We are often asked by self-employed clients to explain why their tax bills are high in proportion to the amount they withdraw from their business as “wages”.

In truth, the self-employed do not take a wage, this would imply that the cost of their “wages” is a deduction for tax purposes, and this is not the case. What happens is that self-employed traders draw down against the profits they have made, after any tax and NIC charges have been deducted.

On this basis, a thrifty self-employed person may find that their annual income tax bill is a significant amount if compared to their annual drawings from the business.

For example, if your profits are £75,000 this will create a tax and NIC bill of almost £23,000. This would leave after-taxed profits of £52,000. You now have a choice: to take less than £52,000 as drawings and retain the difference in your business, or, withdraw the £52,000. If you can manage on an annual draw of say £30,000 this would leave £22,000 in your business, but your tax bill would almost be as high as your drawings.

Of course, there is a third choice, you could draw more than your after-tax profits as drawings. Commercially, this is not a good idea especially if you have no retained profits to draw against, in effect you would be on a one-way road to insolvency.

However, if you have built up capital reserves over many years, and they are no longer required to finance future trading, or if you are winding down, it is perfectly fine to withdraw these funds. Drawing on retained profits from past years will not create additional income tax liabilities, the profits you are drawing against are already tax paid.

Planning for profit withdrawal is often overlooked by self-employed business owners. If you have never considered these issues before we could help you adopt a strategy that suits your goals.

The government has proposed a wide-ranging ban to prevent pension scams. The consultation listed the sorts of phone conversations that the government intends to fall within the scope of the ban. These included:

• offers of a ‘free pension review’, or other free financial advice or guidance
• assessments of the performance of the individual’s current pension funds
• inducements to hold certain investments within a pensions tax wrapper including overseas investments
• promotions of retirement income products such as drawdown and annuity products
• inducements to release pension funds early
• inducements to release funds from a pension and transfer them into a bank account
• inducements to transfer a pension fund
• introductions to a firm dealing in pensions investments
• offers to assess charges on the pension

The government intends to work on the final and complex details of the ban on cold calling in relation to pensions during this year. This will ensure, according to government sources, that we get draft legislation to ban cold calling in relation to pensions right. The government will bring forward legislation when Parliamentary time allows.

In the consultation, the government also proposed limiting the statutory right to transfer:

• transfers in to personal pension schemes operated by firms authorised by the Financial Conduct Authority (FCA)
• transfers in to authorised Master Trust schemes
• transfers where a genuine employment link to the receiving occupational pension scheme could be evidenced.

The government therefore proposes to require all new pension scheme registrations to be made through an active company, except in legitimate circumstances, where HMRC will be given discretion to register schemes with a dormant sponsoring employer. This requirement will extend to existing pension schemes if they are registered with a dormant sponsoring employer, with the same discretion so that HMRC can decide not to de-register a scheme in legitimate circumstances. This change will be legislated for in a Finance Bill in 2017. The existing right of appeal if HMRC rejects a scheme registration will apply to this new requirement.

This is a question we are regularly asked by clients. Usually, the conversation is triggered when we discuss the end of year accounts.

Before we explain why profits are not always represented by cash in the bank, we need to define the term “profits”. Profits are the difference between what you sell and the costs associated with making those sales.

Consider Jeremy, who runs a small shop selling clothing. He started his businesses by introducing £5,000 of his own money and at the end of his first trading year his summarized results were as follows:

• Sales £100,000
• Goods purchased and sold in the year £60,000
• Other costs paid for in the year £15,000
• Stock at end of year valued at cost £7,000
• Drawings for personal use £16,000
• Bank balance £7,000

His accounts show profits of £25,000 (This is made up of sales of £100,000, less cost of goods sold of £60,000 and less other costs £15,000).

So why, Jeremy asks, is there only £7,000 in his bank account?

The answer is that at the end of the year Jeremy had withdrawn £16,000 for his own private use and he had purchased £7,000 of stock that was unsold at the end of the year. We also need to consider that Jeremy introduced £5,000 of his own cash when the business started.

The reconciliation of his profit and the bank balance is therefore: Profit for the year £25,000, less personal drawings £16,000, less stock £7,000, plus own capital introduced £5,000, equals £7,000 – his business bank balance.

