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Tax Advice

Post Corona, are we going to see a major rework of self employment tax?

While announcing the self employment corona relief package yesterday, the Chancellor also added an observation that once “the ship had been righted” and the UK had come through the worst of the pandemic, the government would look to examine “the inconsistency in the tax treatment of those who are employed and self-employed”.

This has been something they have been looking at for a while now – including new IR35 rules (although delayed for a year now), and moving self employed NI contributions to the same as employed; their sole aim to ensure that you pay the same tax on the same £100 you earn, no matter your employment status.

Will affect your renters, which in turn may well affect your salon.

We wait to see…

Budget 2020 | how it affects salons and spas

The Budget was delivered today (11 March 2020) by the Chancellor Rishi Sunak (only a month into his new job) and the first Budget since Philip Hammond gave his fourth and last Budget in October 2018.

This 2020 one then, delivered at a time of much uncertainty and in the wake of a looming coronavirus threat, Sunak had a very positive tone, insisting that “any problems [it] creates would be short-term and would be dealt with”, while the “UK’s medium to longer term outlook is very positive”.

Here are the key points for salon and spa owners:

 

SSP and COVID-19 Corona Virus

The Budget announces measures surrounding COVID-19.

Employees will receive SSP from day 1 if they either have COVID-19 or have self-isolated because of it (rather than from day 4 with all other sicknesses).

Employers cannot currently reclaim SSP back from the Government, however they will now be able to do so if the SSP is paid to an employee who has COVID-19 or has self-isolated because of it.

Here are the rules:

  • employer must have fewer than 250 employees
  • employers will be able to reclaim expenditure for any employee who has claimed SSP (according to the new eligibility criteria) as a result of COVID-19
  • this refund will be limited to two weeks SSP per employee
  • employers should maintain records of staff absences, but should not require employees to provide a GP fit note (see below)
  • the eligible period for the scheme will commence from the day on which the regulations extending SSP to self-isolators come into force
  • while existing systems are not designed to facilitate such employer refunds for SSP, the government will work with employers over the coming months to set up a repayment mechanism for employers as soon as possible

The government has already issued guidance to employers, advising them to use their discretion not to require a GP fit note for COVID-19 related absences. This Budget announces that the government and the NHS will bring forward a temporary alternative to the fit note in the coming weeks which can be used for the duration of the COVID-19 outbreak. This system will enable people who are advised to self-isolate to obtain a notification via NHS111 which they can use as evidence for absence from work, where necessary.

National Insurance thresholds
Good news for salon owners, their staff and self employed chair/space renters

The budget confirmed the expected increase in the thresholds at which employees and the self-employed start paying National Insurance contributions (NICs) to £9,500 from April 2020.

Around 1.1 million people will be taken out of paying Class 1 (employed) and Class 4 (self employed) NICs entirely. This is the first step in meeting the government’s ambition to increase these thresholds to £12,500, which would save a typical employee over £450 per year.

Employer NICs
Good news for salon owners

Currently, the first £3,000 of Employers NIC is free each year. The budget has increased this to £4,000 from April.

This effectively reduces a salon owner’s staff cost by £1,000 per year.

Business rates
Good news for salon owners

From 1 April 2020, the business rates retail discount for properties with a rateable value below £51,000 in England will increase from one third to 50%. On top of this, to support small businesses in response to Covid-19 the retail discount will be increased to 100%.

We await to see if Scotland and Wales follow.

The government is launching a fundamental review of business rates to report in the autumn. The Terms of Reference for this review are published alongside this Budget and a call for evidence will be published in the spring.

Pension tax
Good news for your staff 

Those earning around or below the level of the personal allowance £12,500 and saving into a pension (most likely through auto enrolment) don’t currently always receive tax relief in the same way those earning more do: it all depends on how their pension scheme administers tax relief.

The government has committed to reviewing options for addressing these differences and will shortly publish a call for evidence on pensions tax relief administration.

Capital Gains Tax
Bad news for salon owners

From 11 March 2020, the lifetime limit on gains eligible for Entrepreneurs’ Relief ER (which offers a reduced 10% rate of Capital Gains Tax when you sell your business for example) will be reduced from £10 million to £1 million, in response to evidence that it has done little to incentivise entrepreneurial activity and that most of the benefit accrues to a small number of very affluent taxpayers.

Given that salon owners include ER in their exit/retirement strategy, this could be bad news. Although for most, I think there will be no difference and a £1m limit might be quite adequate 🙂

Corporation tax
Bad news for salon owners

Corporation tax remains at 19% (despite it being promised 3 years ago to fall to 17% from April 2020).

Individual Savings Account (ISA) annual subscription limit
Good news for salon owners, their staff and self employed chair/space renters who have (or want to open an ISA)

The adult ISA annual subscription limit for 2020-21 will remain unchanged at £20,000.

However, Junior ISA and Child Trust Fund annual subscription limit – The annual subscription limit for Junior ISAs and Child Trust Funds will be increased from £4,368 to £9,000.

MTD
Good news for salon owners, their staff and self employed chair/space renters

The government have decided to publish an evaluation of how MTD for VAT went before kicking off phase 2. This is most welcome. We’re not sure business has fully recovered from this initial debacle yet.

IR35

Named after the press release that originally brought the legislation in (and not such a big issue to the majority of Salon owners, see why here), the new IR35 rules are going ahead from next month. More importantly, it maybe a taster of how these rules (purely aimed at where a Ltd co sits between the worker and the salon’s Ltd co) may spill into the very popular self-employed stylist/salon arrangement. We continue to see…

 

Child benefit and the High Income Tax Charge HITC

Child Benefit

From a tax point of view if you receive child benefit there’s nothing else to consider, unless you or your husband/wife/partner earns more than £50,000 in a tax year, as you will have to pay some (or all) of the child benefit you received back through what’s called the ‘High Income Tax Charge’ HITC.

High Income Tax Chargee (HITC)

Individuals who receive Child Benefit may have to pay the HITC if their income (or their partner’s) exceeds £50,000.

Between £50,000 and £60,000 you will pay back a proportion of what you’ve received: 1% for every £100 you’ve earned over the £50,000 (we’ve included an example later on).

Anything over £60,000 and you’ll have to pay it all back.

What’s included in income to see if you are above the £50,000

Income includes pretty much anything that you’d be taxed on: Salary, dividends, bonuses, commissions received, tips, rental income and so on.

If this is the case, you are required to show this on your next Self-Assessment tax return and pay the charge that you owe – called the HICBC.

Many families caught by one of the partners earning over the £50,000 threshold simply decide it is easier to not bother claiming child benefit. But the danger with this course of action is that child benefit is linked to certain national insurance entitlements – the claimant can get national insurance credits for periods when they are not working until the child reaches 12 years of age, and claiming child benefit ensures that the child is sent a national insurance number when they are 16. These entitlements are lost if the benefit is not claimed.

The only way to avoid the HICBC completely while retaining national insurance entitlements is to claim child benefit then opt not to receive it:

Tax tip:

Even if you or you partner exceed the £50,000 threshold, you should still claim Child Benefit (but then tick the box to opt out of actually receiving any cash). This ensures you get any National Insurance credits (which accrues towards your state pension) and also helps your children to automatically receive their National Insurance number before their 16th birthday.

Example:

Between 6th April 2019 and 5th April 2020, you receive a salary of £10,000 , dividend income of £30,000 and income from renting out property of £15,000. So total income of £55,000.

You have also been receiving child benefit for the whole of this period amounting to £1,076.40.

The HITC is calculated as 1% for every £100 you earn over the base £50,000. So in this case, being £5,000 over the base, you are 50 lots of £100 over, which is 50×1% = 50%.

