‘R’ is for remuneration
The building blocks of accountancy
is for remuneration
Our A–Z of top tips continues this month as Julia Burn turns to the letter ‘R’.
As we approach the end of the tax year, it is a good opportunity to review remuneration packages to ensure you are being paid in the most tax-efficient way.
As a business owner or as an employee, there are various methods of remuneration, whether by salary, dividend or pension contributions.
Salary v dividends
If you are a business owner, owning shares in a limited company, and also an employee, it is worth reviewing how you are remunerated to ensure this is done in the most tax efficient way.
While you will be earning a commercial salary, any bonuses may be better to be drawn as dividends from the business rather than bonuses paid via salary.
This is a point that you should discuss with your accountant, who will be able to tailor advice to your individual circumstances.
It is worth considering your personal tax allowance and the tapering of this when a salary exceeds £100,000, as the marginal rate of tax between £100,000 and £150,000 can be very expensive.
The pandemic is affecting doctors’ businesses in many ways, the most notable being the reduction in profits and squeezed cash flows due to forced closures.
If profits in a company are lower than usual, but director drawings have stayed at a similar level, it may result in overdrawn directors’ current accounts.
This can prove very costly to a business and where an overdrawn director’s account is not repaid within nine months of the accounting year end, what is known as S455 tax is payable on the balance at the same time that the company’s corporation tax liability is due.
S455 tax is charged at 32.5% on the balance of the overdrawn director’s account at the end of an accounting year.
It is repayable to the company when the overdrawn director’s account has been settled, but it obviously creates a cash flow issue, so much better for a company to avoid if possible.
Government support for businesses
As mentioned in previous issues of Independent Practitioner Today, the Government has provided various measures to support businesses during the pandemic, including the furlough scheme which has evolved during this time.
It is important to keep up to date with any changes in these schemes, if they are being utilised, to ensure the business is abiding by current regulations and obtaining the best support available. It would be a good idea to keep in regular contact with your accountant, who will be up to date on all of the changes.
Pensions
To encourage taxpayers to save for the future, tax relief is available for contributions you make to your pension. This includes superannuation contributions. The relief is usually claimed via your self-assessment tax return, but, in some cases, it is obtained at source; for example, when you are an employee.
There is a limit – annual allowance – on how much you can save each year without incurring a tax charge. The maximum you can save annually is equal to the annual allowance for the year plus any unused annual allowances from the previous three years.
The standard allowance is £40,000, but it may reduce to £4,000 if you earn in excess of £200,000.
If you incur a tax charge, you may request that your pension scheme pays it, thereby reducing the value of your pension pot. The NHS has declared that it will compensate medical practitioners for such reductions on their retirement.
This has been confirmed by the NHS – see www.england.nhs.uk/pensions/ for more information.
The rules are complex and you should speak to your accountant or pension adviser if you think they may affect you.
When you draw from your pension, you pay tax at source, just like on your employment income. When you first take money out of your pension pot, you should be able to draw 25% of its value tax-free.
If your pensions are valued at more than £1,073,100 in 2020-21 and you start taking money out, substantial tax charges may arise.
Taxation of pensions is complex and you should obtain professional advice.
Personal tax
Due to the Coronavirus pandemic, the Government allowed taxpayers to defer their 31 July 2020 payments on account for the 2019-20 tax year to 31 January 2021 without incurring interest charges.
Where individuals have taken advantage of this deferral, they may find that they have cash flow issues in this month (February 2021), as they will have had a much larger payment than usual to pay in January 2021.
It may be possible to obtain a further deferral from HM Revenue and Customs where you are unable to pay the taxes due, but any further extensions would incur interest charges.
Where the tax liability was below £30,000, the Government extended the above deferral further and the 31 January 2021 tax bill was able to be paid over 12 months, by 31 January 2022.
However, deferring this payment means that the January 2022 tax bill may be higher than usual. If you have funds available to pay any deferred payments by 31 January 2021, you may wish to consider doing so to help your January 2022 cash flow.
The future
We will all have to wait for the Chancellor’s delayed budget to be announced, which is currently scheduled for March 2021, to find out what the changes to tax will be and how that will affect businesses and individuals.
The most important thing is to ensure that all finances are up to date so that decisions which need to be made within businesses and personally can be reviewed and actioned as quickly as
possible.
Julia Burn, is a director at Blick Rothenberg and part of the team that advises medical practitioners
