Employing staff for the first time?

There are a number of rules and regulations that you must be aware of when you employ staff for the first time.

HMRC’s guidance sets out some important issues to be aware of when becoming an employer.

  1. Decide how much to pay someone – you must pay your employee at least the National Minimum Wage.
  2. Check if someone has the legal right to work in the UK. You may have to do other employment checks as well.
  3. Check if you need to apply for a DBS check (formerly known as a CRB check) if you work in a field that requires one, e.g. with vulnerable people or security.
  4. Take out employment insurance – you will need employers’ liability insurance as soon as you become an employer.
  5. Send details of the job (including terms and conditions) in writing to your employee. You need to give your employee a written statement of employment if you are employing someone for more than 1 month.
  6. Ensure that you register as an employer with HMRC. You can do this up to 4 weeks before you pay your new staff. This process must also be completed by directors of a limited company who employ themselves to work in the company.
  7. Check if you need to automatically enrol your staff into a workplace pension scheme.

When it comes to paying staff, you can use a payroll provider or process your payroll in-house. If you decide to run your own payroll you must choose suitable payroll software. Setting up payroll for the first time can be an onerous and complex task.

We can help you complete this set-up process and look after the payroll for you. Call if you need more information.

Source:HM Revenue & Customs | 13-05-2024

Termination payment clearance process

The tax treatment of termination payments has changed significantly over recent years. The changes have aligned the rules for tax and secondary National Insurance contributions (employer (NICs)) by making an employer liable to pay NICs on termination payments they make to their employees. 

HMRC has announced that it is aligning its approach to providing advance assurance on certain termination payment enquiries. 

HMRC guidance had previously committed HMRC to giving a binding answer if you made enquiries on termination cases involving:  

  • the disability and injury compensation exception;
  • the foreign service exception;
  • how the £30,000 threshold applies to payments made by the third party and by the employer; and
  • non-cash provisions.

HMRC will no longer give a binding answer on these cases outside the normal Non-Statutory Clearance process, for example, where there is a genuine point of uncertainty on the correct treatment.

This means that any future enquiries from taxpayers and employers on termination payments should be dealt with through the existing Non-Statutory Clearance procedure. HMRC will no longer provide clearance outside of the Non-Statutory Clearance route.

Source:HM Revenue & Customs | 08-04-2024

More about emergency tax codes

The letters in an employee’s tax code signify their entitlement (or not) to the annual tax free personal allowance. The tax codes are updated annually and help employer’s work out how much tax to deduct from an employee’s pay packet. 

The basic personal allowance for the tax year starting 6 April 2024 is £12,570 and the tax code for an employee entitled to the standard tax-free Personal Allowance is 1257L. This is the most common tax code and is used for most people with one job and no untaxed income, unpaid tax or taxable benefits (for example a company car).

Emergency tax codes can be used if HMRC does not receive a taxpayer’s income details in time after a change in circumstances such as:

  • a new job
  • working for an employer after being self-employed
  • receiving company benefits or the State Pension

Employees on an emergency tax code will see one of the following codes on their payslip:

  • 1257L W1
  • 1257L M1
  • 1257L X

These codes mean that an employee’s tax calculation is based only on what they are paid in the current pay period. The emergency tax codes are temporary and will usually be updated once the necessary details about previous income or pension payments are sent to HMRC. Taxpayers will remain on an emergency tax code until they have paid the correct tax for the year.

Source:HM Revenue & Customs | 01-04-2024

A reminder that NLW and NMW rates are increasing

A reminder for our readers that the National Living Wage (NLW) and the National Minimum Wage (NMW) rates will increase with effect from 1 April 2024.

The increase will see the NLW rate increased to £11.44 per hour, an increase of over £1 over the current rate of £10.42. This means the annual earnings of a full-time worker on the NLW will see an increase of up to £1,800 next year. 

It was also confirmed, as part of the Autumn Statement announcements, that for the first time, eligibility for the NLW will be extended to 21 and 22 year olds. Currently, the NLW is only available to those aged 23 and over.

