The world of figures and finances, spreadsheets, receipts, tax… argh it can all be bamboozling at times. Especially if you run your own business, you’re probably already juggling the equivalent of 3 or 4 different jobs rolled into one, then boom it’s the end of the tax year and you’ve got another role to try and play. Well I’ve enlisted the help of straight talking accountant to the people, Kyle of Jaggar Accountants, to answer some of our questions…
Hey Kyle, my business is registered as a limited company but people I work with are often confused about whether they should be self employed as a sole trader or a ltd company, can you advise on how they should decide please?
There’s different aspects to this – tax efficiency, cost and protection. Generally speaking, a Ltd company can be more tax efficient if earning above about £30k a year. You also get ‘limited liability’ with a Ltd company which means if things go wrong the debts stop with the company and not your personal possessions. The Ltd company route is a bit more complicated and therefore there is more admin than being self employed. So it’s a case of weighing all of those things up and deciding what is more important to the individual. With a sole trader the individual ‘is’ the trade/business. All profits earned are taxed on the individual when they are generated. A Limited Co is seen as a separate entity in it’s own right. Therefore the individual works ‘for’ the company. Profits are taxed on the company and then the individual is taxed on the income they extract from the company.
So really for self employment, being a ltd company is the most tax efficient way to earn an income?
Generally, yes. Assuming profits will be more than £30k.
Ok and what about VAT, who has to pay VAT and when and why?
An individual or company must register for VAT if turnover (sales income) is over £85k in a 12 month rolling period. You can also choose to become VAT registered if it benefits your business to do so. VAT is paid by the end user and so VAT registered businesses are basically collecting it on behalf of HMRC and passing it on to them. Tax collectors without getting paid for it!
What about corporation tax?
Corporation tax is the name of the tax charged on Limited Company profits. It is currently 19% in this country and is payable 9 months and 1 day after the company’s year-end.
How does someone pay themselves if they are a ltd company in the most tax efficient way?
Dividends are generally seen as the most tax efficient way of extracting money out of a company on a regular basis. A dividend is a return on investment for shares held. The business owner would own a share or shares in the company for this to happen. A small PAYE salary equal to the personal allowance is also a good tax efficient way of paying yourself as this is treated as an additional cost in the company accounts but is tax-free on the individual, as long as they have no other income in the year. It’s also a great way to keep your national insurance record up-to-date as there will be some NI payable in the year. (Please note that a payroll scheme would be required for this).
What advice do you have for people that are self employed and working towards a mortgage application? That can be a tricky life stage for small business owners to navigate.
Plan ahead! Being self-employed the mortgage companies see you as more of a risk and therefore require more information than an employed individual. You’ll be required to show 3 years of accounts and personal tax computations. The mortgage companies like to see a steady increase in profits too!
What is one thing all small business owners should do but often don’t do with regard to their finance and accounting?
Don’t leave it too late – a lot of people leave it to the last minute to contact an accountant and a lot of the time they could have saved themselves time, money and stress by getting assistance sooner. Another common issue is mixing business and personal spending within their business accounts. It makes things a lot clearer and cleaner if business accounts are only used for business expenditure.
What about keeping receipts, do people actually need to still be keeping every single receipt these days?
They do I’m afraid and this is particularly important for VAT registered business as a VAT receipt is required. Luckily, a lot of receipts can be digital nowadays so that helps the storage situation. All receipts and invoices should be kept for a minimum of six years.
Crikey, that’s a long old time. I definitely don’t keep all of mine. Oops. Ok and so for people wondering if they need an accountant or do it themselves, what would you advise (as impartially as you can of course)?
Some people do attempt to do their own bookkeeping or accounts however it usually takes a lot of time out of their day. Time that could be better spent on their own business and doing the things that they are good at. The finance function in every business is extremely important to keep an eye on but a good accountant will work with you and advise you accordingly so you should still be in the loop with it. I’d always recommend getting an expert to do the job in any field…even painting and decorating for example – I could do ‘a’ job but a professional would be quicker, better and it would be less stressful.
What about you, who do you work with? What do you love about your job?
I specialise in helping small businesses and individuals, from completing simple tax returns, to doing full bookkeeping and payroll services. I love meeting different people with different businesses and speaking to them about their businesses. It important for me to learn as much as possible about them to enable me to help them in the best possible way.
If you want to contact Kyle for advice on your tax and accounting, you can reach him on email@example.com or check out his website here: