A timely reminder for Construction Industry firms
this month. We have also examined the bonus or dividend choice
for owner/directors of private companies, possible corporation
tax changes for incorporated associations and clubs and the
NIC consequences of reaching the statutory retirement date.
New Tax Scheme for Contractors - starting 6 April
2007.
During June 2006 HMRC issued new guidance to contractors
regarding the changes to the CIS tax scheme next year. You
may have received a copy.
On page 9 of the guidance notes HMRC have listed "Practical
Advice - What to do next". We have summarised some of
the key points mentioned:
-
Checking your current subcontractors status.
Under the new rules you will have to declare
that you are happy that subcontractors who work with you
are genuine self-employed persons and not merely employees
holding themselves out as self employed. There will be
severe penalties if you get this wrong.
-
Checking new subcontractors status who start
working with you on or after 6 April 2007. This
is a process that can be resolved by calling HMRC or by
contacting them online. Essentially the work should be
allocated to a specific person - we could assist by offering
training and support.
-
Produce pay and deduction statements. From
the 6 April 2007 you will need to give each subcontractor
a written statement each month showing fees paid and deductions
made. It would be as well to design your system for dealing
with this now. Depending on the number of your subcontractors
it may be a task best completed using specialist computer
software. Again we can advise.
-
Getting to grips with the new monthly returns.
Returns will need to be filed promptly and accurately.
Getting it wrong will be costly! HMRC have requested that
you file CIS vouchers to 5 April 2007 in good time. This
will enable the tax office to pre-populate your first
returns under the new rules and therefore save you valuable
time.
There are now just 9 months until contractors will have to
deal with the new rules. We would appeal to all affected clients
that they start the planning process sooner rather than later.
Take a Bonus or a Dividend?
If you manage and own shares in, a private limited company,
then assuming that your company has profits to spare, you
will no doubt be seeking advice at some stage - do I take
a bonus (extra salary) or a dividend? (a payment based on
shareholding.)
We have assumed in the conclusions we have reached below
that you already take a commercial salary for the work you
undertake for the company.
A bonus will be subject to your highest rate of tax, plus
employee's and employer's National Insurance Contributions.
Dividends are a return on your investment in the business
- you will pay tax on the amount received but no National
Insurance!
Logically it would seem to be a simple decision, take a dividend,
no extra NIC to pay. Unfortunately logic and tax planning
do not always go hand in hand! There may be circumstances
when a bonus is preferable to a dividend. One way to demonstrate
this apparent contradiction is to examine the outcomes when
the company pays corporation tax at different rates.
Post the 1 April 2006 your company will pay corporation
tax at:
-
the small companies rate of 19%,
-
the full rate of 30%, or
-
a marginal rate of 32.75% if your profits lie between
£300,001 and £1.5m. (This assumes your company is not
associated with other companies for tax purposes. Please
call if you need clarification on this point)
Dividends not bonuses:-
Dividends will generally be more tax effective than bonuses
if your company pays corporation tax at 19%
Dividends are also marginally better than bonuses if your
company pays tax at the full rate of 30%.
Bonuses not Dividends:-
Bonuses will produce a slightly lower overall tax and National
Insurance cost if your company pays tax at the marginal rate
of 32.75%.
The difference in the outcome when corporation tax is paid
at 32.75%, is mainly due to the extra corporation tax relief
that the company receives on the gross bonus paid and the
employer's NIC.
One exception in particular should be noted.
Shareholders paying tax at basic rates or lower.
Dividends are paid to shareholders less a 10% tax credit.
If the shareholder pays tax at no more than the standard
rate then no additional income tax is due. Under these circumstances
it will always be more beneficial to receive a dividend -
even if the company pays corporation tax at 32.75%.
Remember that there are other factors that will influence
the appropriate route. For example, dividends do not
count as earnings for pension premium purposes; and you might
not be able to pay dividends to individuals in the same proportions
that you would like to allocate a bonus and it is vital to
get the administration correct!
If you would like us to review the opportunities for your
company please call.
Company Tax returns for some small clubs and associations.
If you are involved in flat management companies or represent
a small incorporated club or association you may be interested
to read the comment that follows.
You may be aware that as from the 1st April 2006 the nil
rate band for corporation tax was abolished. This taxed the
first £10,000 of retained profits at zero rate. For companies
described as above, this was a useful device to avoid paying
corporation tax on any dividend or interest income they may
have received.
There will be a need therefore for all companies with investment
income to make a formal corporation tax return for the year
ended 31st March 2007. Companies with small amounts of interest
may find that HMRC are prepared to waive assessment - the
cost of raising the paperwork would be more than the revenue
raised!
If you need advice with clarifying your position, or making
a corporation tax return, please call.
Do I pay NIC after retirement date?
The quick answer is no, but that is not the whole story!
For those of us who intend to work until we drop the payment
of National Insurance contributions does change after you
pass the statutory retirement date.
For men: Pensionable age is reached at age 65 years.
For women: Pensionable age is 60 years if born before 6 April
1950, 65 years if born after 5 April 1955, with a sliding
scale in between those dates.
If you are employed you will pay no employee's National Insurance
after you reach the appropriate retirement date. However,
your employer will continue to pay secondary contributions
for as long as you continue to work.
If you are self-employed your flat rate Class 2 contributions
will cease after you reach retirement age. The same applies
to Class 4 earnings related contributions.
Therefore individuals will cease to pay contributions after
they reach retirement age. Employers will continue to pay
their contribution, no change!
Tax Diary July/August 2006
1 July 2006 - Due date for corporation tax
due for the year ending 30 September 2005.
6 July 2006 - Complete and submit forms
P11D return of benefits and expenses and P11D(b) return of
Class 1A NIC's.
6 July 2006 - Last date to file new Tax
Credit applications for the year ending 5 April 2007.
19 July 2006 - Pay Class 1A NIC's (by the
22 July 2006 if paid electronically).
19 July 2006 - PAYE and NIC deductions due
for month ending 5 July 2006. (If you pay your tax electronically
the due date is 22 July 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.
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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