The NMW rates will be as follows from, 1 April 2024:

  • 18 to 20 year-old rate will be £8.60 per hour – an increase of £1.11 per hour
  • 16 to 17 year-old rate will be £6.40 per hour – an increase of £1.12 per hour
  • The apprentice rate will also be £6.40 per hour – an increase of £1.12 per hour
Source:Other | 11-02-2024

Reporting early payment of wages before Christmas

There is a permanent easement in place for employers to report PAYE information in real time over the Christmas period. This can be for a number of reasons, for example, during the Christmas period the business may close meaning workers need to be paid earlier than normal.

Employers that pay wages early over the Christmas period should report their normal or contractual payday as the payment date on their Full Payment Submission (FPS) and ensure that the FPS is submitted on or before this date. Doing this will help to protect employees’ eligibility for Universal Credit, as reporting the payday as the payment date may affect current and future entitlements.

HMRC provides the following illustrative example:

If you pay on Friday 15 December 2023 but the normal or contractual payment date is Friday 29 December 2023, you will need to report the payment date on the FPS as 29 December 2023 and ensure the submission is sent on or before 29 December 2023.

The overriding PAYE reporting obligation for employers is unaffected by this exception and remains that you must report payments on or before the date the employee is paid.

Source:HM Revenue & Customs| 16-10-2023

Increase in National Living Wage

The Chancellor of the Exchequer, Jeremy Hunt, confirmed that the government has committed to the proposals of the Low Pay Commission for increasing minimum wage rates from 1 April 2024. The actual wage rate recommendations of the Low Pay Commission are expected to be announced next month.

The latest forecasts show that this would create a pay boost next year worth over £1,000 for two million low-paid workers. A full-time worker on the National Living Wage (NLW) will be over £9,000 better off than they would have been in 2010.

These increases are expected to see the NLW increase to over £11 an hour. The NLW is the minimum hourly rate that must be paid to those aged 23 or over. The threshold is expected to further reduce to age 21 by 2024. These changes are based on the remit from the Low Pay Commission which sets a target for the NLW to reach two-thirds of median earnings by 2024 for workers aged 21 and over.

The current minimum wage rates for the period from 1 April 2023 – 31 March 2024 are as follows:

National Living Wage

  • Aged 23 & over – £10.42

National Minimum Wage

  • Aged 21 to 22 – £10.18
  • Aged 18 to 20 – £7.49
  • Aged 16 and 17 – £5.28
  • Apprentice rate – £5.28
Source:HM Treasury| 16-10-2023
hmrc deadlines july and august 2023; london accountant; wimbledon accountant

Key HMRC Deadlines for July and August 2023 You Need to Know

Key HMRC Deadlines for July and August 2023

As we step into July and August 2023, it’s essential to stay updated with the upcoming deadlines from HM Revenue and Customs (HMRC). Here’s a comprehensive guide to help you navigate these crucial dates and ensure that your business remains tax compliant.

1 July 2023 – Corporation Tax
The due date for corporation tax for the fiscal year ending 30 September 2022 is 1st July 2023. This deadline applies to corporations and businesses operating within the UK, and it pertains to the tax owed on all profits from your trading, investments, and chargeable gains. Ensure your business has calculated and prepared to pay its tax liability by this date.

 

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6 July 2023Forms P11D and P11D(b)
By 6th July 2023, businesses should complete and submit the P11D and P11D(b) forms. These forms concern the return of benefits and expenses (P11D) and the return of Class 1A National Insurance Contributions (NICs) (P11D(b)). This obligation primarily concerns employers who have provided certain benefits to their directors or employees.

19 July 2023 – Class 1A NICs
The payment for Class 1A NICs is due by 19 July 2023. However, if you plan to pay electronically, the deadline extends to 22 July 2023. This payment pertains to employers who have provided benefits such as company cars to their employees.

19 July 2023 – PAYE and NIC deductions
PAYE and NIC deductions for the month ending 5 July 2023 must be made by 19 July 2023. If you opt to make your payment electronically, the due date extends to 22 July 2023. This deadline applies to all employers who deduct PAYE and NICs from their employees’ wages.

