Have you been thinking about forming a limited company from your existing business, but don’t understand the pros & cons – well here is a list of frequently asked questions my clients ask regarding the process of setting up and running a limited company. If you have any additional questions, please contact Richard at […]
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What is auto enrolment?
It is when you are put into a workplace pension automatically.
Automatic enrolment was introduced in October 2012 and requires employers to provide a workplace pension for their eligible employees.
The auto enrolment process has already started for larger companies first, followed by smaller companies with the aim of enrolling all eligible employees by April, 2019.
How does it work?
If you are an 'eligible employee' you will automatically start paying into a workplace pension set-up by your employer, who will also make a contribution on your behalf.
The government will also contribute a percentage towards your pension as a tax relief.
The date your employer starts auto enrolment is called the staging date.
Do you qualify?
Only if you are an 'eligible employee'. This means you are:
- At least 22 years old
- Working in the UK
- Earning a minimum of £10,000 each year
- Not paying into a workplace pension already
- Not yet at the state pension age (find out your pension age)
Within 6 weeks of your staging date you will be given a document from your employer, which will include:
- Your personal details, e.g. name, address
- Which pension you have been enrolled into
- The amount you will pay
- The amount your employer will pay
- Information on opting-out of the pension
- A declaration of compliance
The declaration of compliance lets you know your employer has correctly followed their employer duties in setting up your pension.
If you do not get one, make sure you ask your employer or contact The Pensions Regulator.
What if you do not qualify?
There are two main reasons why you may not qualify for auto enrolment:
- You do not meet the eligibility criteria
- You already pay into a workplace pension which meets the government's standards
You can still ask your employer to let you:
- Opt-into the auto enrolment pension scheme. Even if you are not eligible for automatic enrolment, you may still be able to join. Your employer will also have to make a contribution if you are added.
- Pay into a separate pension scheme if you cannot opt in. Your employer does not need to make any contributions if you do this.
Do you have to auto enrol?
No, while you will be automatically enrolled if you are eligible, you can choose to cancel your enrolment after the staging date. This is known as 'opting out'.
To opt out, you must complete an 'opt out form' and give it back to your employer.
The earlier you decide to opt out, the better the chance of getting the money you paid in back, for example:
- Opt out within first month: You will get all of your contributions back in full.
- Opt out after first month: It is unlikely you will get your money back until you reach your retirement age, however this depends on the pension scheme your employer enrols you onto.
Your employer must put you back into the pension every three years. This is in case your financial situation changes and you would benefit from the pension scheme and government contributions at a later date. You will still have the option to opt out every three years.
How much do you need to pay in?
The amount you and your employer have to pay into your pension will gradually increase over the next few years.
The maximum combined contribution will be 8% from April 2019, here is how your payments will be calculated, based on your qualifying earnings:
|Who pays||Until March 2018||From April 2018||From April 2019|
|Government tax relief||0.2%||0.6%||1%|
What are your qualifying earnings?
This is worked out by taking your yearly income and deducting the qualifying threshold for pensions, which is £5,876 in the 2017/18 tax year.
For example, if your employer pays you £25,000 a year, the figure of £5,876 will be deducted. This means you have £19,124 of qualifying earnings.
The following table shows how much will be contributed to towards your pension:
|Who pays||Until March 2018||From April 2018||From April 2019|
|Government tax relief||£38.35||£115.06||£191.76|
Figures in table represent annual deductions based on earnings remaining the same for each year.
What type of pension will you get?
Your employer will choose a pension scheme, but they will give you all the details about it. There are two popular types of pension scheme:
Defined benefit pension schemes - This type of pension is based on your earnings over the entire length of your employment.
Two examples of this type of pension are the final salary schemes and career average revalued earnings (CARE) schemes.
Defined contribution pension schemes - Also known as money purchase schemes, this type of pension will invest your contributions, which you can usually review throughout the term of the scheme.
Your retirement pay-out will be worked out based on how much you and your employer have contributed and how the scheme performs throughout the pension schemes term.Visit the Gov.uk website for more information on pension schemes
Does your employer have to auto enrol you?
Yes, if you are an eligible employee, your employer is required by law to enrol you onto their workplace pension, unless you are:
- A member of the armed forces
- The only person in a company (director)
If you are not on the exception list above and your employer refuses to enrol you into a pension, contact The Pensions Regulator for help
Today’s business accountant wears two hats – ‘bean counter’ and ‘business advisor’. The new breed of accountant can deliver good all-round advice on a wide range of business issues Business start-ups without an accountant in the team from the word go are courting disaster. While there may be few beans to count in those early […]
While most employee perks or “benefits in kind” are taxable, there are still a few which enjoy favoured status, to the advantage of employers and employees. This article sets out some of the key benefits and reimbursements which are... beneficial!
