Trivial Benefits, what are they?

Trivial Benefits, what are they?

Introduction 

Here I take the time to explain what makes up a `Trivial Benefit’.

This allowance is one that you can claim as a business expense when you run your own company. This is also one of my handy tax tips for contractors and small business owners.

There are certain conditions to meet when you claim for Trivial Benefits as business expenses. Please note, there are two good aspects when you claim for these through your company:

  • you receive the benefit of the allowance on a personal basis; and 
  • your business saves tax on this at the same time. 

Trivial benefits are a recent entry into the UK tax system. They were first brought in on 6 April 2016. Indeed, Trivial Benefits cover the scenario where a business makes rewards to its directors and staff. The allowance is tax-free, and I would advise that you claim for this, if you qualify. What’s more, it is also an excellent way to reward directors and employees throughout the year.

Most importantly, this expense is not well known. Lots who can claim overlook to do this. Many contractors, due to a lack of awareness, do not even know that this allowance exists.

HM Revenue & Customs’ (HMRC) guidance 

HMRC state that a business can provide trivial benefits to an officer of a `close’ company. An `officer’ means a director or secretary. The term `close’ company means companies that have five or fewer shareholders. In real life, most contractor companies will have nowhere near five shareholders. Therefore, most will qualify for this tax-deductible allowance.

There is some further official guidance from HMRC. This guidance states that if the total provided does not exceed £300 over the tax year, it is tax-deductible. Also, you need to retain invoices or receipts for all Trivial Benefits that you claim during the tax year.

Considerations   

Exemption 

To be exempt from tax and NI, the Trivial Benefit will need to meet the following four conditions:

  • The cost of the trivial benefit is no more than £50 in total inclusive of VAT 
  • It is not cash or a cash voucher that you can exchange for cash 
  • The payment is not a reward for any work or performance 
  • The amount is not part of any work type of duty 

There is nothing new about an employer that provides its staff with benefits such as a gift at Christmas. Employers sometimes provide a free meal to celebrate a member of the staff’s birthday or another special event. Some employers also provide free tea and coffee for their employees while they are at work.

What to bear in mind 

Under the rules, you can afford to spend a bit more on yourself and your staff without having to pay tax on this.

Gift vouchers up to £50 are ok to claim, providing that you cannot exchange the voucher for cash.

Please note, you need to make sure that you do not go over the limit. If you do go over this, even by a small amount, the total cost will be taxable through the employer’s payroll.

It is also crucial to note that trivial benefits are not the same as benefits in kind (BIK). BIK applies when your employer provides you with some form of benefit. The BIK could be a company car, motorbike or van. It could also be medical insurance, dental cover, a director’s loan, or other benefits.

Other thoughts   

Please also remember, if you would like to make a payment of a trivial benefit, it is not in place of any work payment.

What’s more, the £300 limit mentioned above applies to an officer of a `close’ company. Where a business provides a benefit to the director’s family member or household, we need to treat this as being provided to the officeholder. This is then part of their annual exemption.

You should adhere to the limits and exemptions. If you do, the employer will receive a Corporation Tax (CT) deduction on the cost of the Trivial Benefits.

How you can claim for these as a UK contractor

If you work as a contractor through your own UK business, this is one allowance that you should claim. You can claim for this each year as long as you follow the above guidelines. Please make sure that it is not cash or a cash voucher (a cash voucher is a voucher that you can exchange for cash).

Also, please make sure that it is not more than £50 each time. The annual allowance is £300 per director. Therefore, you can claim for the £50 up to six times a year, each year. The amount will save CT at 19%. You also receive the benefit of what items that you spend this on. Please also make sure that you obtain the receipts each time that your business pays for a Trivial Benefit.

Final thoughts

Even now, three years on from the intro of this tax-free expense, many are not aware of it. It is not well known, and as a result, many business owners that can claim this do not do so. There is no definitive list that covers what your trivial benefit can cover. Therefore, as long as you bear in mind the exemptions above, it can be for any cost.

