Author: Abbie Glew

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Spring Budget 2024 Update & Our Reaction

On March 6th, 2024, the government unveiled their Spring 2024 budget. There are many different topics covered in the budget such as public spending, housing, transport, investments etc., so it can be difficult to pinpoint those changes that are relevant to you. Here, we intend to summarise the most relevant updates for individuals and small businesses.

Reduction in National Insurance

After reducing the main National Insurance rate by 2% in Autumn, individuals paid via PAYE will experience another 2% cut, bringing the rate down from 10% to 8% starting April 6, 2024. According to the government estimates, the combined effect of these two national insurance rate cuts would save a worker earning £35,400 over £900 annually.

Taken together these cuts mean:

• an average full-time nurse on £38,900 will receive an annual gain of over £1,000

• an average teacher on £44,300 will receive an annual gain of over £1,250

• an average police officer on £44,300 will receive an annual gain of over £1,250

• a typical junior doctor on £65,000 will receive over £1,500

• and working families with two earners each on the average salary will receive a gain of over £1,800.

Self-employed individuals will also enjoy a national insurance cut, reducing from 8% to 6% (previously 9% for 2023/24). This combined with the abolition of Class 2 NICs altogether would save a self-employed person with taxable profits of £28,000 around £650 per year.

Reaction:

Although it’s positive for those employed or self-employed, we hoped for adjustments to tax-free allowances and brackets in the budget.

The tax-free allowance will remain at £12,570 for the 2024/25 tax year as will the basic rate of tax threshold which is £50,270 (where it has been since 2021/22), this creates ‘fiscal drag’, which is a term that describes the process of pulling more people into paying income tax and pushing others into a higher tax band.

Traditionally tax brackets are adjusted to keep pace with inflation; however, they have been frozen in cash terms since April 2021. This means that as incomes rise, more low earners are pulled into paying the 20% basic-rate income tax (which kicks in at £12,571) and those with earnings nearing £50,000 tip into the higher 40% rate (which kicks in at £50,271).

The government budget lacked substantial support for small, limited companies, despite SMEs constituting 61% of all private sector, meaning that more than 3 in every 5 people are employed in the UK private sector.

Corporation tax rates are at their highest in over 10 years and this coupled with increased minimum wage amounts means that small businesses are under increasing pressure, which is likely in turn to mean that those employed by small businesses are also impacted.

Capital Gains Tax

In an attempt to raise revenue and boost the availability of housing by encouraging residential property disposals, the government has decreased the higher rate of capital gains tax levied on sales of residential property from 28% to 24%.

Previously, basic rate taxpayers would pay tax at 18% on disposals of residential properties whilst higher rate taxpayers would pay 28%. The basic rate of 18% remains the same but higher rate taxpayers will pay 24% from 6 April 2024.

Sales of a main residence are not within the charge of Capital Gains tax, so this only applies to sales of additional residential properties owned.

Reaction:

It will be interesting to see the impact (if any) this has on house prices, and whether it translates to any respite for those renting who have been seeing ever increasing rent prices over previous years.

VAT registration threshold

From 1 April 2024 the VAT registration threshold will be increased from £85,000 to £90,000. This means a business’s 12 month rolling turnover now needs to reach £90,000 for it to be required to register for VAT and begin charging VAT on its taxable supplies.

The de-registration limit has now increased from £83,000 to £88,000 meaning if a VAT registered business’s turnover falls below £88,000 and they do not expect it to breach this threshold within at least the next 12 months then it can de-register from VAT.

The government predicts this will help 28,000 small businesses in 2024/25 from no longer needing to be VAT registered.

Reaction:

The increase to the VAT threshold will be helpful for those hovering around the current £85,000 threshold as they will now be able to increase sales by £5,000 before the need to register.

However, historically the VAT threshold was increased broadly in line with inflation, that was until 2017 when it was frozen. If inflationary increases had persisted, the VAT registration threshold would be approximately £108,000. The change in policy led to a steady increase in the number of businesses within the VAT system, therefore increasing the burden.

We see firsthand that some businesses manage their turnover in order to remain below the VAT threshold. This has the unwelcome effect of deterring business growth, as well as impacting on business owners’ living standards.

While businesses breaching the threshold and registering for VAT will be able to recover VAT on eligible costs, they may not be in a position to simply add 20 per cent to their prices, meaning they may have to absorb some of the VAT cost themselves, so would be worse off as a result. This issue is the most acute in the business to consumer (B2C) space, particularly domestic service suppliers such as plumbers, electricians, hairdressers etc.

High Income Child Benefit Charge

The government has now recognised that it is not fair that a household with two parents each earning £49,000 a year will receive child benefit in full, while a household earning less overall but with one parent earning over £50,000 will see some or all their benefit withdrawn.

The changes to the system have not yet been enacted, they expect them to be in place from April 2026.

In the meantime, the income threshold individuals can earn before they start losing their entitlement to child benefit is increasing from £50,000 to £60,000.

The taper has also been slowed so individuals only lose full child benefit if their income is above £80,000. Previously, child benefit entitlement was decreased by 1% for every £100 earned above the limit, now it is reduced by 1% for every £200 earned above the limit.

This does still mean that a household of two adults with children where one earns £80,000 and the other earns nothing would lose their child benefit entitlement completely, but a household with two adults with children earning £60,000 each will be entitled to full child benefits.

Overall, the government estimates 485,000 families will gain an average of £1,260 in Child Benefit in 2024-25 as a result of these changes.

Reaction:

We are very much in favour of a move to a household approach and are baffled an individual approach was ever introduced. It is however disappointing that this does not look likely to take effect until April 2026.

New British ISA

To improve the competitiveness of the UK’s capital markets and unlock more private capital for the UK’s growth industries, the government is launching a new UK ISA to support savers and open up new investment opportunities for individuals.

The UK ISA will have a £5,000 contribution allowance, which is in addition to the current £20,000 ISA investment limit per tax year.

The government will consult on the details so further specific details are expected in the coming months.

Reaction:

We are all for increased offerings of tax efficiencies on savings and we welcome further details of the ISA so that we can explore using them with our clients.

Furnished Holiday Lettings relief abolished

For a rental property to qualify as a Furnished holiday Let (FHL) the property must be available for letting for at least 210 days a year, it must be actually let for at least 105 days a year and the total of all lettings that exceed 31 continuous days must be no more than 155 days during the year.

Previously there were beneficial tax rules for properties that qualified as FHLs such as mortgage interest deductibility, Capital Gains Tax reliefs, capital allowances on asset purchases and the profits counting as earnings for pension contributions purposes. However, these are to be scrapped from 6 April 2025 and from then FHLs will receive the same treatment as long-term rental properties for tax purposes.

The government state that this will level the playing field between short- term and long-term lets and support people to live in their local area.

This will take effect from April 2025 and draft legislation will be published in due course.

Reaction:

This is a big change for those currently utilising the FHL scheme and will likely result in significant tax increases on this proportion of their income. It is too early to say how it will impact the market, but we will certainly be expecting big shifts.

Other changes to note:

  • Non-domicile rules update – To help reduce taxes on working people the government will ensure that those with the broadest shoulders pay a bit more, by abolishing the tax rules for non-UK domiciled individuals, or non-doms, and replacing them with a residence-based regime. This will ensure that all UK residents who stay in the UK for over four years will pay the same tax on their foreign income and gains, regardless of their domicile status, creating a modernised regime that is simpler, fairer, and more competitive.
  • Multiple dwellings relief – From 1 June 2024, the government is abolishing Multiple Dwellings Relief, a bulk purchase relief in the Stamp Duty Land Tax regime. This follows an external evaluation which showed no strong evidence the relief is meeting its original objectives of supporting investment in the private rented sector. Property transactions with contracts that were exchanged on or before 6 March 2024 will continue to benefit from the relief regardless of when they complete, as will any other purchases that are completed before 1 June 2024.
  • The government will seek to extend full expensing to assets for leasing when fiscal conditions allow and will publish draft legislation shortly.
  • The capital gains tax (CGT) annual exemption will drop to £3,000 in 2024/25, down from £6,000 in 2023/24. This change will mean that those selling capital assets such as property or shares will pay more tax.

What’s staying the same?

Your personal allowance

Your tax-free personal allowance will remain at £12,570 in 2024/25. The personal allowance is partially withdrawn if your income is over £100,000 and then fully withdrawn if your income is over £125,140.

Income tax rates and allowances

For 2024/25, income tax rates and thresholds remain frozen at their 2023/24 levels. After your tax-free ‘personal allowance’ has been deducted, your remaining income is taxed in bands in 2024/25 as follows.

  ‘Other income’Savings incomeDividend income
Basic rate£1 – £37,70020%20%8.75%
Higher rate£37,701 – £125,14040%40%33.75%
Additional rateOver £125,14045%45%39.35%

‘Other income’ means income other than from savings or dividends. This includes salaries, bonuses, profits made by a sole trader or partner in a business, rental income, pension in

Tax on savings income

A savings allowance determines how much savings income you can receive at 0% taxation, instead of the usual tax rates for savings income as shown above. This continues to be set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.

Further, interest income from an Individual Savings Account (ISA) continues to be exempt from tax.

Tax on dividend income

A dividend allowance determines how much dividend income you can receive at 0% taxation, instead of the usual tax rates for dividend income as shown above.

As expected, this allowance will drop to £500 in 2024/25, down from the £1,000 2023/24 allowance. However, dividend income from a ‘stocks and shares’ ISA continues to be exempt from tax.

Individual Savings Accounts (ISAs)

The limit on how much you can save into ISAs (including cash and stocks and shares ISAs) in 2024/25 remains at £20,000 overall.

The Chancellor did announce that the government will introduce a new ‘UK ISA’ with an additional allowance of £5,000 a year but this is subject to consultation, and we do not yet have a start date (see above).

For employers

There have been no changes to the rate or thresholds for employer’s Class 1 NICs, which remains at 13.8% for wages paid in excess of £9,100 a year (£175 per week). For eligible employers, the employment allowance remains at £5,000 per year, reducing their total employer’s NIC liability by this sum.

Benefits in kind

Employees are required to pay income tax on certain non-cash benefits. For example, the provision of a company car constitutes a taxable ‘benefit in kind’. Employers also pay Class 1A NIC at 13.8% on the value of benefits.

The set percentages used to calculate company car benefits are fixed until 5 April 2026 before slight increases apply to most car types, including electronic and ultra-low emission, from 6 April 2026.

The figures used to calculate benefits-in-kind on employer-provided vans, van fuel (for private journeys in company vans), and car fuel (for private journeys in company cars) remain fixed at their 2023/24 levels in 2024/25.

These are:

Van benefit £3,960

Van fuel benefit £757

Car fuel benefit multiplier £27,800

National minimum wage (NMW)

Employers must pay their employees at least the national living wage (for workers aged over 21) / national minimum wage. The minimum hourly rates change on 1 April each year and depend on the worker’s age and if they are an apprentice.

 1 April 2024 – 31 March 20251 April 2023 – 31 March 2024
Age 23 and over£10.42
Age 21 and over£11.44
21-22 year old rate£10.18
18-20 year old rate£8.60£7.49
16-17 year old rate£6.40£5.28
Apprentice rate£6.40£5.28

These increases are not insubstantial, and the affordability of the rates will need to be carefully considered by employers when planning their headcount for the year ahead.

Corporate Taxes

Rates from 1 April 2024

Corporation tax rates and thresholds remain at the levels used in the year to 31 March 2024 as follows:

Financial year to 31 March 2025

  • Main rate 25%
  • Small profits rate 19%
  • Lower threshold £50,000
  • Upper threshold £250,000
  • Marginal relief fraction 3/200
  • Effective marginal relief rate 26.5%

Companies with profits between the lower and upper thresholds will qualify for marginal relief, which means they pay tax at 19% up to the lower threshold and at 26.5% on the remainder of the profits.

