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Get ready for end of tax year 5th April 2020

Posted by Tom West on Mar 12th, 2020 | Tax

Calculations | Get Ready For End Of Tax Year | Crunch

We’re fast approaching the end of the tax year on 5th April, and now is usually a good time to get to grips with any tax changes, so you can maximise your tax efficiency for the outgoing tax year and get your business prepared for the new tax year.

You’ll also want to stay up-to-date with the relevant tax rates and thresholds.

Read on for help with getting ready for the end of the 2019/20 tax year and getting ready for the new tax year 2020/21 – or you might prefer to watch our webinar, which looks at everything you should be doing to maximise your tax-efficiency.

This article covers

It’s vital that any dividends are issued by your company before 5th April 2020 to be included in your personal Self Assessment with HMRC for the 2019/20 tax year. This will help maximise your tax-efficiency by fully utilising your personal tax-free allowances and HMRC tax thresholds.

The tax-free allowances and thresholds for dividends did not change between the 2019/20 and 2020/21 tax years, as shown below.

Dividend tax free allowances and thresholds 2019/20 tax year 2020/21 tax year
Dividend tax-free allowance £2,000 £2,000
Personal Allowance  £12,500 £12,500
Dividend basic rate – The lowest rate of tax on dividends 7.5% on earnings up to £37,500 7.5% on earnings up to £37,500
Dividend higher rate – The middle tier of tax on dividends. 32.5% on earnings above the basic rate up to £150,000 32.5% on earnings above the basic rate up to £150,000
Dividend additional rate – The top rate of income tax for high earners. 38.1% on earnings above £150,000 38.1% on earnings above £150,000

Note: The dividend basic and higher rate amounts assume all of the Personal Allowance is utilised.

Speaking of income tax, you can check out our tax rates and thresholds article for more information on the income tax rates.

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Tax-free dividends:

For the 2019/20 tax year, provided your only personal income before dividends is a salary of £8,632, which is set at the 2019/20 tax year National Insurance (NI) Primary threshold, then you can take up to £5,868 in dividends tax-free. This is calculated as follows and means your total tax-free income is £14,500 (£8,632 salary plus £5,868 in dividends).

2019/20 tax year £
Tax-Free Personal Allowance 12,500
Less tax-free salary (paid at the NI Primary threshold) (8,632)
Remaining Tax-Free Personal Allowance 3,868
Tax-Free Dividend Allowance 2,000
Tax-Free Dividends £5,868

Basic Rate threshold and tax 2019/20 tax year:

The Basic Rate tax threshold is £50,000. If you have taken £14,500 in a combination of tax-free salary and dividends (see above)  you can issue further dividends of £35,500 and remain within the basic rate threshold of £50,000. These dividends will be taxed at 7.5%. The total dividends issued will be £41,368 (£5,868 tax-free plus £35,500 at the basic rate of tax).

Higher Rate threshold and tax 2019/20 tax year:

The Higher Rate tax threshold is £150,000. However, when your income is above £100,000, your personal tax-free allowance is reduced by £1 for each additional £2 you earn above £100,000. Your tax-free allowance is therefore removed completely when your income is £125,000. Having issued dividends of £41,368, to reach the basic rate threshold, you can issue further dividends of £100,000  and remain within the higher rate threshold. These dividends will be taxed at 32.5%. The total dividends issued will be £141,368.

Additional Rate

Once your total income is above £150,000 then further dividends will be taxed at 38.1%.

Once your total income is above £150,000, then any further dividends issued will be taxed at 38.1%.

If you have other sources of income, such as rental income or dividends from other companies, then you will reach the threshold limits more quickly and more tax may be due.

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When issuing dividends, it’s important to make sure that your accounting records are up to date. For users of cloud software, such as Crunch, your business bank account should be reconciled and you should ensure your company accounts are up to date – with all expenses, pension contributions, salaries, and sales invoices which have been issued to your clients.

This means you’re able to make an accurate assessment of your company profits and any tax due. You can then calculate the dividend you can pay yourself and other shareholders.