Therefore, if you are a contractor who runs your own UK company (with five or fewer shareholders), please think about claiming for this in the future.

Link to Contractor Advice UK group on LinkedIn    https://www.linkedin.com/groups/4660081/

The Christmas party

The Christmas party

Introduction 

If you have your own business, can you claim for the annual Christmas party as a genuine business expense? Many contractors ask me what they can claim for this. Well, if you are running your own UK company, you may feel that the tax system does you very few favours. Thankfully, HM Revenue & Customs (HMRC) are not a complete scrooge. It is good to know that during the tax year, they do give business owners certain financial incentives. In fact, nowadays, this annual allowance is now known as the `Annual Event’.     

Other tax tips   

Have a read of my article covering tax tips for contractors for handy tips you should know when you have your own business (this is a member only article and you can read it if you sign up as a member). This includes my latest advice for best tax planning ideas.

The Annual event

Claiming for the Annual event   

The annual event is a good incentive that is claimed by companies each year (but not sole traders). This claim is an event or a series of events that you can enjoy throughout the year.
To clarify, this is an exemption, rather than an allowance. Furthermore, this is worth your while to claim, even though this is only a small amount.

The exemption itself 

When you hold your ‘Christmas party,’ there’s no exemption from tax as such. However, when a business holds an annual event, HMRC does give limited tax relief, and this is on the basis that you can meet certain conditions. 
  • The cost of the annual event is less than £150 per person during the tax year. 
  • Also, the claim is for an event or events. This outing can include your Christmas party. 
  • The annual event is available to all of your employees. 
  • The exemption does not apply to company shareholders if they are not a director or employee. 
  • The director or employee that attends can also bring a guest if they are a partner or a family member. 

A claim for the annual event  

As a company director, you can claim for the annual event or events. You can hold this for yourself, your partner, and any of your employees.     
The cost of the event is tax-deductible, on the basis that the amount that you claim over the tax year does not come to more than £150 per person.   
Further to this, the event or events are open to all of the company employees to attend.   
Please note, though, you do have to hold the event or events to make this claim. You cannot simply claim a fixed sum of £150 cash if you do not spend any money.

VAT consideration   

Can I reclaim the VAT on the annual event?

Please be aware, the guidance from HMRC VAT Notice 700/65 states the position on VAT. You are not able to reclaim the VAT element on your annual event or Christmas party expenses if only the directors and their partners attend the event. The reason for this is because the goods or services are not for a business purpose.   
On the other hand, you can reclaim the input VAT if the directors and partners attend a staff party, alongside other employees. HMRC’s guidance here is, `we accept that the tax is input tax and we do not block it from recovery.’   
When you hold an annual event, as is the case with all other business expenses that you incur, make sure you obtain a receipt. 
My VAT guide gives a more in-depth view on VAT. for contractors and small business owners.

Final thoughts

I am sure you will agree with me, these types of events are key to motivate your staff. Also, this is an excellent way to improve your staff’s morale.
Your annual event or Christmas party is an excellent way for you to let your hair down. Indeed, this will come after the daily stresses of work. An `annual event’ can be an excellent meal in a restaurant of your choice. It can also be a day out at the races. It might also involve a trip to see a good artist in concert or a good old knees-up in your local. Most important, If one of your annual events is the Christmas party, please make sure that you enjoy yourself and do not embarrass your fellow work colleagues!   
As a final thought, please take note the total cost of your annual events cannot exceed £150 per director or employee.   
Link to Contractor Advice UK group on LinkedIn    https://www.linkedin.com/groups/4660081/

 

Use of home as office

Use of home as office

Introduction 

Are you a contractor or business owner who is running your own UK company? If you are, you may use your home as an office sometimes for work reasons. You might do this regularly or only now and again. Therefore, if you do this, can you claim the use of home as office as a business expense?   