The thresholds must be equally shared between companies in a group and those controlled by the same person or persons. It has been confirmed in the Budget that the same rates and thresholds will also apply in the year to 31 March 2026.

Conclusion:

If you have been impacted by any of the above changes or have concerns you would like to discuss, please do not hesitate to reach out to us so that we can support you on a 1-1 basis.

As always, we welcome you to share this information with any one you feel it can benefit.

We’d love to hear from you about your thoughts on the budget through social media or via email using [email protected]

Disclaimer: This newsletter covers the key news headlines from Budget 2024. The authors take great care in its production, but it is not exhaustive and should not be read as a full fiscal summary. The content displayed is correct as of 6 March 2024. We cannot take responsibility for any action taken or not taken from this document alone. Please contact us for personalised advice.

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How to set up a Government Gateway Account

Setting up a Government Gateway Account

This guide will show you how to create a government gateway account in the simplest way and link it to all your relevant taxes.

Creating a government gateway account will allow you to manage all of your taxes and their associated details effectively.

We have split this guide into two sections:

Section 1: Creating your government gateway account – which should only be done once per business/individual
Section 2: Adding taxes to your government gateway account – which will need to be done a number of times depending on how many taxes you or your business is registered for.

TIP:
You do not need to add taxes that you are not registered for. For example if you are not a company you would not need to add corporation tax, if you are not VAT registered you would not need to add VAT etc.

Section 1: Creating a government gateway account

  1. Go to HMRC’s log in page
  2. Click the green ‘sign in’ button
  3. Click ‘Create sign in details’
  4. Enter your email address when asked
  5. You will now be emailed a confirmation code, use this code to confirm your email address
  6. Once your email is verified you will be asked for your full name and to create a password
  7. You will now be issued with a user ID for your government gateway account – see TIP.
  8. You will then be asked to select what type of account you need, it will either be ‘individual’ if you are self-employed or ‘organisation’ if you are a limited company (you can add your self-assessment for directors to the same account if you are a company so there is no need for two government gateway accounts)
  9. You will then be asked to add an additional security step

TIP:
Print this page to PDF and save it somewhere safe in your documents. Losing this ID can create a lot more trouble for you in the future.

You have now created your government gateway account.

Section 2: Adding taxes to your government gateway account

Now that you have set up your government gateway account, you will need to add each tax that is relevant to you.

These taxes could include:

  • Corporation tax (companies)
  • PAYE for Employers (if your business operates a payroll)
  • VAT (if your business is VAT registered)
  • Self-assessment (for self-employed people or limited company directors)

To add a service, you will need to do the following:

  1. From the business tax summary page, click ‘manage account’
  2. Then select ‘Get online access to a tax, duty or scheme’
  3. Select the tax you want to add and click the green button
  4. Each specific tax will require specific information relating to that tax
    • Corporation tax – Company UTR
    • PAYE for Employers – PAYE reference and accounts office reference
    • VAT – VAT number
    • Self-assessment – Personal UTR
    If you are a client of The Orenda Collective, you can access all this information from the portal.
  5. After you have added the tax, HMRC will then post an activation code to your registered address
  6. Once the code arrives, log back in, and input the code

You will now be set up for the relevant tax on your government gateway account.

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The Orenda guide to limited company expenses

When you operate a limited company, the amount of corporation tax your company pays is based on the profits chargeable to corporation tax.

Profit means company income less company expenses.

Therefore by reducing your company profit, you are lowering the amount that the company corporation tax is calculated upon.

Allowable expenses are a perfectly legal way you can pay less tax! But it is very important that you keep track of your limited company income and expenditure, as well as keeping copies of all your receipts and invoices.

It won’t be a surprise that HMRC set out strict rules about which expenses you can claim for (allowable expenses) and which expenses you cannot claim for (disallowable expenses).

Is there a general rule when it comes to limited company expenses?

The overarching rule that you should follow is that every expense you claim on your tax return must be wholly, exclusively and necessarily incurred for business purposes.

However, HMRC rules can be complex, and are often based on concepts such as ‘fairness’ and ‘reasonableness’ of expenses claimed.

In this guide, we’ll be going through all the main types of HMRC approved business expenses you can claim as a limited company for tax purposes.

Allowable business expenses reduce the amount of profit on which limited companies pay corporation tax. So, more allowable expenses means less taxable profit and less tax to pay.

But as always, you want to keep on HMRC’s good side, so you need to make sure you only claim for expenses that are on HMRC’s approved list.

Failing to do so can result in investigations, penalties, and interest.

To account for your expenses properly, you need to keep accurate records of your income and expenditure, do bear in mind that you’re legally bound to keep these records for at least six years.

Maintaining a limited company bank account

It is a requirement that Limited companies have a bank account set up in the Limited company name (as opposed to your personal name).

Where possible we recommended that all company transactions are paid into and out of this bank account for the best record keeping practices.

Company Invoices & Expenses

You should ensure that invoices, bills, receipts etc. are made out to/in the Limited company name as opposed to your own name.

In the event that either you as director or one of your employees has to pay for business expenses personally you should ensure that the receipts/bills are obtained and kept on record and that an expense claim is completed to reimburse you or the employee for the expenditure.

What is an allowable expense?

Allowable expenses are costs that you can claim against the company profits and therefore tax bill.

Generally speaking, most of the things that you pay for as a direct result of being in business are an allowable expense because you wouldn’t incur them if you were not in business.

What is a disallowable expense?

There are certain expenses, that even though you may pay for as a result of being in business, you cannot claim against your taxes.

Allowable vs Disallowable expenses for limited companies

Allowable Disallowable
Wages & National insurance costs of employees & Directors (1) HMRC fines & penalties
Freelancers & subcontractors (2) Parking fines
Pension costs (3) Dividends (1)
Stock and raw materials (4) Depreciation (20)
Home office costs (5) Entertaining & gifts (21)
Rent, utilities & office maintenance (6) Non-safety or non-uniform clothing (12)
Printing, postage & stationary General food (8)
Advertising & marketing Travel between your home and normal work place (8)
Subscriptions Personal expenses such as gym memberships,Spotify, Netflix etc.
Training courses (7) Personal accounting fees e.g. for a self-assessment tax return
Business travel (8)

  • Hotels & meals
  • Mileage, taxis & trains
Business vehicle (if vehicle legally owned by the company) (9)
Equipment & Tools (10)
Website, hosting & email
Telephone & Internet (11)
Uniforms & safety clothes (12)
Legal & accounting fees relating to the company only
Bad debts
Bank credit card and other financial charges (13)
Coaches & Consultants (14)
Charitable donations (15)
Christmas Party & staff events (16)
Gifts and trivial benefits (17)
Pre-trade expenses (18)
Medical costs (19)

Some of the expenditure in the table above requires a little more explanation and we have therefore included more detail below for specific expense categories. 

Wages & National Insurance (1)

If you pay employees or directors in your business, the cost of their salary or wage can be claimed against your profits, along with employers national insurance and pension contributions.

Depending on your personal circumstances we are likely to advise you to operate a payroll even if you are the only employee of the business.

This is because generally the most tax efficient way to extract money from a limited company as a director and shareholder is through a combination of low salary and dividends.

The salary is set at a suitably low threshold that avoids you having to pay income tax personally on the amount, but also entitles you to benefits such as entitlement to statutory maternity pay, a state pensionable year and corporation tax relief on the salary cost.

The optimum salary threshold is usually not enough to live on, and therefore the rest of the funds you need for personal use is extracted as a dividend.

It is important to note that dividends are not tax deductible when computing company profits.

So for example, if your company had £50,000 of income, £10,000 of overheads, you were paid and £11,000 salary and dividends of £5,000, your company taxable profits would be £29,000 and not £24,000. 

Freelancers & Subcontractors (2)

You can claim the costs of any freelancers or subcontractors that you pay to support your business.

However, there are rules around whether an individual performing services is considered employed or self-employed for tax, and we encourage you to review this for each freelancer or subcontractor.

HMRC have created a useful tool that allows you to answer questions based on how your business operates with that individual, in order to determine their employment status that may be useful.

The tool can be found here.

Pension payments through your limited company (3)

Once your company has set up a contract with a pension provider it can make payments into your pension and receive 100% tax relief as an allowable business expense.

In the 2023/24 tax year, there’s a limit of £60,000 (2022/23: £40,000) on how much you can contribute free of tax to a pension scheme either through your company or personally.

Please speak to your financial advisor and us for more information so we can advise in more detail on this matter.

Stock and Raw Materials (4)

If you are a product based business you will incur costs for purchasing stock items, and you may also incur costs for items required to make your product.

For example if you are a clothing business you will need to buy the clothing item (stock) and then you may need to purchase some dye (raw materials) to create your bespoke clothing item that you then sell in your business.

Home office (5)

If you work from home then you may be eligible to claim for some of your home expenses.

HMRC allow for £6 per week or £26 monthly to be paid to employees of the business to cover their additional working from home costs.

Rent, utilities & office maintenance (6)

If you choose to rent business premises, then you can claim:

  • Rent/lease payments,
  • Business and water rates,
  • Lighting,
  • Heating,
  •  Property and contents insurance.

Training courses (7)

Where a Limited Company provides training to employees or directors corporation tax relief via an allowable expense is generally available.

This is provided the training expenditure meets the basic requirement of being incurred wholly, exclusively and necessarily for the purposes of trade.

In most cases the company will be providing the training to enable the employee or director to better perform their duties or role and to advance the companies trade, and therefore it is treated as an allowable expense.

Examples of this could be, a marketing course, further training on your skill or expertise and sales training.

Be careful though if the training cost is not work related as this may not attract corporation tax relief and can create an employee benefit that is required to be reported on a P11d form.

Business Travel (8)

Claiming travel on your taxes can be a complex area.

In general you can claim travel away from your normal place of work for things like:

  • Visiting clients or suppliers for new or existing business
  • Overnight business stays
  • Travel to training courses that qualify for allowable expenses

Travel outside your normal business commute is known as irregular travel.

For your business travel to be an allowable expense, each journey you undertake must be:

  • An irregular journey, outside your normal commute;
  • Fully business related and not contain any element of personal travel (also known as a dual purpose trip);
  • Not related to a regular contract/agreement with a client.

What is a dual Purpose Trip?

A dual-purpose trip is one that has a personal element to it. For example, where as part of a work trip you sight-see, take your family/friend, or even just stop for a spot of shopping.

Consequently your whole trip could be deemed disallowable.

You should keep entirely separate receipts and expenses for the business side of your trip and book anything personal, family or friends related completely separate.

Travel to your normal place of work:

You cannot claim for travel to and from your normal place or places of work e.g. to your office, studio, or co-working space. It must be only travel to a temporary work place.

A temporary workplace is defined by HMRC as one which you attend that:

  • For a limited time only, like a one-off meeting;
  • Meets the “40% rule” – that means a workplace that you spend less than 40% of your working time at;
  • Is for less than 24 months.

So watch out, if you regularly travel to the same place you may not be able to claim the travel expenses.

Travel costs for irregular journeys that meet the above criteria could include:

Mileage OR vehicle costs

  • Trains
  • Flights
  • Buses
  • Parking
  • Taxis
  • Hotels
  • Subsistence (food)

Taxis

Be aware that HMRC take a dim view of excessive use of taxis, particularly if they appear unnecessary – i.e. it was a very short journey.

Overnight stays

If your business travel includes an overnight stay, then you can claim the cost of this as part of your travel.

You can also claim for food & drink that you had to pay for as part of your irregular journey.