Your HITC is therefore 50% x £1,076.40 = £538.

So, you must tick the box in your personal tax return SA100 and include the amount of Child Benefit you have received, and pay the HITC of for the year of £538 by 31st January following the 5th April tax year that it relates to.

Top tip:

Even if you or you partner exceed the £50,000 threshold, you should still claim Child Benefit (but then tick the box to opt out of actually receiving any cash). This ensures you get any National Insurance credits (which accrues towards your state pension) and also helps your children to automatically receive their National Insurance number before their 16th birthday.

Tell your staff

Let your staff and Clients know as well!

Get your ducks in a row. April 5th is fast approaching!

With the income tax year 2019-20 ending on the 5th April, now’s the time to ensure you’ve been canny with your tax planning.

Each owner’s situation is unique. Some may have income outside the salon. Some want to re-invest in their salon rather than pull cash out. Some are married or in civil partnership. Some have used up their company’s employment allowance already. Some want to invest in a pension. The list goes on. Which means that there is no standard rule to follow.

Salonfrog runs through its own tax planning for its Clients who have our Salon Business+ package but here’s a few tips for those who prefer to do it themselves, or don’t have an accountant who does it for them.

  • Your personal tax allowance
    for this tax year is £12,500, so if at all possible, ensure you use it (or loose it).
    More here.
  • Extract profits from your Ltd company in the most efficient way.
  • Salary
    Ensure you’ve pulled the most tax efficient salary from your Ltd company and report it through RTI by the 5th April.
  • Protect your state pension
    Ensure your salary is enough to receive an NI credit for the year (which adds to your state pension). More here.
  • Consider paying dividends
    After setting your salary level, but be mindful of which tax band this takes you into and that you comply with all the legalities. You don’t want illegal dividends.
  • Capital gains
    Ensure any gains you’ve made in the year are also taken into account when setting salary and dividends levels, otherwise you could end up paying a lot more in CGT tax than you need to.
  • Pass you allowance
    Consider passing some of your personal allowance to your partner (if you earn less than £12,500 and they are a basic tax rate payer) so they can get the benefit where you can’t.
  • Student Loans
    If you have a student loan, watch what level your income gets to, as this can trigger a repayment charge in your tax bill. More here.
  • High Income Benefit Charge
    Consider whether you or your partner have received child benefit in the year. If you exceed £50,000 of income in the year, you’ll need to start repaying it at 1% for every additional £100.
    Read more here.
  • Pension
    Pension contributions can be highly tax efficient – but have a number of areas to consider. Getting your Ltd Co to contribute the payments is also a great option. There are numerous rules around this area, so speak to an accountant or pension advisor before going down this route.
  • Loan Account
    If you have an overdrawn Director’s Loan Account, consider clearing this through additional salary or dividend. If your loan is still in place 9 months after your Ltd co’s year end, you may be liable to an additional corporation tax charge of 32.5% on it. This tax charge is reclaimable when you do eventually pay the loan balance off, but it’s another thing to think about.
  • Tax rates
    Consider if any tax rates are likely to increase (or decrease) next year. If increasing, it may be better to take an additional hit in tax this year rather than a bigger hit next year. And vice versa!
  • Charity Gifts
    Giving to charity has tax benefits, so if you are going to give, doing this before 5th April can bring the benefit forward. More here.
  • Trivial Benefits
    Ensure you’ve used your maximum £300. More here.

Those are some of the key areas that affect most salon owners but as we said, each person is different!

Student Loans – make sure you tell your accountant!

If you or your staff have a student loan – it is very important to let your accountant and payroll company know! Fines are out there if you don’t!

Why you need to tell your accountant and payroll company

There are 2 reasons:

  1. So that any amounts to be repaid are calculated correctly and deducted through PAYE
  2. So that at the end of the tax year, your accountant can include the required information on your self assessment tax return and you then pay any additional amounts due on time

The fines quickly stack up if you don’t do this and start at 15% of the amount you owe, up to 40%, not to mention interest charges.

