Should I take a salary or dividends?

Should I take a salary or dividends?

This is a question we often get asked. And to be honest, quite understandably too as it is one question that causes a lot of confusion for small business owners who trade through a limited company.

 

What are dividends?

Dividends are an alternative way of paying yourself using the profits from your company. Limited companies can issue dividends at the end of the financial year (final dividends), and at points throughout the year (interim dividends), which is common when the directors or shareholders rely on this for income.

As long as your company is making a profit, or has reserves from previous years, you should be able to draw dividends to top up your monthly salary. Your company does not need to pay tax on dividend payments, but shareholders may have to pay Income Tax if they’re over £2,000. However, you cannot count dividends as business costs when you work out your Corporation Tax.

Dividends work differently than a PAYE (Pay As You Earn) salary because they are not liable for any National Insurance and you pay less Income Tax than a salary.

So despite paying corporation tax (currently 19%) this makes them a very attractive option for many directors. As an employee taking a salary, you are liable for tax and National Insurance contributions, which will be taken as a proportion of your earnings.

 

Tax on Dividends (above your allowance)

The tax you pay depends on which Income Tax band you’re in.

Tax On Dividends
Dividend allowance £2000 0%
Basic rate £12,500 0%
Basic rate £37,500 7.5%
Higher rate £150,000 32.5%
Additional rate Above £150,000 38.1%

To find out your tax due, add together your income from dividends to your other taxable income to work out your tax band.

The personal allowance rate for salary rose from £11,850 to £12,500 in April 2019 and the dividend allowance remained at £2,000.

These changes mean that it could be more beneficial to pay yourself a slightly larger salary and reduce your level of dividends.

 

Example

For this example, we compare the income after taxes for three scenarios, all of whom have earned £80,000 in gross contracting fee income.
  1. is paying themselves via a salary
  2. has taken an £8,632 salary (2019/20 NiC Primary Threshold) and is taking the rest in dividends, and
  3. is splitting the income via salary and dividends between two equal shareholders
1 2 3
A Gross income 80,000 80,000 80,000
B [A-D] Salary 70,299 8,632 17,264
C [A-B] Gross profit before tax n/a 71,368 62,736
D Employers NIC 8,510 n/a n/a
E Employees NIC 5,373 n/a n/a
F PAYE 15,620 0 0
G Corporation Tax n/a 13,560 11,920
H [D+E+F+G] Tax Sub Total 29,502 13,560 11,920
I [A-H] Net profit, therefore dividends payable 50,498 66,440 68,080
J Tax on dividends n/a 10,311 8,937
K [I-J] Income After Tax 50,498 56,129 59,143

Summary

If you would like us to calculate which formula of salary v dividends is better for you, please contact us at sales@finance-department.co.uk but please remember….

 

Focus on your business and making as much money as possible – tax is a consequence of being profitable and shows you and your stakeholders that the business is doing well.

 

New – Xero CIS (Construction Industry Scheme)

New – Xero CIS (Construction Industry Scheme)

Do you work in the construction industry and use, or are thinking of switching to Xero?

Manually calculating CIS deductions can be time-consuming, and it’s easy to make costly mistakes. So let Xero do the hard work with accurate, automatic calculations and deductions.

One of the biggest developments to Xero recently is the Construction Industry Scheme add on. Xero CIS makes it easy to manage your Construction Industry Scheme obligations including – deductions and payments, managing contractor invoices, subcontractor bills, filing your CIS returns with HMRC and bulk email payments.

Xero Benefits to the Construction Industry

  • Automatically calculate the right CIS tax deductions and file your monthly returns directly from Xero
  • Sync Xero seamlessly with third-party apps for for inventory management, project management, time tracking and more.
  • Invoice clients and pay subcontractors faster with online invoicing.
  • Check on cash flow at any time with the online dashboard.
  • Store all your documents online in Xero in one central, secure and easy-to-access place.

Basic CIS features

  • Automatically calculate and apply CIS deductions to your invoices and bills.
  • Report on deductions you’ve made from payments to subcontractors, and file manually with HMRC.
  • Download payment and deduction statements to manually send to your subcontractors.

CIS Contractor add-on

You’ll need to add the CIS Contractor add-on to your pricing plan to use some features.