You can claim for:

  • The cost of travel to the location;
  • Accommodation for your overnight stay;
  • A reasonable amount for an evening meal and breakfast

HMRC will likely question any excessive claims for expensive hotels or lavish over the top dinners.

So, sorry, but staying at the fancy hotel and having fine dining is probably not going to be acceptable!

Mileage or Business Vehicle (9)

If you use your car for business purposes you will need to decide which is the most tax efficient method for claiming relief.

This will most likely depend on how much travel you do and what car you have.

The main ways you can claim for using your car for business reasons are:

  • Claim business mileage at the rate set by HMRC;
  • Buy a car through your company (i.e. the company owns the car) and claim for the car running costs

Mileage

The mileage rates set by HMRC is set at a rate per mile that contributes to the cost of wear and tear on a vehicle as well as fuel, MOT and servicing.

Other car expenses are not tax deductibles such as MOT, repairs and fuel.

Current rates:

  • 45 pence per mile for cars and goods vehicles on the first 10,000 miles travelled (25 pence over 10,000 miles)
  • 24 pence per mile for motorcycles
  • 4p per mile for fully electric cars

You need to keep a record of all your business journeys, the key things to include are:

  • Date of the journey
  • Purpose of the journey e.g. to visit a client
  • Start location
  • End location
  • Number of miles

A template mileage log can be found in our company bookkeeping spreadsheet.

To calculate the amount you can claim you apply the rates applicable to the number of miles.

For example if you travelled 11,000 miles for business you would claim:

First 10,000 at 45p per mile = £4,500 plus 1000 at 25p per mile = £250, therefore total claim £4,750.

Business Vehicle

Buying a car through your company may be tax efficient depending on your line of work.  However, the way you’ll get tax relief will depend on how you pay for the car and its CO2 emissions.

You will also needed to consider the added tax implications that arise if the car also has personal use.

This is because using the car personally creates a P11d benefit, and both the company and you have to pay tax each year, on the deemed benefit of personal use.

Generally speaking, it’s not usually tax efficient to put a car, that you will use personally through the company in this way, unless it’s an electric car.

This is because normal cars attract a higher rate of P11d tax, which results in the tax savings of owning the car in the company, being wiped out.

Equipment, tools & other assets (10)

You may need to buy items such as:

  • Laptops
  • Headphones
  • Tech items
  • Office furniture
  • Tools
  • Equipment
  • Vans
  • Cars

Provided they are used for the business you will likely get tax relief for the items. Though depending on the type of purchase it may be that the way you claim is through capital allowances as opposed to just normal expenditure.

Capital allowances

Capital allowances are a type of tax relief which businesses can claim when they invest in long-term assets.

Sometimes known as fixed assets (or capital assets), these are assets which you can reasonably expect to stay in use by the business for longer than 12 months.

Claiming capital allowances means you can deduct part or all of the asset’s value from your profits.

There are different types of capital allowances, with different criteria. In some cases, claiming them means a business can write off the entire cost of buying an asset in one year, making a significant dent in its tax bill.

There are three main categories of capital allowances, which you must use depending on the type of assets you have bought.

These three categories exclude cars, which are treated slightly differently.

Here’s how much businesses can claim as a percentage of the cost of the capital asset they have purchased on each tax return:

Main Rate Pool – 18%

  • This pool includes things like plant & machinery, equipment and furniture.

Special Rate Pool – 8%

This is a unique category and refers to purchases which are:

  • parts of a building considered integral – known as ‘integral features’;
  • items with a long life of over 25 years;
  • thermal insulation of buildings;

Single Asset Pool – 18% or 8%

  • A business can create a single asset pool where an asset that has a really short life but you cannot include in this pool any cars, special rate items (number 2 above) or anything that you use for non-business reasons.

Business claim for HMRC capital allowances on cars based on CO2 emissions of the vehicle and whether it is new or second hand. Refer to business vehicle above for more details.

Annual Investment allowance

Certain assets purchased qualify for the annual investment allowance which allows for the cost of the asset to be fully deducted in the year of purchase rather than over the life of the asset.

The Annual Investment Allowance (AIA) is a tax break created by HMRC to encourage spending by businesses.

It permits businesses to deduct the full value of certain ‘qualifying assets‘ against their profits before tax in the year they make the purchase, up to a certain limit (currently £1m).

Capital allowances can be complex and we will prepare the required calculations as part of completing your tax return.

Telephone & Internet (11)

For mobile phones, provided the contract is between the company and the mobile phone provider, the company can claim all costs as an allowable expense.

If you make a claim for business only calls made on your personal mobile or landline phone bill, this is an allowable expense provided you can prove it was a business call.

It’s increasingly difficult to separate the cost of business calls, given the way mobile (and many landline) operators package call costs (e.g. ‘up to 2,000 free monthly minutes’).

If you can’t separate the business element from your personal use of your mobile phone, you cannot make a claim, due to the duality of purpose rules, as any business calls you make incur no extra cost on top of the tariff you already pay for personal calls.

If you start to carry out some of your work from home, using your residential broadband, you cannot make a claim if the broadband was already in place, unless you can clearly split the business from the personal element. Having two broadband lines could show one line is 100% for business.

If you have no broadband contract at home and need internet access to carry out your business, the costs can be reclaimed from your company, and no ‘benefit in kind’ charge arises.

However, it’s worth remembering HMRC are likely to challenge the fact that you have no broadband at home given how reliant on the internet we are.

Uniform & safety clothing (12)

You can claim the costs of branded uniforms that you have for your business, for example if you get t-shirts or jumpers with your logo printed on it.

However, you cannot claim non-branded uniforms unless they are for safety reasons, for example, steal toe cap boots etc.

Dual-use clothing, like business suits, workout gear, general outfits etc. are not an allowable expense.

The general rule is if you could include anything you wear for work as part of your ‘everyday wardrobe’, even if you choose not to wear them outside of work, these items cannot be claimed as expenses.

That applies even if you have to wear a suit or certain type of clothing to work, you cannot claim the cost of these outfits against your taxes.

Bank, credit card and other financial charges (13)

Many types of bank charges can be claimed as an allowable business expense, though they must be for accounts or cards in the name of the business.

You can claim business costs for:

  • bank, overdraft and credit card charges the interest on business and bank loans (but not repayments of the capital or loan amount)
  • hire purchase interest
  • leasing payments

You cannot claim for repayments of personal loans, overdrafts or finance arrangements.

Coaches & consultants (14)

You can claim the cost of a coach or consultant provided the coach or consultant is providing services only related to your business.

For example you might work with a marketing consultant to increase your brand awareness and customer enquiries or similarly you might work with a business coach on streamlining your operational functions or financial position.

These would be examples of allowable expenditure. Be careful though, as life coaching or more general coaching would be considered be not allowable for tax purposes.

Charitable donations as a limited company (15)

Your limited company pays less Corporation Tax when it gives the following to a UK registered charity:

  • Money
  • Equipment or trading stock (items your company makes or sells)
  • Land / property / shares in another company (shares in your own company don’t qualify)
  • Employees (on secondment)
  • Sponsorship payments

Christmas party and staff event expenses through your limited company (16)

Your company can host an annual event – most commonly a Christmas party – as a tax-free benefit, providing you meet certain conditions.

Your employees may invite a partner but you must not exceed an expenditure of £150 per head (including VAT). The event must cater mostly for staff. For example, expenses for one director and a plus one would be acceptable and would give you a budget of £300.

However, if those attending are not mostly employees then it would be difficult to argue the event’s main purpose is to entertain staff.

Note that the £150 amount is an annual limit and can cover multiple events for staff.

Be careful though, if the £150 annual limit is breached the whole event cost becomes a taxable employee benefit and must be declared on a P11d form and the appropriate taxes paid.

Gifts and trivial benefits from your limited company (17)

You don’t have to pay tax on a gift or benefit for your employee or director if all of the following apply:

  • it cost you £50 or less to provide
  • it isn’t cash or a cash voucher
  • it isn’t a reward for their work or performance
  • It isn’t in the terms of their contract.

This is known as a ‘trivial benefit’. Please note for directors, the amount cannot exceed £300 annually e.g. 6 x £50 = £300.

Assuming all the above criteria are met you don’t need to pay tax or National Insurance through P11d benefits or let HMRC know.

You would have to pay tax via a P11d form on any gifts or benefits that don’t meet all these criteria, so be careful not exceed these limits.

Pre-trading expenses (18)

Pre-trade expenses are costs you incur before you start trading. You can usually treat these as if the expenses were incurred on the first day you began trading, so they will be an allowable business expense in your first set of accounts.

The relief is only available if:

  • It was incurred in the period 7 years before commencement of trade
  • If it would be allowable if incurred after trading commenced (e.g. entertaining would not be allowed as a pre trading expense)

Medical expenses (physio, chiropractor, massages, doctors’ fees etc) (19)

Medical benefits provided to employees is an allowable expense in the Limited Company. However, the provision of medical (and all other benefits) are subject to employee benefit in kind tax.

The employee must pay personal tax on it and your company will be liable to National Insurance Contributions at 13.8%.

This generally means for directors, that its more tax efficient to pay for the medical expenses personally as opposed to through the company.

Depreciation (20)

Fixed assets, over time, begin to lose value* and this decrease in value needs to be reflected in the accounts using depreciation.

Depreciation is the write off of fixed assets over a set period of time to reflect the use and eventual depletion in the value of the asset.

We will calculate depreciation when completing your tax return, however, this is not an allowable expense for taxes, instead relief is gained for the reducing value of the assets through capital allowances.

Entertaining (21)

HMRC classes entertainment as “business entertainment” when it is provided free of charge to people (customers, suppliers, subcontractors etc.) who are not employees of your business.

It defines entertainment as “hospitality of any kind” and gives examples including:

  • food and drink
  • accommodation (e.g. hotels)
  • theatre and concert tickets
  • entry to sporting events and facilities
  • entry to clubs and nightclubs
  • gifts
  • use of capital assets
  • when you provide entertainment or hospitality only for the directors or partners of your business

Entertainment does not qualify for any tax relief.

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Mini Budget Update

Following the mini budget update on Friday 23rd September 2022, we summarised the highlights and the details of the budgets. Subsequent to this, as has been widely reported, the government made a drastic U-turn!

Jeremy Hunt announced a statement on 17th October 2022, which effectively reversed a lot of the cuts promised by Liz Truss and the previous chancellor, and we have summarised the changes below.

Highlights

Income tax

Effective from 6th April 2023, the basic rate of income tax is being decreased to 19%.

Update 17 October 2022: Decrease cancelled.

The additional rate of income tax at 45% is being abolished and replaced with one single higher rate tax of 40%.

Update 17 October 2022: Additional rate of income tax at 45% reinstated. 

Corporation tax

Corporation tax was set to rise from 19% to 25% on 6th April 2023, this has now been cancelled and corporation tax will remain at 19%.

Update 17 October 2022: The planned corporation tax rate rise to 25% has been reinstated. 

Stamp duty

From 23 September 2022, you will not pay any stamp duty on the first £250,000 of the property value (doubled from £125,000) and first time buyers will now pay no stamp duty up to £425,000 (up from £300,000).

There has also been an increase in the value of the property on which first time buyers can claim relief from £500,000 to £625,000.

Update 17 October 2022: Stamp Duty cuts remain. 

National insurance rates

The 1.25% rise in national insurance contributions which took effect earlier this year will be reversed from 5th November.

Update 17 October 2022: The National insurance rate reduction remains.

Contractors IR35

The government promised reform of IR35 tax rules for the self-employed which can result in them being taxed as if they were employees.

Reforms to the system introduced in 2017 and last year will be scrapped.

