As we struggle with the heat wave a timely look this
month at paying your tax, accruing for bonuses, treatment
of tips and a reminder of the new pension contribution rules.
We have also added a short commentary on a recently decided
CSA appeals case.
Reducing self assessment payments on account
Self assessment payments on account were payable on the 31
January and 31 July 2006. This covers an individuals' estimated
income tax and Class 4 national insurance liabilities for
the tax year 2005-2006.
But what if you have had a difficult trading year for 2005-2006,
and your earnings have dropped in this period?
The payment due on the 31 July 2006 was the second payment
on account for the year 2005-2006, and was based on your taxable
income and profits for the previous year to 2004-2005.
Consequently if you have suffered a drop in income the payments
on account may be set too high. What can be done?
The remedy is to make a formal application to have the instalments
reduced, and of course we can do this for you.
A drop in earnings/profits will generally reduce your available
cash funds. If you are faced with cash flow difficulties in
making your tax payment it may indicate that the instalment
is excessive, and an application to have the payments on account
reduced, appropriate. If you would like to assess the position
in your case please call.
Accruing for company bonuses - deferring tax.
Accountants use the word accrual to describe an event that
has not yet occurred but needs to be taken into account at
a particular date.
For instance companies can accrue for bonuses not yet paid
at their year end, and obtain corporation tax relief on the
amount of the accrual. To secure the deduction for tax the
company must pay any relevant PAYE or National Insurance within
nine months of the year end date. So if a company accrued
for a director's bonus of £50,000 at the 31 December 2005,
as long as the £50,000 was included in the directors pay at
some time before the 30 September 2006, then the company could
claim a reduction in its profits of both the gross bonus and
employers NIC.
The payment of PAYE and NIC due could therefore be deferred
until the 19 October 2006 - the due date for deductions made
in September 2006.
To comply with current accounting standards there must be
a legal obligation in place at the year end, in the example
above before the 31 December 2005, that requires the company
to pay bonuses. Could we request that clients contact us before
their company year end if they are interested in this bonus
strategy. This will enable us to prepare Board Minutes and
other documentation before the year end.
This "accruals" effect for bonuses can be especially effective
if the director concerned has a healthy loan account with
his company. Loan in this context means funds that the director
is owed by the company. If the loan is equal to or higher
than his annual take home pay the director could fund his
personal cash flow for an entire tax year by taking periodic
reductions in his or her loan account. At the company year
end a bonus would be voted and when the tax and NIC is paid,
in the example above on the 30 September 2006, the loan would
be topped up by the net bonus. To maintain the timing advantage
this process would need to be repeated.
New Pension Rules - Contributions
On the 6 April 2006 (A day) the new pension rules came into
operation. We have included a few notes regarding contributions
made after this date.
-
Annual Contribution Allowance. From
A day contributions into an individual's pension scheme
are limited to £215,000. This allowance will be increased
by £10,000 per year reaching £255,000 in 2010-2011.
-
Exceeding Annual Contributions Allowance. Care
must be taken to avoid paying over more than the annual
allowance. Where the allowance is exceeded the registered
scheme member will suffer a 40% tax charge on the excess!
There are no set-offs for losses or other tax allowances.
The excess has to be reported on the self assessment tax
return for the relevant year.
-
Lifetime Allowance. From A day there
is an overall lifetime limit of £1.5m on the amount of
pension value attracting tax relief. This will increase
to £1.8m in 2010, and be reviewed every subsequent 5 years.
There are safeguards in place for large value schemes
in existence at 6 April 2006.
-
Taking Benefits. The points raised in
1 and 2 above do not apply in the year benefits are first
taken.Substantial contributions can therefore be made
in this year, subject to the maintenance of the Lifetime
Allowance (see 3 above). This may provide owner-managers
with a useful planning device before they sell their company.
-
Income and contributions. Contributions
in a tax year will only qualify for tax relief if you
have matching earned income. So if you have income of
£115,000 in the current tax year your qualifying contributions
will be limited to £115,000 not the Annual Contributions
Allowance of £215,000. The only exception is contributions
up to £3,600 per annum which can be paid with no evidence
of earnings.
-
The old rules - prior to 5 April 2006. Please
note that the following strategies, allowed up to 5 April
2006, no longer apply:
-
Individual contributions are now based on your income
in the same year, not as before your best income in the
previous 5 years.
-
Contributions cannot be carried back to the previous
tax year if paid within 9 months of the tax year end.
Please note that this article provides general comments regarding
pension contributions under the new rules. There are inevitably
further complications outside the scope of this newsletter,
but which you may need to consider. For more background on
tax related issues please call.
Tips and Troncs
A Tronc is a system for pooling tips, the person who manages
the Tronc is known as the Troncmaster! For PAYE purposes the
Tronc will have a separate scheme reference from the employer's
and will make its own returns to the Revenue.
HMRC have recently updated their advice to Troncmasters and
employers regarding the tax, and particularly NIC treatment
of tips. In some cases this change in policy may mean that
contributions have been overpaid in past years, and employers
will be entitled to a refund.
The current position is summarised below.
Income Tax
All tips received by an employee are taxable. Tips distributed
by an employer or a Tronc arrangement will pass through the
PAYE system and deductions for tax made accordingly. Tips
made direct by customers to staff do not have to be included
in the PAYE records - but the employee should still declare
them to HMRC and pay tax usually by adjustment to the individuals
tax code number.
National Insurance
National Insurance is a more complex issue.
-
Tips paid direct to an employee by customers, and retained
by employee - no Class 1 NIC contributions are due.
-
Tips paid to employee via an organised Tronc - no Class
1 NIC contributions due. This is so even where the tips
go to meet a contractual obligation, or to meet statutory
requirements such as the National Minimum Wage. This is
a change of view by HMRC and may have led to NIC overpayments
in certain cases.
-
Tips paid to employee by the employer - as for instance
when compulsory service charges are added to bills and
redistributed by the employer as wages. In these cases
Class 1 NIC contributions are payable.
National Minimum Wage considerations
Tips do not count towards a NMW obligation if paid direct
by customer or via an organised Tronc.
Tips do count as part of NMW if paid by the employer as part
of wages.
There is no doubt that this is still a complicated and contentious
area of taxation. However it is not to be ignored. Clients
who would like a review should contact us for an appointment
- and of course we will organise refunds of NIC overpaid in
appropriate cases.
Calculation of absent parents earnings for Child
Support purposes
The House of Lords ruled on the 12 July that no deduction
for Capital Allowances be allowed when considering the income
of a self employed trader for child support purposes.
This will greatly benefit Mrs Helen Smith who brought the
action as her ex-partner's profits before capital allowances
were £169,250 in the relevant year, and only £20,892 after
capital allowances!
Tax Diary August/September 2006
1 August 2006 - Due date for corporation
tax due for the year ending 31 October 2005.
19 August 2006 - PAYE and NIC deductions
due for month ending 5 August 2006. (If you pay your tax electronically
the due date is 22 August 2006)
31 August 2006 - Last date for submission
of Tax Credit renewal forms.
1 September 2006 - Due date for corporation
tax due for the year ending 30 November 2005.
19 September 2006 - PAYE and NIC deductions
due for month ending 5 September 2006. (If you pay your tax
electronically the due date is 22 September 2006)
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DISCLAIMER - PLEASE NOTE: The ideas shared with you in this
email are intended to inform rather than advise. Taxpayers'
circumstances do vary and if you feel that tax strategies
we have outlined may be beneficial it is important that you
contact us before implementation. If you do or do not take
action as a result of reading this newsletter, before receiving
our written endorsement, we will accept no responsibility
for any financial loss incurred