CIS Contractor only features:

  • Online filing of CIS monthly returns with HMRC from Xero.
  • Bulk email payment and deduction statements to subcontractors from Xero.
  • CIS Contractor is free until 31 March 2020.

 

Whether you’re a builder, plumber, plasterer or carpenter, Xero is simple accounting software that gives you an up-to-date view of your numbers while you’re on the move. Use it from your office, van or the building site and keep your business healthy.

 


FOR MORE INFORMATION ABOUT USING XERO CIS, PLEASE GET IN TOUCH AND WE WILL BE HAPPY TO HELP.  CONTACT US HERE OR CALL ON 01392 495483.

 

The latest Xero updates–November 2018

The latest Xero updates–November 2018

A rundown of the latest updates to the Xero accounting platform

If you have accounting or Xero OCD you will be aware of the latest Xero update, however for all non-accountants or bookkeepers, here is a rundown of the latest updates to the cloud-based bookkeeping and accounting platform.

  1. Reports: You can now display formula columns as percentages in the new financial reports.
  2. Xero Projects: you can now allocate project time into your own or your employee’s payroll timesheets.
  3. Payroll: You can now add an allowance type to a pay item in payroll so Xero can group allowances when you report them to the ATO.
  4. CIS: Xero has opened up the beta to more participants for filing your CIS Monthly Return directly to the HMRC from Xero.
  5. Xero for mobile: You can now include file attachments when sending invoices on your mobile device.
  6. Xero for Android: Create an invoice, quote or receipt by pressing firmly on the app from your mobile Home screen. View your bank account balances on the Dashboard so you can reconcile faster.
  7. Transactions: Multicurrency columns have been added to the account transactions report and event include a little flag icon for easy visual recognition.
  8. Credit notes: these can now be linked directly to a project. This means you will always see a true and accurate representation of your project’s profitability.
  9. Xero App: You can now get a quick view of your profit and loss, and how your income and spending are broken up, from your Android or iOS dashboard.
  10. Navigation: The Xero navigation bar is being updated (late November 2018) to make it faster and simpler for you to find the tools you need.

Watch this video to find out more about the changes to Xero:


For more information about using Xero to organise your business finances, please get in touch and we will be happy to help. Contact us here or call on 01392 495483.

Making Tax Digital (MTD) starts on 1st April 2019; but no need to panic!

Making Tax Digital (MTD) starts on 1st April 2019; but no need to panic!

Making Tax Digital (MTD) is the most fundamental change to the administration of the tax system for at least 20 years.

The essential elements for businesses and organisations are:

  • Paper records will no longer be sufficient: It will become mandatory for almost all businesses and organisations (self-employed, partnerships; limited companies and others) to use software or a spreadsheet to keep accounting records. Paper accounting records will cease to meet the requirements of tax law.
  • Returns and quarterly reporting: There will be a requirement to submit VAT returns and income tax updates (quarterly and annual) to HMRC, directly from software.

As your accountants we will support you through these changes and provide the ongoing services that you need.

When does it start?

  • VAT: As your business is registered for VAT and your turnover is above the VAT threshold you will be required to keep digital accounting records and to file your VAT returns using MTD compliant software from April 2019 (the first VAT period starting on or after 1 April 2019). The current online VAT return will no longer be available.
  • Income Tax (self-employed, partnerships, trusts and landlords who compete self assessment tax returns): MTD is expected to become mandatory for income tax reporting, but not before 2020. Pilots of MTD for income tax have started.
  • Corporation Tax (limited companies): The timings for MTD for corporation tax have yet to be confirmed but it will not become mandatory before April 2020.

What do I need to do now?

If you already use MTD compliant software to submit VAT returns, contact your software provider to confirm timings and/or additional costs. For the majority of our clients, Xero will be upgraded automatically so that you can easily submit your MTD VAT return to HMRC with no additional cost.

If you’re looking to move to accounting software, we’re here to help you make the transition run as smoothly as possible. This is your opportunity to streamline your accounting and business management, as well as getting MTD compliant.

If you currently maintain records on excel or paper your processes will need to change. You will need to provide records to us promptly after each quarter-end and engage us to do the bookkeeping or acquire and use appropriate software such as Xero.