Update 17 October 2022: IR35 tax rules for the self-employed which can result in them being tax as employees reinstated. 

Investment tax

The rise in tax on dividend income, which was linked to the rise in National Insurance rates will also be reversed.

Dividend tax from 6th April 2023 will be 7.5% for the basic rate and 32.5% for the higher rate.

Update 17 October 2022: The dividend rate reduction has been cancelled.

The detail

The Growth Plan 2022 makes growth the government’s central economic mission, setting a target of reaching a 2.5% trend rate.

They believe that sustainable growth will lead to higher wages, and greater opportunities and provide sustainable funding for public services.

Update 17 October 2022: Following the market turmoil caused by the mini budget on 23rd September it seems they have made dramatic U-turns on all their announcements. Who knows what their new economic mission is!

Income tax rates

The basic rate of income tax will be cut to 19% from 6th April 2023, 12 months earlier than planned.

This will apply to non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland.

A four-year transition period for Gift Aid relief will apply, to maintain the income tax basic rate relief at 20% until April 2027.

There will also be a one-year transitional period for Relief at Source (RAS) pension schemes to permit them to continue to claim tax relief at 20%.

The additional rate of income tax will also be removed from 6th April 2023. This will apply to the additional rate of non-savings, non-dividend income for taxpayers in England, Wales and  Northern Ireland. 

Update 17 October 2022: A cut in the basic rate of income tax – which had been promised by two chancellors this year, has been cancelled. Jeremy Hunt has said the basic rate of income tax will stay at 20% indefinitely. This means your income tax rates will remain unchanged.

The additional rate for savings, dividends and default rates will also be removed from 6th April 2023, and this change will apply UK-wide.

As the additional rate of income tax will be removed current additional rate taxpayers will also benefit from the Personal Savings Allowance of £500 for higher rate taxpayers.

Update 17 October 2022:  The proposed abolition of the 45% additional rate of tax, which is paid by people who earn more than £150,000 a year, had already been ruled out.

National Insurance

From 6th April 2022, the rate of National Insurance contributions across all classes (except Class 2 and 3) was increased by 1.25%.

However, as announced on 23 September 2022, these rates are reverted to historical rates with effect from 6 November 2022.

Furthermore, the new Health and Social Care Levy, which was due to take effect on 6th April 2023 is now scrapped. 

There are no changes to the Primary Threshold and Lower Profits Limit which were increased from £9,880 to £12,570 in July 2022. These are aligned with the personal allowance threshold.

Update 17 October 2022: No changes – this announcement remains.

Dividend rates

The government is reversing the 1.25% increase in dividend tax rates applying UK-wide from 6th April 2023.

Alongside the reversal of the Health and Social Care Levy, the ordinary and upper rates of dividend tax will be reduced to 2021-22 levels of 7.5% and 32.5% respectively. 

Due to the abolition of the additional rate of income tax, income that was previously charged at the additional rate will now be charged at the upper rate of 32.5%.

The reduction of all rates by 1.25% will benefit 2.6 million taxpayers with an average benefit of £345 in 2023-24, and additional rate payers will further benefit from the abolition of the additional rate of dividend tax.

Update 17 October 2022: the reduction in dividends rates has been reversed, this means dividend tax rates will remain at: basic rate 8.75%, higher rate: 33.75% and additional rate 39.35%.

Corporation tax

The corporation tax rate will remain at 19%, irrespective of the profit levels. The chancellor scrapped the increase in corporation tax rates which was due to take place on 6th April 2023. 

S.455 tax rate on directors’ overdrawn loan accounts will remain at 32.5%.

Update 17 October 2022: the announcement that corporation tax will remain at 19% has been reversed. From April 2023 the main rate of corporation tax will be 25% for Companies with profits of £250,000 or more. A small profits rate of 19% will exist for Companies with profits of £50,000 or less and any Companies with a profit of between £50,000 and £249,999 will pay a tapered rate of tax between 19-25%.

Stamp Duty Land Tax

SDLT thresholds for residential properties in the UK have increased from 23rd September 2022 as below: 

Residential properties: 23 September 2022 onwards

Property value UK Residents Non-UK Residents
  Only property Additional property Only property Additional property
Up to £250,000 Nil 3%   2% 5%
Next portion from £250,001 to £925,000 5% 8%   7% 10%
Next portion from £925,001 to £1,500,000 10% 13% 12% 15%
Remaining amount above £1,500,000 12% 15% 14% 17%

From the 23rd of September 2022, first-time buyers will not pay SDLT up to a property value of £425,000, and 5% SDLT will be due on the portion from £425,001 to £625,000.

If the price is over £625,000, there is no relief available. 

Update 17 October 2022: This remains, no changes.

Personal Investment allowances (EIS, VCT, SEIS, CSOP)

The Chancellor set out his determination to make this country an entrepreneurial, share-owning democracy.

He announced that the Enterprise Investment Scheme and the Venture Capital Trusts will be extended beyond 2025.

The limits for the Seed Enterprise Investment Scheme and Company Share Option Plans will be increased to make them more generous.

These schemes offer private investors generous tax benefits such as income tax relief, and exemption from capital gains tax and inheritance tax and they are a vital part of driving investment for new start-up companies.

Update 17 October 2022: This remains, no changes.

Off-payroll working (IR35) reforms repealed 

From 6th April 2023, the recent reforming rules for the public sector (2017) and private sector (2021) are repealed.

From that date, workers providing their services via an intermediary will once again be responsible for determining their employment status and paying the appropriate amount of tax and National Insurance contributions.

This will free up time and money for businesses that engage contractors, the reform also minimises the risk that genuine self-employed workers are impacted by the underlying off-payroll rules.

Update 17 October 2022: IR35 tax rules for the self-employed which can result in them being tax as employees reinstated. 

Annual Investment Allowance (AIA)

The Chancellor has announced that the £1 million level of AIA (which was due to end on 31st March 2023) has been made permanent.

This means businesses can deduct 100% of the costs of qualifying plants and machinery up to £1 million in the first year.

Update 17 October 2022: This remains, no changes.

Investment Zones

Businesses in designated areas in investment zones will benefit from 100% business rates relief on newly occupied and expanded premises.

Local authorities hosting Investment Zones will receive 100% of the business rates growth above an agreed baseline in designated sites for 25 years.

In addition, businesses will receive full stamp duty land tax relief on land bought for commercial or residential development and a zero rate for Employer National Insurance contributions on new employee earnings up to £50,270 per year.

To incentivise investment there will be a 100% first year enhanced capital allowance relief for plant and machinery used within designated sites and accelerated Enhanced Structures and Buildings Allowance relief of 20% per year.

Update 17 October 2022: Not clear whether this remains. 

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The Orenda guide to self-employed expenses

Guide to self-employed expenses

When you are self-employed, the amount of tax and national insurance you pay is based on your taxable business profits.

Profit is a term that describes all your income less all your business expenses. Therefore by reducing your profit, you are lowering the figure that your tax and national insurance are calculated upon.

Having allowable business expenses as someone who is self-employed is a perfectly legal way for you to pay less tax! But it is very important that you keep track of your income and expenditure, as well as keep copies of all your receipts and invoices.

It won’t be a surprise to learn that HMRC set out strict rules about which expenses you can claim for (allowable business expenses) and which expenses you cannot claim for (disallowable business expenses).

In this guide we aim to help you understand the do’s and don’ts of self-employed business costs and what may or may not be classed as allowable business expenses. Read on to find out more!

Self-employed expenses you can claim

Here is a list of the most common self employed expenses that you can claim.

Allowable vs disallowable self-employed expenses

Allowable Disallowable
Wages & National insurance costs of employees (1) HMRC fines & penalties
Freelancers & subcontractors (2) Parking fines
Stock and raw materials (3) Your wages/salary (1)
Home office costs (4) Depreciation (14)
Rent, utilities & office maintenance (5) Entertaining & gifts (15)
Printing, postage & stationary Non-safety or uniform clothing (11)
Advertising & marketing General food (7)
Subscriptions Travel between your home and normal work place (7)
Training courses to improve existing skills (6) Training for new skills, qualifications or expertise (6)
Business travel (7)

  • Hotels & meals
  • Mileage, taxis & trains
 Personal expenses such as gym memberships, Spotify, Netflix etc.
Business vehicle (8)

  • Servicing
  • Insurance
  • Repairs
  • Fuel
 Medical expenses (16)
Equipment & Tools (9)  
Website, hosting & email  
Telephone & Internet (10)  
Uniforms & safety clothes (11)  
Legal & accounting fees  
Bad debts  
Bank charges or payment system fees  
Coaches & Consultants (12)  
Pre-trade expenses (13)  

What is an allowable self-employed expense?

The overarching rule that you should follow when it comes to allowable expenses, is that every expense you claim on your tax return must be wholly and necessarily incurred for business purposes only.

Claiming wrongly could result in investigations, penalties, interest and surprise tax bills.

Allowable expenses are costs that you can claim against your tax bill. Generally speaking, most of the things that you pay for as a direct result of being in business are allowable expenses because you wouldn’t incur them if you were not in business.

What is a disallowable expense?

There are certain expenses, that even though you may pay for as a result of being in business, cannot claimed against your taxes as a business cost.

Some of the expenditure in the table above requires a little more explanation and we have therefore included more detail below for specific expense categories.

 

Wages & National Insurance (1)

If you pay employees in your business, the cost of their salary or wage can be claimed against your profits, along with employer’s national insurance and pension contributions.

This does not apply to your own wages, i.e. the money you take from the business to live on, this is because as a self-employed person you are taxed on your profits before your salary or wage.

Freelancers & subcontractors (2)

You can claim the costs of any freelancers or subcontractors that you pay to support your business.

However, there are rules around whether an individual performing services is considered employed or self-employed for tax purposes, and we encourage you to review this for each freelancer or subcontractor.

HMRC have created a useful tool that allows you to answer questions based on how your business operates with that individual, in order to determine their employment status.

The tool can be found here.

Stock and Raw Materials (3)

If you are a product based business you will incur costs for purchasing stock items, and you may also incur costs for items required to make your product.

For example if you are a clothing business you will need to buy the clothing item (stock) and then you may need to purchase some dye (raw materials) to create your bespoke clothing item that you then sell in your business.

Home office (4)

If you work from home then you may be eligible to claim for some of your home expenses.

The easiest way to claim your expense is to use a simplified flat-rate amount depending on the number of hours you work at home.

You can claim a flat-rate amount for working from home as an allowable business expense. This is provided you work from home at least 25 hours per month.

The working from home flat rates currently are:

  • £10 per month if you work between 25 and 50 hours per month;
  • £18 per month if you work between 51 and 100 hours per month;
  • £26 per month if you work 101 or more hours per month.

Simplified expenses do not cover the internet and mobile phones. Therefore, make sure you claim separately along with other business expenses, if appropriate.

The flat rate method means you don’t need to keep hold of any receipts.

This makes things a lot easier however, the downside is:

  • You can only claim the use of home as office allowance if you work at home for more than 25 hours per week;
  • You still need to make a separate claim for business use of your telephone and internet (for which you must keep receipts);
  • Whilst this is a super simple method of claiming, you should check whether claiming for actual costs is more beneficial to you.

Alternatively, you can claim an actual portion of your household bills, including your utility bills, mortgage interest (not the capital part) or rent based on the space you are using.

When working out you claim for using your home as an office, you’ll want to consider the following household bills in your calculation:

  • Heating
  • Electricity
  • Rent
  • Mortgage interest (not capital)
  • Insurance
  • Repairs
  • Cleaning
  • Council tax

Once you have all your actual costs, you’ll need to work out the portion to claim on your taxes.