Don’t forget that any dividends must be paid from available company profits. If you take more than is allowed, you could face penalties and interest as it’s treated as a Director Loan.

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If you’re running payroll, even for a single employee, then you mustn’t forget to file your final Full Payment Submission (FPS). This is an HMRC Real Time Information (RTI) requirement and you could face a £100 fine if you don’t file your end of year Full Payroll Submission (FPS) by 5th April 2020.

If you’re a Crunch client then further details on how to do this in the Crunch system can be found in our Final Payroll Submission Help Centre article.

You should record a payroll run for March 2020 to maximise your tax-efficient salary, paying yourself up to the NI Primary threshold of £8,632 for the 2019/20 tax year. It’s therefore worth checking the amount of salary you have been paid in the tax year to date (since 6th April 2019).

For Crunch clients, from 6th March 2020, you can record your final payroll run for the tax year. You will receive full instructions on what to do in an email from your client managers, or you can read our FPS article in the Help Centre.

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If you want to make pension contributions this year, you need to make sure these payments are received by your pension provider by 5th April 2020.

If you run a limited company then making payments through your limited company is usually more tax-efficient. You can also pay into your pension through your monthly payroll or make lump sum contributions periodically throughout the tax year.

The total amount that can be contributed per year and still be tax-free is £40,000. Up to that limit, the government provides tax relief at the basic rate of 20% and this is added to your contributions by your pension provider.

If you are a higher rate taxpayer, you can claim further tax relief through your annual Self Assessment return. You are allowed to include the full £40,000 amount on your Self Assessment and the government will provide further tax relief of 20% (if you pay tax at the higher rate of 40%). So you claim back £8,000 from the government through your annual Self Assessment.

Don’t miss out on Pension Tax relief

If you ’re a higher rate taxpayer, and you make contributions personally, your pension pot can be topped up by £1,000 and it would cost you £600 after tax relief. As a basic rate taxpayer, your pension pot can be topped by £1,000 and it costs you £800.

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While you’re thinking of future investments, you may want to check if you could make any payments into an ISA or other tax-efficient savings which also have limits on what you can pay in each tax year.

Please speak to your financial advisor for more information and bespoke advice. If you don’t have an advisor then we can help. Find out more about Investments and Pensions advice from our partner Hargreaves Lansdown.

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With many limited companies choosing to have 31st March as their financial year end, it can be a daunting undertaking for first-time limited company directors, but with our comprehensive year end checklist you’ll know exactly what you need to do.

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The government has introduced some important changes to the rules surrounding IR35 in the private sector and has announced an increase in the NI Primary threshold. These, and other changes, will be introduced from 6th April 2020, as shown in the following updates:

We’ve put together an article with the personal and business tax changes for the new tax year starting on 6th April 2020.

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We held a webinar on Wednesday 18th March where our Senior Technical Accountant, Michael Awuye went through all the things you need to do before the end of the tax year and how to get prepared for the new tax year, as well as an overview of changes announced in the budget.

(Download the webinar slides)

So how much salary should we pay to avoid employer and employee NI?

The amount changes each year and depends on any other income you have, but usually £8632 for 2019/20 and £8788 for 2020/21  – all explained in our article ‘How much should I take as a salary’.

 

If we’re not taking any salary because revenue is too low, is the £2,662.50 still due?

The £2662.50 mentioned in the slides is the estimated personal tax liability due if you take the recommended salary and Dividends as explained. If you’re not taking any salary or dividends, then this amount will not be due. If you take less salary and dividends, you will owe less.

 

Does a salary up to the secondary NI threshold of £8,788 for 2020/21 count towards a qualifying year for state pension?

Yes. As long as your salary is above the lower earnings limit you get a qualifying year – this is also explained in our article ‘How much should I take as a salary’:

 

I have just paid £8630 salary – that’s £2 off crunch recommendation. Should I adjust it?

