Reply to: contracting newbie...expenses

[madge2014]

If you're trying to figure out your personal tax liability, try this:

The higher rate limit is £41,865 if you have a normal tax code.

Deduct any gross income from that - so prior salary, gross bank interest, rental profit, foreign income etc.

Whatever is left is your remaining basic rate tax band, which is your max gross dividend value before tax kicks in. Divide by 10 and x by 9. That's your net dividend value, so the amount you can actually take in cash.

Any dividends in higher rates will be taxed at 25% of what you take, until you get over £100k, then it gets more complex.

So if you've had £10k so far, the calculation is:

£41,865 - £10,000 = £31,865/10*9 = £28,678.

If you're taking a dividend of say £2,000 now, that leaves £26,178 left up to 05/04/2015.

It can get a lot more complicated if you have pension contributions, donations, an odd tax code, benefits in kind etc. but it the above will give you a general view. You also need to be aware of self assessment payments on account, as they can surprise people in the first year of trade.

Thank you very much again for the details response. This is much clearer now

[madge2014]

Looking at the questions on this thread and the fact you have an accountant I think it is time you actually went to go speak them and get them to do what you are paying for.

Yes I am seeing my accountant later this week but just though I would run it by the seasoned veterans on here first as I'm a tad confused.

Thanks in advance

As stated in previous post.

[northernladuk]

You also need to be aware of self assessment payments on account, as they can surprise people in the first year of trade.

Still surprise me even now!

[Contreras]

Loan it to yourself as director and put it in a personal savings account, subject to BiK limit.

Whilst possible avoid this highlighted option until you are a lot more comfortable with your finances IMO...

Alright spoil sport. Invest it in stocks then... http://forums.contractoruk.com/accou...ed-advice.html

[Clare@InTouch]

Thank you very much for the comprehensive response.
I got a mail back from the accountant today.

The £495 Can indeed be transferred to my personal account. I just need to mark it as "expenses" on the transfer.

I had earnt just under the 10k mark at my previous permanent employer and so I have been advised that there would be no benefit in me receiving a salary this year.

So does this mean I am already 10k nearer to breaching the higher rate band ?

With regards to the amount I set aside for tax liability, any advice on the best place to keep it to perhaps gain some interest whilst it's just sitting there ?

Appreciate there are going to be other expenses going forward. My post was purely focusing on the first few months. I understand I am going to need to take the blinkers off and start thinking longer term.

If you're trying to figure out your personal tax liability, try this:

The higher rate limit is £41,865 if you have a normal tax code.

Deduct any gross income from that - so prior salary, gross bank interest, rental profit, foreign income etc.

Whatever is left is your remaining basic rate tax band, which is your max gross dividend value before tax kicks in. Divide by 10 and x by 9. That's your net dividend value, so the amount you can actually take in cash.

Any dividends in higher rates will be taxed at 25% of what you take, until you get over £100k, then it gets more complex.

So if you've had £10k so far, the calculation is:

£41,865 - £10,000 = £31,865/10*9 = £28,678.

If you're taking a dividend of say £2,000 now, that leaves £26,178 left up to 05/04/2015.

It can get a lot more complicated if you have pension contributions, donations, an odd tax code, benefits in kind etc. but it the above will give you a general view. You also need to be aware of self assessment payments on account, as they can surprise people in the first year of trade.

[northernladuk]

Yes, I guess. Plus any investment interest/dividends + other income, less charity donations.

Have a search, there are existing threads already on this... Options include: Pay it on account to HMRC, the interest rate is still paultry but better than most current accounts. Hold it in a business deposit account for a not-quite-so-paultry rate of interest. Loan it to yourself as director and put it in a personal savings account, subject to BiK limit. A combination of the above.

Whilst possible avoid this highlighted option until you are a lot more comfortable with your finances IMO...

[Contreras]

I had earnt just under the 10k mark at my previous permanent employer and so I have been advised that there would be no benefit in me receiving a salary this year.

So does this mean I am already 10k nearer to breaching the higher rate band ?

Yes, I guess. Plus any investment interest/dividends + other income, less charity donations.

With regards to the amount I set aside for tax liability, any advice on the best place to keep it to perhaps gain some interest whilst it's just sitting there ?

Have a search, there are existing threads already on this... Options include: Pay it on account to HMRC, the interest rate is still paultry but better than most current accounts. Hold it in a business deposit account for a not-quite-so-paultry rate of interest. Loan it to yourself as director and put it in a personal savings account, subject to BiK limit. A combination of the above.

