Personal vs Company Pension Contributions

If you are a Director or a Contractor with a Ltd Company with a pension scheme you have two options on how to make your pension contribution, as a personal or company contribution.

Personal contributions are simple to do, and will come naturally to anyone who has previously worked for a company as an employee. However, there is a problem. You will pay tax and National Insurance on drawing the income and then when you make the pension contribution you will just get the tax relief back, not the National Insurance cost.

When you make a company contribution you can offset the contribution as a cost to the company. The contribution is made directly to the pension so there is no tax and no National Insurance for the company or you personally. It is therefore more efficient.

You need to take care to not exceed the annual allowance of £50,000 and you also need to make sure the contribution is to reward activities that are wholly and exclusively for the benefit of the company, but your accountant can help you confirm this. - Mike Lawrence

Mike Lawrence is the Managing Director of Guardstone Financial Planning Ltd, a fee based firm of Financial Advisers www.guardstonefp.com

HM Revenue & Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

Are you Claiming your Higher Rate Pension Relief?

We are always told we should save for our retirement, and the last year has been a good reminder that we cannot simply rely on the State, as it may not always be able to afford to maintain pensions and other forms of welfare. One way that we can use to save for retirement is of course pensions, and they come in many different forms. From company pension schemes to personal pensions they all help us save for retirement through tax relief.

It always amazes me that not everyone is claiming their higher rate tax relief on pension contributions. Everyone gets basic rate tax relief when making contributions. If you see £80 coming out of your bank account you will get £100 invested in the pension. That is to take account of the 20% basic rate tax.

If you are a higher rate tax payer, however, you can get a further 20% back by submitting your tax return or amending your tax code. Speak to your accountant if you are not sure whether you are claiming this relief, but if you are not then that is money you are losing out on. You could be paying too much tax.

If you are a higher rate tax payer chances are you should be submitting a tax return, even if HMRC have not sent you the form. If you are making pension contributions you should definitely do a return each year to claim your higher rate relief. - Mike Lawrence

Mike Lawrence is the Managing Director of Guardstone Financial Planning Ltd, a fee based firm of Financial Advisers www.guardstonefp.com

HM Revenue & Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

VAT in the UK - Part 2 – The Flat Rate VAT Scheme

I use a lot of calculation examples in this section. Don’t worry if it seems complicated, you can use our free flat rate vat calculator to compare the difference between normal VAT registration and flat rate VAT registration.

In the first part of this article I looked at the basics of VAT in the UK. The VAT rates, VAT registration and VAT thresholds etc. In this part I'm going to look at another UK VAT scheme.

There is another VAT scheme that businesses can register for in the UK. It’s called the Flat Rate VAT scheme. This scheme was introduced by HMRC to simplify VAT returns for small businesses and contractors with their own limited companies.

Let’s use an example. Billy G is an IT contractor. He incorporated a limited company and he’s turning over more than £70 000 per year but less than £150000 per year. He needs to register for VAT but the thought of calculating the VAT he paid on his expenses (which are very limited because he provides a consulting service with little or no expenses) seems like a lot of hassle for nothing.

He doesn’t mind the fact that his service fee will increase by 20% because the clients he contracts for are all VAT registered so they will simply claim back the VAT he charges them. So in other words it has no negative effect on them. Billy does a bit of research and discovers the Flat Rate VAT scheme. Under the flat rate vat scheme Billy will pay vat over to HMRC at a standard rate. This rate is industry specific. For Billy, who’s in the Computer or IT Consultancy sector, the flat rate vat percentage is 14.5%.

So Billy registers for the flat rate vat scheme. His normal invoice amount per week is £1000. Now that he’s flat rate vat registered he has to add VAT on his invoice, so his new invoice amount is £1200.

At the end of his first VAT quarter HMRC advises him that it’s time to submit his first VAT return. Billy received a total amount of £15 600 for the quarter. Under the flat rate VAT scheme Billy has to pay over VAT to HMRC at 14.5% for his industry group. But because Billy is in the first year of his VAT registration he only has to pay VAT over at 13.5% because under the flat rate scheme you get a 1% discount for the first year you’re VAT registered.