It would be best to check with your client managers if you’re a Crunch client – if you’re still able to amend it easily then yes. Otherwise you could add the £2 to your dividend payment.

 

Is this about the Financial Year just about to finish or the upcoming Financial Year?

The presentation covers both the 2019/20 Tax Year and the 2020/21 Tax year. The tax year runs from 6th April to 5th April. Not to be confused with your company ‘financial year’ which is your company ‘accounting period’.

 

I need to post the 64-8 HMRC authorisation form to you – is it better if I scan it or is someone in your office opening mail?

Yes we are still opening mail. There are people in the office to receive mail.

 

If trading as a limited company, do either the primary or secondary NI thresholds apply? (assuming working outside of IR35?)

Yes, because you will usually pay yourself a salary as a limited company director. It’s usually tax efficient to set your salary at the relevant threshold – Primary in the 2019/20 tax year or secondary in the 2020/21 tax year due to the changes the government made to NI thresholds. All explained in our article ‘How much should I take as a salary’:

 

If we have a limited company, do we file twice? Once for the income the company paid the director and once for the company? Corporation Tax is separate?

A limited company director has to file a Self Assessment, the limited company has to file a Corporation Tax return. The Crunch system is able to manage all these filings for you. If you’re a client please speak to your client managers. Otherwise, you can check our article on your responsibilities as a company director to see what you need to file and when.

 

Since I pay myself below the first PAYE threshold, but I still want to have a full NI record, do I need to make voluntary NI contributions? How much should I be paying annually?

As a limited company director, as long as the salary you pay is above the Lower Earnings Limit, you get NI credits. This is explained in our article “How Much Should I Take As A Salary?”

 

When referring to dividend thresholds there’s no mention of Corporation Tax but only to personal thresholds. In order to get dividends does it mean that you’ll have to pay Corporation Tax at the Ltd from the 1st dividend @19%? If yes what’s the Corporation Tax for 2021?

Your company pays Corporation Tax at 19% (for the 2019/20 or 2020/21 tax year) on it’s profits (sales less expenses). Director or employee salaries are treated as an expense so the company does not pay Corporation Tax on them. Dividends are paid from the company’s profits after all expenses and taxes are paid.

A director has to then pay personal tax on this income.. If you set your director salary below the relevant NI threshold you will not pay any Income Tax or National Insurance on it. You will usually have to pay tax on the dividends you take. It’s explained in our Dividends article.

 

Rental is added to salary and not added into the overall Salary and Dividend total?

If referring to the order of taxation for the various incomes, then the answer is yes.

 

At what stage should I be calculating what proportion of home bills (if any) can I claim as business expense

It depends on a few things, whether you’re a limited company or whether you’re a sole trader. We have an article that explains working from home expenses in detail. If you’re a Crunch client you can also speak to your client managers for help.

 

Do Crunch automatically make payroll submissions for director salary?

In general yes, it is done through the Crunch system if you’re a limited company client. We have sent out an email recently to everyone explaining Final payroll submission for Crunch clients. It depends how your salary has been set up – recurring or one off, and at what level. Please double check with your client managers.

 

I’m just starting out and not intending to pay a salary until the end of April – do I HAVE to register for PAYE with HMRC if I am the only employee?

To take salary, you need to have a PAYE scheme. As you intend to take salary at the end of April, the salary will fall into the next tax year (2020/21), so you need to be registered for PAYE anytime from 6th April 2020 to 5th May 2020 to take a salary in late April 2020.

 

Is any capital gains on shares seen as income, or separate from the dividend/income?

Capital gains is income generated by selling assets, it gets declared separately on your Self Assessment.

 

My first invoice is expected to be paid at the end of the month. Does this give me enough time to set up payroll for this month (and thus full payment submission) assuming my company is paid and has the funds available.

This question assumes there is a direct link between receipt of funds and payroll. Steady inflow from clients does of course help pay a salary, but salary which is an employer obligation to the employee for work done is not dependent on receipt of client funds but on contractual agreement with the employee. If you are a sole director/employee of your business (which sounds like it might be the case), then you have more flexibility in that regard and will have until 5th April 2020 to decide your March payroll amount. Your final Full Payment Submission can be made then.

