from A newsletter for proactive planning... In this edition... Extracting profits in 2024/25 Small earnings from self-employment – Tax and NIC implications New VAT threshold – When should you register and when can you deregister? VAT records – What do you need to keep? Taxation of company cars in 2024/25 May 2024 Issue www.compassaccountants.co.uk
PAGE 2 Extracting profits in 2024/25 If you run your business as a personal or family company, you will need to extract your profits in order to use them personally outside your company, for example, to meet your living expenses. There are various ways of doing this, some more tax efficient than others. Although there is no ‘one size fits all’ and your optimal profit extraction strategy will depend on your personal circumstances, a popular approach is to pay a small salary and to extract further profits as dividends. Salary There are benefits in paying yourself a salary. Your company will be able to deduct the salary plus any associated employer’s National Insurance in calculating its taxable profits. If the salary does not exceed your personal allowance, you will not have to pay any tax on it. Likewise, as long as it is not more than the Class 1 primary threshold, there is no employee’s National Insurance to pay either. It is also beneficial to pay a small salary to secure a qualifying year for state pension and benefit purposes. This is advantageous if you do not already have the 35 qualifying years needed for the full state pension. For 2024/25, you need to pay a salary of at least £6,396 (equal to the lower earnings limit for the year). If you pay a salary of between £6,396 and the primary threshold of £12,570, you are deemed to have paid National Insurance contributions at a notional zero rate, which means you get a qualifying year for free. For 2024/25, assuming that your personal allowance is £12,570 and it is not used elsewhere, the optimal salary is £12,570. This can be paid free of both tax and employee’s National Insurance. However, there will be some employer’s National Insurance to pay if you are not eligible for the Employment Allowance, which will be the case if you operate your business through a personal company and you are the sole employee and a director. For 2024/25, employer’s National Insurance is payable at 13.8% to the extent earnings exceed £9,100 (unless a higher secondary threshold CONT- ON PG 3
PAGE 3 applies, for example, because you are under 21 or an armed forces veteran in the first year of your first civilian employment since leaving the armed forces). On a salary of £12,570, the employer’s National Insurance hit is £478.86. However, like the salary, it is deductible in computing your company’s taxable profits. If the Employment Allowance is available, as may be the case if you operate a family company or have other employees, there will be no employer National Insurance to pay on a salary of £12,570. Once a salary of £12,570 has been paid, it is not tax efficient to pay a higher salary or a bonus as the combined tax and National Insurance hit will outweigh the corporation tax savings. Dividends Dividends are taxed at a lower rate than salary and bonus payments and also benefit from their own tax-free allowance. Once a salary of £12,570 has been paid, it is more tax efficient to extract further profits as dividends if you have sufficient retained profits to be able to do so. There are some watch points here. Dividends are paid from retained profits and can only be paid if your retained profits are at least equal to the proposed dividend. Further, if there is more than one shareholder for a class of shares, dividends must be paid in proportion to shareholdings. However, this can be overcome by using an alphabet share structure whereby each shareholder has their own class of share, allowing the flexibility to tailor dividends to the shareholder’s personal circumstances. As dividends are paid from post-tax profits, corporation tax has already been paid at between 19% and 25% depending on the level of the company’s profits. If the dividend allowance is still available, dividends up to the allowance (set at £500 for 2024/25) can be enjoyed tax-free. Once the dividend allowance (and any remaining personal allowance) has been used up, dividends are treated as the top slice of income and taxed at the dividend tax rates, set for 2024/25 at 8.75% where dividends fall in the basic rate band, at 33.75% where they fall in the higher rate band and at 39.35% where they fall in the additional rate band. Other options Profits can also be extracted in the form of benefits in kind, or rent if the company is run from a home office. It can also be tax efficient for the company to make pension contributions on your behalf.
