Tax Frequently Asked Questions
Why is the net amount on the profit calculations different to the net on my invoices?
This is due to the Flat Rate ‘bonus’ that you generate on each invoice. You charge VAT at 20% of the net amount but only pay over a certain percentage (based on trade sector) of the gross invoice to HMRC so you are paying less VAT than has been charged, thus the net on the profit calculation reflects this.
What is PAYE?
PAYE is specifically paid on salary on a per-pay run basis as opposed to income tax which is payable on an all-income basis when completing your self-assessment each year. This page will concentrate on the tax due on salaries under PAYE.
The tax year runs from 6th April to 5th April each year and it is on this basis that PAYE is calculated.
The yearly thresholds (2022/23) are as follows:
- £0 - £50,270 20% (This is the basic rate tax band)
- £50,271 - £150,000 40% (This is the high rate tax band)
- £150,000+ 45% (This is the additional rate tax band)
This is based on a standard tax code of 1257L (personal allowance of £12,570) which every taxpayer gets as a right being deducted from the salary before the above thresholds are applied and as such taxed at 0%. If your tax code differs from 1257L then a different amount of salary will be taxed at a rate of 0%.
To illustrate this with an example:
Mr Bloggs received an annual salary of £50,000 and is on a 1257L tax code, he will pay tax as follows:
First £12,570 @ 0% = £0
Next £31,785 @ 20% = £6,357
From £42,385 – £50,000 @ 40% = £3,046
Total = £9,403
Other examples based on 1257L are as follows:
|Salary||20% Band||40% Band||Total|
Income Over £100,000?
If your total income exceeds £100,000 your personal allowance will be reduced by £1 for every £2 worth of income in excess of £100,000 until it reaches zero when your total income is £121,200.
If your total income is £110,000 your personal allowance would be reduced by £5,000 to 500L calculated as:
£11,000 - £100,000 = £10,000 / 2 = £5,000
£10,600 - £5,000 = £5,600 = 500L tax code.
Why do I have a PAYE rebate on my salary?
This is generally because you are now taking a much lower salary compared to that in your previous employment. Where the previous salary has had high rate tax deducted some (or all) of this higher rate tax may be refunded in the form of a PAYE rebate on your current salary.
You told me that taking a salary at the National Insurance threshold was most tax efficient, so why is PAYE being deducted from my salary?
PAYE and NI are completely separate. Taking up to the NI threshold is generally the most tax-efficient salary to take, this may incur some PAYE if you are not on a ‘standard’ tax code, but this will all be recalculated on your self-assessment tax return and the PAYE you have paid will be deducted from your overall tax liability for the year.
When must you register for VAT?
If you are in business (whether as a limited company, sole trader, etc.) then you must register for VAT if the value of your taxable supplies meets one of the following:
- Your turnover for the previous 12 months has gone over the 'VAT threshold' which is currently £85,000
- You think your turnover in the next 30 days alone will go over this limit.
You must notify HMRC of your liability to be registered for VAT within 30 days following the last day of the month in which you first met one of the above criteria. Failure to do so may render you liable to penalties/interest and VAT on sales that you may not have actually charged VAT on.
How does Flat Rate VAT scheme work?
This is a VAT scheme designed to simplify the VAT process. You still charge VAT at 20% on your invoice but you pay a reduced percentage of the gross invoice in VAT to HMRC depending on the trade sector you work in. For example, in IT you would pay 14.5% of the gross invoice in VAT to HMRC.
What is Corporation Tax?
Corporation Tax is a tax based on the profits of limited companies and is payable to HMRC. The rate at which Corporation Tax is paid is dependent on the level of company profits as follows:
- £0 - £300,000 19%
- £301,000 - £1,500,000 19%
- £1,500,000 19%
When calculating the Corporation Tax you first need to start with the profits per the accounts. This is calculated by deducting all expenses from the company’s turnover to give a profit before tax figure which, for Corporation Tax purposes, is referred to as ‘profits’.
From this, there are a number of adjustments that need to be made to take into account various tax treatments of certain items, because some things in the accounts are not allowable for Corporation Tax (and a rare number of items are not subject to Corporation Tax).