We can deduce from this explanation that to reconcile profit and cash flow you need to factor in receipts and payments that are not considered when calculating profit. In Jeremy’s case: his capital introduced, stock at the end of the year, and his personal drawings.

On the face of it, the rent-a-room relief is straight forward: if your gross rents from letting are not more than £7,500 in the current tax year, there is nothing you need to do, this income is free of tax; but beware the small print.

Gross rents are defined as the rental income you receive (before deducting expenses) plus any additional contributions you receive from your lodger towards: meals, cleaning, laundry or similar costs.

You cannot use the rent-a-room scheme if:

• The house where the room was let is not part of your main home when you let it.
• The room was unfurnished.
• The room was used as an office or for any business – you can use the scheme if your lodger works in your home in the evening or at weekends or is a student who is provided with study facilities.
• The room is let in your UK home and is let while you live abroad.

If your gross rents exceed £7,500 there are two ways you can work out how much tax is due.

1. Method one is to declare your actual profit on your tax return – rents less expenses.
2. Method two is to pay tax on the difference between your actual rents received and the tax-free limit of £7,500.

The best method will depend on amount of your rents and expenses. Whichever method produced the lowest taxable income is the one to use.

Although you are exempt from any tax liability if your gross rents are less than £7,500 (£625 a month), if your costs of letting the room are more than the rents you receive – in other words, if you make a loss – you may be better declaring your rents and expenses, method one above, as the losses may be carried forward and used in future years.

And finally, if you want to use method one or two, you must advise HMRC by the 31 January following the end of the relevant tax year. For the current tax year, 2017-18, you would have until 31 January 2019.

If you are unsure which is the best option for you to use, we can help.

Whilst it is possible to involve your children in your business, this is a strategy that should be approached with caution.

Giving shares in your company to minor children is perfectly possible, but any dividends that you pay to under eighteens will be treated as if the income belonged to the relevant parent. HMRC would invoke the settlements legislation to do this. You could employ an under eighteen-year-old son or daughter, but you will need to be mindful of commercial considerations. These would include:

• You would have to observe the minimum wage regulations.
• The hourly rate paid should be a commercial rate for work undertaken. It would be hard to justify paying your children £50 an hour to deliver leaflets.

Once your child reaches the age of eighteen more opportunities arise: the possibility of issuing shares and paying dividends, if your business is a company, may be possible. At present, this is a useful option, as the first £5,000 of dividend income is completely tax free. If appropriate, this may be an attractive way to provide a tax-free allowance to reduce the need to extend student debt for example.

If you operate as a self-employed trader, you will not be able to issue shares, but you could employ your son or daughter if you are mindful of the commercial considerations listed above.

However, whether self-employed or incorporated. there are issues that should be resolved before transferring or issuing shares, or employing offspring, not least, that you may be diluting your ownership of your business. We can help. Planning in this regard is best done prior to making any decisions to involve children in this way.

We are often asked to register a trading name for an existing company. Usually, this is done so an incorporated business can develop a new brand with a name that is different to their existing company name. Unfortunately, there is no formal process that can be employed to do this; no registrar of trading names. However, there are ways to safeguard the use of a trading name.

The most effective strategy is to register a second limited company, with the required trading name, and keep it on the shelf, dormant. You will have to pay to incorporate the new company, and file annual accounts and other returns, but no-one else will be able to register a company with the same name.

Companies House also advise registering a trade mark if you want to stop other businesses from using your trading name. Here’s what they say on this matter:

You can trade using a different name to your registered name. This is known as a ‘business name’.

Business names must not:

• be the same as an existing trade mark
• include ‘limited’, ‘Ltd’, ‘limited liability partnership, ‘LLP’, ‘public limited company’ or ‘plc’
• contain a ‘sensitive’ word or expression unless you get permission

You’ll need to register your name as a trade mark if you want to stop people from trading under your business name.

You can’t use another company’s trade mark as your business name.

Registering a trade mark can be a drawn out and expensive process, but if you have good reason to protect your business name this may be a worthwhile investment. If you decide to do this, registering a trade mark does not preclude forming a company with the same name, and so a combination of the two would be a belts and braces solution.

