Every worker aged 16 or over is entitled to be paid at least the national minimum wage (NMW), although the hourly rates vary according to the person's age.
Members of the family who still live at home and work for an unincorporated business are exempt from the NMW, as are non-relatives that live and work within the home. However, if the business operates as a company this exemption does not apply, and all employees of the company must receive the NMW appropriate to their age.
There is an exemption for the directors or company secretary of a family company who do not have an explicit employment contract with that company. So if you work for your company mainly in your position as a director, you do not have to pay yourself the NMW for the hours you work. However, if you have a written employment contract with your own company you are technically a worker and an employee for the purposes of the NMW legislation, and you must pay yourself at least the NMW for all the hours you work under that contract. Therefore, if you adopt a strategy of low salary around the level of the personal allowance (£5435 for 2008/09) and high dividend to minimise NI costs, whilst still working full time, you should ensure you do not have an explicit employment contract.
Inside or Outside the Company?
The recent changes to capital gains tax may have left you confused as to whether you should hold your assets, such as property, within your company or in your own name. There is no single answer to this question, as the factors to be considered will depend on your future intentions for the investment, your plans for passing on your wealth, and the possibility of selling the company.
If you hold a property personally and sell it for a profit after 5 April 2008 the gain will be taxed at 18%, after deduction of your annual exemption, which is £9,600 for 2008/09. Spouses or civil partners may choose to hold assets jointly, in which case two lots of annual exemption will be available to set against the gain before the next amount is taxed at 18%.
If your company sells a property for a profit after 1 April 2008 it will be taxed at 21%, or 28% if the total profits including gains, for the year exceed £1.5 million. Where profits exceed £300,000 the marginal tax rate may be 29.75%. However, the company can deduct indexation allowance from the gain before the net amount is taxed. Indexation allowance increases the cost of the asset for the effect of inflation while it has been held. So assets that cost very little or have been held for a relatively short period gather only a small amount of indexation allowance but those with a high cost and long period can gather a significant amount to offset. The company does not have an annual exemption to set of against its capital gains.
Where the asset is sold by the company the sale proceeds remain within the company. If you want to use those proceeds for personal investments you need to extract them from the company, which may create a further tax charge. If the asset is sold while being held in your own name the sale proceeds will be available to you immediately to invest as you wish.
If you transfer an asset from the company to your own name this should be done at market value, not at the historical value recorded within the company accounts. This transfer may well create a tax charge for the company and a stamp duty charge for you. So it's best to decide who should hold the asset before it is purchased.
Better Return by Holding Cash Personally?
If your company has built up some large cash balances you should review the interest rate it is earning on those deposits. Competition between banks means that even business deposit accounts can pay up to 5.5% on deposits of £25,000 or more. The interest rates paid on personal savings accounts can be higher, but you should also consider how much tax you and the company will pay on the interest earned.
From 6 April 2008 you are likely to pay tax at 20% on your savings income, but where your non-savings income, excluding UK dividends, amounts to less than your personal allowance of £5,435, you may pay just 10% on interest received. However, if you are a higher rate taxpayer you will pay 40% tax on interest received. Your company on the other hand will pay tax on interest at a minimum of 21% from 1 April 2008, which will rise to 22% from 1 April 2009. Although if profits exceed £300,000, or you control a number of companies, the marginal corporate tax rate could be as much as 29.75%.
In summary there could be a tax penalty of up to 19.75% (29.75% – 10%) where surplus funds are held within your company rather than in your own name. If you are paying tax at a lower rate than your company it makes sense to extract as much cash as possible, without pushing your total income into the higher tax band. The most straightforward and tax efficient way of extracting cash is as a dividend. Although if there are other shareholders who hold the same class of shares the same rate of dividend must be paid to all those shareholders.
Finally in these difficult times for banks remember the compensation limit for deposits held in UK banks is capped at £35,000 per banking license. So if you hold several accounts with one bank, £35,000 is the maximum compensation you will receive if that bank fails. Also the compensation scheme does not cover deposits made by companies rather than individuals.
Claim Back Wages from the Taxman
When your employees become parents they may take some maternity, paternity or adoption leave. If they earn more than the NI threshold (£87 per week for 2007/08) and have worked for you for at least 6 months, you will also be required to pay them at the statutory rate during most of that leave period. These statutory wages (SMP, SPP or SAP) must be paid at a flat weekly rate of £112.75 for 2007/08, although SMP is paid at 90% of a woman's average wage for the first six weeks of the leave period.
All this statutory pay for absent employees can leave you out of pocket, so the good news is you can claim it back from the Taxman. First you need to check whether the Taxman classes you as a 'small' employer or not. Small employers get 100% of the statutory (baby-related) pay back, plus a 4.5% bonus, other employees can only claim back 92% of the statutory pay.
The test of being 'small' depends on how much NIC you were due to pay for the previous tax year. If this was £45,000 or less you qualify as a 'small' employer. Dig out a copy of the form P35 you submitted last year for 2006/07 and check the figures of NI reported on that form, to see if you are under or over the £45,000 threshold. Look at the total NI collected before deducting any amounts used to fund any statutory payments.
You should technically reclaim the statutory pay as you pay it out each month during the tax year. The Taxman wants you to hold back the statutory pay plus the 4.5% compensation, from the other payroll deductions you make each pay period. If you forgot to do that, all is not lost as you can complete a form SP32 to reclaim all the statutory pay paid out over the last few tax years. We can help you with that.
Questions & Answers
Q. I am about to sell my VAT registered business as a going concern, but the buyer will not take on my VAT number so I will deregister for VAT. My business has been using the cash accounting scheme, so what happens to VAT received from customers after the date of deregistration?
A. Your final VAT return for your business must be completed on the normal accruals basis, not on the cash basis. You need to include all of the VAT that you added to your sales, or which has been charged on your purchases, and hasn't already been included in your previous VAT returns. The VAT on your sales invoices must be included even if those invoices have not been paid. Further details are given in VAT leaflet 731: Cash Accounting.
Q. I expect to make a taxable profit of £150,000 in my self-employed business in the year to 5 April 2008 and I've also made a capital gain of £65,000 in this tax year. Can I shelter these items from tax by making pension contributions?
A. The bad news is you only have until 5 April 2008 to make pension contributions to reduce the tax payable on your 2007/08 taxable profits. You cannot carry back pension contributions made in a later tax year to be set against income of an earlier tax year. You can pay pension contributions up to the limit of your taxable profits for 2007/08, subject to a cap of £225,000. The maximum you can actually pay is a net contribution of £117,000 (78% x £150,000). Your pension fund will then reclaim the basic rate tax of £33,000 (22% x £150,000), leaving a total gross contribution in your fund of £150,000. You cannot pay pension contributions to reduce the amount of capital gains that are taxed in 2007/08, but a large pension contribution could ensure your gains are taxed at the basic rate of 20% rather than 40%.
Q. My company has had a PAYE inspection and the Taxman said I must pay NICs on the telephone bills we pay for employees. Is this right and how can I avoid this extra expense in the future?
A. Where the employer pays a bill in the employee's name, such as the employee's telephone bill, the amount paid is treated as earnings and class 1 NICs are due. The costs that relate to business calls may be excluded from this value of 'earnings', but not the cost of the line rental. If the employer pays for a second line to be installed at the employee's home to be used exclusively for business calls, class 1 NIC is not due on the cost of those calls or line rental. So to reduce your NIC costs make sure the contract with the telecoms company is with your company as the employer.