19 July 2023 – CIS300 monthly return and CIS tax
The deadline for filing the CIS300 monthly return for the month ending 5 July 2023, and payment of the CIS tax deducted for the same period, is 19 July 2023. This applies to contractors operating under the Construction Industry Scheme (CIS).

1 August 2023 – Corporation Tax
For the fiscal year ended 31 October 2022, the due date for corporation tax is 1 August 2023. All corporations and businesses operating within the UK need to ensure they’ve prepared to meet this deadline.

19 August 2023 – PAYE and NIC deductions
For the month ending 5 August 2023, the PAYE and NIC deductions are due by 19 August 2023. Electronic payments can be made until 22 August 2023. All employers deducting PAYE and NICs from their employees’ wages need to take note of this deadline.

19 August 2023 – CIS300 monthly return and CIS tax
The filing deadline for the CIS300 monthly return and payment for the CIS tax deducted for the month ending 5 August 2023 is 19 August 2023. This is crucial for contractors operating under the CIS.

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the best way to pay yourself as a company director in the UK; london accountant; dividends taxation; income tax

How to best pay yourself as a UK company director

As a new company director in the UK, you are likely wondering how to best pay yourself through your company. You have several options for transferring company profits into personal income, including salaries, dividends, and investments. This post outlines the pros and cons of each, and gives you the information you will need to make your income as tax efficient as possible.

 

How can a company director pay themselves?

Company directors are considered employees of the company and so take a salary which is subject to income tax. Directors can also pay themselves using dividends, which are a common method of distributing profits to shareholders (which includes directors).

Salaries and dividends are subject to different tax rates, tax-free allowances, and National Insurance obligations, which we break down below.

 

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What is the difference between salary and dividends?

Dividends are a way for companies to distribute a portion of their profits to their shareholders. As a director, you can choose to pay yourself through dividends instead of a salary. Dividends are typically paid out after the company has paid its taxes and can be a tax-efficient way to receive income.

However, there are some basic rules to follow. Firstly, your company must have sufficient profits to pay dividends, and you should keep records of these profits. Secondly, dividends must be declared and approved by the company’s shareholders. Lastly, dividends cannot be paid if the company is insolvent or if the payment would render it insolvent.

When it comes to tax purposes, it’s important to find the right balance. Dividends are subject to lower tax rates than salaries. You also do not need to pay National Insurance Contributions on dividend income, which you would have to do so on any salary income.

Lastly, as is also the case with personal income tax, a certain amount of dividends you receive is tax-free.

You can read our full guide to dividends to learn more.

 

What is the most efficient way for a company director to pay themselves?

From the explanation above, it should be clear that paying yourself efficiently as a company director involves balancing tax-free personal allowances and differing tax obligations.

The table below should be very helpful in outlining these differences between salary and dividends.

company director pay; dividends tax; income tax; london accountant

At the most basic level, directors clearly want to use all of their available tax-free personal allowance. That means taking at least £12,570 as salary and £1,000 as dividends.

It is important to note that once you reach the Higher Rate income bracket, your personal allowance amount begins to decrease. And in the Additional Rate bracket, there is zero tax-free personal allowance.

An important factor that is left out of the above table is the added cost of National Insurance Contributions on salary income. National Insurance Contributions must be paid both by the employee and employer. The basic NIC rate for employees is currently 12% of earnings, and an additional 13.8% of earnings to be paid by the employer. These are basic figures, see our guide to National Insurance for a detailed understanding.

As a company director, you will effectively bear both of these costs, making salary income even less appealing when compared to dividends. A common strategy is to take enough of a salary that the director qualifies for state benefits such as the State Pension, but that does not incur NIC payments.

Under most circumstances, dividends will be more tax efficient than salary income, though how easy it is to distribute dividends will depend on the structure of your company and its shareholders.

Using investments as tax-efficient income sources

It is also important to take advantage of any other tax free allowances that HMRC makes available. An example of this would be transferring company profits into investments, rather than personal salary. In that way, you could take advantage of the tax-free capital gains allowance of £6,000.

Trusts are another way of accomplishing this, and which have their own tax-free capital gains allowance of £3,000.