These are added back to the ‘profits’ to give the profits chargeable to Corporation Tax (PCTCT) and this is what the Corporation Tax rate is applied to.
To illustrate this with an example:
XYZ Limited had turnover of £100,000 and expenses of £20,000 which included £500 entertaining and £100 company formation costs. The profits per the accounts would be £80,000, however, when calculating the PCTCT you would add back £600 to give taxable profits of £80,600. The company is ‘small’ so pays corporation tax at 20% which would equal £16,120 (£80,600 x 20%).
To relay the figures to HMRC the company has to submit a CT600 (Corporation Tax return) along with a tax computation (this shows any adjustments between the ‘profits’ and ‘PCTCT’) and a copy of the accounts. These are all due to HMRC 12 months after the year-end in a specific format known as iXBRL.
Payment of the Corporation Tax is due to reach HMRC no later than 9 months and 1 day from the year-end.
The due dates may be earlier, such as in a company’s first year. The CT600 can cover a period of 365 days and no more, an accounting period is longer than these two CT600’s have to be done. In this case, the due dates are calculated from the last day of the 1st CT600 rather than the year-end.
When is Corporation Tax due?
Corporation tax is due for payment 9 months and 1 day after the accounting period end. If the accounting period is a full year this will be 9 months and 1 day from the year end but earlier dates will apply if the financial year is longer than 365 days, typically in the first year.
Why do I have to pay payments on account for my personal tax?
You'll usually have to make 'payments on account' for the current year's tax if your previous year's tax was over £1,000 - unless more than 80 percent of the previous year's liability was covered by tax taken off at source. Each payment is half of the tax due for the previous year.
Because I am self-employed should I be paying Class 2 National Insurance payments?
You are not self-employed, if you are an employee of your own limited company and any National Insurance contributions (if applicable) will be deducted from your annual salary.
Please note: If you take a salary at the NIC threshold then you will not have any National Insurance deducted but you are still paying over the lower earnings limit in order to qualify for state pensions.
How do I pay National Insurance as a director?
Directors are in a unique position because they have the power to influence how and when they receive their pay.
This means that if their NIC was calculated under the ‘normal method’ they could pay their annual salary in one single week and thus pay a lot less NI than a normal employee paid the same amount but spread over the whole tax year.
To combat this, directors' NIC is calculated under a different method called the ‘directors method’. Broadly speaking, this is done on the same basis as PAYE in so much as previous earnings from the employment in that tax year are taken into account when calculating the NI due i.e. a cumulative basis. Directors will not pay any NI on their salary until the cumulative earnings exceed £7,956.
The employer's contribution is calculated in exactly the same manner but this starts to become payable once the cumulative salary has exceeded £7,956.
Overall, provided that the salaries due throughout the year are paid equally, then directors and employees will pay the same amount of NI and it will only be the timing of the NI deductions that differs.
To illustrate this with an example:
Mr Bloggs is paid an annual salary of £36,000 on a monthly pay basis as a director of his own limited company, ABC Limited.
As a director, his NI is calculated under the ‘directors method’.
|April Salary||£3,000||Cumulative salary|
|£3,000||Not exceeded the threshold so no NI payable.|
|May Salary||£3,000||Cumulative salary|
|£6,000||Not exceeded the threshold so no NI payable.|
|June Salary||£3,000||Cumulative salary|
|£9,000||Threshold exceeded so NI becomes payable as below.|
Employees' National Insurance:
Cumulative salary (£9,000) less primary class 1 NI threshold (£7,956) gives £1,044 taxable for NI at 12% = £125.28
Employers National Insurance:
Cumulative salary (£9,000) less secondary class 1 NI threshold (£7,956) gives £1,044 taxable for NI at 13.8% = £144.07
For the July salary onwards, the earnings thresholds have been used up by the April to June salaries. This means that all further salaries this tax year will attract NI at the rates of 12% (for the employee) and 13.8% (for the employer) which equates to £360 and £414 respectively per month.
Not a director for a full tax year?
If you become a director part way through the tax year then the NI thresholds (both employees and employers) are reduced down accordingly so you only receive a percentage of these based on how many weeks are left to go in the tax year.
