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Tax Advice

Christmas party? | do it virtually and get the tax back!

This year has been (erm, let’s say) testing to say the least, and you might think it more important than ever to say thank you to your staff.

However, given lockdown restrictions you’re not going to be having the annual xmas party at the local bar or restaurant.

Possible alternative

HMRC has just updated its guidance, confirming that the cost of a ‘virtual’ party is an allowable expense for your salon.

“A company holds one annual function in a tax year and does so virtually using IT. All employees are invited and each is provided with a hamper consisting of some food and drink to be enjoyed by the attendees during the party. The total cost per head is £100 which is within the £150 exemption and so the exemption applies.”

In other words, spend up to £100 on each of your employees on something they can enjoy while attending a Zoom meeting. Say some words of thanks, then let them get on with it, and get the tax back!

Not just for xmas

And the rules mean that you don’t have to do this necessarily in December; you could do it anytime of the year, as long as it’s just the once per year.

Further reading

Here’s background to why you get the tax back on the  Xmas parties and also on trivial benefits (an alternative idea to the xmas party):

Xmas staff party | the tax rules

Trivial Benefits | a tax efficient way to thank your staff – and you!

How to pay for all this furlough? | Nicholas Macpherson sums it up nicely

A longer read than usual for one of our posts but Nicholas Macpherson, former permanent secretary to three chancellors, hits the nail on the head, just like tax is going to hit us all in the pocket to pay for furlough in the not too distant future…

Nicholas Macpherson:

Taxes are going to have to rise.

As with war, the immediate cost of the coronavirus can be financed by borrowing. But as and when we return to normal times, the government will need to set out a plan which stabilises and then reduces public sector debt as a share of national income.

The problem is public expectations of healthcare are rising. Voters will expect greater spare capacity to guard against future pandemics and they will demand better care homes. Demographic pressures on spending are already on the rise. And Mr Johnson’s government has shown little interest in public expenditure control: it was elected on a platform of ending ‘austerity’.

My guess is that taxes will have to rise by at least £50bn a year. The question is how?

I worked on two major fiscal consolidations when I was at the Treasury: 1992–93 and 2010–12.

The first lesson I learnt is that tax reform and tax increases are difficult to reconcile. Extending VAT to domestic fuel in the early 1990s led to an almighty row and government defeat. Similarly, George Osborne had little difficulty raising an extra £13bn by raising the VAT rate from 17.5% to 20%, but he found it impossible to raise £100m by extending VAT to pasties and holiday caravans. It’s better to leave tax reform to the good times when you can lower the rate while extending the base, as Nigel Lawson demonstrated in the 1980s.

The second lesson is that introducing small new taxes can help, but if they are not to cause upset the government should not push them too far. Airport passenger duty and insurance premium tax have been nice little earners. But the revenue they raised initially was in millions not billions. Everybody is in favour of a carbon tax in principle, until they have to pay a higher price at the pump or on their fuel bills. There’s a wider point about tax acceptability: push a tax too far, as New Labour did with council tax and the fuel duty escalator, and you spend many years repenting at leisure as you freeze the tax.

The third lesson is about fairness. Voters won’t tolerate openly regressive taxes like the so-called community charge or poll tax. But at the same time, you won’t raise serious money by soaking the rich. It’s tempting to think that the rich and the companies they own can bear the burden of higher taxes. They won’t. Capital is mobile. Tax it more and it tends to move elsewhere. It’s irritating that digital companies operate out of Luxembourg or Ireland but, the United States apart, governments are never going to extract serious revenue from them. The same can be said of the rich. President Hollande’s tax hike in 2012 merely led to an exodus of the affluent, many of whom came to London.

Taxing wealth is tempting. But wealth taxes rarely raise much revenue, once the inevitable exemption for housing is introduced. And experience suggests that people will go to extraordinary lengths to avoid inheritance tax.

There’s a good case in principle for taxing land – after all, it doesn’t move. But the politics of property taxation are notoriously difficult. All the chancellors I worked for worried about the asset rich but income poor widow. And it is no coincidence that there hasn’t been a revaluation of council tax in 30 years. I much admired the Irish reform of reducing stamp duty rates and introducing a self-assessed property tax. Stamp duty rates are too high and discourage mobility. But I can’t see it happening here. And even if it did, it would be more likely to take the form of a revenue neutral package than as a serious tax raiser.

That does not mean the government should do nothing in these areas. Corporation tax rates were probably reduced too far too fast. And there’s a good case for higher tax rates on capital gains, though economists tend to overestimate the likely yield: experience suggests if you wait long enough a government is elected which will tax your gains at a much lower rate. It’s worth looking again at pensions tax relief though this is already constrained and fiendishly complicated. The government might also consider more council tax bands, though in the absence of a revaluation it might be difficult to make these stick. But measures like these will raise billions rather than tens of billions.

