When you first start handling payroll, correctly calculating and processing deductions is often the biggest challenge. This is especially true for any new business that doesn’t start bang on April 6^th (the start of a new tax year) or when you hire someone new. They’re going to be with you for a partial year, and this can make calculations tricky.

National Insurance is a key deduction, and as there are multiple different classes of National Insurance it can be confusing. So how do you determine the class of National Insurance for your team, how do you calculate it, and what do you need to take into account? As seasoned tax accountants, we think we can help.

National Insurance Payments by Class

There are four different classes of National Insurance. For the most part as an employer your team will be dealing with Class 1, though under certain circumstances they may want to make Class 3 contributions in addition. Your own National Insurance may be Class 2 or Class 4.

Let’s break this down by category.

National Insurance Class 1: Employees

At the time of writing, National Insurance contributions (NICs) are only paid for employees earning £242 per week and upward. (Employees earning between £125 and £241 per week still qualify for national insurance credits.)

From £242 to £967 employees will pay an 8% rate for National Insurance. An additional 2% is taken from all further earnings. For example, if you have a member of staff paid £1000 per week, their total NICs for the week would be £78.02 – £77.36 for the first £967 and £0.066 for the remaining £33.

NICs are not calculated on a flat rate. Employees paid a flat salary with no commission or overtime will pay the same amount week to week, anyone whose hours vary or who receives payment through commission, overtime, etc., will be contributing different amounts each pay cycle.

If any of your employees have reached State Pension age, they no longer pay NICs at any level.

National Insurance Classes 2 and 4: The Self-Employed

Both Class 2 and Class 4 National Insurance are allocated to the self-employed. The difference depends on your total profit, so this calculation is made annually.

If your total annual profit is £12,570 or lower, you’re in Class 2. Between £6845 and the top of Class 2, your contributions are treated as having been paid, but as soon as your profit hits £12571, you will enter Class 4.

If your total annual profit is £6844 or lower, NICs are voluntary – a payment of £3.50 per week – but if not paid, you will not be marked as having made contributions. This may mean reduced eligibility for state pension and other National Insurance run systems later in life.

All profits above the Class 4 threshold are subject to deductions. Between £12570 and £50270, contributions are made at 6%. For further profit, contributions are made at 2%.

So if your annual profit is £60,000, you’ll pay nothing on the first £12570, then £2262 up to £50270 and £194.60 on the remainder, for a total of £2456.60.

National Insurance Class 3: Voluntary Contributions

Class 3 NICs are purely voluntary and are designed to help people to qualify for state pension benefits. You will need 35 years of NICs or credits to qualify for the full state pension, but start to received at least some if you have at least ten years worth.

There are a number of rules and guidelines covering Class 3 contributions, but they are essentially very flexible. You or your employees may wish to take advantage of Class 3 contributions, depending on the specific situation, but we would always recommend involving an accountant in these discussions in order to go about this process in the most effective way.

If you have any other questions or if you’d rather outsource your payroll so experts can handle these calculations for you, please get in touch and we’ll be happy to help.

While it’s not an option for everyone, many businesses do have the option to work from home. There’s one immediate financial saving to this as you get to skip the commute, but it does also mean spending more money (and time) at home than you otherwise would.

As a way to offset that, there are a number of expenses that can be claimed for working from home.

So what should you know about?

Expenses Claimed for Equipping a Home Office

While everyone’s different, most of us who work from home have one designated space where the work gets done. It may not be grand enough that we’d call it a home office in normal conversation, but nonetheless, for official purposes that is how it’s treated.

(The same is true if you have a space for manufacturing physical products at home as part of your business – that would be a home workshop).

Of course it’s important that you can show this truly is a home office. You’ll need to show that you spend time there regularly while working. If the majority of your time is spent at a co-working space or at official business premises, no claims can be raised for a home office.

For a long time now, a rule of thumb for expense eligibility has been that items purchased should be “wholly, exclusively, and necessary” for business purposes in order to qualify for expenses. If you’re buying a printer with the intention that it will only be used for business purposes, that counts; if you’re buying a 3D printer to make a few things for your business and also to scratch a hobbyist itch, it doesn’t.

Of course, as with all rules of thumb, it’s not always right; there are a variety of exceptions or special circumstances which can complicate the question. We’d always recommend checking your claim with accountants before submitting it so you can be absolutely sure you’re compliant.

In addition, you can claim tax relief when buying equipment that has a business purpose.

Filing cabinets and other storage that will be used primarily for business purposes can be claimed on as office equipment; it just happens that the office you’re equipping is at home. A minor amount of personal use would be considered a ‘benefit in kind’.

Ongoing Work from Home Expenses

So far we’ve only dealt with equipping your home office. Running your home office, as with any office, incurs costs. Limited companies have two basic options for claiming ongoing expenses in this way.

Simplest is to adopt HMRC’s flat rate expenses. If you work at home for all or part of your week, you can claim tax relief on £6 per week at time of writing, on any expenditure you’re making purely for work. So you can’t claim this against rent as that is the same regardless of your work, but you could claim on increased gas and electricity costs caused by being home through working hours.