Dealing with admin and other considerations  

Many businesses across the UK operate from home. As a result of this, at least all or most of the admin will be dealt with there. As part of this you will need to know how to maintain your business records and how long to store the records for.  When you are working from home it will also be good to know how to go about creating an office at home.

It is also worth a note, in a minority of cases, far more of the business activity than merely the admin is done from home.

Besides dealing with business admin, in your office you may have a computer and phone etc to carry out most of your work on.  On a separate but related issue, you can claim the full costs of furnishing a dedicated office at home. Therefore, you can claim for carpets, curtains, desks, and filing cabinets. What’s more, you can claim for a business computer and other relevant electronic equipment through your business. You can also claim for the cost of a business phone and related call charges. On your business computer, besides using this to maintain your accounting records, you may also use this to create your sales invoices and consider marketing ideas for your company.

You can also claim the tax depreciation on such items as a tax-deductible business expense. 

Have a read of my article covering tax tips for contractors for handy tips you should know when you have your own business (this is a member only article and you can read it if you sign up as a member)

What to consider   

Is it fair to make a claim for use of home as office when you work from home? 

I think, on balance, it only seems fair that the business should be able to make some form of a claim. The claim should be from the expenses that you incur when you run a home office that you use in part for such purposes.

The best option is to avoid a tax cost for you as the business proprietor / homeowner when you make a claim. Indeed, for you to do so, you mustn’t be making a profit in this. It is also vital that you do not describe the payment as rent. If the business pays you rent, then this will be taxable income for you as an individual.

Therefore, you will need to find a way how you can work out the amount of any payment for the use of your home as an office. There are some costs which stay the same such as Council Tax. If you work from home, you should not take these into account.

Other expenses that you should not take into account will include the cost of buying the home (this included the mortgage payments). Some other costs will include rent, most insurances, and possibly water rates.

But you do work from home sometimes… 

When you buy your home, it would be ideal if there is a certain feature, such as a room. You could use this room just for business use. The room would be beyond the number that the household ordinarily requires. If this is so, you can justify a claim for the extra running costs in your home office. When there is no separate office, it is not as easy to work out your home office running costs.

Expenses that you can claim for will tend to comprise of the heat, light, and power supplies. Some cleaning costs might be ok too. Insurance might be too if the cover includes equipment that you use in the business, such as computers and other electronic devices.

History and HMRC guidance   

Prior to 2005 

Before the end of 2005, there was no benchmark for the use of home as an office. Neither the Inland Revenue (now HMRC) nor accountants had any guidance as to what proportion or absolute amounts of running expenses they could regard as acceptable. Separate meters would be required to measure the amount of energy that a business used in the activities at home.

Cynically, I suppose, claims were made as high as the claimants dared. Perhaps in the hope that HMRC would not challenge their claims at all, or if they were, they could be justified.

HMRC guidance for use of home as office 

In early 2006, the HMRC issued a bulletin about home office use. We paraphrase, “in recognition of the increasing occurrence of people carrying out their work from their homes, HMRC will not seek to challenge a claim towards home running expenses up to £3 per week” The amount was then £4 per week for many years up to March 2020. The amount you can now claim is £6 per week from 6 April 2020.

But today, if you like it or not, HMRC has its benchmark.

A justification exercise 

A claim for use of home as office at an amount higher than the benchmark will need to have some scientific justification and some evidence.

Perhaps you could tally up the costs for some time before the business use at home started. You can then compare these with costs for a similar period after, will this be evidence? On the other hand, you can take a tally of the appropriate expenses divided by the number of rooms in the home (one being the room that you use for the business). You can then adjust the amount, up or down, as required. The claim will also depend on the amount of time that you spend in the dedicated office room. You can compare this with the time that you spend in the rest of the house.

What’s more, perhaps you can take some energy that the office equipment consumes. Indeed, a justification exercise may not be easy to put together, and contentions may be difficult to defend. Furthermore, the amount of extra tax that you save might not make a claim cost-effective. Especially if you will incur professional fees in any detailed breakdown or later defence of the claim.