That takes me to the final lesson I learnt. If you need to raise serious revenue, there is no substitute for raising the main rate of one of the big taxes. There is a reason why income tax, national insurance and VAT account for the vast majority of tax revenue. They are easy to collect and they are paid by most of the population.

The problem, in the short run at least, is the government made a manifesto commitment not to raise the rates of these taxes.

Here, the solution is simple. Introduce a new tax: a ‘temporary’ social solidarity charge. It would be modelled on national insurance and based on ability to pay, but unlike NICs it would be paid by old as well as young, and on pension, dividend and rental income as well as earnings. Unlike income tax, there would be no reliefs, and so with the broadest possible base the increase in tax rates could be kept to the minimum.

The new charge could be sold as a way of spending more on health and social care. I’m under no illusion. It won’t be popular. Taxes never are. Sometimes, you have to raise taxes to recreate a coalition for lower spending. The pendulum will swing.

Salonfrog + Shine | jointly present a free live webinar with financial expert, Rachel Stewart

UPDATE:

For those who would like access to yesterday’s webinar , here’s the link to access and watch in your own time. https://bit.ly/3iKhfBJ

 

Salonfrog and Shine are jointly presenting a free live webinar with financial expert, Rachel Stewart of Traprain “Financial on Financial Planning for Peace of Mind”
Thursday, 8th October at 2pm.

Rachel is not your usual financial person and actually brings some ‘humanity’ to the subject.

We’ve all had a bit of a scare this year but planning our finances is something we all tend to put off. If this year has shown us anything it’s that the unexpected can happen and it can happen very suddenly.

In the webinar, Rachel will go through:

• How to create your long-term financial plan
• Understand how to spot gaps in your position – and how to fill them!
• Understand what conversations you need to have with your loved ones
• Understand the human behaviours which can get in the way of planning your finances
• Gain confidence in the facts and figures you need to be thinking about and planning for

You need to register before the event here: – bit.ly/3669KSZ

Even if you can’t make the time, by registering you can watch a replay of it.

Rachel has also offered Salonfrog clients a free 2 hour consultation. No hard sell and no tie in! I know Rachel – she just isn’t like that!

I think this is one of the most important webinars I’ve been involved with and hope to see you there!

Tips & Troncs | our latest webinar

Salonfrog was delighted to have been invited by Shine Connect to give a webinar on Tips yesterday.
A great session with some good questions at the end!

To see it, you will need to join the Shine Connect facebook group.

Also, here’s the link to our guide: Tips!

Zoom training session | chair rental

Salonfrog was delighted yet again to deliver another Zoom training session around Chair Renting – and how Salon Owners can protect themselves with this type of set up. Another great turnout!

To watch it, simply join the Shine Connect private Facebook group, for salon owners:
https://www.facebook.com/groups/ShineConnect/

New Tax Year | new tax measures!

The 6th April kicks off a new tax year 2020/21 for income tax.

We look at some of the key changes that might affect salon and spa owners:

Have a property you rent out?

If you rent out a residential property (a lot of our Clients also have a rental property business as well as their salon), there are 3 key changes from April 2020:

1a. 30 day payment and reporting
Bad news
If you sell a residential property, you now need to report the capital gains tax (CGT) you made 30 days from the date of completion of the disposal (this didn’t used to be until the deadline of 31 January following the end of the tax year).
It means you have to pay any tax due a lot earlier than before.

1b. final period exemption
Bad news
There is a reduction in the final period exemption from 18 months to 9 months (the period where you can ignore any capital gains when you make a disposal of a rental property).
It means you have to pay more tax on the disposal.

1c. Finance costs
Bad news
The transitional rules for mortgage interest relief for individual landlords (introduced from April 2017) will finally end on 5 April 2020. Which means that the buy-to-let mortgage interest relief will be 20% of the lower of:

  • interest in the tax year;
  • profits of the property business in the tax year; and
  • total income (excluding savings income and dividend income) which exceeds the personal allowance in the tax year.

Any excess interest instead will be carried forward to be included in the calculation for the next tax year.

Employ staff?

Employment Allowance EA
Good news
For most of our Clients, they do not have to pay the first £3,000 of employers national insurance each year under what is known as the employment allowance. For this tax year, the EA has increased from £3,000 to £4,000. Which means your payroll costs reduce.

Minimum wage levels increase
Bad news
From April, the national living wage increases.
See more here: Minimum wage increases.

National Insurance limits increase
Good news
From April, an increase in the threshold where employees and employers start paying national insurance increases.
See more here: NI limits and thresholds for 2020/21

Inheritance tax
Good news
The inheritance tax (IHT) residence nil rate band is increased to £175,000 from 6 April 2020. Taken together with the existing IHT nil rate band, an individual taxpayer will be able to leave an estate of up to £500,000 without paying IHT.

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!

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