It is also essential to consider how increased income may push you into a new tax band, and create much higher tax liability. For example, the dividend tax rate jumps from 8.75% in the first income bracket to 33,75% in the second.

As such, it may be more profitable in the long term to reinvest money into business (tax-free), or into other investments, rather than taking extra personal income that pushes you into a higher tax band.

 

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eligibility for UK employment allowance 2023

Eligibility for Employment Allowance 2023

If you’re a business owner in the UK, you may be eligible for the Employment Allowance, which can help you save money on your National Insurance contributions. This allowance can be a valuable resource for businesses looking to reduce their expenses and squeeze more into their bottom line.

What is the UK Employment Allowance?

The UK Employment Allowance is a government initiative that allows eligible small businesses to reduce their National Insurance contributions by up to £5,000 per year. This can be a significant cost savings for businesses, especially those with a small number of employees.

Who is eligible for the UK Employment Allowance?

To be eligible for the UK Employment Allowance, a business must have paid Class 1 National Insurance contributions in the previous tax year. However, the business’ Class 1 NI contributions must also have been less than £100,000 in that previous tax year.

Additionally, the business must have an employer’s liability insurance policy in place. The allowance is available to most businesses, including sole traders, partnerships, and limited companies.

However, businesses that employ only the owner or director are not eligible for the allowance. It’s important to note that businesses can only claim the allowance once per tax year, regardless of how many PAYE schemes they operate.

How much can businesses save with the UK Employment Allowance?

Businesses in the UK can save up to £5,000 per year on their National Insurance contributions with the UK Employment Allowance. This is the amount for the 2022/23 financial year. The maximum amounts for previous years were:

  • 2015-16: £2,000
  • 2016-20: £3,000
  • 2020-22: £4,000

Of course, you are not automatically entitled to this full amount. The allowance depends on the amount of National Insurance contributions being made – you can only claim the full amount if you’ve paid £5,000 or more in NI contributions that tax year.

How to claim Employment Allowance

Once you are sure your business is eligible, businesses can claim the allowance through their payroll software or by contacting HM Revenue and Customs. You’ll pay less employers’ Class 1 National Insurance each time you run your payroll until the £5,000 has gone or the tax year ends (whichever is sooner). It’s important to keep records of the claim and any adjustments made to National Insurance contributions.

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What are PAYE forms; P800; P11D; london accountant

What are P800, P45, P60, and P11D forms?

The P800, P45, P60, and P11D forms are used for the PAYE scheme.

Pay As You Earn, or PAYE, is the process whereby the taxes you owe on your income are taken off your pay before you receive it. This is done by your employer, who pays that money to HMRC.

If you pay taxes via PAYE and your only income is a single salary, it is unlikely that you will have to submit a Self Assessment tax return. However, you will still encounter several forms which are important for you to keep track of and understand to make sure you, or your employer on your behalf, are paying the right amount of tax.

understanding paye forms; london accountant; p11d; p800

P45

When you stop working at a job, your employer must supply you with a P45 form. This form details how much tax you have paid on your salary so far for that tax year. Tax years run from 6 April to 5 April the following year.

P45 forms are important for your new employer to work out how much tax should be deducted from your salary.

 

The P45 has four parts:

  • Part 1, which your employer sends to HMRC.
  • Part 1A, which you should keep in your own records.
  • Part 2 and 3, which you give to your new employer (or Jobcentre Plus if you are not working).

what if i cannot get a p45 from my employer?

If you cannot get a P45 from your previous job, or if you are taking on a second job, your new employer will have to determine how much tax you should be paying.

Employers have to get information from you about any other jobs you work, any student loans you have outstanding, and any benefits that you receive. They may ask you to fill in HMRC’s own ‘starter checklist’ that asks for all the details needed for PAYE.

P60

The P60 form details how much tax you paid on your salary via PAYE. If you have multiple jobs, you will get a P60 from each of them. If you work for an employer on 5 April, that employer must provide you with your P60 by May 31st of that year.

You’ll need your P60 to prove how much tax you’ve paid on your salary, for things like:

  • Claiming back overpaid tax.
  • Applying for tax credits.
  • As proof of your income if you apply for a loan or a mortgage.