Please note, all businesses already using Xero (or other MTD compliant software) to submit their VAT returns have nothing to worry about.  Xero will automatically upgrade the VAT functionality so you will be using MTD-compatible software come 1 April 2019 – and there will be no upgrade fees.

If you would like to engage us to implement software for you, please call 01392 495483 or email info@finance-department.co.uk.

Download the factsheet here »

 

Should I hire an accountant or a bookkeeper for my small business?

Should I hire an accountant or a bookkeeper for my small business?

This is a question we often come across. When starting out or building a business it is difficult to know which is the right solution to accelerate business growth; an accountant or a bookkeeper?

Ultimately, they both play an important part in your business growth, especially when it comes to avoiding fines and making the most of your hard-earned income.

Here are a few tips on which is the perfect solution for your business right now.

Bookkeepers

Bookkeepers are trained and use the same financial recording methods as accountants. They do this so that your accountant can quickly and easily process your financial information. They will:

  • take all your receipts, invoices and other transaction details.
  • record the information in accounting software using proper accounting methods.
  • work with you to make sense of the numbers, for example assigning costs to specific clients.

But there’s more to bookkeeping than recording daily transactions. People who do this work are usually highly skilled at using accounting software. They will be able to advise you on:

  • add-on solutions to streamline your business workflow, such as POS tools (see our blog on Xero Apps here) payroll services to simplify the way you pay your staff
  • bookkeeping rescue work, tidying up mistakes made by inexperienced staff training for small business on using accounting software.

They can also offer day-to-day support for small business owners. In fact, a good bookkeeper is your partner in keeping things running smoothly within your business.

Accountants

Accountants can give you strategic advice and come up with clever ways to save money or boost revenue. They’ll also remove or automate administrative tasks that distract you from your core business. Getting an accountant will help you run your business with more clarity and confidence.

  • They’ll help launch your start-up business by testing your idea, identify your start-up and operating costs, and create credible revenue forecasts.
  • Help with your business strategy by working with you to set goals – personal, professional and financial – then give you tools to measure your progress.
  • Fix / manage and advise on your cashflow
  • Help with financing and debt strategies by finding the least expensive borrowing strategies for your business – with the right mix of repayment flexibility and low interest.
  • Deal with unpaid invoices – therein of every business owner’s life.

For your business to run smoothly, ideally you need both people. You’d hire a bookkeeper to look after the day-to-day work. And you’d hire an accountant to handle official reporting and high-level business advice.

The Finance Department specialises in helping your business go from start-up to scale-up by being able to provide bookkeeping, accounts and your full finance department throughout your entire business lifecycle.

 

Take a look at how other businesses have benefitted from outsourcing their bookkeeping and accounting »

Business Budgeting

Business Budgeting

Businesses need budgets.

But how do you go about setting a business budget? What are the main things you need to put in? And what will it tell you?

 

A budget gives you the knowledge and insight to eliminate wasteful spending and get to profitability faster. A well-planned small business budget will:

 

  • show you how many sales you need to cover costs
  • figure out how much money you can reinvest in the business
  • find out when you can afford to hire help
When setting a business budget, you need good numbers. Don’t guess at what’s coming in and what’s going out. You could be making assumptions that aren’t true. Take the time to look into your accounts and dig out the real figures. It might sound like hard work but it’s worth it.

 

Creating a budget sounds complicated and daunting but setting a budget for your small business is easier than you think. Here are 3 simple tips to get you started:

1. Getting started – Your Profit & Loss Statement Report

Your profit and loss report (P&L) tells you at a glance whether you’re making money or not. To do that, you’ll subtract your expenses from your income.