[northernladuk]

Thank you! Ah yes forgot the accountancy costs.
I had an initial bill from them already for doing be incorporation of the company / set up fees etc. will need to add that to the expense for June I suppose too.

Looking at the questions on this thread and the fact you have an accountant I think it is time you actually went to go speak them and get them to do what you are paying for.

[madge2014]

I suspect that your accountant has said that £2505 is available for payment as dividends and/or salary - the £495 should be reimbursed to you first, if you are claiming those expenses. Make sure you understand exactly what every payment from your company to you is for - you don't want to be mixing everything into one payment and then trying to get someone to sort it out later on.


That seems worryingly naive, unless this is the only contract that you plan to have (which opens a whole other can of worms). If you finish this contract and the next one is away from home, will you not incur some additional expenses there? What about childcare, accountancy, bank charges, food, postage, penalty charges, non mileage travel, entertainment....

Yes sorry. I was referring to the only expense I can foresee in my current short term contract. - granted I did overlook the accountancy fees in my original response.

Thank you for your input. Appreciated.

[madge2014]

That's a simplistic and flawed calculation for anything but an estimate. To be fair it's probably on the safe side though.

Bear in mind that dividends will incur a personal tax liability if they take you into the high rate band or if you're a high rate payer already.

As said, that's an estimate, it might actually be more or less.

Fyi, at that rate you'll breach the 10,000 mile threshold in 20 weeks, 25p/mile thereafter.

Me neither. Ask him/her to explain their advice.

That should be the easy bit. Either pay it to your personal account or transfer it (bookkeeping entry) to your director's loan account. Think of the DLA as a running tab of what the company owes you (or vice versa).

Accountants fee?
New laptop / mobile phone ?
Share capital? VAT liability?
Anything else?

Try to keep a 'safety buffer' of funds in the company over and above the estimated distributable reserves. Remember that you can always take it out next year.

Whatever you do, be be sure to keep clear records. There's no set format to this, except that your accountant should be able to make sense of it.

Thank you very much for the comprehensive response.
I got a mail back from the accountant today.

The £495 Can indeed be transferred to my personal account. I just need to mark it as "expenses" on the transfer.

I had earnt just under the 10k mark at my previous permanent employer and so I have been advised that there would be no benefit in me receiving a salary this year.

So does this mean I am already 10k nearer to breaching the higher rate band ?

With regards to the amount I set aside for tax liability, any advice on the best place to keep it to perhaps gain some interest whilst it's just sitting there ?

Appreciate there are going to be other expenses going forward. My post was purely focusing on the first few months. I understand I am going to need to take the blinkers off and start thinking longer term.

[madge2014]

You need to factor in expenses like accountancy costs (which maybe won't even hit you until next year), annual shuttle fee costs and other administrative charges (they don't amount to a huge deal though) plus other unforseen charges, so best advice is to build up a residue of capital (it's up to you how much, only you know your circumstances) and leave that in the company.

Thank you! Ah yes forgot the accountancy costs.
I had an initial bill from them already for doing be incorporation of the company / set up fees etc. will need to add that to the expense for June I suppose too.

[Clare@InTouch]

I suspect that your accountant has said that £2505 is available for payment as dividends and/or salary - the £495 should be reimbursed to you first, if you are claiming those expenses. Make sure you understand exactly what every payment from your company to you is for - you don't want to be mixing everything into one payment and then trying to get someone to sort it out later on.


That seems worryingly naive, unless this is the only contract that you plan to have (which opens a whole other can of worms). If you finish this contract and the next one is away from home, will you not incur some additional expenses there? What about childcare, accountancy, bank charges, food, postage, penalty charges, non mileage travel, entertainment....

Totally agree.

Find out the exact breakdown of that £3,000 and make sure you know how much you're going to owe in VAT and CT. Also make sure you get your head around the company tax vs your personal tax, and that you know whether or not you're going to be taxed personally on the amount you take. Is it salary or dividend? Are you into higher rates of tax, and if so how much can you expect to pay on it?