Here are the steps you need to follow:

  1. Count up the number of rooms in your house or apartment;
  2. Divide the total costs of the bills by each room (either equally or by floor space);
  3. Estimate how much time you spend working in each room across a week;
  4. Divide that amount by 7 to get the daily usage;
  5. Divide that answer by 24 and then multiply this with your answer from step 2 for the specific room.

A template calculation can be found in our self-employed spreadsheet.

Claiming for your home using actual expenses can be more tax-efficient for some – just make sure that you:

  • Keep your utility bills to support your claim should HMRC investigate;
  • Apportion the cost of bills according to the floor space of each room, rather than equally (as in step 2 in our example above) if it makes more sense;
  • Don’t dedicate a room in your home to your office space. Dual-use is essential, otherwise, you may risk being charged capital gains tax when you sell your home or getting a bill for business rates;
  • Check your mortgage, tenancy agreement or lease because there may be clauses preventing you from using your home as an office.

Whether you choose the flat-rate method or actual costs method to claim for your home office, don’t forget you’ll need to claim expenses for additional costs against your self-employed taxes such as:

  • Broadband
  • Mobile phone
  • Desk
  • Shelving and storage
  • Stationery

Rent, utilities & office maintenance (5)

If you choose to rent business premises, then you can claim:

  • Rent/lease payments,
  • Business and water rates,
  • Lighting,
  • Heating,
  • Property and contents insurance.

Training courses (6)

Training courses tend to fall into two categories:

  1. Training courses to update and improve existing professional skills & qualifications
  2. Training courses attended to learn new skills or gain new qualifications

Any training that keeps your existing skills and expertise up to date is an allowable business expense. For example, if you are a hairdresser and attend a course to learn about a new dye product to use on your clients, this would be allowable.

However, if you attend training to learn new skills, this will most likely not be tax-deductible. This is because when you learn a new skill, these costs are considered capital in nature so cannot be expensed on your tax return. For example, a hairdresser that attends a course on how to become a makeup artist, this would be disallowable.

You must retain evidence to support your conclusion on the training course tax deductibility, as HMRC may wish to inspect it.

Business travel (7)

Claiming travel on your taxes can be a complex area.

In general, you can claim travel away from your normal place of work for things like:

  • Visiting clients or suppliers for new or existing business
  • Overnight business stays
  • Travel to training courses that qualify for allowable expenses

Travel outside your normal business commute is known as irregular travel.

For your business travel to be an allowable expense, each journey you undertake must be:

  • An irregular journey, outside your normal commute;
  • Fully business related and not contain any element of personal travel (also known as a dual purpose trip);
  • Not related to a regular contract/agreement with a client.

What is a dual Purpose Trip?

A dual-purpose trip is one that has a personal element to it. For example, where as part of a work trip you sight-see, take your family/friend, or even just stop for a spot of shopping. Consequently your whole trip could be deemed disallowable.

You should keep entirely separate receipts and expenses for the business side of your trip and book anything personal, family or friends related completely separate.

Travel to your normal place of work:

You cannot claim for travel to and from your normal place or places of work e.g. to your office, studio, or co-working space. It must only be travel to a temporary workplace.

A temporary workplace is defined by HMRC as one which you attend that:

  • For a limited time only, like a one-off meeting;
  • Meets the “40% rule” – that means a workplace where you spend less than 40% of your working time at;
  • Is for less than 24 months.

So watch out, if you regularly travel to the same place you may not be able to claim the travel expenses.

Travel costs for irregular journeys that meet the above criteria could include:

  • Mileage OR vehicle costs
  • Trains
  • Flights
  • Buses
  • Parking
  • Taxis
  • Hotels
  • Subsistence (food)

Taxis

Be aware that HMRC take a dim view of excessive use of taxis, particularly if they appear unnecessary – i.e. it was a very short journey.

Overnight stays

If your business travel includes an overnight stay, then you can claim the cost of this as part of your travel. You can also claim for food & drink that you had to pay for as part of your irregular journey.

You can claim for:

  • The cost of travel to the location;
  • Accommodation for your overnight stay;
  • A reasonable amount for an evening meal and breakfast

HMRC will likely question any excessive claims for expensive hotels or lavish over the top dinners. So, sorry, but staying at the fancy hotel and having fine dining is probably not going to be acceptable!

Mileage or business vehicle (8)

If you use your car for business purposes you will need to decide which is the most tax-efficient method for claiming relief. This will most likely depend on how much travel you do.

The main ways you can claim for using your car for business reasons are:

  • Claim business mileage at the rate set by HMRC;
  • Buy a car through your business and claim for the business use proportion

Mileage

The mileage rates set by HMRC are set at a rate per mile that contributes to the cost of wear and tear on a vehicle as well as fuel, MOT and servicing. Other car expenses are not tax deductibles such as MOT, repairs and fuel. Therefore you must pay tax on these.

Current rates:

  • 45 pence per mile for cars and goods vehicles on the first 10,000 miles travelled (25 pence over 10,000 miles)
  • 24 pence per mile for motorcycles
  • 4p per mile for fully electric cars

You need to keep a record of all your business journeys, the key things to include are:

  • Date of the journey
  • Purpose of the journey e.g. to visit a client
  • Start location
  • End location
  • Number of miles

A template mileage log can be found in our self-employed spreadsheet.

To calculate the amount you can claim you apply the rates applicable to the number of miles. For example, if you travelled 11,000 miles for the business you would claim

First 10,000 at 45p per mile = £4,500 plus 1000 at 25p per mile = £250, therefore total claim £4,750.

Business vehicle 

Buying a car through your business may be tax efficient depending on your line of work. However, the way you’ll get tax relief will depend on how you pay for the car and its CO2 emissions.

You are not able to claim for personal expenses, which means you will only ever be able to claim for the business proportion of the car. You need to make sure you can show evidence of how you use your car for business, should HMRC ever investigate.

The easiest method is to assign a % of business use to the vehicle e.g. 80% personal and 20% business.

As a self-employed sole trader, the way you’ll get tax relief on your car is by using Capital Allowances.

Capital allowances are a way of giving you tax relief on more expensive items, like cars, that you keep for a number of years.

You’ll have to claim for a portion of the car cost, depending on its emissions, using Capital Allowances:

  • up to 50 g/km – 100% first-year allowance
  • 51g/km-110g/km – 18% capital allowances
  • 111g/km or more – 8% capital allowances

If you choose to use this method for your new car, then you can also claim for the business proportion of fuel, servicing, insurance and repairs on your vehicle as tax-deductible expenses.

For example, you buy a car for £10,000 and use it for 70% for business. The car has emissions of less than 50 g/km. You can expense the full business amount of the car – £7,000 (£10,000 x 70%) against your taxes in the tax year you buy it.

If the same car had emissions of 120 g/km then you’ll work out the amount you claim as an allowable business expense differently.

Tax Year 1

  • Cost of car £10,000
  • Claim 8% £800 ( business use claim on your tax return is £560)
  • Cost c/fwd £9,200

Tax Year 2

  • Cost of b/fwd £9,200
  • Claim 8% £736 ( business use claim on your tax return is £589)
  • Cost c/fwd £8,464

You’ll then need to keep going year on year until you either sell the car (and need to make a balancing adjustment), or you have claimed for the full amount of the car against your taxes – whichever comes first.

Depending on which car you have in mind the amount you can claim will vary.

We would take care of calculating the capital allowances etc. for you as part of doing your tax return, but if you choose this method for claiming car costs it’s best to have a chat with us beforehand.

Equipment, tools & other assets (9)

You may need to buy items such as:

  • Laptops
  • Headphones
  • Tech items
  • Office furniture
  • Tools
  • Equipment
  • Vans
  • Cars

Provided they are used for the business you will likely get tax relief for the items. Though depending on the type of purchase, it may be that the way you claim is through capital allowances as opposed to just normal expenditure.

Capital allowances

Capital allowances are a type of tax relief that businesses can claim when they invest in long-term assets. Sometimes known as fixed assets (or capital assets), these are assets which you can reasonably expect to stay in use by the business for longer than 12 months.

Claiming capital allowances means you can deduct part or all of the asset’s value from your profits.

There are different types of capital allowances, with different criteria. In some cases, claiming them means a business can write off the entire cost of buying an asset in one year, making a significant dent in its tax bill.

There are three main categories of capital allowances, which you must use depending on the type of assets you have bought. These three categories exclude cars, which are treated slightly differently.

Here’s how much businesses can claim as a percentage of the cost of the capital asset they have purchased on each tax return:

Main Rate Pool – 18%

  • This pool includes things like plant & machinery, equipment and furniture.

Special Rate Pool – 8%

This is a unique category and refers to purchases which are:

  • parts of a building considered integral – known as ‘integral features’;
  • items with a long life of over 25 years;
  • thermal insulation of buildings;
  • cars with CO2 emissions of more than 130g/km.

Single Asset Pool – 18% or 8%

  • A business can create a single asset pool where an asset has a really short life, but you cannot include in this pool any cars, special rate items (number 2 above) or anything that you use for non-business reasons.

Businesses claim for HMRC capital allowances on cars based on CO2 emissions of the vehicle and whether it is new or second-hand. Refer to business vehicle above for more details.

Annual Investment Allowance

Certain assets purchased to qualify for the annual investment allowance which allows for the cost of the asset to be fully deducted in the year of purchase rather than over the life of the asset.

The Annual Investment Allowance (AIA) is a tax break created by HMRC to encourage spending by businesses. It permits businesses to deduct the full value of certain ‘qualifying assets‘ against their profits before tax in the year they make the purchase, up to a certain limit (currently £1m).

Capital allowances can be complex and we will prepare the required calculations as part of completing your tax return.

Telephone & internet (10)

If you use your mobile and home internet for your business then you can claim a proportion of these costs on your tax return. For example, if your mobile costs £50 per month and you use it 50% for business, you could claim £25 per month as a tax-deductible expense.

Uniform & safety clothing (11)

You can claim the costs of branded uniforms that you have for your business. For example, if you get t-shirts or jumpers with your logo printed on them. However, you cannot claim non-branded uniforms unless they are for safety reasons, for example, steel toe cap boots etc.

Dual-use clothing, like business suits, workout gear, general outfits etc. are not an allowable expense.

The general rule is if you could include anything you wear for work as part of your ‘everyday wardrobe’, even if you choose not to wear them outside of work, these items cannot be claimed as expenses.

That applies even if you have to wear a suit or certain type of clothing to work, you cannot claim the cost of these outfits against your taxes.

Coaches & Consultants (12)

You can claim the cost of a coach or consultant provided the coach or consultant is providing services only related to your business.

For example you might work with a marketing consultant to increase your brand awareness and customer enquiries or similarly you might work with a business coach on streamlining your operational functions or financial position. These would be examples of allowable expenditure.

Be careful though, as life coaching or more general coaching would be considered be not allowable for tax purposes.

Pre-trading expenses (13)

Pre-trade expenses are costs you incur before you start trading. You can usually treat these as if the expenses were incurred on the first day you began trading, so they will be an allowable business expense in your first set of accounts.

The relief is only available if:

  • It was incurred in the period 7 years before the commencement of trade
  • If it would be allowable if incurred after trading commenced (e.g. entertaining would not be allowed as a pre-trading expense)

Depreciation (14)

Fixed assets, over time, begin to lose value and this decrease in value needs to be reflected in the accounts using depreciation.

Depreciation is the write-off of fixed assets over a set period to reflect the use and eventual depletion in the value of the asset.

We will calculate depreciation when completing your tax return, however, this is not an allowable expense for taxes, instead, relief is gained for the reducing value of the assets through capital allowances.

Contact us at The Orenda Collective today, so we can help you with this.