PAGE 4 Small earnings from self-employment – Tax and National Insurance implications Many people earn small amounts of money from selfemployment, often as a side hustle. For example, this may be from craft or baking activities, tuition or the provision of services, such as babysitting. If you earn money in this way, it is important to understand the associated tax and National Insurance implications. Tax consequences A separate trading allowance of £1,000 allows you to earn up to £1,000 of self-employed profits tax-free. If your profits from all self-employments in a tax year are £1,000 or less, you do not need to report the income to HMRC and there is no tax to pay. However, it is important to remember that you need to take account of your total profits from all self-employments – the trading allowance applies across all self-employments rather than on a business-by-business basis. If your profits from self-employment are more than £1,000, you will need to complete a tax return. If you are not registered for Self Assessment, you will need to register by 5 October after the end of the tax year for which you first need to report your income. You can do this online (see www.gov.uk/register-for-selfassessment). You will need to complete your tax return and file it online by 31 January after the end of the tax year, so by 31 January 2026 for your 2024/25 tax return. You must also pay any tax and National Insurance that you owe by this date too. You can still benefit from the trading allowance if your profits from self-employment are more than £1,000 by deducting the £1,000 trading allowance rather than your actual expenses where it is beneficial to do so. This will be the case if your actual expenses are less than £1,000. If you make a loss, even though there is no tax to pay, you may want to complete a return so that the loss is available to use against any future profits. National Insurance For 2024/25, the self-employed only pay Class 4 contributions where their profits exceed the lower profits limit, set at £12,570. The liability to Class 2 contributions has been abolished for 2024/25 and later tax years. If your profits from self-employment are less than £12,570, there will be no National Insurance for you to pay. However, if your profits are between the small profits threshold, set at £6,725 for 2024/25, and the Class 4 lower profits limit of £12,570, you will receive a National Insurance credit which will provide you with a qualifying year for state pension and contributory benefit purposes for zero cost. If your profits from self-employment are below the small profits level of £6,725, you will not be able to benefit from the National Insurance credit. However, you will have the option of paying voluntary contributions at the Class 2 rate of £3.45 per week. If you do not already have the 35 qualifying years needed for the full state pension and will not otherwise secure this by the time that you reach state pension age, this can be a cheap option -- paying voluntary Class 2 contributions of £3.45 per week is much cheaper than paying voluntary Class 3 contributions of £17.45 per week.
PAGE 5 New VAT thresholds – When must you register and when can you deregister? The VAT registration threshold rose from £85,000 to £90,000 from 1 April 2024. The deregistration threshold increased from £83,000 to £88,000 from the same date. The changes in the thresholds change the trigger points for compulsory registration and optional deregistration. When must you register? You must register for VAT if your taxable turnover in the last 12 months was more than the VAT registration threshold of £90,000 or if you expect your turnover to go over £90,000 in the next 30 days. You must also register if you and your business are based outside the UK and you supply goods and / or services to the UK, or expect to do so in the next 30 days. Taxable turnover The key metric here is ‘taxable turnover’ which may be different to your actual turnover. Taxable turnover includes only those supplies that are within the scope of VAT, i.e. supplies that would be liable to VAT at the standard, reduced or zero rate if the business were registered for VAT. There is no need to take account of exempt supplies in determining whether the VAT registration trigger has been reached. Registration deadline If your turnover exceeded £90,000 in the last 12 months, you must register within 30 days of the end of the month in which your turnover for the preceding 12 months reached £90,000. Your effective date of registration is the first day of the second month in which your turnover for the previous 12 months exceeded the VAT registration threshold. Your effective date of registration will be 1 July 2024. Where you expect your turnover in the next 30 days to exceed the VAT registration threshold of £90,000, you must register by the end of that 30-day period. Your registration takes effect from the date that you realised that the threshold would be exceeded. Example In the 12 months to 18 May 2024 your turnover was £92,430. This is the first time in a 12-month period that your turnover has exceeded the VAT registration threshold. You must register for VAT by 30 June 2024. Example On 2 July 2024 you sign a contract to deliver standard rated goods with a value of £120,000 by 15 July 2024. You will be paid on delivery. You must register by 31 July 2024. Your effective date of registration is 2 July 2024. CONT ON PG 6