If you are employed, or receive a pension from a non-State provider, any tax you should pay is probably deducted before payment under the PAYE rules. Assuming HMRC administer this process correctly, any taxes due should be settled in full.

However, the self-employed, those in receipt of significant dividends or bank interest, and retired persons who receive the State Pension in combination with other significant income streams, may possibly owe HMRC unpaid tax at the end of the tax year.

To save to meet these potential liabilities it is necessary to estimate current income, work out any taxes due and be aware of the date on which these likely liabilities will need to be paid. It is then a simple matter of dividing the liability by the time available to arrive at a monthly amount to put by.

If you don’t follow this process, you will have to pay tax on your current income from income in future years. Which is fine if all your income sources continue at the same level, but if your overall income falls, or stops, a disproportionate part of subsequent earnings may need to be allocated to pay past taxes causing financial hardship in those later years.

The same process applies to companies subject to corporation tax. Corporation tax is due nine months after the end of an accounting year. If directors keep a weather eye on current year profits, it should be possible to make some provision for tax on those profits, such that when the tax is due for payment, funds are available to settle.

The solution in most cases is to do the math, and when possible, save out of the income that created the tax liability in the first instance. Readers who would like help to figure out how to do this, please call, we would be pleased to help.

Many people die without making a Will. In legal terms, this means they die “intestate”. When this happens, the estate must be shared out according to certain rules. Individuals who may benefit under these rules are:

• Married partners and civil partners at the time of death. This includes separated partners but not divorced partners or a civil partner if a civil partnership has ended.
• Children, grandchildren and great grandchildren, if the estate is over a certain amount.
• Parents, brothers and sisters, nieces and nephews.
• Grandparents, uncles and aunts.

The order in which estates are distributed follow strict rules. For example, if there is a surviving partner, a child only inherits from the estate if it is valued at more than £250,000.

Partners who are unmarried, or not in a formal civil partnership, have no claim on their deceased partner’s estate.

When family groups are affected by divorce, re-marriage, or co-habiting and there are children involved, the actual rights of family members to share in a deceased’s estate can be complex, and may result in assets of the estate being distributed in a way at variance with the unwritten wishes of the deceased person.

The estates of persons, who die intestate and have no relatives, are passed to the Crown under the “Bona Vacantia” rules.

For these reasons, everyone should prepare a Will and make their intentions known and legally enforceable.

Taxation will also need to be considered. Without a Will, Inheritance Tax may take a disproportionate share of an estate. The current rate applied on chargeable assets on death is 40%.

Readers of this article who have not made a Will or considered the Inheritance Tax consequences of their death should take advice now. Failure to do so may create distressing situations for surviving family members and result in a large chunk of your hard-won assets being paid over in taxation. We can help. Please call to arrange an initial fact-find meeting.

No-one is going to complain if you pay more than the National Minimum Wage or National Living Wage rates – which ever applies.

However, there are matters you will need to consider if you pay less than the appropriate minimum wage rates.

The minimum wage legislation applies to workers or employees. It does not apply to the self-employed or office holders: an office holder is paid for the duties they perform and the most common example is a company director. This distinction is important, as office holders are not subject to the minimum wage legislation. Unfortunately, directors sometimes negotiate a contract of employment with their company and therefore any salary paid as part of such contract would be subject to the minimum wage legislation.

In other words, it is fine to pay yourself as a director (if you have no contract with your company) at less than the minimum wage. This may be the case, for example, if you have adopted the strategy of paying a low salary and any balance of remuneration as dividends.

HMRC oversee the monitoring of the minimum wage legislation. Accordingly, it is worth reviewing your wage and salary rates from time to time to ensure your business is paying at the correct rates.

Not only will you have to reimburse employees with any shortfall in wage payments, you may also be fined by HMRC.

We can help. If you would like to make sure you are compliant, we can check your payroll and advise if any remedial action needs to be taken.

A list of the current minimum wage hourly rates is displayed below:

• Aged 25 and over £7.50
• Aged 21 to 24 years £7.05
• Aged 18 to 20 years £5.60
• Under 18s – £4.05
• Apprentice rate – £3.50

Apprentices are entitled to the apprentice rate if they are either: aged under 19, or aged 19 or over and in the first year of their apprenticeship.