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Budgeting for the tax bill and Interest on early payment of tax

How to save for the tax bill ?


1.0 Budgeting

A usual question is how to budget for the tax bill at the end of the year.

HMRC has helpfully created a calculator (Link) which can estimate the amount of money an individual should save to pay their tax bill.

2.0 Saving mechanism

Now the question arises how to save this money.

2.1 Self-Assessment (Income tax) – No interest is paid for early payment. So in case an individual client wishes to save for their tax bill it is advisable to save in a bank where they can earn some interest before tax is due.

2.2 Corporation tax – Yes, interest is paid for early payment but the earliest date HMRC will pay interest from 6 months and 13 days after the start of your accounting period. So again it is advisable to save in a bank account. Though, in practice I have rarely seen Company director’s saving for tax. Businessmen usually have more projects than funds available!

Source:

For Corporation tax

Directors and PAYE


Satyajit Ray

1.0 Basics

• Directors are employees.

• Directors are not entitled to National living/minimum wage.

• Directors usually register for Self-assessment (SA). They will need to complete employment pages of the return.

• Two methods for computing National Insurance Contributions (NICs) for directors:

a) Cumulative ; or

b) Regular employee method

Please note both method give similar results at the end of the tax year.

1.1 Bonus facts

• Directors can register for `Annual Scheme` who are paid on an annual basis to avoid sending (Employee Payment Summary) EPSs every month.

Dividends can only be paid when there are sufficient profits made in the business this could be current year profits or brought forward reserves.

• NIC is not due on Dividends.

Record keeping: PAYE records needs to be kept for 3 years.

• Its advisable to keep records for 7 years.

2.0 Paying directors without running payroll

We can only put £120 (LEL : tax year 20-21) x 52 = £6,240 as director’s wages.

“as you do not need to register for PAYE if none of your employees are paid £120 or more a week”

See link below:
https://www.gov.uk/paye-for-employers

3.0 Optimum salary for directors
If the employer is eligible for Employment Allowance , which will happen in case there are two directors husband and wife or two friends both directors in the company. We should pay them a salary equal to the personal allowance.

In other cases uptill the NIC secondary threshold.

Maths on the above:

Suppose A earns a salary of £12,500 (tax year 20-21), he pays no tax but NIC @ 12 % above primary threshold (£9,500). Thus he pays 12% on £3,000 i.e. £360.

But as the company does not pay Employer NIC, company can save 19% on £3,000 i.e. £570 , difference £210 saved.

For two directors saving are £210 x 2 = £420 per annum.

4.0 Minimum Salary for State Pension
Any individual (including a director) earning between £120 (LEL) and £183 (PT) a week, is treated as having been paid the contributions to protect your National Insurance record.

  • Employee starts paying NIC on salaries over PT and
  • Employer starts paying NIC on salaries over ST

See link below:
https://www.gov.uk/national-insurance

5.0 Method of payment of directors salaries
Usually Director’s salary is credited in their account via a Journal entry. This is alright when Director Loan Account is in Credit. In case Director Loan Account is in debit i.e. monies have already been withdrawn, it would be necessary to actually pay the salary, which director could transfer back to the company.

6.0 Interest on directors loans
If a director has given loan to his company and charges interest on it, this interest income will be covered by Personal savings allowance.

7.0 Auto enrollment
As per Pension regulator “organisation with one or more directors who do not have contracts of employment is not an employer if it does not have any staff other than the director(s).

The company will have no automatic enrolment duties and does not need to complete a declaration of compliance. In this case they should let us know that they’re not an employer.”

See link below:
Pension Regulator website

Annual PAYE process

Year end payroll tasks in simple terms.

In simple terms – annual PAYE process for most employers.

Step 1 – Send final FPS: this is a check box in the PAYE software which needs to be ticked confirming that it’s the final FPS of the year.

Step 2 – Issue P60: once step 1 has been completed, we need to issue P60 to all employees employed as at 6th April. Some software send P60s to all employees even those who left. So ensure to exclude the leavers when sending P60s. Also save a copy in your records.

Step 3 – Update Software: all PAYE software must be updated once the tax year ended. Usually the software will prompt you automatically to update it once you logging. Alternatively, visit software provider’s website for instructions.

Step 4 – Update tax code for the new year: please use HMRC guide P9X for this.

Step 5 – Update staff salary with National Minimum wage. Adjust director’s salaries where required.

Bonus points:

1 – Before every payment run employers need to download tax notices from HMRC website. HMRC has made a very good free software – HMRC Desktop Viewer Most software will have an inbuilt facility to download PAYE notices.

2 – We are using MoneySoft payroll for our payroll. We find it easy to use and value for money. We were recommend this software by good friends at 1 to1 accountants.

Employee on the road to Samarkand

Employee moving abroad.

March 2021

A client’s employee wished to leave her job as she was moving back to India. Client requested her to keep on working for few months from India until they found a replacement.

As per HMRC guidance I advised them to submit P85 to HMRC.

Client called HMRC and was advised by the specialist team to complete DT individual form.  Print it off and get it stamped by the Indian Tax Authority.  Once it is stamped it will need to be passed on to HMRC who will issue employer with an NT code (no tax code) but until then employee has to pay tax in the UK and payroll will be run in usual manner. 

The moment employee is issued with an NT code employee does not pay tax in the UK.  Only when P45 is issued employee will be reimbursed any tax overpaid.

July 2021

As expected when employee approached Indian Tax authorities made excuses to certify the DT Individual tax form.

We will see soon how this tale ends…

Title of this article inspired by a play – Hassan: The Story of Hassan of
Baghdad and How He Came to Make the Golden Journey to Samarkand
by James Elroy Flecker

Taxation of Interest Income from NRE and FCNR Deposits for UK Residents

NRE and FCNR get tax credit even without paying taxes in India

  1. Double Taxation Avoidance Agreement (DTAA) provides for credit to be given for tax `spared` (i.e. not paid) in India under the provisions of Indian law set out in Article 24 (4)
  • This tax ‘spared’ relief is restricted to a period of 10 years from first exercised – Article 24 (5)
  • Credit for `tax spared’ is limited to the amount of tax which would otherwise have been paid under the terms of the agreement. As per UK India DTAA interest can be taxed maximum @ 15% Article 12 (2). Thus, relief restricted to 15%.
  • DTAA does not mention any certification requirements.
  • Income under sections of Indian Income Tax Act 1961 is mentioned in DTAA:
SectionsType of Income
10(4)Non-Resident (External) Account
10(15) (iv)FCNR Deposits
Other sectionsNot relevant for present scenario

Conclusion:

NRE and FCNR Deposits will get a Foreign Tax Credit Relief for tax which would have been paid in India if NRE/FCNR interest was taxable . This relief is restricted to 15% of gross interest.

Sources:

  1. Double Taxation Relief Manual DT9553
  2. International Manual INTM161270
  3. UK India DTAA Agreement – Synthesized text
  4. Source of Indian Income Tax text
  5. Institute of Chartered Accountants of India – Taxation of Non-residents 2018 version.

Bonus:

  1. Prior to 1st April 2020 dividends distributed in India were subject to Dividend Distribution tax (DDT). Indian residents did not need to pay tax on dividends, but non-residents were at a disadvantage as they could not get credit for DDT.

Now DDT has been abolished, dividend will be taxable in the hands of the shareholders.

2. Interest on Fixed Deposits – interest arises and is taxable each year as it is credited. see Example 2 on SAIM2440

3. Interest Certificate – Your bank can easily provide this certificate for individual tax years. It will make tax computations much easier.