£6 per week works out to £312 annually, if you’re working every week. This makes for a very simple allowance; it’s not evidence-driven and requires no additional calculations, but can offset additional utilities costs you wouldn’t otherwise occur.

If your business is much more energy intensive (going back to the home workshop, for example) you may have a significant increase to your ongoing payments as the result of working from home.

In these circumstances, you might benefit more from an accurate calculation of your increased household expenses. This does require evidence in your submission, though; the process is as follows:

• Keep records, with evidence, of total utility costs. This includes fixed costs that are disregarded in the flat rate method like rent or mortgage payments, council tax, and internet, as well as electricity, gas, insurance, etc.
• For each room in your home (excluding hallways, porches, and bathrooms), calculate what percentage of your time spent there is business related. This might look like:
  • 15% of time spent in your living room is taken up by business, making calls
  • 95% of time spent in your home office is used for business
  • 0% of time spent in the kitchen is business related
  • 5% of time spent in your bedroom involves checking email or planning the day’s work, and is thus spent on business
• Each of your expenses should then be divided by the number of rooms (still excluding hallways, porches, and bathrooms)
• For each room, you can claim according to the percentage of time you spend working there.

As you can plainly see, this requires a lot more calculation and record-keeping. We would only recommend this method if you know your increased home expenditure is significant.

Expenses claims can be one of the most complicated aspects of tax accountancy. If you’d like more clarity on the process, why not drop us a line?

Running a small business successfully always means being ready to learn new things; there are so many new skills that need to be developed, from understanding how social media can help reach new customers to the ins and outs of payroll.

And while it’s true that other people – either employees, contractors, or agency services – can handle some of these for you as you grow, it still pays to be able to understand what they’re telling you.

While we can’t speak for every industry, we know that the jargon used by banks and accountants can be daunting to people who aren’t used to it. Hence this: a simple, easy reference for small business owners looking to better understand their finances.

Accounts Payable (AP)

Accounts Payable records all money you owe to your suppliers and haven’t yet paid. On your balance sheet, it’s entered as a current liability, and invoices are used for keeping AP up to date. Suppliers you haven’t yet paid can also be referred to as creditors.

Accounts Receivable (AR)

It’s best to think of Accounts Receivable as the opposite to Accounts Payable. This is the money you’re owed for services or goods that have been provided but which you haven’t been fully paid for yet. On balance sheets, AR is recorded as an asset even though it’s outstanding – your customers are legally obligated to pay you. And just as suppliers of AP are creditors, customers for AR are known as debtors.

Assets

Assets is a broad category; simply put, assets are everything the business owns which has a financial value, including cash. Raw materials you’ll use to make goods are assets; so is any equipment used by the business. You might also hear this referred to as capital or capital assets.

Not quite the same thing are current assets; this means your cash, as well as anything you can convert to cash within 12 months – for example, any stock you have that’s ready to sell.

Audit

Included in this list for reassurance purposes, audits don’t automatically mean anything’s gone wrong. The term covers any official review of financial records that seeks to establish whether or not they’re correct. Audits are carried out to confirm compliance or as part of the due diligence that may be required for investment.

Bank Reconciliation

At regular intervals, you should match your cashbook up against your bank statements, looking for any discrepancies that may indicate bookkeeping errors or unrecorded financial transactions. This process is known as bank reconciliation, and carrying it out frequently helps catch issues before they become a problem.

Business Credit Report

Useful for lenders, insurers, and investors, business credit reports create a record of the business’ credit history. A poor business credit report can have repercussions for a long time.

Capital Gains

If you sell an asset for more than you paid for it originally, the profit is recorded as a capital gain.

Defaulting

Failing to make payments on Accounts Payable is known as defaulting. This seriously affects your Business Credit Report, as well as your reputation with those creditors.

If you default and can’t arrange to defer payment, you enter insolvency.

Equity

The value of all assets minus your liabilities is also called your equity, and it’s used when assessing the value of stocks or shares in the business.

Financial Year

Split into four quarters usually written as Q1, Q2, Q3, etc., a business’ financial year doesn’t always run alongside the calendar year, though it can; most businesses either use the tax year (April to March) or the calendar year, but you can start your financial year at any point.

As a result, when dealing with someone else’s business and hearing terms like Q1 or Q2, you could be looking at any three-month period; make sure you have the dates correct if it’s relevant to your planning.

Gross Income

Simply enough, gross income is all money that comes into the business, with no deductions. It can also be referred to as revenue.

Gross Profit

Gross profit is your gross income minus the cost of sales, before any other costs are factored into account.

Insolvency

Mentioned earlier in the entry on defaulting, insolvency is a situation where the business cannot pay due debts. If the business is insolvent for a period of time and no way out can be found, bankruptcy proceedings may be called for.

Liability

Liabilities are any debts and other financial obligations. As with assets and current assets, there is also current liability, which is any liability due to be paid within the next 12 months.