If you leave the directorship during the year you still receive the full allowances for that tax year.
Note: Employees' NIC falls to 2% of any part of the salary in excess of £41,865 pa.
I want to pay myself a bonus, is this tax efficient?
A bonus just like a salary is subject to National Insurance; both employers and employees. The rate of Corporation Tax relief does not outweigh the additional NIC incurred on salaries leaving dividends more tax efficient in most cases.
Will I need to pay higher rate tax?
Whilst basic rate dividends are taxed at 8.75%, providing that you do not exceed the higher rate (HR) threshold of £50,270 for the current tax year (2022/23) in personal income then you would be unlikely to pay the higher tax on your dividends through your personal tax return.
To keep track of your total income you should record the amounts that you have taken throughout the tax year in dividends along with all other income you have received so you know exactly where you stand in relation to any additional taxes that may be due.
To calculate the available dividends before breaching the higher rate threshold you can use the following:
|£50,270.00||Higher rate thresholdy|
|Less:||(£XXXX.XX)||Expected salary for the year – through your limited company|
|(£XXXX.XX)||Gross salary from previous employment(s) – since 6th April 2017|
|(£XXXX.XX)||Personal bank interest (gross)|
|(£XXXX.XX)||Rental income/any other income|
|(£XXXX.XX)||Dividends taken in the current tax year.|
|£XXXXX.XX||Dividends available before any tax is due|
Any dividends taken in excess of the higher rate threshold will be subject to 33.75% until your total income exceeds £150,000, at which point the additional rate dividends will be subject to the 39.35% additional rate tax.
However, if your total income exceeds £100,000, your personal allowance will be reduced by £1 for every £2 worth of income in excess of £100,000 until it reaches zero when your total income is £123,000, this will then mean there will be additional tax on both your salary and dividends on top of the taxes mentioned above.
I have not used up all of my basic rate tax allowances for last year, can I declare a dividend now and backdate it?
Unfortunately, this would not be possible. When a dividend is declared, the directors of the company must hold a board meeting and reach an agreement to pay out a dividend to the shareholders of the company. Minutes should then be prepared detailing the decision and these should be kept in the company register. It is not possible to hold the board meeting in the past and therefore dividends cannot be declared retrospectively. We recommend that you assess your higher rate tax position prior to the end of the tax year and declare a dividend from any retained earnings in the company in order to utilise any unused tax allowances prior.
What is a P11d form?
A P11d is a form that is submitted to HMRC each year to advise them of the benefits and expenses you have been provided with by your employer.
This page outlines what the P11d is used for, a broad outline of the expenses/benefits that should be declared on the P11d (and those that do not need to be declared), and the tax treatment of the expenses/benefits declared. All tax rates and allowances shown are based on those in force for the 2022/2 tax year and are subject to change.
If you have provided your employees (normally only yourself) with expenses or benefits, you need to report these to HMRC by 6 July after the end of the tax year; this is done on the P11d form. You also have to tell them about any class 1A National Insurance that may be due if you have provided taxable benefits (company car, medical insurance, etc.).
Unfortunately, the submitting of the P11d is not optional, if you have provided expenses/benefits to employees then a P11d needs to be completed (one for each employee). If the P11d is submitted late then you could be liable for a penalty. Caroola will take care of the P11d submission before the due date on your behalf based on the expense details you have provided throughout the year.
What are payments on account?
If you have completed a Self Assessment Tax Return you may be liable to make payments on account for the following tax year. You will have to make payments on account if the tax due for the year was over £1,000, the only exception to this is where more than 80% of the year's liability was covered by tax deducted at source.
If you do have to make payments on account they will be held by HMRC and offset against any liability that may arise in the next tax year. The payments on account to be made are calculated as 50% of the previous year’s liability, the first being due on 31st January following the tax year, the second by the following 31st July.
How much can I declare as a dividend before paying higher rate tax?
This will depend on how much you have been paid as salary and dividends for the current tax year (and any other income you may have). We can provide an estimate on request of how much more you can declare as dividends before paying higher rate tax. If you are taking a salary at the personal allowance (2014/15 - £10,000) and have no other income then you will be able to take £28,678.50 in net dividends before paying higher rate tax.
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