So Billy makes the very easy calculation, £15600 * 13.5%. That is a total of £2106 he has to pay over to HMRC. But Billy received more VAT than that. He received £2600 from his clients. So in effect he made a £494 flat rate VAT ‘profit’ in the quarter. The official term at HMRC for this ‘profit’ is ‘flat rate allowance’, but it looks like money for nothing to me!

Wow, so why don’t everybody just register for the flat rate vat scheme and earn extra money for doing nothing? Well there are a few things to keep in mind. Firstly, you cannot claim any VAT you paid on expenses. This is not a big problem for Billy because his business expenses are low. He only bought one laptop for £500. He paid £83 VAT on that, so he’s still £411 better off.

The second thing to keep in mind is that the cost of Billy’s service increased by 20%. He usually invoiced for £1000 a week, but after he registered for VAT he had to add VAT on his invoice. The result is his invoice amount increased to £1200. Again, in Billy’s case this is not a problem because the company he consults for is also VAT registered, for them it’s irrelevant whether Billy charges VAT or not.

But for Builder A the scenario is a bit different. Builder A had to buy a lot of material to complete the loft conversion. On the £25 000 loft conversion he had to buy materials to the value of £12000. He had to pay £2000 VAT on these materials.

If Builder A was registered under the normal VAT scheme he could have deducted the £2000 from the VAT he charged the client (£4166.66). So there is no effect on him, he pays the full amount of vat he receives (minus the VAT he pays for expenses) back to HMRC.

But if Builder A was registered under the flat rate vat scheme he could not claim back his input VAT (the £2000 VAT he paid on expenses). He could however pay VAT back to HMRC at 9.5% (which is the flat rate VAT percentage for the General Building and Construction industry group.)

After doing all the VAT calculations Builder A realised he would have been £208.33 worse off under the flat rate vat scheme.

Seems complicated? It is, but luckily we have a free flat rate vat calculator you can use to compare the difference between normal VAT registration and flat rate VAT registration. The calculator will also show you the flat rate vat percentage for your industry group. Simply follow the instructions on the vat calculator and the calculator will let you know what the best VAT scheme will be for your situation.

Before I end this article, just another quick disclaimer. I only covered the basics in this article. There are a lot of scenarios and situations not covered in this article. Do not make any major financial decisions based solely on the information supplied in this article. Speak to an accountant first.

VAT in the UK - Part 1

In this article I'm going to explain the basics of VAT in the UK, focussing briefly on the following:

• What VAT is
• How you calculate VAT
• The VAT rate in the UK
• VAT Registration and VAT Thresholds

And in part two I'm going to focus on the Flat Rate VAT Scheme.

Just a quick disclaimer before I begin. This information is very basic. To be able to make it easy to understand I'm not going to go into every possible scenario. That's your accountant's job. I'm just going to give you a very basic overview of the most common scenarios for the average guy on the street. I'm also going to use the new UK VAT rate of 20% for all the examples in this article.

What is VAT (Value Added Tax)?

VAT is just another tax. When you buy something or pay for a service chances are very good VAT is included in the price. There are some exceptions, but like I said earlier, that's outside the scope of this document. So let's say for example you buy a laptop and you pay £500 for it. VAT is already included in the price.

If you did not have to pay VAT on the laptop it would only have cost you £416.67. The same goes for most services you pay for. For instance, you get quoted for that loft conversion you've been planning. The builder is VAT registered so he has to charge VAT by law. He quotes you £25 000. The actual price for the loft conversion is only £20 833.33. The rest is VAT, and the builder will have to pay this over to HMRC when he does his VAT return.

How do you calculate VAT?

It depends what amount you have in front of you. If you have the inclusive amount (the total price with the VAT already included), and you're looking for the exclusive amount (amount excluding VAT like in the examples above), the formula is:
Exclusive Amount = Inclusive amount / (1+ (VAT Rate / 100)

Or much easier, use this free online VAT calculator to do it for you.

If you have the inclusive amount and you want to calculate the VAT part, the formula is:
VAT = Inclusive amount - (Inclusive amount / (VAT Rate / 100))

Or again, much easier, use this free online VAT calculator to do it for you.