Further essential reading:

https://www.gov.uk/repaying-your-student-loan

 

Electric Car – a most tax efficient company car – for more than one reason

The way in which company car benefits are calculated is changing from April 2020. There will be two parallel car benefit tables for cars registered before 6 April 2020 and those registered on or after that date.

Electric Cars

However, the position for purely electric cars is slightly different. From 6 April 2020 the taxable benefit for all electric cars will be reduced to zero, irrespective of when the car was registered.

In 2019/20 the taxable benefit for an electric car is 16% of list price, so drivers of electric cars will be delighted that their taxable benefit for 2020/21 will be zero! This won’t last, as in 2021/22 the taxable benefit will rise to 1% of list price, then 2% of list price in 2022/23. This assumes that this tax policy will remain in place under the new government.

Tax Tip

If you want to take advantage of these low company car benefit rates and purchase (rather than lease) an electric car through your Ltd company, wait until April 2020 to make the purchase. The 100% first year allowance for new cars (with CO2 emissions of no more than 50g/km) is available for purchases made before 1 April 2021.

This means there is a sweet spot in 2020/21 where the company gets 100% capital allowance on the purchase of an electric car and the employee has a zero taxable benefit for using the car.

Example

Your Ltd company purchases an electric car for £30,000 and then provides it to you (as Director) as a company car.

Buy it after 6 April 2020 and before 1 April 2021 and your Ltd company will save £5,700 in corporation tax (£30,000 x 19%), and you will not pay any income tax on it, since it is classed as a 0% benefit in kind.

HMRC impose fines for submitting your tax return late. We look at how they can quickly stack up.

You should submit your self assessment tax return on time and pay any amounts due by the deadline of 31st January each year. If not, you could be liable to fines.

Not one of our Clients but reported recently, we look here at how HMRC issued fines to Mr P and how it was calculated.

Real Case example

HMRC issued Mr P with a notice to file his 2016/17 self-assessment tax return on 6 April 2017 – which would have been due by 31st January 2018. However, this return was eventually filed electronically on 31 August 2018, seven months after the filing deadline.

Late-filing penalties applied

Penalties for filing a self-assessment tax return late increase the longer a return remains unfiled.

HMRC initially issued Mr P with a total of £1,300 in penalties in February and August 2018, made up of:

  • £100 initial late filing penalty (FA 2009, Sch 55 para 3)
  • £900 in daily penalties (£10 per day under FA 2009, Sch 55 para 4)
  • £300 penalty as the return had still not been filed 6 months after the penalty date (FA 2009, Sch 55 para 5)

The law (FA 2009, Sch 55, para 5) permits a penalty to be imposed at the higher of £300 or 5% of any liability to tax which would have been shown in the return, in cases where the return remains unfiled six months after the filing deadline.

Thus, once Mr P’S return was filed, HMRC increased the total six-month late filing penalty to £943, this being 5% of the tax liability shown on his return (£18,858.74).

This resulted in total late filing penalties of £1,935! And this, on top of any taxes he was due to pay anyway.

Queen’s Speech | 19.12.19 | any news for salon and barbershop owners?

The Queen’s Speech sets out the government’s agenda at the usual State Opening of Parliament following an election. The second Queen’s speech in the space of nine weeks produced few surprises  relating to tax issues were short on detail.

The key points included:

  • An increase in the national insurance threshold,
  • An increase to the national living wage,
  • Changes to business rates
  • Measures to encourage flexible working

Several policy areas only received passing comment, such as climate change policy and it also promised cross-party consensus on the future of social care in the UK.

Salonfrog Comment

Announcements on key tax changes are normally reserved for the chancellor to make during the budget but the next one is not expected until February, so it was left to the Queen this time.