Entertaining (15)

HMRC classes entertainment as “business entertainment”, when it is provided free of charge to people (customers, suppliers, subcontractors etc.) who are not employees of your business.

It defines entertainment as “hospitality of any kind” and gives examples including:

  • food and drink
  • accommodation (e.g. hotels)
  • theatre and concert tickets
  • entry to sporting events and facilities
  • entry to clubs and nightclubs
  • Gifts
  • use of capital assets
  • when you provide entertainment or hospitality only for the directors or partners of your business

Entertainment does not qualify for any tax relief.

 

Medical expenses (physio, chiropractor, massages, doctors fees etc) (16)

Unfortunately, you can’t claim for any medical related expenses such as physio, chiropractor, massages, doctors fees etc. This applies even if the symptoms you are addressing through the medical expenses were caused by your trade, or are you stopping you from completing your trade.
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How to process VAT charged by overseas suppliers on your UK VAT Return?

When you are registered for UK VAT and you receive an invoice or receipt that shows VAT on it you automatically assume that you can reclaim that VAT. However, sadly that is not always the case.

You are only able to reclaim the VAT on your UK VAT return if the VAT is charged by a UK supplier with a UK VAT number.

What happens when you are charged VAT from an EU supplier or overseas supplier?

As noted above you can’t claim the VAT that you have been charged on EU or overseas suppliers back in your UK VAT return, this applies even though you can see the VAT%, the VAT amount of the VAT number on your invoice.

The invoice will likely look very similar to any other UK supplier invoice but the supplier is outside of the UK so you can’t process them the same way.

What should I do instead?

Instead, you need to set your account up with the supplier so that you don’t get charged VAT in the first place…

If you provide your VAT number to an EU or overseas supplier then they will zero rate your VAT and charge you 0% VAT. 

You can usually log into your online and account and check the settings to ensure that the account is in your business name and that your UK VAT number is provided.

Which suppliers does this commonly impact for our clients?

  • Google Adwords– Based in Dublin in the Republic of Ireland. If your account is set up properly with a UK VAT number included then they will charge you 0% VAT and their charges will be subject to reverse charge VAT. You can tell google your VAT status here.
  • Facebook– Also based in Dublin and will be zero-rated subject to the reverse charge. You can tell Facebook that you are a UK VAT registered business here by selecting add information to your invoice.
  • Hootsuite– Based in Canada, but they are registered for VAT in the EU, so also zero-rated subject to the reverse charge. You can tell Hootsuite that you are a UK VAT registered business here.
  • GoDaddy– Based in America, but they are registered for VAT in the EU, so zero rated and subject to the reverse charge. You can tell GoDaddy that you are a VAT-registered business by following these steps.
  • Mail Chimp – Based in America, but they are registered for VAT in the EU, so zero rated and subject to the reverse charge. You can tell Mailchimp that you are a VAT registered business by following these steps.

We will keep adding new suppliers and instructions as we identify them.

What is the reverse charge?

You must account for VAT in your business accounts under the reverse charge VAT mechanism where applicable.

The reverse charge is the amount of VAT you would have paid on that service if you had bought it in the UK.

Where it applies, you act as if you are both the supplier and the customer. You charge yourself the VAT and then you also claim it back. So the two taxes net each other out. Feels a bit pointless I know… but HMRC wants to measure the amount of tax under the reverse charge which is why we have to report it as part of our taxable sales.

Most accounting systems such as Xero have a VAT code for EC Reverse Charge that will take care of the entries on your VAT return for you when you select it.

If you would like support please do get in contact with The Orenda Collective.

 

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Is it worth getting an electric company car?

As a business owner you may be looking at ways to extract funds from your business. Company cars used to be a common method of doing that but over recent years the tax charged has made them unattractive.

But that is changing if you are happy to have an electric car.

What is a company car, how do they work?

A company car is one owned by a business and provided to an employee for their use.

It is expected that any vehicle given to an employee will have personal use and therefore there is a tax charge. 

Income tax for the individual and National Insurance for the company.

How is the tax on a company car worked out?

The tax charge (benefit in kind that is declared on a P11d form) is based on the CO2 emissions and the cost price of the car.

What is the benefit-in-kind (BIK) for electric cars?

As when purchasing any car through a company, as soon as the vehicle is used for personal travel, a BIK will arise. Unlike petrol and diesel cars however, electric cars have a much lower BIK tax rate. 

For the 2024/25 tax year (and 2023/24), the BIK rate for all zero-emission vehicles is 2%. This rose from 1% in the 2021/22 tax year, but there are still significant savings to be made when compared to petrol or diesel cars, which can attract a BIK rate of up to 37% depending on their emissions.

Tax on BIKs must be paid by both the company and the employee, therefore be aware that if you are a sole director of your own limited company, you will have tax to pay from your company as well as from through your personal tax return.

Learn more here.

Company Tax

To calculate how much tax the company will pay for providing an electric car to an employee as a BIK, you will need to use the formula:

P11D value (the value of the electric car) x BIK rate based on CO2 (2% as set out by the government in 2024/25 tax year) x 13.8% (the rate of Class 1A National Insurance contribution payable by employers).

Using an example of a Tesla worth £60,000, the company would calculate 2% of this value (£1,200) and multiply it by 13.8%. The company would pay £165.60 in tax every year the car is available as a BIK to the employee.

Individual Tax

To calculate how much tax the employee will need pay as a result of receiving an electric car as a BIK will be dependent again on the P11d value, the BIK rate and the employee’s personal income tax band. You would use the formula:

P11D value (the value of the electric car) x BIK rate based on CO2 (2% as set out by the government for 2024/25) x employee’s income tax rate

Using the same example of a Tesla worth £60,000 the employee would pay the following tax depending on their income tax band:

  • Basic rate taxpayer at 20% would pay £240 in tax each year
  • Higher rate taxpayer at 40% would pay £480 in tax each year
  • Additional rate taxpayer at 45% would pay £540 in tax each year

Should I buy, lease, hire purchase, PCP, etc.?

This is not a decision we feel should be principally driven by the tax treatment. Instead, we recommend putting tax to one side for a moment and considering which option makes most sense from a purely commercial basis:

  1. Are you going to want to own the car in, say, five years’ time or would you be looking to upgrade?
  2. How much more would you pay, in total, under a hire purchase deal as compared with PCP?
  3. What about if you add in the PCP balloon payment?
  4. How reliable do you think the car is and how much of a disaster would it be were it to require expensive repairs?
  5. Who would be on the hook for those repair costs?

Once you have determined the most sensible approach from a commercial perspective, you can find the tax treatment below:

Purchase

You would get relief by means of capital allowances. So, for a £50,000 car your limited company would get corporation tax relief of £9,500 if it was a small company for corporation tax purposes (£50,000 Purchase Price x 100% First Year Allowance x 19% Corporation Tax Rate) and £12,500 if it was a main rate company for corporation tax purposes (£50,000 x 100% x 25%).

Note if your company is a marginal rate company i.e. profits between £50,000 and £250,000 then the exact amount you will get for corporation tax relief depends on your marginal rate of tax.

From 1 April 2021, pure zero-emission cars can qualify for 100% first year allowance if the car is purchased new and unused. This means that the entire cost of the electric car is deductible from profits before tax (with no caps limiting the value of the vehicle to be eligible for this allowance). The first year allowance is another type of capital allowance and is generally applicable to plant and machinery, as well as energy-saving equipment. Commercial vehicles already qualified for 100% relief under AIA.

Hire Purchase

Again relief would be through capital allowances, same as for an upfront purchase. To the extent interest is charged, this is a deductible business expense.

Operating Lease

The monthly lease fees are deductible business expenses. So, say the monthly cost is £1,000. You claim £12,000 a year as a deduction in your corporation tax return and save £2,280 in tax if your are a small profits company for corporation tax (£12,000 expense x 19% Corporation Tax Rate) or £3,000 if you are a main rate company (£12,000 x 25%).

Note if your company is a marginal rate company i.e. profits between £50,000 and £250,000 then the exact amount you will get for corporation tax relief depends on your marginal rate of tax.

Finance Lease

The asset is, “depreciated” over its economic life in the accounts. The depreciation and any interest are deductible expenses. Say the car cost £50,000 and the useful economic life is determined to be 8 years. You can deduct 1/8th the cost each year, so £6,250, saving £1,187.50 in tax if your are a small rate company (£6,250 depreciation x 19% Corporation Tax Rate) and £1,562.50 if you are a main rate company (£6,250 x 25%).

Note if your company is a marginal rate company i.e. profits between £50,000 and £250,000 then the exact amount you will get for corporation tax relief depends on your marginal rate of tax.

What’s the difference between an operating lease and a finance lease?

An operating lease is a typical, bog standard lease agreement. You get the use of a car, you pay a fee and in 5 years you hand the car back in.

A finance lease arises where the lease, “transfers substantially all the risks and rewards incidental to ownership.” This might exist where, for example:

  • The lease is fairly long,
  • If you add up the total payments it’s very close to buying the car,
  • You’re on the hook for repairs, insurance, and any other costs,
  • You have the option to buy at the end of the contract for a small fee

Depending on how they’re drafted, PCP contracts can sometimes fall within the definition of a finance lease.

Can you claim back VAT on electric cars?

The usual rules apply when it comes to claiming back VAT payments on cars purchased through a company, regardless of whether it is electric or fuel-run. The only time you can claim back VAT is when the car is solely being used for business purposes and has no personal usage. HMRC are often sceptical of this claim, so ensure that you have sufficient evidence if this is the case.

In comparison, were you to lease and not purchase an electric car instead through your company, you would be able to reclaim 50% of the VAT from the lease payments, even where there is some personal use. Where the leased electric car is exclusively used for business, 100% of the VAT can be reclaimed.

If you have purchased an electric van or motorcycle through your company that is solely for business purposes then 100% of the VAT can be recovered. If there is any significant personal use then you will need to adjust for a proportionate amount of VAT to be claimed.

Bottom line though, why not just buy an electric car myself?”

Let’s take an example:

Beth is a marketing agency who operates through a limited company that is small rate for corporation tax purposes. She’s considering buying an electric car, mostly for private use. She plans to spend £50,000 on the car and is a higher rate taxpayer.

  • Option 1: Beth has her company declare a £50,000 dividend which she uses to buy the car. She pays tax at 33.75% on the dividend. That costs her at least £16,875 in income tax.
  • Option 2: Beth has her limited company buy the car. There is no dividend tax to pay so he’s saved £16,875 right off the bat. She can also claim capital allowances which save her £9,500 in corporation tax. Income tax on the benefit will be just £400 for 2024/25 and the company benefit cost is £150.05. So, all in, Beth is £25,924.95 better off buying in the company than buying herself – more than half the value of the car.

Please note this is an example and the savings depend on the value of the car, the rate at which the individual pays tax, whether it qualifies for capital allowances and the benefit percentages are subject to HMRC change.

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Spring Statement Update 2022

The Chancellor of the Exchequer, Rishi Sunak, delivered his Spring Statement on Wednesday 23 March 2022.

To find out how these announcements will impact you and your business in a simple easy to understand way, check out our updates.

National insurance contribution (NICs) increases

National insurance contributions paid by employees, employers and the self-employed are increasing by 1.25% from April 2022.

This is to provide additional funds for health and social care.

National insurance threshold increases 

It’s not all bad news though…some new measures have been announced in an attempt to reduce the effect of the increase, at least partially and that’s the increase in the starting NIC threshold for individuals.

The annual level at which employees and the self-employed start to pay NICs was due to increase from £9,568 to £9,880 from 6 April 2022.

This increase will go ahead but be further uplifted to £12,570 from 6 July 2022, effectively aligning the point at which an individual starts to pay NICs with the £12,570 income tax personal allowance.