Using your home broadband / phone for business reasons whilst working from home 

When you are working at home, you will more than likely be using the internet. What’s more, you may receive business calls or may need to make them yourself. Therefore, you will in most cases also be able to make claims for your business phone calls and broadband usage.

Advisory rate -HMRC’s rate

Unless my clients have strong feelings to the contrary and wish to justify a higher claim for use of home as office, then I believe claims henceforth should be only the pre-agreed £4 per week. I will also assume this is ok for you unless you tell me otherwise.

You may claim more than £4 per week within your expenses. If you think you can justify the higher level, then you should prepare yourself to perform a justification exercise. This is as I describe above! However, if you now agree to tune down your claim to £4 per week, then please make the required entry in your accounts.

Final thoughts

To sum up, as time goes on, more and more business-type people work from home. If you would like to work out how much it costs for you to work from home, you will need to make a comparison. When you do this, you will look at what the overall costs are now. You can then compare these against what your costs were previously.

In most cases, my clients stick to the allowable rate of £6 per week for the use of home as office claims. That is unless they spend much more than the occasional time working from home. Examples here could include where you work several days per week from home. It could also include if you run various computers at home at the same time.

Link to Contractor Advice UK group on LinkedIn    https://www.linkedin.com/groups/4660081/

 

How much dividends can I take?

How much dividends can I take?

Introduction

How much dividends can I take from my business? This thought is a common one when you run your own company. What’s more, when you calculate this, you are going to work out the levels of your post-tax profits. It’s also key to know what these are on an ongoing basis. To sum up, the amount of profit that is available, in turn, determines how much your business can pay you in dividends.
Besides, when your company pays dividends, they are paid to the shareholders in the business. Your company should also pay the shareholders in their respective share ratios.
Now, before I move on, there are many aspects to paying dividends. These include when should I pay them, the timing of paying them, how much can I pay (this article), the dividend allowance and illegal dividends.

If your company pays you too much

You should not overdraw your dividends as a contractor. If this occurs, this could mean that you draw from funds that are required to cover its future tax bills. To sum up, you need to know what is available as dividends from your company now.
It’s also possible that your company can pay more dividends than are available at any moment in time. When this happens, any surplus amounts that you draw from your company will need treating as a director’s loan. In turn, further tax issues can arise due to the loan. If you ever find yourself in a position at any time where your company cannot pay its taxes, there are certain things that you need to consider.

Methods to use   

How much can my business pay in dividends? -1st method

When you work out the amount of available post-tax profit in your company you can use the method that I show below:
  • First of all, I take my business turnover in the current financial year 
  • Then, I deduct my business expenses in the current year 
  • Next, I subtract what my business pays me as my gross salary in the current fiscal year 
  • In turn, this gives my company’s profit before Corporation Tax (CT) 
  • Now, I deduct my company’s CT at the current rate of 19%. Apply this rate of tax to the profit before tax figure in the previous line. 
  • As a result, this gives me my company’s profit after CT. 
The company’s profit after CT is a key figure to know in your business. This figure shows what’s available to you as dividends out of the current year’s profits.
The final step is to add your company’s retained earnings from the previous accounts period on to the figure above. This amount (it is the Profit and Loss account) shows on the Balance Sheet in the last set of financial accounts.                                                                                                                                                                                                                                                           

How much can my business pay in dividends -2nd method

You can also work from the company bank account balance(s) as a different method. If you use this method, it will also show how much is available in company profits. You can use the following method to do this:
  • First of all, I take my company’s current bank account balance. If I have more than one company bank account, I add the bank account balances together. 
  • Next, I add on to this any company sales invoices that I have raised, which are outstanding. 
  • Then, I deduct from this any company tax bills that are outstanding. You need to calculate these right up to the present day. 