The Prime Minister had said, during the run up to the general election, that the cut in corporation tax to 17% from April 2020 would be shelved but this was not mentioned in the speech. So we wait and see.

Full transcript here: https://www.gov.uk/government/speeches/queens-speech-december-2019

HMRC CEST Tool | make sure your salon or barbershop check is up to date

If you have self employed individuals in your salon or barbershop (for example chair renters or room renters, or even use contract staff), this is an important update from HMRC for you.

Background

HMRC has just enhanced its CEST tool and published new guidance notes intended to provide users with greater clarity on the factors used to decide if someone really is self employed or not for tax and NIC purposes.

HMRC developed some time ago a tool which you can use to check whether anyone who you consider as self employed in your salon or barbershop, really would be considered the same by HMRC.

If HMRC considers a self-employed person to actually be employed, they can look to you as salon owner for PAYE and NI back pay, as well as possible fines.

CEST Update

The CEST tool has just been enhanced and includes more questions than the previous version, including:

  • substitution: CEST uses a more sophisticated logic when asking questions on substitution;
  • business on own account: questions are asked about how rather than just whether the contractor interacts with customers of the client, whether the contract is part of a wider series of contracts with the same client and the extent to which the contractor provides services to other clients; and
  • provision of equipment: more detail is requested on the provision of equipment including specific questions on paying for materials, vehicles and other costs.

It also contains more links to HMRC guidance.

Salonfrog tried it

We’ve tried running it for a few scenarios specific to chair and room renters and often we got a result of ‘self employed’. However, the tool’s decision often sited the reason for this because “they will have to fund costs before your client pays you” and also in one of the critical questions there was no option to say that all the income was that of the self employed person and that they simply paid a flat rate rent to the salon.

Run it for each of your self employed people

We strongly recommend you run the tool for each of your self employed people as HMRC say they will stand by the tool’s decision! Once you run it, you have the option to save the results as a PDF, which you should do.

https://www.gov.uk/guidance/check-employment-status-for-tax

Salon owners (and their staff) should check their NI Qualifying Years

Although it may seem a long way off for some, you should check your NI Qualifying Years regularly. We tell you why & how here.

Background

To get the full basic State Pension when you reach retirement age, you need to have earned 30 “qualifying years” of National Insurance contributions or credits; and to get the new State Pension you’ll need 35 years.

A Qualifying Year is credited to you when you pay enough national insurance during that year, or for some reason you can claim a ‘free’ credit for that year.

If you have fewer than 30/35 qualifying years when you retire, your basic/or new State Pension will be less than the full rate (currently £129.20/£168.60 per week). However by checking your position regularly, you can ensure you earn the required 30/35 years (or at least close to it). For example, you might be able to top up ‘missing years’ or claim ‘credits’ to add to your total score – but there are time limits to do this. So read on…

What to do:

1st: Check what you have

Check how many years’ credits you have. You can do this on line and you’ll need you Government Gateway user ID:

https://www.gov.uk/check-national-insurance-record

2nd: See if you have any ‘free’ credit years you can add on

You may be able to get National Insurance credits even if you’re not paying National Insurance, for example when you’re claiming benefits because you’re ill or unemployed, or have taken time off to raise children. Have a look here to see if you can claim any missing years:

https://www.gov.uk/national-insurance-credits

3rd: Decide if you need to plug the gap

If you have any gap years, decide whether you want (or need) to make additional contributions or claim credits to plug the gap.

For example, if you already have 26 credit years and you plan to work for at least another 4 years, then there’s little need to plug any gaps. However, if you have 10 credit years and only plan to work for another 4 years, it may be worth catching up.

You can make voluntary contributions to plug the gap, but you need to check your eligibility here:

https://www.gov.uk/voluntary-national-insurance-contributions/who-can-pay-voluntary-contributions

Final points

Remember to tell your staff, family and friends to do the same! Feel free to pass them the link to this Article.

Feel free to contact us should you have any questions.

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