Skip to content
01844 274808 info@harmonea.co.uk

Small Business Accounting

When to incorporate

This is a question we get asked frequently.  Currently sole traders have to pay personal tax on their profits, class 2 national insurance and class 4 national insurance on profits over £8424 at 9% up to £46,350 at which point Class 4 NI is 11%.  Sole traders have to pay a payment on account if their annual tax bill exceeds £1000.

 

Limited companies do not have to pay payments on account or national insurance but have to pay 100% of their corporation tax 9 months after the year end at a rate of 19% on profits.

 

Limited companies can have shareholders unlike soletraders.  When taking the combined personal tax and corporation tax liability for limited companies vs tax and national insurance for soletraders, the rough tipping point is if you have profits of £12,000 or more, it would work out to be more efficient for tax purposes to be a limited company.

Facebooktwitterredditlinkedinmail

Your Dividend Questions answered

Types of shares

When a company is incorporated at Companies House, it must have at least one share.  Most commonly shares are in £1 increments although this is not compulsory.  One penny, 25p, 50p and £5 per share are not unusual.  Ordinary A shares come with full voting rights.  Not all shares carry voting rights.  Typically, A shares do and the others don’t.  ‘Alphabet shares’ can be issued and it is most usual to have A shares for the directors and B shares for example, to the spouses, partners, children or employees.  Corporate entities can also be shareholders.  It is acceptable for one individual to hold more than one class of share in a company.

 

Who can be a shareholder?

If you are over the age of 16, you can be a shareholder.  You do not need to be a director to be a shareholder, nor do you need to be a shareholder if you are a director.

 

Who is entitled to receive dividends?

If you are a shareholder of a limited company and the company declares a valid dividend, you are entitled to receive a dividend should a dividend be issued to your class of share.  Just because you are a shareholder, it does not guarantee you will receive a dividend. 

 

How often can dividends be issued?

A company can only pay a dividend if it has distributable reserves.  This means it has made a profit after tax has been deducted.  Dividends can be taken at any time but it is advised to take no more frequently than quarterly.  Quarterly, half yearly or annually are all acceptable.  Doing so more frequently may be construed as salary by HMRC and be liable to personal income tax and national insurance at the prevailing rates.  Issuing a dividend monthly for £1200 and a salary of £987 is not realistic.  Profits rise and fall from month to month.  In the example below a company makes modest profits and every quarter calculates how much can be extracted in dividends.  You will see that the profits rise and fall over the course of the year and in this example, a total of £3807 can be taken in dividends over the course of the year.

 

 

Jun-

17

Jul-

17

Aug-17

Sep-17

Oct-

17

Nov-17

Dec-17

Jan-

18

Feb-18

Mar-18

Apr-

18

May-18

Annual figs

SALES

£3,000

£3,250

£1,200

£1,750

£2,400

£2,500

£1,200

£1,750

£4,000

£2,700

£2,550

£2,700

£29,000

COST OF SALES

£50

£50

£50

£50

£50

£50

£50

£50

£50

£50

£50

£50

£600

GROSS PROFIT

£2,950

£3,200

£1,150

£1,700

£2,350

£2,450

£1,150

£1,700

£3,950

£2,650

£2,500

£2,650

£28,400

EXPENSES

£2,000

£2,500

£1,200

£2,000

£2,000

£2,000

£2,000

£2,000

£2,000

£2,000

£2,000

£2,000

£23,700

NET PROFIT

£950

£700

£50

£300

£350

£450

£850

£300

£1,950

£650

£500

£650

£4,700

CT @ 19%

£181

£133

£10

£57

£67

£86

£162

£57

£371

£124

£95

£124

£893

PROFIT AFTER TAX

£770

£567

£41

£243

£284

£365

£689

£243

£1,580

£527

£405

£527

£3,807

AMOUNT AVAILABLE AS DIVIDEND

   

£1,296

   

£405

   

£648

   

£1,458

£3,807

 

Put simply, dividends are profit (sales minus expenses) after tax provision (19%) calculated on a quarterly basis.  It is not necessary to issue a dividend if you don’t want to but if you do, the guidance in this notice should be used.

What is the process for declaring a dividend?