UK company taxes consist of 

  • Value Added Tax (VAT). Usually, any VAT that you owe is any VAT that you have yet to declare on the next VAT return. This VAT may include the last quarter’s VAT bill, which your company has yet to pay. 
  • Pay As You Earn / National Insurance (PAYE/NIC). You usually pay this on each quarter or each month. Any PAYE/NIC that you now owe is generally for the latest month or quarter. 
  • CT. You pay this on an annual basis. You may not have yet paid last year’s CT charge at the current time. Therefore, the CT that you currently owe is the CT for your company’s current financial year. This CT may include any CT that you owe for the previous business year. 

Going forward

On an ongoing basis, as a UK contractor or business owner, you should try and keep track of the profit in your company.
If you do this, you then know how much your business can pay you as dividends at any time.
You are also then aware of what you should leave behind in your company to cover the various tax bills.
If you follow the above methods, this makes sure that you do not leave your business short of its tax bills later on. When you do this, it can present problems for you to try and resolve at a later date. If this occurs, you need to make up any shortfall. As a result, you also have to deal with any tax consequences.

Final thoughts

If you are a director of your own company, it’s certainly good to know what you can draw from this. It’s good practice to work out your business profit and keep a note of this on an ongoing basis. By doing this, you are aware of the dividends that you can take should the need arise. When you do this, it also makes sure that your business does not end up in financial difficulty at a later point in time.
As a final thought, now you know how much your business has in profit, you can also consider something else. When you take your dividends, how does this impact your tax position? If your income is above £50,000 gross, it will incur higher rates tax. Therefore, please have a read of my article that covers maximising your basic rate tax band.
Link to Contractor Advice UK group on LinkedIn    https://www.linkedin.com/groups/4660081/
Can I pay my spouse a salary?

Can I pay my spouse a salary?

Introduction

When you are in business and are setting up for the first time or you have been running your company for quite some time you might think can I pay my spouse a salary through my company? If so, how much can I pay them as a salary? These are questions that pop up quite often from contractors, and the good news is you can, although you will need to take an overall look at your business to see if this something that you would like to do.
When you are running your own company, you may also be an employee in your business. As a contractor and the main income generator you may also be taking a director’s salary. What’s more, you may also decide to make your spouse an employee, too, and pay them a salary for any work that they do for you.
Depending on what your spouse earns, it may also be an idea to consider making use of the transfer of the Marriage Allowance.

What to consider   

Is your spouse a higher rate taxpayer?

There is no benefit in paying your spouse a salary if they are already earning above the higher rates tax level (£50,270).
As a result, if your company did, it would save Corporation Tax (CT) at 19% on the salary cost. Your spouse, though, would pay PAYE tax on the salary at 40%.

Are they using up their tax allowance?

There is also no real benefit in paying your spouse a salary if they already earn enough to use up their allowance. The personal allowance is currently £12,570 in 2021/22.
Consequently, if your company did, it would save CT at 19% on the salary cost. Your spouse, however, would pay PAYE tax on the salary at 20%.

Do they have no other salary or have income less than £12,570 per annum?

In contrast, if your partner or spouse has no other salary or earns less than £12,570 per annum, you could pay them a salary and make some tax savings. Your company would save CT at 19% on the salary cost, and your spouse would receive the monthly net salary.

Employing your spouse and paying them a salary   

Working and performing tasks for your company   

Importantly, if you are going to pay your spouse a salary, they should also be doing some work for your company to justify this. Such tasks could be administration type tasks and could include:
  • answering the phone; 
  • opening company mail; 
  • dealing with company e-mails; 
  • updating the company’s accounting system; 
  • creating invoices 
If your spouse is not doing any work, HMRC may challenge the salary.

PAYE scheme

For your company to be able to pay a salary to you and perhaps your spouse, it will need to be running a PAYE scheme. HMRC will set this up, and your accountant will usually administer this for you. You can find out more about this on the HMRC website.

National Living Wage (NLW) and National Minimum Wage (NMW)

Please note, you will need to pay at least the National Living Wage or National Minimum Wage if:
  • If your spouse is not a director; and 
  • does not have a contract of employment. 

