s say you sell some Ethereum for £15,000. You need to figure out how much it cost you. This might be quite simple. If that’s all the Ethereum you have, and you bought it all in one go for £7,000, you’ve a profit of £8,000 to be taxed. Easy!

What if you didn’t buy it all in one go? If you’ve bought Ethereum on two or more occasions, you have to keep track of all the times you bought Ethereum, and keep a running record of the average cost of each unit - a record of your “pool” of units and their average cost. Then, when you sell X units, you need to take the relevant number of units at the average cost out of the pool, and figure out the profit you made on selling them. Fairly easy!

There’s a further complexity, though. Sometimes you have to look at the units you bought afterwards as well. This is because of rules designed to stop people realising tax-free profits at the end of one tax year and then buying the same things back a day or two later at the start of the next. In our example, if you buy some Ethereum in the 30 days after you sell some, then you need to match that purchase against the disposal instead of the older units, and for tax purposes you’ll still be deemed to hold those older ones at their original cost. Not easy!

These rules are thorny enough for share trades, but there are a few factors that make them trickier still for cryptocurrencies:

1. Cryptocurrency transactions are often far more frequent. When you sell some shares, it’s usually fairly easy to identify when you bought them and how much for, and to therefore work out the profit you’ve made. With cryptocurrency there are often far more transactions to assess (though in fairness this may become more common in share trading too, as apps and push notifications encourage people to trade more frequently).
2. Most people do their share trading via a single broker account, but many people have multiple accounts/wallets for cryptocurrency. You might need to match a sale of cryptocurrency from one wallet against a purchase made via one or more other wallets.
3. A big trap is that you might not even dispose of cryptocurrency for actual money. If, say, you exchange some Ethereum for some Bitcoin, that represents a disposal of Ethereum to declare and pay tax on, even if you’ve no GBP to show for it. Someone may never have cashed out any cryptocurrency at all, but still have multiple taxable disposals. We’ve written about this before.
4. Similarly, you may use some cryptocurrency to pay for something - that represents a disposal of the cryptocurrency at its market value and a potential tax bill.
5. Finally, even if you gift the cryptocurrency to someone, that’s also a disposal at whatever its market value is at that point (unless you're gifting it to your spouse or civil partner, anyway), with tax to pay if you’ve made a gain - that’s the same with shares and any other assets too.

All this means that, for someone with complex cryptocurrency activities, some software that can pull everything together is likely to be necessary!

For the time being, the £12,300 annual exempt amount is likely to keep most people from having to report anything to HMRC (though if you make losses you might want to report them, so you can offset them against future gains). Even so, make sure you keep proper records - if you’ll be selling cryptocurrency in future it’s important to have your precise trading history on record so that you can figure out the profit on each disposal when the time comes.

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What’s the pension annual allowance?

“How much can I put into my pension this year?” sounds like quite a simple question, doesn’t it? Often, though, our job is to point out that a question that quite reasonably seems straightforward is not. This is often one of them!

One of the overarching concepts with pensions is the Annual Allowance. This is generally thought of as “how much can I contribute to my pension each year?”. But it’s not as simple as that. A better way of thinking of it is “what’s the most money that is allowed to make its way into my pension pot this year?”. Because personally contributing isn’t the only way money can get into your pension. There are really three:

1. You can make a contribution personally into your own pension scheme (by, for example, contributing to a personal pension or an Automatic Enrolment one - a Defined Contribution scheme, where there's a visible pot that's yours; the vast majority of pensions these days).
2. Your employer (which might be your own limited company) can similarly make a contribution into a scheme.
3. If you’re in a Defined Benefit scheme, where there’s no discrete personal pot of savings but your employer promises to pay you a pension once you retire, from their pension fund as a whole, then your employer can increase the pension it promises to pay (this happens a lot with NHS consultants, whose promised pension increases each year with longevity and seniority). That’s deemed to be an increase of a notional pension pot, counting towards the Annual Allowance and the employer must quantify it for you.

Fundamentally, we all have an Annual Allowance of £40,000, and that's the total cap on those three things put together. But there are still complications:

• The Annual Allowance is reduced if your income for the year is over £240,000 (previously £150,000).
• If you’ve not used up all your Annual Allowance in the previous three years, that’s usually added to this year’s allowance too. So, in an extreme case someone could have £160,000 legitimately make its way into their pension funds this year.