 

Income (revenue): How much money are you generating from sales of your products or services? It helps to break these into:

 

  • Recurring income: regular and reliable revenue from client retainers and contract work
  • Expected income: predictions of future income. This is a forecast of what your business is likely to earn.
  • Expenses (costs): How much money are you spending on business costs such as staff, raw materials and marketing? As with income, it helps to break these into:
  • Direct costs: any costs incurred directly relating to your sales, this could be services engaged or raw materials.
  • Recurring expenditure: your monthly payments for rent, utilities, payroll and so on
  • Sundry costs: occasional payments for office supplies, client entertainment expenses and other items
It can be easy to overlook some of the costs of doing business. To help capture them all, consider:

 

  • Depreciation: business assets, such as computers and equipment, lose value as they get older, include your current depreciation and add an estimate of any assets purchased in the year.
  • Overheads: make sure you don’t overlook fixed costs such as rent or energy (e.g. electricity, gas, transport fuel)
  • Payroll: the total cost of employing your staff – including national insurance, pension and other benefits.
  • Loan interest: interest costs of current and/or new business loans or HP agreements
If you have more revenue coming in than costs going out, you’re making a profit, well done. If it’s the other way around, you’re making a loss which is okay in certain situations, but losses aren’t sustainable over the long term.

 

If you make a profit, think carefully about what to do with it. Could you:

 

  • drive bigger profits by reinvesting in the business?
  • save money by paying down debts quicker?
  • keep cash in reserve to ride out future revenue dips (this is an especially big consideration for seasonal businesses)?
There are many ways to treat a profit and setting a business budget will help you decide on the right strategy. A financial advisor will help you come up with the most tax-efficient plan.

 

Balance sheet

This tells you what your business is worth. It’s the difference between what you own and what you owe. On the plus side of the balance sheet you’ll find:

 

  • the value of the assets owned by your business, such as work tools or real estate
  • cash you have in the bank
  • invoices that have been sent to clients but have not yet been paid
All of these are business assets. On the other side of the balance sheet are your liabilities, which include:

 

  • expenses that have been incurred but not yet paid, such as bills from suppliers
  • taxes that are due to be paid in the near future
  • loans or other business debts that you have
The balance sheet shows your assets minus your liabilities, if it’s positive you’re on the right track!

 

With all this information at your fingertips, you’re ready to start setting a budget for your business.

 

2. Creating your first small business budget

Now that you have all your current financial information in black and white, you can create a forward-looking budget. It will tell you how much you:

 

  • spend running the business
  • can invest to improve the business
  • can pay yourself (and any shareholders)
A budget will also give you a much better idea of what your cash flow will look like. This will help you avoid running out of money and getting into a tight spot with creditors. Your budget will also show you where you can make savings.

 

Once you have a basic small business budget, you can start playing with the numbers.

 

  • What if sales go up by 10%?
  • What if you lose your biggest client?
  • What if you negotiate lower rent?
You can try dozens of different variables here. Many businesses use this type of exercise to find out when they can afford to hire staff. You can too, by adding additional payroll to your costs and seeing how this affects your profit.

 

You can create several versions of the budget to cover many variables. Experiment as much as you like and see what the outcomes look like.

 

Painless budgeting for your business

Now that you know how to go about setting a budget, there’s nothing stopping you from getting started – except, perhaps, the effort. Sifting through financial records to pull the data you need can be gruelling. Even so, it’s best to avoid shortcuts such as estimating costs.

 

If you’re looking for a quicker and less error-prone way to build a small business budget, consider accounting software such as Xero. When set up right, an accounting system will automatically record all your income and expenditure, so you don’t have to manually gather the information.

 

3. Don’t be afraid to ask for help

Setting a budget isn’t complicated but it can still help to involve an expert. A bookkeeper or accountant can double-check the numbers and help you make realistic predictions about business growth, upcoming expenses, and tax exposure. They can also advise you on what to do if the actual numbers deviate from the predicted ones.

 

Bookkeepers and accountants charge for their time. But when it comes to business budgeting they will often save you far more than they cost. So, if in doubt, ask one for help.

 

Budgets put you in control of your business

The real advantage of setting a budget is that it helps you make strategic business decisions. Not sure what’s going to happen over the next six months? Try a variety of different scenarios and see what numbers emerge.

 

Always remember that a small business budget isn’t set in stone. As your situation changes, you can make changes to your figures and see what it means for your profit.

 

The Finance Department specialises in helping your business go from start-up to scale-up by being able to provide bookkeeping, accounts and your full finance department throughout your entire business lifecycle.

 


Take a look at how other businesses have benefitted from outsourcing their bookkeeping and accounting »


 

Blog adapted from our friends at Xero – Bookkeeper, Emma Northcote-Green.