Q: I’m self employed and I’ve only just prepared my tax return. As a result, I’ve only just found out that I haven’t put enough aside for my tax liability. What should I do?
A: Your balancing payment for 2010/11 and the first payment on account for 2011/12(if applicable) are due by 31 January 2012, together with your tax return.
If you are struggling to pay your tax, you should call HM Revenue & Customs’ (HMRC) Business Payment Support Service (BPSS). HMRC will ask you probing questions about the business and your cashflow, to ascertain why you can’t pay your tax. If they think you genuinely cannot pay your tax they may grant you an extension to settle your taxes in or agree a payment plan. However, they do not reduce the amount outstanding and they will still charge you interest.
Even though you can’t afford to pay your tax, make sure you still file your return before 31 January 2012. Otherwise, you will be charged an automatic penalty of £100.
Sole trade or company?
Q: Up until recently, I was employed in a fairly well-paid job. However, I have left my job and started my own business. Do I need to set up a company? If not, are there any benefits of doing so now?
A: No, you are not obliged to form a company.
However, business owners often chose to set a company up because they can be a more tax efficient vehicle to trade through. Furthermore, being a company makes the business look established and gives it status. And it gives the shareholders (the owners of a company) assurance that their liability is restricted to their investment in the event the company begins to fail to meet its debts.
Having said that, new businesses often generate losses in their early years of trading. If you believe your business will generate losses initially, you ought to consider remaining unincorporated. This would then allow you to carry back any losses against your employment income. If you form a company to trade through from the outset, any losses made by the company are confined to its affairs and cannot be used against your personal affairs.
What is a K code?
Q: I have just received my tax code from HMRC for 2012/13, and it is a K code. Can you tell me what this means and how it will affect my income?
A: Your tax code shows how much tax-free pay (personal allowance) you are entitled to.
Your personal allowance can be increase by things like the Married Couple’s Allowance and professional allowances/ subscriptions.
But it can also be reduced by taxable income that you receive without any tax taken off it (some state benefits/ pensions etc), taxable company benefits and any unpaid tax you owe from previous years.
If you have been issued with a K code, such adjustments have reduced your tax-free allowance to such an extent, that they are actually more than your personal allowance. Normally, the number in a tax code indicates the amount of income you are entitled to tax-free. However, the number in a K code denotes how much should be added to your gross income, before calculating the tax to be deducted from your pay.
Do I pass Class 2 NI if I’m employed and self employed?
Q: I have a full-time job but I also have a small business of my own. Therefore, I pay Class 2 NI contributions. But as I am paying my ‘stamp’ on my employment income, do I have to continue paying Class 2 as well?
A: Class 2 contributions count towards:
- Incapacity Benefit/Employment and Support Allowance
- Basic State Pension
- Bereavement benefits
- Maternity Allowance
I’m afraid you do have to pay Class 2 NI; despite the fact you are paying Class 1 on your employment income. However, if your profits are deemed to be ‘small’ (currently £5,315), you may be eligible for an exception from paying Class 2 NI.
If you are only liable for Class 2 contributions, you should consider your position carefully before applying for an exception.
Is my company dormant?
Q: I formed a company a while ago and I am now receiving letters from Companies House telling me to file the company accounts. However, I did not set the business up eventually. The only transactions were the bank charges in the company bank account. Do I still need to file accounts or is the company dormant?
A: By definition, a dormant company will have no ‘significant accounting transactions’ during the period. There is little guidance on what is deemed to be ‘significant’, but when deciding you should consider whether such a transaction would be entered into its accounting records. You may also disregard the following specific transactions:
- Receipts from shareholders for the payment of their shareholdings
- Fees paid to Companies House for a change of company name, the re-registration of a company and filing annual returns; and
- Payment of a civil penalty for late filing of accounts.
Bank charges do not meet the above definition, and therefore, the company is not dormant. It should therefore abide by the normal obligations for a small private limited company.
If you do not intend to make use of the company for some time, it may be advisable to source a business bank account that does not incur bank charges. You may then be able to take advantage of the reduced filing requirements for a dormant company.