There is a well-established regime for taxing non-monetary “perks” for employees, such as company cars. They are generally reported on a Form P11D for each employee, so that he or she will pay income tax on its deemed value. These “benefits in kind” also cost the employer, who is normally obliged to pay Class 1A National Insurance contributions (NICs) at 13.8%. But note that in most cases, the employee escapes employee NICs.
Why sacrifice your salary?
While it could be argued that there is little point in an employee giving up his or her salary in return for ordinary taxable benefits in kind, there are one or two benefits which enjoy favoured status – so are not taxable. In these cases, replacing taxable income with a valuable benefit means less tax for the employee (so effectively more net pay), and an NIC saving for the employer.
1 Childcare vouchers
One of the most popular benefits co-ordinated with salary sacrifice, the employer can provide a basic rate taxpayer with up to £243 a month (or £55 a week) in childcare vouchers which are free of tax and NI for the employee – so the full amount can be applied directly for approved childcare. £243 a month equates to £2,916 a year, so a basic rate taxpayer can take home £2,916 in vouchers, instead of just £1,982 in cash. The employer stands to save roughly £400 in NIC as well. Both parents are eligible for the vouchers, potentially saving them over £1,800 a year.
There are conditions for a voucher scheme, and higher rate taxpayers can no longer benefit as much as their basic rate counterparts. Employer-supported childcare in the form of workplace crèches or directly contracted provision also stands to benefit, although vouchers are far more common for small businesses.
2 Employer pension contributions
Here, the employer offers to contribute to a pension scheme on behalf of the employee, instead of salary. The contribution is again free of tax, and NIC. This could be to replace existing salary, or it could be an alternative way to pay a bonus. The employer can put some or all of the NIC it saves towards the pension contribution, making it even larger than the cash alternative.
Of course, the employee cannot normally access the pension fund directly but this is less of a concern as retirement age approaches.
Care is needed when drawing up salary sacrifice agreements, in order for them to be deemed effective for tax purposes, as they are frequently scrutinised by HMRC. A key point is that the sacrifice must be agreed before the employee becomes entitled to be paid the salary or bonus payment. HMRC’s own guidance in its Employment Income manual starting at EIM42750 (www.hmrc.gov.uk/manuals/eimanual/EIM42750.htm) is genuinely helpful on this issue.
For lower-earning employees such as those who are entitled to benefits, salary sacrifices may also have adverse effects.
A mobile phone for an employee is not a taxable benefit in kind, nor does it attract NIC. Only one phone per employee enjoys this favourable treatment.
A common mistake, particularly with mobile phones, is for the contract to be between the phone company and the employee. Where an employer steps in to pay an employee’s contractual liability, there may be a tax charge and an NIC charge – on both employer and employee.
Computers and office equipment at home
HMRC permits the use of office furniture, stationery, computers, etc., away from the office without incurring a tax charge provided the motivation is for business purposes and private use is not ‘significant’.
Based on the relevant guidance, HMRC appears to have a quite relaxed attitude towards what is regarded as ‘significant’ private use in this context – fairly generous examples can be found at EIM21613 (www.hmrc.gov.uk/manuals/eimanual/EIM21613.htm).
Anyone who has previously tried to claim that there is no significant private use of a company car will be amazed at the difference in HMRC’s approach.
There is a potential trap for self-employed people when it comes to training: simply put, the costs of training for updating/maintaining existing skills are allowable, while acquiring a brand new skill is not.
This distinction is irrelevant for employees (and directors) – provided the training is intended to assist the employee in his or her employment, then the cost is not a taxable benefit for the employee.
Professional fees, subscriptions, etc.
An employer can pay for an employee’s membership of professional bodies, annual subscriptions, licence fees and trade union membership, relevant to the employee’s occupation. There are lists of approved professionals and bodies, which can be found in HMRC’s manuals at EIM32880 onwards (www.hmrc.gov.uk/manuals/eimanual/EIM32880.htm).