The bookkeeper/business owner prepares the management accounts which shows CT provision and calculates the dividends available for distribution.  A meeting is held and it is agreed what dividends will be issued.  Take the example above.  In Q1 a profit of £1296 was available.  Let us say there are 3 classes of share.

John holds 1 A share and 1 C share

Janet holds 1 B share

Susan holds 1 D share

 

At the meeting, it is agreed to issue 100% of the profits equally between the 4 classes of share

 

25% of £1296 is £324 per share category.

 

In this example, John gets £648 and Janet and Susan each get £324.  Minutes and dividend vouchers need to be issued to John, Janet and Susan each time a dividend is issued.

 

Let us suppose in Q2, the dividend is only issued to the B share holder.  100% of the dividend (£405) goes to Janet.

 

John could use any combination he wants to distribute the dividends.

 

 

What is the tax implication on dividends?

For the year ending 5/4/18, each shareholder is entitled to receive £5000 tax free in dividends.  For the year ending 5/4/19, each shareholder is entitled to receive £2000 tax free.  Each shareholder is required to submit a personal tax return declaring their dividend income.  Dividends over the initial tax free allowance are taxed at 7.5% up to £34,500, the dividends are taxed at 32.5% with no national insurance contributions currently required.

 

What would you advise?

Doing your bookkeeping on a regular basis and producing and acting upon management accounts is crucial.  With MTD (Making Tax Digital) coming in in April 2019, it will be necessary for companies to submit their accounts on a quarterly basis to HMRC.  By doing your bookkeeping regularly, you will ease the pain of having to do this.   If you need more help or advice concerning dividends or bookkeeping, please contact us for an exploratory meeting.

Facebooktwitterredditlinkedinmail

Is your company dormant?

Dormant Companies are defined in 2 different ways by Companies House and HMRC:

A Dormant company at Companies House is if any transaction goes through the business, then you are not dormant.  There are exceptions to this such as paying the fee for the Confirmation Statement, changes to shareholding etc. meaning if you have bank charges going through when you haven’t made any sales, then your company is not dormant.

 

HMRC state that if you are not trading then you are dormant meaning if you have don’t have any trading income or expenses you are classed as dormant with them.

 

If you have any further questions about dormant companies then please let us know.

Facebooktwitterredditlinkedinmail

When do I need to pay my Corporation Tax?

Annual Accounts and Corporation Tax

After the end of its financial year, your private limited company must prepare:

You need your accounts and tax return to meet deadlines for filing with Companies House and HM Revenue and Customs.

Action                                                                         Deadline

File first accounts with Companies House               21 months after the date you registered with Companies House

File annual accounts with Companies House           9 months after your company’s financial year ends

Pay Corporation Tax                                                      9 months and 1 day after your ‘accounting period for Corporation Tax ends

File a Company Tax Return                                         12 months after your accounting period for Corporation Tax endsFacebooktwitterredditlinkedinmail

Rates and Thresholds from April 2019 to March 2020

Below are some of the changes to rates and thresholds, as advised by HMRC.  These will become effective from April 2019.

 

Personal Allowance                £12,500 per year.

Basic Tax Rate                         20% on annual earnings above the personal allowance, up to £37500.

Higher Tax Rate                      40% on annual earnings from £37501 to £150,000.

Additional Tax Rate                45% on annual earnings above £150,000.

 

The threshold above which both employers’ and employees’ national insurance contributions will begin is £8,632 per year, or £719 per month.

The new minimum wage rates from 1st April will be :-

Age 25 and above                                                                                                 £8.21

Age 21 to 24 inclusive                                                                                          £7.70

Age 18 to 20 inclusive                                                                                          £6.15

Aged under 18, but above compulsory school leaving age                           £4.35

Apprentice under 19 years old                                                                           £3.90

Apprentice over 19 years old, but in first year of the apprenticeship        £3.90

Facebooktwitterredditlinkedinmail

How well is your business doing?

Ratios

There are a number of different ratios that can be used by companies to help them measure and analyse their performance. The ratios are often compared to previous year’s performance as well as the average results for your industry. This can then be used to measure how well you may be doing in different aspects of your business. There are 5 different categories of ratios that each ratio falls under. These are: profitability ratios, market ratios, debt ratios, activity ratios and liquidity ratios.