PAGE 6 Voluntary registration If your taxable turnover is below the VAT registration threshold, you can opt to register voluntarily. This can be beneficial if you make mostly zero-rated supplies but incur VAT on goods and services that you buy as it will enable you to recover the VAT that you incur. If you register for VAT and you supply goods and services that are liable to VAT at the standard or reduced rate, you will need to charge VAT to your customers. If your customers are not VAT-registered, they will not be able to recover the associated VAT, and this may make you less competitive than other suppliers who are not VATregistered. Registering for VAT will also mean that you will need to comply with MTD for VAT, and this will add additional costs. It is important to assess the pros and cons before opting to register voluntarily. Deregistration At £88,000, the deregistration threshold is now more than the VAT registration prior to 1 April 2024. Businesses whose turnover was just over the old £85,000 registration limit but below £88,000 now have the option to deregister. This may be beneficial to make them more competitive against businesses who are not VAT-registered. It will also relieve them of the need to file VAT returns and comply with MTD for VAT. However, if you deregister, you will no longer be able to recover any input VAT suffered. If your turnover is likely to increase beyond the new VAT registration threshold of £90,000 in the near future, arguably, it is not worth deregistering as you will need to re-register once the registration threshold is reached. VAT records – What do you need to keep? If you are registered for VAT, you will need to keep normal business records. The records must be complete, up to date and sufficient to enable you to calculate the VAT due to or due from HMRC. You will also need to maintain a VAT account and keep copies of your VAT invoices. Business records HMRC take a wide view of what constitutes ‘business records’ and their list includes: annual accounts, including a profit and loss account; bank statements and paying-in slips; cash books and other account books; purchase invoices; copy sales invoices; credit or debit notes issued or received; orders and delivery notes; purchase and sales books; records of daily takings, such as till rolls; import and export documents; relevant business correspondence; and any documents or certificates supporting special VAT treatment. The precise records that need to be kept will depend on the type of business. However, all businesses will need to maintain a VAT account and keep copies of invoices. CONT ON PG 7
PAGE 7 If your business is registered in Northern Ireland, you must also keep any documentation relating to dispatches and acquisitions of goods to or from the UK or an EU member state. VAT account The VAT account forms the link between the business records and the VAT return and all VAT-registered businesses must keep a VAT account. To comply with MTD, it must be kept digitally; either within a software package or on a spreadsheet. To show the link between the output tax in your records and the output tax shown on your VAT return, you must keep a record of: the output tax owed on sales; if your business is registered in Northern Ireland, the output tax owed on acquisitions from EU member states; the tax required to be paid on behalf of a supplier under a reverse charge procedure; tax that must be paid following a correction or adjustment for an error; and any other adjustments required by the VAT rules. You must also keep a record of the following in order to show the link between the input tax in your records and the input tax shown on your VAT return: the input tax claimed on business purchases; if your business is registered in Northern Ireland, the input tax allowable on acquisitions from EU member states; any tax that can be recovered following a correction or an adjustment for an error; and any other necessary adjustments. Need to keep digital records To comply with the requirements of MTD for VAT, VAT-registered businesses must maintain certain records digitally and keep their accounts within ‘functional compatible software’. This is a software program or set of software programs, a product or set of products or an application or set of applications which are able to: record and preserve digital records; provide HMRC with information and returns from data held in those digital records via an API (application programming interface) platform; and receive information from HMRC using the API platform. Where data is transferred between software, applications or products (for example, from a spreadsheet to the VAT return software), this must be via a digital link. VAT invoices VAT invoices issued are an important part of the business records, while VAT invoices received are the primary evidence for recovering VAT. Copies must be kept of all VAT invoices issued and received. Maintaining records The general rule is that business records for VAT purposes should be kept for at least six years.