Margin

More properly called a profit margin, your margin is the proportion by which your sales exceed the cost of sale.

Net Assets

Your Net Assets are calculated by deducting your total liability from your total assets. You’ll also see the term Net Worth, which refers to the same thing.

Net Profit

Deduct overheads from Gross Profit to calculate your Net Profit, also known as Net Income. This is a key figure to keep an eye on; if your Net Profit is negative, you’re losing money.

Overheads

All static costs in running your business are included in your overhead; essentially, it covers all costs except the cost per sale. This includes rent, utilities, and marketing.

P&L

Your P&L is also known as your Profit and Loss Statement. It sets out your sales and expenses over the past year, showing your profit and loss (hence the name). A very useful document in mid-term planning.

Return on Investment (ROI)

A key part of business planning, ROI is a way to measure profitability. You can measure the ROI on your entire business, an investment (say, bringing in a second expert to increase your capacity), or a specific project like the launch of a new product.

ROI can refer to calculating the actual profitability of actions already taken, or expected profitability for actions yet to be taken.

Start-Up Loan

Start-up loans are available for business owners looking to start or grow a small business.

Turnover

Turnover for a period of time simply means the total sales made over that period.

Working Capital

Working capital is the term used for the money a business has for day-to-day expenses. You calculate your working capital by subtracting current liabilities from current assets.

As a business manager or a self-employed individual, tax returns become your responsibility in a way they weren’t before. For the most part, this responsibility is solved through the use of a professional, whether an in-house accountant or employing a tax accountant to handle this for you.

For those taking it on themselves, tax returns are often put off until the last minute. However, any complications you run into then won’t be resolved in time to meet the filing deadline – or perhaps you’ll choose to meet the deadline and risk errors in the report.

Either option opens up more than just financial issues. Fixing these can take real time, under pressure from HMRC, which means less time spent on your business or your home life and increased stress levels while you’re working on it.

Financial Penalties for Late Tax Returns

If you miss your tax return deadline (usually 31^st January, but if you’re providing paper tax returns, it’s earlier – the 31^st October), you automatically incur a £100 fixed penalty.

This kicks in even if you wouldn’t owe any tax, for example if you’re running a new business which hasn’t yet had the time to reach the minimum tax threshold.

From there, however, the clock is already ticking. You have three months to submit overdue returns before additional penalties are levied, but once you’re past that point, every day you miss submission of a tax return costs an additional £10 per day.

The amount you can be penalised through this is capped at £900, which means that if you’re six months late to submit your tax return, that’s £1000 in penalties, alongside whatever you might owe in tax. If you imagine someone who calculated they didn’t owe tax and consequently thought they didn’t need to file a return, that’s a significant extra payment they’ll have to find.

After six months, an additional penalty is levied. This will be either £300 or 5% of the tax liability owed, whichever is higher. This penalty is repeated if the return is a full year late.

Not only that, but HMRC can issue a fine of up to 100% of the amount owed if they believe the payment is being deliberately withheld.

As you can see, the upper limit on this is significant. Failing to submit a tax return for a year because you owed no tax can cost you £1600 on its own.

This alone should be enough incentive to make sure returns are submitted correctly and on time. That’s much harder to do if you haven’t been preparing your accounts through the year!

Penalties and Interest on Unpaid Tax

For online filing, filing late also means paying late as the deadline is the same. If your payment is made late, you face interest on the payment – 8% per annum calculated on the unpaid amount.

However, late payments also mean penalties. If you fail to take interest into account, you can end up with penalties on the interest (and on any other unpaid amount). At 30 days late, an additional 5% of tax owed at that date is added. The same calculation is run if the payment is six months late, and again if the payment reaches 12 months late. Note that interest on its own would increase payments by 8% even without these penalties, so this can end up being a significant increase.

Penalties like this can have a significant impact on the company’s liquidity, so they should be avoided wherever possible.

Hidden Costs

As well as affecting the business’ cash-flow (with payments potentially being needed at awkward points within your billing cycles, when you may not have the liquidity to handle it), there’s also a clear cost to late returns in administration time.

Whether you handle that or someone else, this is worked time spent dealing with a problem that could have been prevented in the first place – effectively, it’s a waste of paid time.

We won’t pretend this is a zero-stress situation, either, as there can be real uncertainty until you have full confirmation from HMRC that everything’s revolved.

Making Sure Your Returns Aren’t Late

We often hear from people who handle their tax returns in one marathon session just ahead of deadline, but this tends to come with a collection of risks.

Instead, we recommend maintaining comprehensive digital records of income and expenditures, including what they’re for, throughout the year. Doing this through good accounting software makes it much easier to track, and may also make it easier to know roughly what funds to set aside to cover the ongoing tax burden. That way you don’t risk the interest and penalties on a late payment.

The most efficient and the least stressful way to handle all of this, of course, is to engage an accountant to support you. For businesses in the Lancaster and Morecambe area we’re standing by, ready to help – just get in touch.