No retained profits – Can you extract cash to cover your living expenses?

No retained profits – Can you extract cash to cover your living expenses?

If you operate through a limited company, for example as a personal or family company, you will need to extract funds from your company in order to use them to meet your personal bills. There are various ways of doing this. However, a popular and tax efficient strategy is to take a small salary which is at least equal to the lower earnings limit (set at £6,240 or 2021/22) to ensure that the year is a qualifying year for state pension and contributory benefits purposes, and to extract further profits as dividends.

However, this strategy requires the company to have sufficient retained profits from which to pay a dividend. If the company has been adversely affected by the Covid-19 pandemic, it may have used up any reserves that it had. As dividends must be paid from retained profits, if there are none, it is not possible to pay a dividend.

Are there other options for extracting funds to meet living expenses?

  1. Pay additional salary or bonus

Unlike a dividend, a salary or bonus can be paid even if doing so creates a loss – it does not have to be paid from profits. However, this will not be tax efficient once the salary exceeds the optimal level due to the National Insurance hit and the higher income tax rates applicable to salary payments.

  1. Take a director’s loan

If it is expected that the company will return to profitability, taking a director’s loan can be an attractive option. Depending when in the accounting period a loan is taken, a director can benefit from a loan of up to £10,000 for up to 21 months free of tax and National Insurance. If the company has returned to profitability within nine months of the year end, a dividend can be declared to clear the loan in time to prevent a section 455 tax charge from arising. If the account is overdrawn at the corporation tax due date nine months and one day after the year end, a section 455 tax charge of 32.5% of the outstanding amount must be paid by the company (although this will be repaid after the corporation tax due date for the accounting period in which the loan balance is cleared).

  1. Put personal bills through the director’s loan account

Another option is for the company to pay the bills on the director’s behalf and to charge them to the director’s loan account. Again, if the company has sufficient profits to clear the outstanding balance within nine months of the year end, a dividend can be declared to prevent a section 455 tax charge from arising. A benefit in kind tax charge (and a Class 1A National Insurance liability on the company) will also arise if the outstanding balance is more than £10,000 at any point in the tax year.

  1. Provide benefits in kind

Use can be made of various tax exemptions, such as those for trivial benefits and mobile phones, to provide certain benefits in kind in a tax-free fashion.

  1. Pay rent

If the company is run from the director’s home, the company can pay rent to the director for the office space. This should be at a commercial rate, and the director will pay tax on the rental income. However, there is no National Insurance to worry about and the rent can be deducted in computing the company’s profits, even if this creates a loss.

As a bonus, if the extraction policy creates a loss, it may be possible to carry the loss back to generate a much-needed tax repayment.

Restart Grants and Recovery Loans

Restart Grants and Recovery Loans

As lockdown restrictions are eased, businesses may need help to re-open and to recover from the impact of the pandemic. Depending on the nature of the business, they may be eligible for a Restart Grant or a Recovery Loan.

Restart Grants

The Restart Grant Scheme provides support to help business that were required to close to re-open as lockdown restrictions are eased. The grants are available to businesses in non-essential retail and businesses in the hospitality, accommodation, leisure, personal care and gym sectors.

The grants are available from 1 April 2021 and must be claimed from the local council. Applications can be made on the relevant council’s website.

To qualify, a business must:

  • be based in England;
  • pay rates; and
  • be trading on 1 April 2021.

Non-essential retail business can apply for a Restart Grant of up to £6,000, whereas businesses in the hospitality, accommodation, leisure, personal care and gym sectors can apply for a Restart Grant of up to £18,000. Local councils will use their discretion to determine whether a business is eligible for a grant.

Recovery Loan Scheme

The Recovery Loan Scheme is designed to provide access to finance for UK businesses as they recover from the impact of the Covid-19 pandemic. Businesses of any size can apply for loans under the scheme, and can benefit from a loan or overdraft of between £25,001 and £10 million per business or asset finance of between £1,000 and £10 million per business. However, the amount offered and the terms are at the discretion of the lender.

To encourage lenders to participate, the Government guarantee 80% of the finance to the lender; however, the borrower remains liable for 100% of the debt.

A business can apply for a Recovery Loan if it is trading in the UK. Applicants will need to demonstrate that their business:

  • would be viable were it not for the pandemic;
  • has been adversely impacted by the pandemic; and
  • is not in collective insolvency proceedings.

Businesses that meet the eligibility criteria can apply for a recovery loan, regardless of whether they also have a Bounce Back loan or a Coronavirus Business Interruption Loan. Under the scheme, no personal guarantees are taken on facilities up to £250,000, and a borrower’s principal private residence cannot be taken as security.

The scheme is due to run until 3 December 2021.

Can you claim the Employment Allowance for 2021/22?

Can you claim the Employment Allowance for 2021/22?

The Employment Allowance is a National Insurance allowance that enables eligible employers to reduce their employers’ (secondary) Class 1 National Insurance bill by up to £4,000. However, not all employers can benefit – there are some important exclusions.

Eligible employers

To qualify for the Employment Allowance, the employer’s Class 1 National Insurance liabilities for 2020/21 must be less than £100,000. Where the employer is part of a group, the £100,000 limit applies to the group as a whole, not the individual group companies.

The Employment Allowance is not available to companies where the sole employee is also a director. This rules out most personal companies. However, family companies with more than one employee are able to claim.

There are other exclusions too, for example, employers who employ someone for personal, household and domestic work unless the worker is a care or support worker.

Amount of the allowance

The Employment Allowance is set at the lower of £4,000 and the employer’s secondary Class 1 National Insurance liability for the year. Once claimed it is set against the employer’s Class 1 liability until it is used up.

Example

A Ltd is eligible for the Employment Allowance. Its secondary Class 1 National Insurance liability is £1,500 a month. It claimed the Employment Allowance at the start of the 2021/22 tax year. The allowance is used as follows:

Month 1: £1,500 of the Employment Allowance is set against the liability for the month of £1,500, leaving nothing to pay. The remaining Employment Allowance of £2,500 (£4,000 – £1,500) is carried forward.

Month 2: £1,500 of the Employment Allowance is set against the liability for the month of £1,500, leaving nothing to pay. The remaining Employment Allowance of £500 (£2,500 – £1,500) is carried forward.

Month 3: The remaining £500 of the Employment Allowance is set against the liability for the month of £1,500, leaving £1,000 to pay. The Employment Allowance has now been used in full.

Months 4 to 12: The Employment Allowance has been used in full, so the employer’s Class 1 National Insurance liability for the month of £1,500 is payable in full.

Claiming the allowance

The Employment Allowance is not given automatically and must be claimed each year. This can be done through the payroll software, or via HMRC’s Basic PAYE Tools if the payroll software does not have an Employment Payment Summary (EPS) feature.

Although claims can be made at any time in the tax year, the earlier the claim is made, the earlier the employer will start benefiting from the Employment Allowance.

Claims can also be made retrospectively for the previous four tax years if the employer was eligible for the Employment Allowance, but did not claim it.

Tax allowances frozen until April 2026

Tax allowances frozen until April 2026

The financial impact of the Covid-19 pandemic is unprecedented and borrowing levels in 2020/21 of 16.9% of GDP represent the highest level of peacetime borrowing. To meet some of this cost, the Chancellor, Rishi Sunak, announced in the 2021 Budget that various thresholds and allowances would remain at their 2021/22 levels until April 2026.

Personal allowance

The personal allowance is increased to £12,570 for 2021/22 – an inflationary increase of £70 over the 2020/21 level of £12,500. However, the allowance will remain at this level for 2022/23, 2023/24, 2024/25 and 2025/26. As incomes rise with inflation, people who currently do not pay tax may start to pay tax once their income rises above £12,570.

Income tax rates and bands

The basic rate band is increased to £37,700 for 2021/22. This means that where someone is in receipt of the personal allowance of £12,570, they will start paying higher rate tax once their income exceeds £50,270. This remains the case for tax years up to and including 2025/26.

The basic rate band and higher rate threshold will remain at these levels until April 2026. As incomes rise in line with inflation, more people will pay tax at the higher and the additional rates. Tax is payable at the additional rate of 45% on taxable income in excess of £150,000.

Capital gains tax annual exempt amount

The capital gains tax annual exempt amount remains at £12,300 for 2021/22 and is frozen at this level until April 2026.

However, there may be changes to capital gains tax on the horizon as this is something that the Government are looking at.

National Insurance

The upper earnings limit for Class 1 National Insurance contributions and the upper profits limit for Class 4 contributions are aligned with the rate at which higher rate tax becomes payable. Both are set at £50,270 for 2021/22. For Class 1 purposes, this is equivalent to £967 per week and £4,189 per month. These too will remain unchanged until April 2026.

All other National Insurance thresholds will be reviewed at the appropriate time.

Inheritance tax

The nil rate band has been frozen at its current level of £325,000 since 2008/09. It will remain at this level up to and including 2025/26. The freezing of the threshold brings more estates within the ambit of inheritance tax.

The residence nil rate band (RNRB) remains at its 2020/21 level of £175,000 for 2021/22. It too will remain at this level for the 2023/24 to 2025/26 years inclusive. The RNRB is reduced where the value of the estate is £2 million or above by £1 for every £2 by which the value of the estate exceeds £2 million.

