Tax Code / P45 / Higher Rate Tax

[captainham]

I spoke with one of the very helpful accountants who posted in this thread. It was suggested that one other reason to take the salary, even though the NI threshold has been passed, was to prevent any red flags being raised in Hector's HQ which could lead to the inquisition knocking on your door.

I can understand the thinking behind this at least in part, but then I'm not planning to change my own plans on this for this tax year.

My business is a brand new start-up venture, it will take me some time to build up cash in the business to allow me to pay a salary and get my head around all the requirements of running a business, running payroll, etc, so I view the lack of salary as an integral part of establishing my business in the early days.

Without knowing how HMRC "works" (and I doubt even they do!), you could argue that paying a salary from day one might be as much of a red flag, as in "Why is this new business able to start up and immediately have enough cash floating around to pay the typical (and potentially suspicious) low salary method to it's Directors?"

[Obbiie]

I spoke with one of the very helpful accountants who posted in this thread. It was suggested that one other reason to take the salary, even though the NI threshold has been passed, was to prevent any red flags being raised in Hector's HQ which could lead to the inquisition knocking on your door.

To close out the account issues, I'm switching next week to the aforementioned helpful accountant.

Cheers all,

Kevin

[Jessica@WhiteFieldTax]

Hmmm, So I'm even more confused now why my 'contractor' accountant would advise me to pay myself a 'tax efficient' salary when I have told them clearly that I have x amount of previous earnings in the tax year.

I'd thought I was obliged to pay some sort of token salary for NI, but then once I understood the NI threshold it started alarm bells ringing.
.

Its a valid question to ask.

However some people prefer to pay a small amount of NI from day one, even if they've gone over thresholds earlier in the year. Theres a feeling that it makes your new company more "legit".

Likewise some accountants are more comfortable if their clients are paying a small NI amount.

Alas, its not black and white - sometimes its an art form.

However your accountant should be able to give you a reasoned answer; if they don't then alarm bells are ringing.

[captainham]

Sorry but your current accountants sound pretty clueless, contractor-specific or not. You would be best served by binning them sooner rather than later and moving your business elsewhere.

As long as you've already been paid whatever the minimum is for an NI credit this year (somewhere in the region of £5-6k), then job done, no more salary needed this year.

Edit: you've been paid £35k already this tax year, just noticed. You are definitely sorted for an NI credit!

[Obbiie]

Hmmm, So I'm even more confused now why my 'contractor' accountant would advise me to pay myself a 'tax efficient' salary when I have told them clearly that I have x amount of previous earnings in the tax year.

I'd thought I was obliged to pay some sort of token salary for NI, but then once I understood the NI threshold it started alarm bells ringing.

I should not have been wowed by fancy software and should have gone with the three or four firms that are mentioned in NorthernLads thread. Live and learn. . .

[escapeUK]

Doesn't make sense to pay yourself a salary this year, you're just giving money away to HMRC needlessly in my opinion.

Thats right, throwing good money after bad!

[captainham]

I'm in the same boat...quit as permie earlier this tax year and already over my personal allowance.

So I'm not taking any salary this year, just divi's, then next financial year I'll switch to the more typical low salary+divi route.

Plus I'll get some tax back eventually as I've paid more tax than I should have versus how much I was paid in previous employment (due to tax being paid monthly but based on how much I was due to earn over the whole year as a permie).

Doesn't make sense to pay yourself a salary this year, you're just giving money away to HMRC needlessly in my opinion.

[Obbiie]

Actually, one more question.

Since I've already had an income in the tax year that takes me way over the NI minimum threshold, should I even be taking a salary from my LTD company or just dividends for the rest of this tax year?

Will be switching to a new accountant as soon as I can, but as some of the set up elements between my current accountant and HMRC are still being finalised I think I should wait until they are done (especially the tax code issue) Hopefully then I won’t need to ask these basic questions here!

Kevin

[Obbiie]

Thanks everyone for you're help. The fact that my current accountant is a contractor specific accountant and hasn't given me this kind of advice tells me all I need to know on that front.

The explanations on the tax code make sense, I think it's both an error in the code and an error in the payroll system, at least It will be sorted now after only one month.