 

If you issue an invoice now (18th March) but it won’t be paid until next month (18th April) should you realise this money in 2019/20 or 2020/21? (Note: I’m a Sole Trader)

The income relates to the 2019/20 year. The principle remains the same irrespective of whether you’re a sole trader or limited company. Income is recognised in the period the work is done, not when the payment is received.

 

I work at home some days and not others, do I work out how many days I have worked at home in the month and then make sure I claim those days?

You do not specify if you are a sole trader or a limited company director but we’ll address both.

If you use the simplified method to claim for your use of home for business (£4 per week in the 2019/20 tax year, £6 per week for the 2020/21 tax year for a limited company or £10/£18/£26 per month for sole traders dependent on the amount of time you claim), you do not need to keep detailed records. However, if you are claiming higher amounts using a more complex approach, then you will need to keep detailed records of the days worked at home, number of rooms, percentage of use etc. There’s more detail in our Working from home article.

 

I have already paid 50% of the coming year’s tax through a Payment on Account. They require the other 50% before July. However, my tax for the following year is going to be 20% of the previous year. What happens?

There are a couple of things here due to changing events related to COVID-19. The government has said payments on account due on 31st July 2020 can be deferred until 31st January 2021. Secondly, as you indicate your tax bill will be lower in the next tax year, you can reduce your payment on account. Reducing your payment on account should ideally have been done when your 2018/19 Self Assessment was being submitted. To reduce your payment on account, it is best to speak with an accountant to estimate what your tax bill is, as, if you underpay, HMRC will charge interest on what they were anticipating your tax bill should be.

 

I have dividends coming in from the stock market. In calculating how much in terms of dividends I should take out from my limited company, what date should I ideally wait till before creating dividend vouchers for this tax year?

You should be able to find out what dates your dividends from the stock market will be paid. Once you know how much you are going to be paid in the tax you then have until 5th April 2020 to issue dividends from your limited company as the tax year ends on this date and the new tax year starts on the following day. You are not able to backdate the issuing of dividends to a previous tax year.

 

Is your dividend allowance affected by an additional PAYE salaried role?

No. Dividend allowance relates only to the tax free element of dividends received on an annual basis. The allowance is £2,000 per tax year. However, the tax you then pay on any dividends over your tax free allowance will be affected. Your total income will be used to decide the dividend tax rate you pay.

 

Probably a silly question, but can I put money straight into an ISA from my company, or do I pay myself additional money in order to get an ISA but get charged tax on that additional money?

ISA stands for Individual Savings Account and as such, you have to pay money into an ISA from your own bank account. This means you have to have already paid any tax due on it by whatever means you draw money out of your limited company, either through salary or through dividends.

 

If trading as a limited company, do either the primary or secondary NI thresholds apply? (assuming working outside of IR35?)

Yes, because you will usually pay yourself a salary as a ltd company director. It’s usually tax efficient to set your salary at the relevant threshold – Primary in the 2019/20 tax year or Secondary in the 2020/21 tax year due to the changes the government made to NI thresholds for the 2020/21 tax year.

 

Hi, I had a PAYE salary from my previous role during this financial year – which took me above the personal tax threshold. As a result I haven’t taken a salary from the company this year (only dividends) – will this meet the minimum National Insurance requirements, as I only paid NI in 2 months?

If you’re a Crunch client it would be best to call us and discuss with an accountant as we are unsure if the personal tax threshold means earning more than personal allowance or basic rate thresholds. An accountant will be able to advise once they see all the figures.

 

The government has announced that there will be a £10,000 cash grant to around 700,000 of the UK’s smallest businesses, delivered by local authorities. Where can I know more about that?

Guidance on this can be found on HMRC website. (Please note this is linked to the business rates your business pays, so you would usually need to have a business premise to qualify).

 

How do small businesses apply for the COVID-19 Small Business Grant?

Your local authority will write to you if you are eligible for the grant.

 

What are the eligibility criteria for the COVID-19 Support Grant?

There are various grants and eligibility for each can be found here.

 

Is the grant for self employed contractors who work through ltd companies as freelancers?

Not entirely clear what your situation is so will address a couple of scenarios to cover the income support scheme.

  • If you are a self employed contractor operating as a sole trader (not a limited company), there is a separate taxable grant for you if you are entitled which is due to start in June 2020. This will be based on sole trader profits.
  • If you are the sole director of your limited company, HMRC has said you can access the Coronavirus Job Retention Scheme. Detailed guidance is due to be published when the scheme is implemented in April. We will publish updates for all Crunch clients when that is available or when HMRC confirms the position regarding sole directors.

 

So if I contract through my limited company for a small-sized private sector business, does IR35 still come into effect in April 2020?

IR35 rules are already in place for all businesses. What was going to change is who had to decide the IR35 status of an assignment and make the deductions for employment taxes if the assignment was inside IR35. For each assignment with a small-sized company, your limited company needs to make the IR35 assessment and is liable for deducting and paying the taxes and National Insurance contributions necessary. The changes that have been delayed were for assignments with medium and large sized private companies. There’s more information on our IR35 Hub.

 

If my cash flow is low, and I’m unable to take a salary wage from my business account, will this affect me from a tax efficiency point of view?

As a director of your company, you can still have the payroll generated but not actually take the cash at this point. This simply means your director loan account will be in credit by the amount the company owes you and you can draw funds at a later date. This keeps you tax efficient while managing cash flow.

 

Any tips on how to use company excess profits? Distributing them through dividends or salary is not tax efficient

There are a number of options to consider here including bring on a partner or spouse (especially a non-working one) to utilise their personal allowance. Paying pension contributions through your limited company is also tax efficient as it’s a tax deductible expense. Depending on how much is paid in by the company (especially if the £40,000 allowance has not been utilised over the 3 previous years and you carry back contributions), this pension contribution could mean your company makes a loss, this loss can be carried back or forward against profits to reduce Corporation Tax payments. Speak with an accountant to get the best possible outcome for you.

 

I was PAYE for 2018/19 so no Self Assessment. In 2019/20 I was self-employed, will I need to make a payment on account?

You will need to make a payment on account if your 2019/20 Self Assessment bill is more than £1,000. If your tax bill is less, then you will not be required to make a payment on account towards the following tax year’s bill. We explain more about Payment on Account in our article.

 

What would happen if the dividends I receive from a company are automatically reinvested?

If you mean dividends from your own company:

If you reinvest the dividends in your company, it will simply be treated as a loan to your company and your director’s loan account will reflect this and you can draw it out at any point. If you use the funds from the dividends to for instance buy stocks and shares from a third party, then when you sell the stocks and shares, they will be subject to Capital Gains Tax if you make a profit on disposal.

If you mean dividends from another company:

You will still need to declare the amount issued to you, this would be declared on your Self Assessment.

 

My year ends in June, do i need to make a payment into my pension before the end of the tax year or end of company year?

End of the tax year. Pension allowances are for the tax year which is from 6th April to 5th April.

 

Re IR35: how is “medium sized company” defined?

It’s probably easier to say that a company is classed as small by the Companies Act 2006 if it meets two or more of the following criteria:

  • Annual turnover is no more than £10.2 million
  • Balance sheet total is no more than £5.1 million
  • No more than 50 employees.

If the company does not meet two or more of the criteria above, then it would be classed as medium as long as it meets two or more of the following criteria:

  • Turnover < £36 million
  • Balance sheet total < £18 million
  • Employees < 250 employees

Need some more help?

All of the above comments are for your information only. We always recommend speaking to an accountant for a more in-depth analysis of your circumstances. If you don’t have an accountant or are looking to switch, give our friendly team a call on 0333 311 8000 or arrange a free consultation.

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