In the tax year to 5 April 2023, this is a NIC cut worth £267 for most employees and £207 for most self-employed individuals.

Importantly, this will more than negate the impact of the 1.25% NIC increase for most workers with employment earnings of less than £34,000, providing them with a small contribution to the increased cost of living.

The starting NIC threshold for the self-employed and company directors is computed on an annual basis and so will be set at a pro-rata sum of £11,908 for the whole of the tax year to 5 April 2023, before increasing to £12,570 in the tax year to 5 April 2024.

Class 2 NIC liabilities of the self-employed

For the self-employed, some individuals will find that they no longer need to pay Class 2 NICs from April 2022. The small profits threshold will be set at £6,725 as planned, but the requirement to pay Class 2 NIC will only apply to those with self-employed profits over £11,908.

This will benefit approximately 500,000 self-employed individuals by saving them £165 a year.

From 6 April 2023, Class 2 NIC will only be payable by those with profits over £12,570.

What about employers?

No changes have been made to the annual level at which employers’ NIC start to apply; namely £9,100 for most employees in the tax year to 5 April 2023.

However, the Employment Allowance, which allows eligible businesses to reduce their employer NIC cost, will increase from £4,000 to £5,000 for the tax year to 5 April 2023.

It is expected that 495,000 businesses will benefit from this increase, with most saving £150 in the tax year to 5 April 2023.

If we operate your director payroll look out for an email from us in due course that will identify the new tax optimum salary for April 2023 onwards.

Dividend tax rates are changing

From April 2021 the dividend tax rates are increasing by 1.25% in line with the increase to national insurance contributions.

Your first £2,000 of dividends remain tax free.

Dividends under the basic rate threshold of £50,270 will be taxed at 8.75%.

Dividends within the higher rate threshold of between £50,271 and £150,000 will be taxed at 33.75%.

Dividends over the additional rate threshold of £150,001 will be taxed at 39.35%.

Income Tax

The Chancellor has committed to reduce the basic rate of income tax from 20% to 19%, but not until 6 April 2024.

It is estimated that this will save 30 million individuals an average of £175 per year.

Corporation Tax

The main rate rises to 25% from 19% from April 2023 – so a 6% increase.  Businesses with profits below £50k will still pay 19% and there will be a taper for businesses with profits between £50k and £250k.

VAT registration threshold

No changes to the VAT registration threshold. You must register for VAT if your sales go over the current registration threshold in a rolling 12-month period. This is not a fixed period like the tax year or the calendar year – it could be any period, for example the start of June to the end of May.

National Minimum/Living Wage increases

The NLW and NMW rates from 1 April 2022 are:

Rate from April 2022 Current rate (April 2021 to March 2022) Increase
National Living Wage £9.50 £8.91 6.6%
21-22 Year Old Rate £9.18 £8.36 9.8%
18-20 Year Old Rate £6.83 £6.56 4.1%
16-17 Year Old Rate £4.81 £4.62 4.1%
Apprentice Rate £4.81 £4.30 11.9%
Accommodation Offset £8.70 £8.36 4.1%

Business Tax Relief for Capital Investment

In preparation for the 130% ‘super-deduction’ for companies coming to an end on 31 March 2023, other alternatives are being considered in an attempt to continue encouraging investment from April 2023.

In the meantime, the reliefs potentially available (to companies and non-corporates) for expenditure on plant and machinery includes:

  • A £1million annual investment allowance;
  • 130% and 50% super-deductions;
  • 100% first-year allowances (including on electric cars); and
  • 18% and 6% writing down allowances.

The date of acquisition of capital assets can make a difference to the tax relief you can claim so do speak to us before your next sizeable investment but remember we will automatically review any reliefs for capital investments as part of the work we do on your accounts.

Fuel Duty

Fuel duty has been cut by 5p per litre for 12 months from 6pm on 23 March 2022.

The Treasury report that this will save the average car driver £100 a year and the average van driver £200 a year.

GIFT AID YOUR DONATIONS TO HELP UKRAINE

For individuals and businesses wanting to donate money to help to support those suffering in Ukraine, there are a number of charities providing humanitarian relief. Ideally, this should be done via the Disasters Emergency Committee (DEC) Appeal at www.dec.org.uk/.

Individual UK taxpayers should make sure to tick the Gift Aid box as that will increase their donation by 25%. It should also be remembered that, like pension contributions, higher and additional rate taxpayers are able to obtain even more tax relief. For example, a £40 donation only costs £30 after higher rate tax relief.

Household Support Fund

The Household Support Fund will be doubled to £1billion from April 2022. The Fund will help households with the cost of essentials such as food, clothing and utilities.

Green Technology

Green technology, including solar panels and heat pumps, will be exempt from business rates in England from April 2022, a year earlier than originally planned.

VAT on Energy Saving Materials (ESMs) installed in residential accommodation will be reduced from 5% to 0% from this April in Great Britain. The 0% rate will apply until 31 March 2027.

A 100% relief for eligible low-carbon heat networks which have their own rates bill will also be available.

VAT Rates in the Leisure and Hospitality Sector

No extension has been granted to the leisure and hospitality sector for use of the reduced 12.5% VAT rate on eligible supplies including food, non-alcoholic beverages and hotel and holiday accommodation. The VAT rate applied to these supplies will revert to 20% from 1 April 2022 as planned.

Research and Development (R&D)

The R&D tax relief schemes for companies will be enhanced from April 2023 but we have to wait until this summer for more details.

We do know the reform is set to boost sectors where the UK is a world-leader, including artificial intelligence, robotics, manufacturing, and design.

Capital Gains Tax

No changes to rates, no major changes to allowances/exemptions. Annual exemption frozen.

Inheritance Tax

No changes to rates, no major changes to allowances/exemptions. Nil Rate Bands frozen.

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Why Xero is the Best Small Business Accounting Software

What is Xero cloud based accounting?

Xero is an innovative cloud based accounting software that has all the tools you need to grow and scale your small business. It is a software that understands both the necessity and pain of accounting for small business owners and introduces a number of solutions for each through its simple to use functionality and integrations.

You are able to view and share interactive reports and budgets, import bank transactions, send invoice reminders and much more. Whether you’re setting up a new business or migrating your existing business accounts, Xero is a fast and simple software that will help you to spend less time in spreadsheets and more time focusing on your business.

7 Reasons why Xero is the best all round accounting software for small businesses

Xero is used by millions of small businesses worldwide and can be easily accessed anywhere via the cloud. We have listed 7 of the best reasons why Xero is and continues to be the best accounting software solution for small businesses.

If you are interested in using Xero for your business regardless of size, please contact us to talk about the range of pricing packages available.

1. Time saving capabilities

Xero gives you the opportunity to take control of your business finances anywhere in the world via the mobile app and simple online log in. Xero helps to create endless efficiencies by reducing the amount of time you spend manually inputting your finances. You can view real time financial details including information such as outstanding invoices and bills as well as set up rules, repeating invoices and much more.

2. Automated Bank Feeds

Xero automate bank feeds, this means that instead of manually importing bank statements into Xero, you can connect your bank and credit card account directly to Xero, which reduces the likelihood of error. With these being automated, it’s going to save you a lot of time and it’s a more efficient way to manage your accounts.

3. User-Friendly

One of the biggest benefits of Xero is how user-friendly it is. The whole system is easy to navigate your way around and the terminology is easy to follow. Even without in-depth accounting knowledge, Xero is simple to understand and use which is what makes it so great for small business owners.

4. Always Improving

Like any system, there is always room for improvement. The great thing about Xero is that they release monthly product updates to keep you up to date with any changes and improvements. Cloud-based software can be used on any devise with internet connection, keeping small business owners connected with their business and accounts. Xero are working on flexibility with remote working, making data fluid and accessible.

5. Payments made easier

Late payment of invoices are a big problem in the UK, but using Xero is a great way to prevent cash flow issues. Xero allows you to see when an invoice has been opened, send statements to customers, set up automatic reminders and maintain your customer accounts quickly and efficiently.

6. Making Tax Digital

Making Tax Digital is a key part of the government’s plan to make it easier for businesses to get their tax right and keep on top of their finances. Making Tax Digital means you are no longer able to keep and submit manual VAT records and returns.

Instead, HMRC will only accept VAT returns sent using software that supports Making Tax Digital for VAT, such as Xero. This is now mandatory, for VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000).

HMRC also have plans for Making Tax Digital for income tax and corporation tax in the not to distant future and Xero are committed to ensuring they remain compliant with HMRC requirements, this means your business will be future proofed for evolving tax legislation.

7. Xero integration with apps

Xero integrates with hundreds of apps that small businesses use and this makes the process and interaction between them seamless and efficient. We have included a few examples below but there are many more in the Xero app section that may be relevant to your business.

Dext

A big challenge for small business owners is keeping their books and records up to date and understanding their financial position, Dext and Xero can help small business owners to take control of their finances.

Dext is a data capturing tool which extracts key data from documents and then creates transactions in Xero at the click of a button. Dext allows you to email bills and receipts straight into your Dext organisation as well as link direct to specific supplier accounts.

Dext is easy to use, with a mobile app to upload a photo and set up automated connections so whenever you get a bill from a supplier it goes straight into Dext. Like Xero, you can invite your accountants, bookkeepers or team members into your Dext organisations and decide how much visibility you want them to have.

Dext also stores documents therefore you are not required to keep any paper copies of bills and receipts freeing up space and reducing paperwork.

Hubspot – CRM integration

HubSpot’s CRM platform has all the tools and integrations you need for marketing, sales, content management and customer services. Xero and HubSpot integrate together for visibility into your customers’ journey and time saving.

HubSpot helps develop those leads your website attracts, meaning you can start to build better relationships with potential clients and existing clients through personalised conversations.

GoCardless

Collecting payments, chasing invoices and subscriptions can be time consuming and can put people off starting a business, however with GoCardless you don’t need to worry about that. It is made for recurring payments and puts you in control of when you get paid.

GoCardless is made for businesses that bill their customers on a recurring basis. It’s ideal for collecting payments for both intermittent and repeating invoices.

The GoCardless and Xero integration will end late payments, predict your cash flow, reduces bookkeeping and international payments are available with no mark-up on foreign exchange.

GoCardless and Xero has a simple setup. You are able to create a GoCardless account directly within Xero, you then send out your invoices and GoCardless will automatically collect payments when they are due. Once payment has been received through GoCardless, the invoice in Xero will be marked as ‘paid’. GoCardless is a lower cost alternative to card payments and helps take the stress away from invoicing.

Workflow Max

Manage your workflow from quotes through to invoicing while tracking time and costs. Improve your project budgeting and gain critical insights into your business. Workflow Max and Xero integration is designed to improve profitability and gain insights. Workflow Max can configure to suit the needs of your business and track leader, proposals and sales pipeline all in one place.

Convinced that Xero is for you but need some training on how to use the software?

We are certified Xero advisors here at The Orenda Collective and we offer Xero training packages to clients and non-clients alike.

Some of the topics covered on the basic training include:

  • Xero set up including organisation settings, financial information and branded invoice templates
  • Connecting Xero to your bank through bank feeds
  • Changes to the standard chart of accounts to make your accounting template bespoke to your business
  • How to raise an invoice, send it directly to a customer, chasing the invoice with customer statements and reconciling the payment received against the invoice
  • How to enter bills and receipts from your suppliers/ providers and how to reconcile the payment against the expense
  • Reconciling the bank (a key control!)
  • How to access reports and meaningful data within Xero and what it all means to you as a business owner
  • Q&A time for you to go through any questions and concerns you may have

Our 60 minute training sessions are £150 and include a 15 minute call in advance of the training to ensure we set your training outcomes and cover anything specific to you within the session.