PAGE 8 Taxation of company cars A taxable benefit arises where an employee has the private use of a company car. Unless the car is an electric car, a further benefit arises if the employer meets the cost of fuel for private travel. Car benefit charge The amount that is charged to tax depends predominantly on the list price of the car and the car’s CO2 emissions. The charge is an ‘appropriate percentage’ of the list price, as adjusted for employee contributions and periods of unavailability. The list price of the car is the manufacturer’s registered price when the car was new – it is not the price actually paid by the employer. Consequently, the price on which the tax charge is based may be considerably higher than the price paid by the employer, particularly if the car was purchased second-hand. The list price is increased by the list price of any optional accessories, and reduced by any capital contributions made by the employee up to a maximum of £5,000. The appropriate percentage depends on the car’s CO2 emissions and is unchanged from 2023/24. It ranges from 2% for electric cars to 37% for cars with CO2 emissions of 160g/km and above. Where a car’s emissions fall in the 1 to 50g/km band, the appropriate percentage also depends on the car’s electric range, as shown in the table below. CO2 emissions Electric range 1 to 50g/km 1 to 50g/km 1 to 50g/km 1 to 50g/km 1 to 50g/km More than 130 miles 70 to 129 miles 40 to 69 miles 30 to 39 miles Less than 30 miles Appropriate percentage 2024/25 2% 5% 8% 12% 14% Cars with CO2 emissions of 51 to 54g/km have an appropriate percentage of 15%. The appropriate percentage increases by 1% for every 5g/km increase in CO2 emissions until the maximum charge of 37% is reached. A supplement of 4% applies to diesel cars which do not meet the RDE2 standard, subject to a maximum charge of 37%. Once the appropriate percentage has been applied to the list price (as adjusted for accessories and capital contributions), it is adjusted to take account of any period at the start of the tax year before the car was made CONT ON PG 9
PAGE 9 available to the employee, any period in the tax year after the car ceased to be available to the employee and any periods of at least 30 days when the car was not available to the employee. Finally, the charge is reduced for any contribution that the employee is required to make (and actually does make) as a condition of the car being available for his or her private use. Example Billy is given a company car on 1 May 2024. It is a petrol car with CO2 emissions of 60g/km. The car has a list price of £35,000. For 2024/25, the appropriate percentage for a car with CO2 emissions of 60g/km is 17%. Applying this to the list price of £35,000 gives an amount of £5,950. However, as the car was not made available to Billy until 1 May, it is reduced by £408 (25/365 x £5,950) to reflect the period of unavailability. Consequently, the cash equivalent of the benefit is £5,542 (£5,950 – £408). If Billy is a basic rate taxpayer, he will pay tax of £1,108.40 on the benefit of the car in 2024/25. For a higher rate taxpayer, the tax bill is £2,216.80 and for an additional rate taxpayer, it is £2,493.90. Billy’s employer will pay Class 1A National Insurance of £764.80 (£5,542 @ 13.8%). Fuel benefit Unless the car is an electric car, a separate tax charge will arise if the employer also provides fuel for private use. The charge is found by multiplying the appropriate percentage used to calculate the car benefit charge by the multiplier for the year, which for 2024/25 is set at £27,800. The charge can be eliminated if the employee is required to ‘make good’ the full cost of fuel for private travel and actually does so before 1 June after the end of the tax year where the benefit is payrolled and by 6 July after the end of the tax year where the benefit is reported on the P11D. The advisory fuel rates can be used to determine the amount that the employee must pay in order to ‘make good’ the cost of the fuel. Where a tax charge arises in respect of the provision of free fuel, the employer must pay Class 1A National Insurance on the taxable amount. No tax charge arises if the employer provides or meets the cost of electricity for private travel in an electric company car.
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