If you have the exclusive amount and you want to calculate the VAT that needs to be added to this amount, the formula is:
VAT = Exclusive Amount * (Vat Rate / 100))

And lastly, if you have the exclusive amount and you want the total inclusive amount after VAT was added, the formula is:
Inclusive amount = Exclusive amount * (1 + (VAT Rare / 100))

The VAT Rate in the UK

Depending on when you read this, the VAT rate in the UK will either be 17.5% or 20%. Before the 4th of January 2011 it's 17.5%. On the 4th of January 2011 the VAT rate in the UK change to 20%.

VAT Registration and VAT Thresholds

So why do some companies charge VAT and others not? Let's look at our loft conversion example again. You get two quotes, one from Builder A and another from Handyman B. Builder A has VAT included on his quote, but Handyman B does not. Why is this?

You only have to legally register for VAT in the UK when your VAT taxable turnover exceeds £70 000 in a year. You can still register for VAT if you want to, but you do not have to. Handyman B did not turn over more than £70000, so he's not VAT registered. Builder A however did turn over more than £70000 so he had to register for VAT. The result is that Builder A's quote amount is handicapped by a 20% VAT increase.

But it's not all bad news for Builder A. He will be able to claim back the VAT he paid on the building materials he purchased, so the cost of his purchases will be 20% lower than that of Handyman B.

So to summarise the VAT thresholds:
You have to register for VAT in the UK when your company's VAT taxable turnover exceeds £70000 in a year. You can voluntarily register for VAT no matter what your turnover.

You can join the Flat Rate VAT scheme if your company's tax exclusive, annual taxable turnover is not more than £150000. And if you are Flat Rate VAT registered you must leave the Flat Rate Scheme if the total value of your company's tax inclusive supplies in the year (excluding sales of capital assets) is more than £225000.

In the second part of this article I'm going to explain the UK's Flat Rate VAT scheme. I'll look at how the scheme works and do some basic comparisons between normal VAT registration and flat rate vat registration.

When does a company have to register for a PAYE (Pay As You Earn) Scheme?

A PAYE scheme is needed if any one of the following applies to your company:

• 
  Salary payments are made at or above the Lower Earnings Level to company directors or employees (Currently £97 per week, £421 per month for 2010/2011 tax year).
• Salary payments are made to a director or employee who receives salary payments from another job or pension.
• Benefits or expenses are provided to the director and/or subcontractors
• A Limited company that intend to claim a refund of CIS deductions paid

If the answer is no to all of the above then a PAYE Scheme is not needed. If however you answered yes to any of the above questions you'll need to register a PAYE scheme for the company with HMRC.
If you do need to register and want to find out the amount of PAYE and National Insurance you'll have to pay on your weekly or monthly gross salary you can have a look at our free advanced online UK tax calculator.

What taxes are due and payable on salary payments?

There are three tax 'types' payable on salary payments (salary payments include sick leave, maternity or paternity pay and adoption pay) and they all work on a sliding scale. The more you earn the more tax you pay.

• PAYE Tax: Employers deduct Pay As You Earn tax from wages or occupational pension before paying the wages to the employee
• Employee National Insurance: Payable by the employee and deducted from weekly or monthly wages by the employer
• Employer National Insurance: Employer’s need to pay employer National Insurance on wages. This is a tax that is payable by the employer, it does not get deducted from the employee's Gross Salary amount

You can have a look at our free advanced online UK tax calculator for a detailed breakdown of your tax payment. Simply enter your gross salary and click the 'Show Detailed Calculation' button for a breakdown of PAYE tax, employee and employer national insurance payable to HMRC.

HMRC Tax Error

You may have seen the headlines in the last week about an estimated 4.3 million people that has paid too much tax (average £400) in the UK over the past 2 years and then also the unfortunate 1.4 million people that paid too little tax (on average £1500). Link to article on Sky news.

People that submit self assessment / personal tax returns every year should not be affected by this, but if you are a temp worker or permanently employed or if you have maybe left the UK and want to find out if you have overpaid tax then have a look at this website EasyLimited. It can help you work out if you have overpaid tax for any of the last 6 tax years.