For more information or to discuss a tailored Xero training program please contact us.

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Does my business need to operate a workplace pension?

What is a workplace pension?

A workplace pension is a way of allowing an employee to save for their retirement that’s arranged by the employer.

Some workplace pensions are called ‘occupational’, ‘works’, ‘company’ or ‘work-based’ pensions.

Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension scheme and contribute towards it. This is called ‘automatic enrolment’. If you employ at least one person you are an employer and you have certain legal duties.

How do workplace pensions work?

A percentage of your employee’s pay is put into the pension scheme automatically every payday.

In most cases, the employer adds money into the pension scheme too. The employee may also get tax relief from the government.

Does Auto-enrolment apply to my business?

Whether you’re a coach, a graphic designer, have a marketing business, or a photographer, you are an employer from the day your first member of staff started working for you and you have legal duties.

If you are employing staff for the first time, your legal duties for automatic enrolment begin on the day your first member of staff starts work. This is known as your duties start date. You should start preparing early in anticipation of this, so you know what you’ll need to do.

Does my business have to operate a workplace pension?

All employers must provide a workplace pension scheme. This is called ‘automatic enrolment’.

Employers must automatically enrol employees into a pension scheme and make contributions to the pension if all of the following apply:

  • They are classed as a ‘worker’
  • They are aged between 22 and State Pension age
  • They earn at least £10,000 per year
  • They usually (‘ordinarily’) work in the UK (read the detailed guidance if you’re not sure)

Are there any situations when my business does not have to operate a workplace pension?

The employer usually does not have to automatically enrol a worker if they do not meet the previous criteria noted above or if any of the following apply:

  • They’ve already given notice to you that they’re leaving their job, or you’ve given them notice
  • They have evidence of their lifetime allowance protection (for example, a certificate from HMRC)
  • You have already included the worker on a pension that meets the automatic enrolment rules and you the employer arranged it
  • You made a one-off payment to a workplace pension scheme that’s closed (a ‘winding-up lump sum’), and then the worker leaves and re-joins the same job within 12 months of getting the payment
  • more than 12 months before the staging date, the worker left (‘opted out’) of a pension arranged by your employer
  • The worker is from an EU member state and they are in an EU cross-border pension scheme
  • The worker is in a limited liability partnership
  • The worker is a director without an employment contract and employs at least one other person in your company

Does my business have to contribute to a workplace pension for my employees?

An employer does not have to contribute to an employee’s pension if they earn these amounts or less:

  • £520 a month
  • £120 a week
  • £480 over 4 weeks

If an employee earns less than £10,000, but above £6,240, the employer doesn’t have to automatically enrol the employee in their scheme however, if they join, the employer will be unable to refuse you and must make contributions on the employees behalf.

Do I need to auto-enrol my employees?

What you need to do will depend on whether you’re about to start your automatic enrolment duties or whether you’re coming back for re-enrolment.

The pension regulator has a useful Q&A tool that will help you determine when and if you need to auto-enrol your employees that we recommend you use, but below is a useful summary.

Type of employee Eligible jobholder Non-eligible jobholder Entitled worker
Age 22-State Pension age 16-74 16-74
Earns £10,000+ £6,240-£10,000 Below £6,240
Auto enrolment status Must be auto enrolled Can ask to join Can ask to join
Employer contribution status Employer contributions required Employer contributions required Employer contributions are required in line with our Scheme rules.
  • You’re only required to auto enrol eligible jobholders. You must pay contributions towards their pension savings. You must enrol eligible jobholders even if they say they don’t want to join the Scheme.
  • Non-eligible jobholders can ask to join the Scheme. If they ask, you must put them in and pay contributions towards their pension savings.
  • Unless you have alternative pension arrangements for entitled workers, they can also ask to join the Scheme and you must put them in.

What does my business have to tell an employee when they are auto-enrolled?

The business must write to the employee when they’ve been automatically enrolled into the workplace pension scheme. You must tell them:

  • the date you added them to the pension scheme
  • the type of pension scheme and who runs it
  • how much they’ll have to pay in and how much you’ll contribute
  • how to leave the scheme, if they want to
  • how tax relief applies to them

So you have established you need to auto-enrol your employees, what next?

Your automatic enrolment duties start when you employ your first member of staff (duties start date).

You have 6 weeks from your duties start date to set up a pension scheme.

Step by step guide to fulfil your duties:

  1. Choose a pension scheme: Choose a pension scheme that can be used for automatic enrolment and put your staff into it. Do this as soon as possible as it may take time.
  2. Work out who to put into a pension scheme: Work out who you need to put into a pension scheme on your duties start date. Do this on your duties start date.
  3. Write to your staff: Use the pension regulator letter templates to write to each member of staff individually to tell them how automatic enrolment applies to them. Do this within 6 weeks after your duties start date.
  4. Declare your compliance: Use the pension regulator declaration of compliance checklist to find out what information you’ll need to provide to them how you’ve met your duties. You must complete your declaration by your deadline or you may be fined. Do this within 5 months after your duties start date

How much has to be contributed to the auto-enrolment pension scheme?

Any worker who earns over the lower threshold for qualifying earnings is called a jobholder. You’ll have to make a minimum contribution into their retirement pot.

Workers earning less than the lower threshold of qualifying earnings are called ‘entitled workers’ or ‘workers without qualifying earnings’. For these workers, you don’t have to make a minimum contribution, but you can if you want to.

There are several ways you can calculate contributions for auto enrolment. There are statutory minimum contribution levels, but you can choose to set higher contribution levels if you want to.

Qualifying earnings

This is the minimum basis for calculating auto enrolment pension contributions.

Basic earnings

These include basic pay, holiday pay, and statutory pay such as sick pay or parental leave pay. They don’t include bonuses, commission, overtime, and similar payments.

If you use basic earnings to calculate auto enrolment pension contributions, the minimum contribution to an employee’s pension savings is 9%. Employers must pay at least 4% and the employee the remaining 5%.

Total earnings

These are all earnings including basic pay, holiday pay, sick pay, bonuses, commission, overtime and similar payments. If you use total earnings to calculate auto enrolment pension contributions, the minimum contribution to an employee’s pension savings is 7%. Employers must pay at least 3% and the employee the remaining 4%.

These are all earnings including basic pay, holiday pay, sick pay, bonuses, commission, overtime and similar payments. If you use total earnings to calculate auto enrolment pension contributions, the minimum contribution to an employee’s pension savings is 7%. Employers must pay at least 3% and the employee the remaining 4%.

Definition Qualifying earnings Basic earnings Total earnings
Includes All earnings between a lower and upper limit set by the government and reviewed each year. Basic pay, holiday pay and statutory pay such as sick pay, but not bonuses, commission, overtime and similar payments. All earnings including basic pay, holiday pay, sick pay, bonuses, commission, overtime and similar payments.
Total minimum contribution 8% 9% 7%
Employer 3% 4% 3%
Employee 5% 5% 4%

What are qualifying earnings?

Qualifying earnings is a band of gross annual earnings that can be used to work out what contributions a worker should get. It includes a worker’s salary, overtime, bonuses and commission, as well as statutory sick, maternity, paternity or adoption pay.

For the 2023/24 tax year it’s anything over £6,240 and up to £50,270.

How much is the minimum contribution?

The legal minimum for jobholders is currently 8 percent of their qualifying earnings. Of this, you need to pay at least 3 percent. The remainder comes from your workers’ pay, which you’ll have to collect and send to your pension provider, and tax relief from the government. The pension provider will claim the tax relief on your workers’ behalf.

You can pay more if you want to. Some employers pay all of their workers’ minimum contributions or pay additional amounts on top of the minimum. This is a good way of attracting and keeping good workers in your organisation.

The table below outlines the minimum contributions:

Date Minimum contribution What you’ll pay What your worker pays What the government pays
From 6 April 2019 8% 3% 4% 1%

How do you work out the minimum contributions?

The minimum contribution is a percentage of a worker’s gross annual earnings that fall within the qualifying earnings band.

For the 2023/24 tax year this means that the first £6,240 of their earnings isn’t included in the calculation. For example, if a worker earned £20,000 in 2023/24 their qualifying earnings would be £13,864 and their annual minimum contribution would be based on that.

Because you pay contributions every time you pay your workers, you’ll need to work out qualifying earnings for each pay period and make your contribution based on these amounts. There may be pay periods when workers don’t earn enough to qualify for a minimum contribution.

The table below shows the lower and upper levels of qualifying earnings for some commonly-used pay periods. You’ll need to make a contribution based on everything they’re paid over the lower level and up to the upper level.

Pay period Lower Level of qualifying earnings Upper level of qualifying earnings
Weekly £120 £967
Fortnightly £240 £1,934
Four-weekly £480 £3,867
Monthly £520 £4,189

What is the duties start date?

Your legal duties for automatic enrolment begin on the day your first member of staff starts work. This is known as your duties start date and you cannot change this date.

Can I use postponement?

One of the main reasons you might decide to delay working out who to put into a pension scheme is if you have seasonal or temporary staff who you know will stop working for you within three months. You can also use it for staff who begin work on a probationary period or if you need more time to set up your pension scheme or other business processes. But you can choose to use postponement for any other business reason.

When you can postpone?

You can only postpone automatic enrolment from:

  • your duties start date
  • a staff member’s first day of employment
  • the date a staff member first meets the age and earnings criteria to be put into a pension scheme that you also pay into.

Remember, if you use postponement on your duties start date it only changes the day on which you need to assess your staff, it doesn’t change your duties start date or your declaration of compliance deadline. You can only use postponement if you’re within six weeks of the date that your member of staff met the age and earnings criteria to be put into a pension scheme.

How do I use postponement?

You must write to each member of staff individually to tell them that you have delayed working out who to put into a scheme and how automatic enrolment applies to them. You will have six weeks to write to them from the date after postponement starts. There’s no need to tell us that you’ve decided to use postponement.

You can postpone for up to three months. You can postpone as many or as few staff as you like and the postponement period doesn’t have to be the same length for everyone.

If any of your staff write to you asking to join a pension scheme during the postponement period, you must put them into one once you have received their request.

You will have to pay into the pension scheme if they are:

  • aged 16-74
  • and earn at least £520 a month or £120 per week.

To find out how much you will need to pay you should ask your pension scheme provider.

Do I have any on-going duties?

Each time you pay your staff (including new starters), you must monitor their age and earnings to see if they need to be put into a pension scheme and how much you need to pay in. Find out more about your ongoing duties.

When does automatic enrolment apply to a director?

You will have automatic enrolment duties:

  • if the director has a contract of employment with your organisation and at least one other person (who can be another director or a member of staff) also has a contract of employment with your organisation
  • if you have multiple directors and no other staff – and at least two of the directors have employment contracts – all the directors with employment contracts will be members of staff and subject to automatic enrolment duties

When does automatic enrolment not apply to a director?

You will not have automatic enrolment duties:

  • if a director does not have an employment contract, they are not considered a member of staff and do not need to be assessed for automatic enrolment – however if you have other staff, you’re an employer and will have duties for these staff – even if none of these staff meet the age and earnings criteria to be put into a pension scheme you must still complete a declaration of compliance
  • if your organisation only has directors without contracts of employment and no other staff
  • if your organisation only has one director with a contract of employment and no other staff

When should I reach out to an accountant?

Operating a payroll with or without auto-enrolment can be complex and time consuming. There is also a real possibility for penalties and employee disputes if the appropriate procedures are not followed.

We therefore recommend you reach out to an accountant ahead of employing any staff or paying yourself through payroll to reduce your risk.

If you need any support please do not hesitate to contact The Orenda Collective.