The payment on account thing is great info to know, helps me plan much better, thanks again!

Kevin

[Craig at Nixon Williams]

Hi Kevin

Assuming that the permanent employment was your only job then your tax code should not have been a W1/M1 code. HMRC may have sent this to your former employer in error – if you call HMRC and explain your circumstances then they should be able to issue a new code. On a salary of £1,100 per month, I would expect to see some tax deducted if a W1/M1 code has been applied, a cumulative tax code however would probably have given rise to a refund of tax given you will have paid some tax at the higher rate on your previous earnings.

Given your circumstances, you will need to bite the bullet - take dividends and pay higher rate tax on them. The tax rate applied to dividends falling in the higher rate band is 25% of the dividend received; the 22.5% mentioned earlier is the effective rate on the gross (taxable) dividend which is the dividend received plus a notional 10% tax credit. When you enter the higher rate tax band, put aside 25% of the amount of dividend transferred for tax and this can then be paid over to HMRC when it falls due. The payment on account is a payment of tax for the following tax year, so for example if your tax liability for 2012/13 is £5,000 – this will become due on 31st January 2014, you will also make a further payment of £2,500 on 31st January 2014 and again on 31st July 2014 in respect of the 2013/14 tax year. If your tax bill for 2013/14 is then £6,000, you will make a balancing payment of £1,000 on 31st January 2015 plus the payments on account for the next tax year.

A contractor accountant will be better geared up to assist you with your accounting and tax affairs as the advice offered is specific to contractors.

Hope this helps you!

Craig

[captainham]

I do have a contractor accountant recommendation thread but cba to find it at the moment. Personally I would look for someone helpful that knows there stuff, and to give you a hint, one has just posted on this thread.

Methinks you mean this one

[northernladuk]

- If my accountant is offering just a basic book-keeping/HMRC forms and account filling service, do you recommend I switch to another accountant that would give me more support in terms of tax planning, or would engaging a contract specific IFA help? (I’m thinking more about future tax years here as I think I’m pretty limited in terms of options this year by the previous income)

Don't over estimate accountants. A few will send out proactive mailers but generally they are not there to teach you how to do your books. You still have to learn yourself but a good accountant will be on hand to explain everything to you. Remember though at teh end of the day you are legally responsible for your own accounts so some level of understanding should be found.

A contractor accountant will be much more switched on to what we do. Non contractor ones can be a bit slap dash and not as helpful in my experience. You don't need a local guy as you never need to meet.

I do have a contractor accountant recommendation thread but cba to find it at the moment. Personally I would look for someone helpful that knows there stuff, and to give you a hint, one has just posted on this thread.

[Sally@InTouch]

Another newbie with a list of questions. I’ve asked my accountant these questions but they don’t seem to be helping much, I suspect it could be that I’m not asking the questions correctly or I have some basic errors in my understanding so I would appreciate any input to help me, help them, understand me.

I have read the beginners guide and tried a few search strings here but can’t cover all of my questions off.

My situation:
- First contract and I have set up a new limited company, started in August 2012. Projected annual turnover £120K.
- Yes, I have an accountant and the basics such as VAT reg, tax efficient salary and putting money aside for Employer NI & Corp tax are taken care of.
- I had a permanent role from April 2013 until August 2013 and I earned 35,000 GBP pre-tax in this period. (Role did not work out which caused me to finally pull the trigger on contracting as a career choice long term)
- My monthly personal expenditure (rent/bills and supporting a partner who is a full time student) is quite high at the moment so I need around 4500/5000 GBP a month after tax for living costs. For future tax years I want to get this down (reduce rent etc…)in order to save/invest in a pension but this is not a short term fix.