If you would like to have a look if you are currently paying the correct amount of tax, then please have a look at this free online UK salary and tax calculator

Calculating how much tax to pay when working as sole trader/self employed.

Here at besttaxback.com we are often asked to calculate the amount of tax that sole traders (self employed) need to pay.

If you are self employed then that means you are receiving your money without any tax taken off from it. You need to register with HMRC as self employed within three months after you have started to trade as a sole trader/self employed. If you are not sure if you are self employed /a sole trader, see our article: When am I classed as self employed / sole trader?

The easiest way to work out how much tax you will need to pay is to use the besttaxback.com online tax calculator. In 4 easy steps you can calculate precisely how much tax you need to pay to HMRC.

First enter your Gender, Date of Birth and then select Self Employed from the drop down box.


Enter this information if you do have it to hand.


Enter this information if you do have it to hand.


First you need to select the Tax Year that you would like to do the calculation for. A tax year starts on the 06 April every year and ends on the 05 April the following year e.g. the previous tax year 2009/2010 started on the 06 April 2009 and ended on the 05 April 2010.

Next you need to enter your Gross Pay either per day, week, month or tax year. For example: If you earned £2,000 (no tax deducted by the person or company that paid you) as a sole trader/self employed and you had £150 business expenses for that month, then you must please select the tax year i.e. 2010/2011, enter £1,850.00(£2000 less £150) Gross pay and select monthly and then click on calculate amount to pay yourself.

The system will then show how much of this money you can take out for your own personal use. If you click on show detailed calculation then it will show the breakdown of taxes you will need to pay.

If you are self employed/sole trader and if you are earning more than the basic tax free allowance in a tax year then you have to pay the following taxes:

Income tax rates.

Basic Income tax: 20% on the first £37,400 your earn that exceeds £6,475(No basic tax payable on the first £6,475 you earn in the 2010/2011 tax year).

Higher Rate: 40% on taxable income that exceeds the £37,400 threshold.

Additional Rate: 50% on your income that exceeds £150,000 for a tax year.

National Insurance:

Class 4 National Insurance: 8% national insurance tax on the amount that exceeds £5,715 in a tax year. The rate comes down to 1% on income that exceeds the higher tax bracket.

Class 2 National Insurance: In addition to the Class 4 National insurance you also need to pay £2.40 a week, class 2 national insurance as well.

The besttaxback.com online calculator can give you an instant calculation of the estimated tax that you will need to pay if you are a sole trader/self employed. Please be aware, there are other factors to take into account (for instance, when your accounting period begin and ends) and it is always advisable to ask your accountant to help you determine the amount of tax payable.

Click the link below to go to the calculator right now...

Can I claim my household expenses as a business expense?

When running a business from home you can claim part of your household expenses as a business expense.

You are allowed to deduct the part of your expenses that wholly, exclusively and necessarily relates to costs incurred to run your business from home. If you have converted a room in your house into an office then you can claim certain expenses based on either the percentage floorspace used for or the amount of time it is used for business purposes.

You can then for example use the percentage of floorspace used for business purposes to calculate the portion of your rent, council tax, mortgage interest, insurance and water rates that is business related.

HMRC provides detailed information on their website about which expenses you can deduct if you are running your business from home.

Tax on the income received from letting a room in a house

A lot of people let rooms in their residence for extra income. This raises the question whether they need to pay tax on the income generated from renting out a room.

If you are letting a room or rooms (furnished) in your main residence then there is a special exemption (rent a room relief) that you may want to opt for.

The Rent a room relief scheme means that no additional tax is payable if your total gross rental income (before deducting any expenses or capital allowances) is less than £4,250.

The first £4,250.00 is therefore exempt from tax and the income as well as expenses can be ignored for tax purposes. If the gross rental income is more than £4,250.00 then you will need to include the amount that exceeds £4,250.00 as taxable income. Example: Total rent received for the tax year was £6,538, then you will need to pay tax on £2,288.00(£6,538 less £4,250.00).

You are however entitled to ignore the scheme and rather opt to take into account the gross rental income and expenses if for instance your expenses are more than your gross rental income for the room and you want to carry forward the loss.