What if I do not get a P60 from my employer?

If you are not able to get a P60 form from your employer, you can also use HMRC’s online ‘personal tax account’ system to get the details that would be on the P60. You can also use this service to check your State Pension, manage your tax credits, and claim a tax refund.

P11D

P11D forms are used to report your ‘Benefits in Kind’ (or simply ‘benefits’) to HMRC. Benefits are anything given to you by an employer that has monetary value and is not wholly necessary for your work.

Using the company car to travel from the office to a work site is a necessary business expense not a benefit for you, the employee. Free meals at work are not strictly necessary, and count as a benefit.

Why must I declare my work benefits?

It is important to tax employee benefits, as they would otherwise just become a way to get around income tax. However, there are many company benefits which are considered tax-free, including meals, a mobile phone, or workplace parking.

You will need to pay tax on benefits like accommodation, medical insurance, and private pensions. The P11D form is what you will need to fill out to tell HMRC about the benefits you receive.

Paying tax on benefits involves working out how much a benefit is worth in cash. Your employer must do this and give those details to you. You may not need to fill in a P11D if your employer already takes the tax owed from benefits out of your salary.

P800

You will receive a P800 form, also known as a ‘tax calculation letter’, if HMRC believes you have paid the wrong amount of tax – either too much or too little.

If you are due a refund, you must claim it online within 21 days or you will be sent a cheque in the mail.

If you owe tax, HMRC will automatically collect this over the course of the next year, usually through your employer and the PAYE amounts taken off your salary.

What if I receive a simple assessment letter?

If you owe more than £3,000, have to pay tax on your State Pension, or owe tax that cannot be taken off your salary, you will receive a Simple Assessment Letter instead of the P800.

You will have to pay this amount by 31 January, or within 3 months if you received the letter after 31 October.

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National Living Wage rates from April 2023

New National Minimum Wage (NMW) and National Living Wage (NLW) rates come into effect on 1 April 2023.

The new rate for the NLW will be £10.42 which will represent a 92p increase over the current rate. The NLW is the minimum hourly rate that must be paid to those aged 23 or over. The hourly rate of the NMW (for 21-22 year olds) will increase to £10.18 (a rise of £1). The rates for 18-20-year-olds will increase to £7.49 (a rise of 66p) and the rate for workers above the school leaving age but under 18 will increase to £5.28 (a rise of 47p). The NMW rate for apprentices will increase by 47p to £5.28. The accommodation offset will rise to £9.10 per hour (an increase of 40p).

It is important that employers update their systems, by 1 April 2023, to reflect the new rates as there are significant penalties for employers who are found to have paid workers less than the above rates. 

If you have underpaid an employee, you must pay any arrears immediately. There are penalties for non-payment of up to 200% of the amount owed unless the arrears are paid within 14-days. The maximum fine for non-payment can be up to £20,000 per employee and employers who fail to pay face a possible 15-year ban from being a company director as well as being publicly named and shamed.

Source:Other| 27-02-2023

Setting up a salary sacrifice arrangement

A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit. The tax and NIC advantages of certain benefits provided as part of a salary sacrifice arrangement were removed from 6 April 2017. The change removed the Income Tax and employer NIC advantages of certain benefits provided as part of salary sacrifice arrangements such as mobile phones and workplace parking. There was a transitional plan in place for certain benefits that ended on 6 April 2021.

An employer can set up a salary sacrifice arrangement by changing the terms of an employee’s employment contract. The employee needs to agree to this change. The employee’s contract must be clear on what their cash and non-cash entitlements are at any given time.

A salary sacrifice arrangement cannot reduce an employee’s cash earnings below the National Minimum Wage rates. Employers must put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained.

It may also be necessary to change the terms of a salary sacrifice arrangement where a lifestyle change significantly alters an employee’s financial circumstances. This may include marriage, divorce and a partner becoming redundant or pregnant. Salary sacrifice arrangements can allow opting in or out in the event of lifestyle changes like these.