This is £8.91 per hour (NLW) for over 23’s as of April 2021. NMW applies for 22 and under and for 21-22 the rate is £8.36, for 18-20 it is £6.56 and for 16-17 it is £4.62. For Apprentices, the rate is £4.30.

Apprentices are entitled to the minimum wage for their age if they are both aged 19 or over and have completed the first year of their apprenticeship.

Suggestion     

Finally, if you decide to pay your wife or partner a salary, you may wonder how much.
As part of this you will need to consider here what is the value of the work that they carry out for your business. What’s more, £797 per month (£9,564 per annum) is the current minimum level that counts as a qualifying year for UK state pension purposes.

Final thoughts

Many contractors choose to pay their spouse a salary through their company. In turn, the spouse will carry out certain tasks for the company, usually administration type tasks.
Link to Contractor Advice UK group on LinkedIn https://www.linkedin.com/groups/4660081/
The UK Marriage Allowance transfer

The UK Marriage Allowance transfer

Introduction

Have you ever wondered if you can claim for the UK Marriage Allowance Transfer? On the other hand, have you never been aware that this exists or you did not know how this works?

The transfer is worth up to £250 to you per year. Although this is not a lot, it may be worth doing in the case of some couples.

Two separate articles of mine which explain how your personal tax position can be affected in the UK are the UK child benefit tax charge and the student loan repayments.

You might also make a saving via your self-assessment tax return if you have invested into an Enterprise Investment Scheme during the tax year.                   

Missing out   

As mentioned, many people miss out on the claim. The reason for this is simply due to a lack of awareness on the subject. Your contractor accountant will be able to help check this for you.

In previous times, the Marriage Allowance was brought in by the Coalition Government. Today, both married couples and civil partners can claim this.

The process   

How the UK Marriage Allowance Transfer works   

This UK Marriage Allowance Transfer allows couples to transfer part of their Personal Allowance (PA). The transfer is 10% of one partner’s PA to the higher-earning partner’s PA. In 2021/22, the PA is £12,570. Therefore, one partner can transfer £1,250 of their PA to their partner. In turn, this will result in an income tax saving of £250 for the higher earner.

Being entitled to claim depends on the income of both of the people in the marriage. People in civil partnerships can also claim.

When can you transfer the UK Marriage Allowance?     

When one of the partners has an income of £12,570 or less, you can transfer the allowance. Please note, the other partner should not be a higher or additional tax ratepayer. By this, I mean they are not earning over £50,270 during 2021/22.

Therefore, to be eligible, one partner must be a non-taxpayer. The other one needs to be a basic rate taxpayer.

If you claim for this, the non-taxpayer will transfer precisely 10% of the prevailing PA for the tax year in question.

There may be instances where the non-taxpayer has already used up some of their tax allowances. The 10% transfer then results in some tax becoming payable.

You can apply online     

You can apply for the UK Marriage Allowance online via the HMRC website. When you apply, you will need both yours and your partner’s NI numbers. What’s more, you apply via the person’s account who is transferring part of their marriage allowance to their partner. You will also need proof of ID. This ID includes your passport, payslip details, and tax credits. Finally, you will also need the bank account where you receive child benefit, etc.

If your application is accepted HMRC, they will issue updated tax codes. These will show the transfer of the Marriage Allowance from one partner to the other. HMRC will also update the change to the start of the current tax year.

You can also do this via the Self Assessment service in your HMRC account.     

Final thoughts

Many couples overlook to check if they claim for this. Although this is not a significant amount, it is worth a claim for if you qualify. If you are not sure how to go about this after reading the above, please speak to your accountant.

If you have had several employments previously in your working life, and you have pension schemes dotted around from these jobs, something that you may be interested in is pension consolidation.

Link to Contractor Advice UK group on LinkedIn    https://www.linkedin.com/groups/4660081/