Scale rate expenses for travel/subsistence
Many readers will be familiar with the quite stringent rules for claiming deductions for ‘travelling and subsistence’. But HMRC is prepared to agree reasonable flat rate amounts that can be paid to employees working away from home/the business. (In fact scale rates can be agreed for expenses other than travelling and subsistence, although this is relatively uncommon).
Employers can use either the ‘advisory rates’ for meals published by HMRC at EIM05231 (www.hmrc.gov.uk/manuals/eimanual/EIM05231.htm), or agree specific rates with HMRC. This can be done for the business individually, usually by taking a sample of ‘real expenses’ and agreeing an average, or sometimes when the business is affiliated with a representative body which has agreed a national rate on behalf of its members – classic examples are those for the construction industry, and for long-distance lorry drivers.
Where the employer’s business involves employees spending long periods ‘on site’, this can be a real administrative saving. However, a scale rate payment can be made only if an employee confirms he or she has actually incurred some subsistence expense.
Personal incidental expenses
While HMRC doesn’t like to admit it, there is a long-standing allowance for employees who spend nights away from home. The allowance is intended to cover miscellaneous private expenses incurred, such as laundry or the cost of calling home. The amount is £5 per night away in the UK, and £10 per night outside the UK.
• It is a round sum that may be paid free of tax and NIC.
• No receipts are required, nor does any expense actually have to be incurred – it is explicitly for private expenditure, what the employee does with the allowance is irrelevant.
Whether you employ people, or are a director or employee yourself, the items above should offer plenty of opportunities for saving tax. I am particularly a fan of personal incidental expenses, as I enjoy telling tax inspectors that there are in fact some “round sum payments” which aren’t taxable!
None of these benefits has to be arranged as part of a salary sacrifice agreement – but it does help to sweeten the deal for the employer by reducing employers’ NICs. And where a director’s or employee’s income level is such that he is at risk of having child benefit clawed back, or of losing his personal allowance, then salary sacrifice can prove particularly useful.
There was a time when a limited company was considered the best way to hold rented properties; then the times (and the tax rates) changed and holding investment properties in a company became less attractive.
With rates of corporation tax plummeting over the last few years, and set to reach 20% for all companies in a couple of years, it may be the time to reconsider the use of a property company.
In particular, if part of your strategy involves selling properties to realise the capital gains they have made (and property prices seem at last to be rising again!), bear in mind that the company will pay only 20% on its capital gains, whereas you (if you are a higher rate taxpayer) will pay 28%.
When considering whether to use a company to hold your properties, much depends on the size of your planned portfolio, and how much cash you want to extract from it. If the plan is to reinvest the rental profits and acquire more properties, then the company will only pay 20% tax on its profits, whereas you could be paying 40% or even 45%.
If you want to draw out the profits for your own use, however, a company will not save you significant sums in tax, because when you draw out the profits as dividends (the most tax-efficient way to do this) the effective rate of tax for a 40% taxpayer is 25% on the dividend paid, and when you bear in mind that dividends are not tax deductible for the company, it works like this:
Example – The cost of drawing company profits
Derek is a 40% taxpayer. His property company makes a profit of £30,000, and he wants to pay this out as a dividend. He can only pay a maximum of £24,000, because the other £6,000 is needed to pay corporation tax. On his £24,000, he will pay income tax of £6,000, so the total tax paid by him and the company is £12,000, or 40% of the profits – exactly the same tax he would have paid if he owned the properties directly.
If Derek leaves the profits in the company to invest in more properties, however, he will have £6,000 more to invest than he would have if he owned the properties directly.
A company can decide when to pay dividends, so to some extent this enables you to control the rate of tax you pay on your dividends. If you own properties directly, you are taxed on the profit as it arises and apart from the timing of expenses like repairs, there is little you can do to change this.
Things a company cannot do
It is also worth bearing in mind that there are certain strategies that only work in the case of properties you own personally rather than through a company:
• Equity release – as a property owner, you can remortgage a property and use the cash for your own purposes, provided the mortgage is no greater than the market value of the property when it was first let. A company can, of course, remortgage its properties in the same way, but to extract the cash you will need to receive a (taxable) dividend.
• Main Residence – the exemption from CGT on your “only or main residence” does not apply if the property is owned by a company – indeed, there is likely to be a tax charge on you for the benefit of being allowed to occupy the property!
Here's a Practical Tip from Cloud Accounting NI :
Whether a company will be the best way to own your property portfolio depends very much on what your business strategy is. As with most tax matters, there is no “one size fits all” answer to the question, but it is a question every property investor should be asking themselves.