Source:HM Revenue & Customs| 30-01-2023
IR35 reforms London

IR35 reforms

One of the measures the Chancellor of the Exchequer, Kwasi Kwarteng referred to in the delivery of the Growth Plan 2022 (commonly referred to as the mini-Budget) concerned moves to simplify IR35 rules. This measure was one of the pre-election promises of the new Prime Minister, Liz Truss. In the end it seems that the Chancellor went further than expected and announced moves to simplify the IR35 rules that included the full repeal of the 2017 and 2021 reforms.

The rules for individuals providing services to the public sector via an intermediary such as a personal service company (PSC) changed from April 2017. The rules shifted the responsibility for deciding whether the intermediaries’ legislation applies, known as IR35, from the intermediary itself to the public sector receiving the service. These rules were further extended in April 2021 for individuals providing services to certain medium and large-sized clients private sector organisations via an intermediary such as a personal service company (PSC). Small companies remained exempt.

It should be noted, that whilst the full details on this change remain to be published, the repeal of the 2017 and 2021 reforms is set to take place with effect from the start of the 2023-24 tax year on 6 April 2023.

From this date, contractors providing services via an intermediary will once again be responsible for compliance with the IR35 rules to determine their employment status and to pay the necessary tax and National Insurance contributions. This will remove the burden that currently falls on businesses and public authorities to determine the employment status of their contractors.

The government will need to ensure that these reforms do not result in increased tax avoidance and there may be new measures put in place in that regard. We will publish further information when more details are made available.

Source:HM Treasury| 27-09-2022
Minimum wage for different types of work

Minimum wage for different types of work

Employers must ensure they are paying staff at least the National Minimum Wage (NMW) or National Living Wage (NLW). The NMW and the NLW are the minimum legal amounts that employers must pay their workers.

HMRC’s guidance states that there are different ways of checking that workers get the minimum wage depending on whether they are:

  • paid by the hour (known as ‘time work’);
  • paid an annual salary, under a contract for a basic number of hours each year (known as ‘salaried hours’);
  • paid by the piece – the number of things they make, or tasks they complete (known as ‘output work’); and
  • paid in other ways (known as ‘unmeasured work’) once you know how many basic hours you can calculate if they are being paid at least the minimum wage to which they are entitled. 

There are penalties for employers that are found to have underpaid their workers and, in some cases, there may be criminal prosecutions. The NLW is the minimum hourly rate that must be paid to those aged 23 or over. The rates for the period from 1 April 2022 – 31 March 2023 are as follows. The rate for the NLW is £9.50. The hourly rate of the NMW (for 21-22 year olds) is £9.18. The hourly rate for 18-20 year olds is £6.83 and the rate for workers above the school leaving age but under 18 is £4.81. The NMW rate for apprentices is £4.81.

If an employee has been underpaid, the employer must pay any arrears without delay. There are penalties for non-payment of up to 200% of the amount owed. The penalty is reduced by 50% if all of the unpaid wages and 50% of the penalty are paid in full within 14 days.

The maximum fine for non-payment can be up to £20,000 per employee and employers who fail to pay face up to a 15-year ban from being a company director as well as being publicly named and shamed.

Source:HM Revenue & Customs| 24-09-2022

PAYE Settlement Agreements

A PAYE Settlement Agreement (PSA) allows employers to make one annual payment to cover all the tax and National Insurance due on small or irregular taxable expenses or benefits for employees.

The expenses or benefits included in a PSA must be defined as one of the following;

  • minor – e.g., a small birthday present;
  • irregular – e.g., one-off relocation expenses over £8,000 (these are tax-free below £8,000); and
  • impracticable (difficult to work out the value of or divide up between individual employees) – e.g., shared cars or taxi journeys.

Employers that are required to notify HMRC of the value of items included in a PAYE settlement agreement (PSA) must do so using form PSA1.

The deadline for applying for a PSA for 2021-22 expired on 5 July 2022. Any tax or National Insurance due for 2021-22 under a PSA must be paid electronically to clear into HMRC’s bank account by 22 October 2022. Employers that pay by cheque must ensure that the payment reaches HMRC’s Accounts Office by 19 October 2022.  There may be interest and / or a late payment penalty due where the payment is made late.

Source:HM Revenue & Customs| 05-09-2022