Profitability ratios are probably the most commonly used ratios, they measure how a company would use its assets and how it controls its expenses to produce a good rate of return. Market ratios are used to show the return on investment for the business. They are often used when trying to sell a business to show potential investors that the company is worth buying into and will be profitable. Debt ratios are often used to measure how quickly a business can pay off any long tern debts, for example a bank loan or mortgage. Activity ratios are used to measure whether a business is getting the most out of their resources and also whether their cash is being utilised. Liquidity ratios are used to measure whether a business is capable of paying of their debts, for example a business may have a lot of cash in the bank but if their liabilities are higher than their assets then their company is not liquid.

You do however need to be careful when using any single ratio as it will never give you the full picture of how well your business may be doing. An example of how this may happen is if you use the gross profit margin ratio  and compare it to the net profit margin ratio.

A simple example of this is shown below.

Looking at the results above you can see two very different results but they are both correct so must be used correctly. If for example you had set a target at the beginning of the year to make a 25% profit. If you were to use the gross profit margin you can see that the profit you have made would be 30% which is great as it looks like you have beaten your target. However as you are able to see this doesn’t show you the full picture as the 30% doesn’t include any of your expenses. When you take your expenses into account you can see that your profit margin falls to only 5%.

Another ratio that is good to use is the current ratio  (also known as the working capital ratio). This is one of the basic liquidity ratios as it simply uses the company’s current assets to see if they would be able to cover their current liabilities. An example of this is shown below:

As you can see in this example the company’s current ratio is 2.0. This means that for every £1 of liabilities that they have, it is covered by £2 worth of assets. A common rule of thumb that is used is that if you have at least a 2.0 current ratio your company is often in a good position.Facebooktwitterredditlinkedinmail

Construction Industry Scheme

CIS (Construction Industry Scheme)

You must tell HM Revenue and Customs each month about payments you’ve made to subcontractors through your monthly return.

You need to send your monthly returns or submit them online to HM Revenue and Customs by the 19th of every month following the last tax month.

You must pay HM Revenue and Customs every month by the 22nd (or the 19th if you’re paying by post). You may be charged interest and penalties if you pay late.

Pay CIS deductions to HMRC in the same way as PAYE and National Insurance payments.

Facebooktwitterredditlinkedinmail

What is a registered office and do I need one?

What is a registered office address?

A registered office address is a legal requirement of all Limited Companies and Limited Liability Partnerships (LLPs) incorporated in the UK. Its purpose is to provide Companies House and HMRC with an official address for delivering statutory mail and legal notices. It must be a full, physical postal address in the same part of the UK where your company is registered i.e. England and Wales, Scotland or Northern Ireland. Both residential and non-residential addresses are permitted but many people prefer to keep their homes private.

Your registered office does not have to be in the same part of the country where your main trading activities are carried out, nor do you ever have to visit it. It is simply for receiving official mail and storing statutory records for inspection purposes.

 

Why do I need a registered office for a limited company?

  • Legally required under UK company law
  • Official mailing address for statutory correspondence.
  • Details are placed on public record to create corporate transparency.
  • Statutory records and registers must be kept and made available for inspection at the registered office.

You can change your registered office at any time after company formation as long as it stays in the same UK country.

 

Can I use my home as a registered office?

You may use your home for this purpose but it is not mandatory, nor is it the best choice. Ideally, you should use a non-residential address for reasons of privacy and professionalism.

The benefits of a non-residential registered office are:

  • Due to the public disclosure of corporate information, the use of a residential address could result in unwanted visitors and unsolicited mail at your home.
  • More likely to be perceived as an established, credible business if you have a professional registered office address.
  • Draws a clear line between work life and home life.

 

If you would like Harmonea to be your Registered Office address, please contact us.Facebooktwitterredditlinkedinmail

Manual book-keeping or Electronic book-keeping

We are often asked for our opinion on book-keeping packages.  Our view is you need to use it 52 weeks of the year so choose what suits you.  However, as companies grow, it can be beneficial to use proper software for the job.  This can save a lot of headaches at the end of the year.

Cloud or Local is the next question.  Many software companies now offer cloud software where you can access it any time from anywhere to suit you.  This can be useful but many are not happy with this feeling that their data is not safe.

Harmonea have recently reviewed 10 book-keeping software packages which are a mix of local and cloud software offerings.  If you would like a copy, please ask.Facebooktwitterredditlinkedinmail