Questions:
- My previous, permie, employer issued a P45 with a ‘Week 1, Month 1’ 810L tax code. When I run payroll I’m not seeing any tax or NI being taken off for August (on around 1100 GBP salary) and for September I see 100 GBP of Income tax and 0 NI (same salary) My accountant says this is due to the ‘week 1 month 1’ code (parts 2/3 of the P45 also did not even list my previous income) but I called HMRC and they say I should be paying tax based on that code (on anything over 675 GBP a month). Is this just a bad P45 from my previous employer or is it the accountancy software that is wrong?
- As I have a previous income of 35k this tax year, I can’t see any way of avoiding going into higher rate tax this year (given the high monthly income I need for now, probably into Q2 2013) Are there any options or do I just need to bite the bullet?
- If I am going into higher rate tax then what is the sensible way to ensure I am prepared for paying the tax when SA time comes around? Should I save 25% of the dividend I pay myself each month in a personal savings account or do I not understand this correctly? I want to prepare and not be hit with an unexpected bill, I’ve seen it mentioned that HMRC ask for more than just the actual tax owed, something about ‘on account’ but this has left me a little lost.
- If my accountant is offering just a basic book-keeping/HMRC forms and account filling service, do you recommend I switch to another accountant that would give me more support in terms of tax planning, or would engaging a contract specific IFA help? (I’m thinking more about future tax years here as I think I’m pretty limited in terms of options this year by the previous income)

Thanks for any help!

Kevin

Hi Obbie

You should be paying some tax and NICs on that level of salary so maybe the payroll has been set up incorrectly. You need to file the P45 with HMRC and also file a P46 to receive a new tax code and get off the week/month one basis.

Higher rate tax on the cash value dividend is 22.5% or 25% of the gross dividend. Payment is due 31st January following the end of the fiscal year, April 5th. You also pay 50% of the due amount, on account, for the next year, and the remainder in July that year. You can ask for the amount to be reduced if you think the next year's bill will be lower.

In my experience, a new contractor needs a fully supported service from an accountant to reassure you whenever you have any questions. It's vital that you understand how your business works and what your responsibilities are. There's plenty of specialist to choose from, phone around and see how you feel when speaking with them.

Good luck!

[Obbiie]

Another newbie with a list of questions. I’ve asked my accountant these questions but they don’t seem to be helping much, I suspect it could be that I’m not asking the questions correctly or I have some basic errors in my understanding so I would appreciate any input to help me, help them, understand me.

I have read the beginners guide and tried a few search strings here but can’t cover all of my questions off.

My situation:
- First contract and I have set up a new limited company, started in August 2012. Projected annual turnover £120K.
- Yes, I have an accountant and the basics such as VAT reg, tax efficient salary and putting money aside for Employer NI & Corp tax are taken care of.
- I had a permanent role from April 2013 until August 2013 and I earned 35,000 GBP pre-tax in this period. (Role did not work out which caused me to finally pull the trigger on contracting as a career choice long term)
- My monthly personal expenditure (rent/bills and supporting a partner who is a full time student) is quite high at the moment so I need around 4500/5000 GBP a month after tax for living costs. For future tax years I want to get this down (reduce rent etc…)in order to save/invest in a pension but this is not a short term fix.

Questions:
- My previous, permie, employer issued a P45 with a ‘Week 1, Month 1’ 810L tax code. When I run payroll I’m not seeing any tax or NI being taken off for August (on around 1100 GBP salary) and for September I see 100 GBP of Income tax and 0 NI (same salary) My accountant says this is due to the ‘week 1 month 1’ code (parts 2/3 of the P45 also did not even list my previous income) but I called HMRC and they say I should be paying tax based on that code (on anything over 675 GBP a month). Is this just a bad P45 from my previous employer or is it the accountancy software that is wrong?
- As I have a previous income of 35k this tax year, I can’t see any way of avoiding going into higher rate tax this year (given the high monthly income I need for now, probably into Q2 2013) Are there any options or do I just need to bite the bullet?
- If I am going into higher rate tax then what is the sensible way to ensure I am prepared for paying the tax when SA time comes around? Should I save 25% of the dividend I pay myself each month in a personal savings account or do I not understand this correctly? I want to prepare and not be hit with an unexpected bill, I’ve seen it mentioned that HMRC ask for more than just the actual tax owed, something about ‘on account’ but this has left me a little lost.
- If my accountant is offering just a basic book-keeping/HMRC forms and account filling service, do you recommend I switch to another accountant that would give me more support in terms of tax planning, or would engaging a contract specific IFA help? (I’m thinking more about future tax years here as I think I’m pretty limited in terms of options this year by the previous income)

Thanks for any help!

Kevin