From an expenses point of view you can claim anything that you need in order to run the business. If there’s a personal benefit there will likely be a personal tax implication. Some ideas of expenses:

Eye tests
Computer equipment
Postage & stationery
Books & technical manuals
Professional subscriptions
Insurances – professional indemnity, public liability
Travel to the client site – but do not claim petrol, that’s covered in mileage
Lunch, if you’re out on business all day (claim the actual amount, never round sums)
Use of home at £4 a week, or more if you actually work at home
Breakfast if you have an unusual early start
Dinner if you have an unusual late finish
If you’re staying overnight you can claim the cost of accommodation, plus a round £5 overnight allowance (£10 if abroad)
You can claim the cost of a yearly staff function where you can spend up to £150 per person.

There are other items you can pay for through the company, but they should come direct from the bank itself, not be expenses claimed:

The cost of your mobile 'phone if you get the contract swapped into the company name
Contributions into your personal pension - make sure the provider treats them as employer contributions
Payments for a registered childminder – up to £55 a week (as long as your salary is within the basic rate tax band)

The best advice is to talk to your accountant, and keep asking questions until you understand what he's talking about. A decent accountant wants you to understand as it makes their life easier, no one wants messy clients, so don't be afraid to keep asking questions.

[tractor]

.....

I suspect that your accountant has said that £2505 is available for payment as dividends and/or salary - the £495 should be reimbursed to you first, if you are claiming those expenses. Make sure you understand exactly what every payment from your company to you is for - you don't want to be mixing everything into one payment and then trying to get someone to sort it out later on.


That seems worryingly naive, unless this is the only contract that you plan to have (which opens a whole other can of worms). If you finish this contract and the next one is away from home, will you not incur some additional expenses there? What about childcare, accountancy, bank charges, food, postage, penalty charges, non mileage travel, entertainment....

It is worrying when so many people think the first thing to focus on is actually getting a contract when there are so many more important things to learn first e.g. how companies work, how accounts work, how PAYE works, how the law is different for companies than individuals, how contracts work, how VAT works .... ad nauseum.

It is far more difficult now than in the 80's/90's. Successive government claims of 'tax simplification' and 'red tape removal' are just smoke and mirrors and it has and will continue to get worse year on year.

Become a businessperson first and a contractor second IMO otherwise you are jumping off a cliff into a fast flowing river and screaming 'teach me to swim please'

[TheFaQQer]

I am a tad confused as I thought I would be able to xfer the full £3000 over to my personal account to do what I wanted with.

My accountant says however that the maximum I should withdraw is 3000 - £495 (expenses) = £2505

I suspect that your accountant has said that £2505 is available for payment as dividends and/or salary - the £495 should be reimbursed to you first, if you are claiming those expenses. Make sure you understand exactly what every payment from your company to you is for - you don't want to be mixing everything into one payment and then trying to get someone to sort it out later on.

The only expenses I will ever have going forward are
Mileage
Indemnity insurance - direct debit out of the business account
Website costs - direct debit out of the business account.

That seems worryingly naive, unless this is the only contract that you plan to have (which opens a whole other can of worms). If you finish this contract and the next one is away from home, will you not incur some additional expenses there? What about childcare, accountancy, bank charges, food, postage, penalty charges, non mileage travel, entertainment....

[stek]

Thanks all

So .. I've just received my first invoice payment and the business account is no longer on 00.00p hurrah

So I have a spreadsheet that calculates how much of my net payment I need to set aside from the total amount for tax liability (20% corp + 13.5% flat rate VAT)

I am not paying myself a salary as I had already earnt over the threshold this year at me previous permanent employer.

Let's say for argument sake that after tax liability has been deducted from my invoice total. I have a nice round some of say £3000 left

The only "expenses" I have had in the last month are mileage

11 days in June @ 100 miles each day
1100 x 0.45p per mile = £495

I am a tad confused as I thought I would be able to xfer the full £3000 over to my personal account to do what I wanted with.

My accountant says however that the maximum I should withdraw is 3000 - £495 (expenses) = £2505

This is the part I can't get my head around.
What now happens to the £495 that is left in the business account ? How do I / can I get my hands on it. Is there a reason I've been told not to withdraw it ? Or do I just withdraw it to another account and tag it "expense claw back"

The only expenses I will ever have going forward are
Mileage
Indemnity insurance - direct debit out of the business account
Website costs - direct debit out of the business account.

Yes I am seeing my accountant later this week but just though I would run it by the seasoned veterans on here first as I'm a tad confused.

Thanks in advance

Accountancy fees? PCG Membership?

Anyway, you can draw as much as you like providing you leave enough to pay VAT/PAYE/CT etc, just you will probably be taxed at the higher rate on whatever you draw over the threshold.

That's probably what your accountant is protecting you from but why not ask him/her/it?