We’re not done, though. The Annual Allowance is simply a ceiling on what can go in by one route or another. But there are separate limits on what can go into personal pension funds via those first two routes:

• Although anyone can contribute up to £3,600 to a personal pension in a tax year, above that the amount you can contribute personally is capped at your “Relevant Earnings” - basically, your income from a PAYE job or an unincorporated business. So even if someone has Annual Allowance of £88,000 available because they’ve got some unused AA from earlier years, if their income for this year is £42,000 via PAYE then the maximum personal contribution they can make is £42,000 (even if they’ve loads of spare cash beyond that). Directors on a small salary therefore can't pay much into their pension personally. (It’s also important to remember that personal pension contributions are made net of basic rate tax, so if that person wants to contribute £42,000, they’ll actually hand over £33,600 to the pension company, who’ll get the other £8,400 from the government).
• The amount your employer can pay into your pension needs to be justifiable in terms of the total “package” you get from them (otherwise it’s not a legitimate deduction against tax for them). If your employer is just a third party, that’s going to be the case automatically; the whole reason they’re giving you that salary, pension contribution etc is because they think it’s an appropriate economic bargain for your services. When it’s your own company it needs more thought. If you work through your own company, is it reasonable for your company to put £40,000 into your pension? Generally, yes. It’s likely that, in conjunction with the small salary you’re getting, the total package wouldn’t be considered excessive, as you seem to be generating enough value for the company that it can afford the package. So this is how most director-shareholders fund their pension; their contributions aren’t capped at their small salary, because they’re not making personal contributions. Would it be reasonable for the company to make a similar payment into the pension of a non-working spouse? No. If they’re not working for the company, the appropriate employment package for them would be zero.

It’s even harder if you’re in a defined benefit scheme - you won’t know about the deemed increase in your pot until after the year-end, at which point it’s too late to make any further contributions for the year! The uplift might be less than you thought, and you’d have liked to have put another £5,000 into another personal pension you have - unlucky! The unused Annual Allowance will have been carried forward to use in the next year, though (if income and so on permits).  Or the uplift might be more than you thought, taking you over the Annual Allowance you have available - in which case you've tax to pay.

Pensions are pretty simple for many, but not for everyone!

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Do I qualify for the fifth Self Employed Income Support Scheme grant? And how does the turnover test work?

We’re almost at the point where sole traders and members of partnerships can apply for the fifth (and final) grant under the Self Employed Income Support Scheme.  So, who qualifies and how much do they get?

The big picture remains pretty similar to before, this time for those who were self-employed (but not those who work via a limited company) in both 2020-21 and 2019-20.  The grant is for those whose income comes wholly or mainly from self-employed profits of less than £50,000 a year.  You must have submitted your 2019-20 tax return by 3 March 2021, and you must continue to operate your business and intend to do so beyond the point of making the claim.

This final grant covers the period 1 May 2021 to 30 September 2021, and when making a claim you declare that you believe your profits will be significantly down for that specific five-month period, because of the impact of COVID-19 - the grant is only for those still struggling.  If you’re doing OK now, you can’t apply.

So far, so good.

When it comes to the amount payable for those who qualify, though, there’s a twist.  For grants 1 to 4 you either qualified or you didn’t - the amount you were paid was then just mechanical and based on a percentage of average profits.  For grant 5, there’s an extra stage, though, designed to try and distinguish between different levels of distress.  You might get 80% of your average quarterly profits, capped at £7,500 (the same as grant 1).  But you might get just 30%!  There’s a sudden and serious cliff-edge.

Which category you fall into depends upon how much your turnover (revenue from customers) fell in 2020-21 compared (usually) to 2019-20.  If it didn't fall at all, you’ll get nothing.  If it fell by less than 30%, you’ll get the 30% grant (well done to HM Treasury for using the exact same percentage for two wholly different purposes, which is not at all confusing), capped at £2,850.  If it fell by more than 30%, you’ll get the 80% grant, capped at £7,500.  (By the way, if you started in self-employment during 2019-20 and weren’t self-employed at all in the previous three years, you’ll also get the 80% grant, and don’t even have to tell HMRC about your turnover).

If 2019-20 was atypical for some reason, then you can use 2018-19 for the comparison, though you need to be able to justify why 2019-20 was unusually low and thus an unreasonable starting point for the comparison.  Examples HMRC give in their guidance include being on long term sick leave or parental leave, or losing a large contract.

There are some traps you could fall into if you’re not careful.  If you’ve more than one self-employed business, you have to look at the turnover of them all put together, not just the “main” one.  And if one of your tax returns had turnover for a period other than 12 months because of a change of accounting period, you have to annualise it before doing the comparison.   Members of partnerships must use the turnover for the whole partnership, not just their share of it.

Importantly, you should NOT include previous SEISS grants in your turnover (which is logical, nobody would have imagined you should), and you should NOT include money received under the Eat Out To Help Out scheme (which is not quite so logical, as that’s money that was actually reflected in till receipts and VAT returns and so someone might reasonably consider it to be part of the revenue of their business).

HMRC have uploaded a video to YouTube with some guidance about how to work out your turnover but it’s not necessarily very good.  They accurately say if a tax return has been completed (many applicants have already submitted their 2020-21 return, of course) then you can just take the number from the return.  But they suggest that if you haven’t yet done the return, you could look at your bank statements and add up the money coming in.  That’s no good for a typical business that doesn’t use the cash basis, though, because it doesn’t take into account opening and closing debtors, for example.  Some of our 2020-21 turnover didn’t turn up in our bank account until invoices were paid after the end of the year.

In any case, you’ve until 30 September to claim (if you qualify).  So, if you haven’t done it, perhaps you should get your tax return done first!

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Working from home allowances and PAYE codes

It’s long been the case that, if an employer requires an employee to work from home, they can pay them a small tax-free amount to reflect the extra costs that the employee might incur as a result. It’s also long been the case that, if the employer doesn’t do that, the employee can at least ask HMRC for tax relief on the allowance they could be receiving but are not.

Until 2020-21 it didn’t happen very often, but of course last Spring the number of employees working from home increased exponentially. Many (probably most) employers didn’t pay the allowance (£312 for the whole year) - apart from anything else, the employees were generally financially better off anyway as a result of not having to commute. So lots of employees claimed tax relief on the £312 instead, which meant HMRC adjusted their PAYE code to collect a little bit less tax each month.

With most PAYE code adjustments, HMRC automatically roll it forward year-on-year, on the assumption that the situation will persist. However, they’ve confirmed that they’re *not* rolling forward the home working adjustments, and a fresh claim must be made each year. This is more good than bad, as it avoids the risk of an inappropriate tax deduction being given for many years and then having to be clawed back by HMRC later when they realise. If you or your employees need to make fresh claims for 2021-22, here’s some more guidance:

https://www.gov.uk/tax-relief-for-employees/working-at-home

When might directors pause their employer pension contributions?

Imagine your company has a 31 March year-end.

Are you going to make an employer pension contribution in March 2023?  Probably not.  If you make the contribution in March 2023, it’s going to save corporation tax at 19%.  If you wait one month (one day, even) until April 2023, it’ll save corporation tax at the new rate of 25% (albeit 12 months later, but it’s still a guaranteed 6% return).

Are you going to cancel a planned contribution this month, and wait until April 2023 and the greater tax saving?  Probably not - on average, 25 months of tax-free investment growth would be likely to outstrip the 6% tax difference.

Are you going to make an employer pension contribution in February 2023?  Probably not. If you wait two months until April 2023, it’ll save corporation tax at the new rate of 25% rather than 19%.

Are you going to cancel a planned contribution next month, and wait until April 2023 and the greater tax saving?  Probably not, it’s fair to think that 24 months of tax-free investment growth will still have a fair chance of outweighing the 6% tax difference.

There’s a point somewhere in between where might choose to pause contributions, though.  Over the long term, the profits in your company above and beyond what you pay yourself are going to be split in some fashion between pension contributions and building up reserves in the company.  Mathematically, you'd ideally do the former when the corporation tax rate is 25% and the latter when it’s 19%.

Of course, this interesting dilemma presupposes that there will be no changes to the other rules and limits on pension contributions between now and 2023-24.  Historically, that's often been a reckless assumption!

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