Pension lifetime allowance

The pension lifetime allowance places a cap on the value of tax relieved pension savings. The tax relief on pension savings in excess of the lifetime allowance is recovered in the form of a 25% tax charge where the excess is taken as a pension and a 55% tax charge where the excess is taken as a lump sum. The lifetime allowance remains at £1,073,100 for 2021/22 and will stay at this level until April 2026. This will limit the ability of anyone with pension savings at or near this level to make further tax-relieved pension contributions during 2021/22 and the following four tax years.

Further grants for the self-employed

Further grants for the self-employed

The Self-Employment Income Support Scheme (SEISS) has provided grant support for self-employed individuals whose business has been adversely affected by the Covid-19 pandemic. An extension to the scheme was announced at the time of the 2021 Budget. As a result, it will continue to provide support until September 2021.

Three grants have already been made under the scheme. As a result of the extension, a further two grants will be available. In addition, individuals who started trading in 2019/20 may now be eligible to claim.

Fourth grant

The fourth grant covers the period from February to April 2021 and is based on 80% of three months’ average trading profits. The amount of the grant is capped at £7,500. It is paid out in a single instalment.

To be eligible, the trader must have filed his or her 2019/20 self-assessment tax return and traded in 2020/21. Only traders whose trading profit is not more than £50,000 in 2019/20 or, where trading profit exceeds this level in 2019/20, not more than £50,000 on average over the period from 2016/17 to 2019/20 can benefit from the grant. In addition, income from self-employment must account for at least 50% of the individual’s total income.

To qualify for the grant, the trader must either:

  • be trading currently but demand has fallen as a result of the impact of the Covid-19 pandemic; or
  • have been trading but is unable to do so temporarily as a result of the Covid-19 pandemic.

The trader must also declare that:

  • they intend to continue trading; and
  • they reasonably believe that there will be a significant reduction in their trading profits due to reduced business activity, capacity, demand or inability to trade due to Coronavirus.

Claims for the fourth grant can be made online from late April 2021 until 31 May 2021.

Fifth grant

The fifth and final grant will cover the period from May to September 2021. The amount of this grant depends on the extent by turnover has fallen as a result of the Covid-19 pandemic.

Traders who have suffered a reduction in turnover of at least 30% will be eligible for a grant worth 80% of three months’ average trading profits capped at £7,500. A smaller grant worth 30% of three months’ average trading profits capped at £2,850 will be available to traders who turnover has fallen as a result of coronavirus but where the reduction in turnover is less than 30%.

Newly self-employed

When the SEISS was originally launched, only those traders who had filed their 2018/19 tax return by 23 April 2020 could claim. As the filing date for the 2019/20 tax return of 31 January 2021 has now passed, individuals who commenced trading in 2019/20 and who have been adversely affected by the Covid-19 pandemic can claim the fourth and fifth grants under the scheme provided that they had filed their 2019/20 self-assessment return by midnight on 2 March 2021. They will also need to meet the other eligibility conditions.

Grants are taxable

Grants received under the SEIS are taxable and must be taken into account in working out the taxable profits for the year in which the grant is received.

Budget 2021-2022

Budget 2021-2022

On 3 March 2021, the Chancellor, Rishi Sunak, submitted his budget for 2021 with the following highlights:

Extension of the Coronavirus Job Retention Scheme till September

Until the ninth month of the year 2021, the Coronavirus Job Retention Scheme will remain operational as employees continue to receive 80% of their salary for the period of their absence from work. However, every concerned staff needs to meet certain costs starting from July. The set employer contribution is 10% of the normal pay for furloughed hours for July, while the percentage will rise to 20% for August and September.

Self-Employment Income Support Scheme to Include Further Grants

With the Self-Employment Income Support Scheme, self-employed individuals can apply for additional two grants. Starting from February to April 2021, the fourth grant is expected to cover three months and worth 80% of the average profits made in three months, albeit capped at £7,500. Although the final grant depends on the pandemic’s impact on turnover, it is expected to cover May to September. Those who commenced their first self-employment in 19/20 can access the final two grants, provided they covered their 2019/20 tax return latest by 2 March 2021 midnight.

Continuation of the SSP Rebate Scheme

By utilizing the SSP rebate scheme, smaller employees can reclaim SSP per employee for up to two weeks from the Government, provided the coronavirus-related condition causes the absence. The same scheme is set to continue for now.

Income Tax Thresholds on Hold

While the basic rate stands at £37,700, personal allowance is set to rise to £12,570 for the 2021/22 period. This implies that higher rate tax is payable for any individual receiving the standard personal allowance immediately after the income surpasses £50,270. For 2021/22, the income tax rate remains the same at 20%, 40%, and 45%; the same applies to the 7.5%, 32.5%, and 38.1% dividend tax rates. Until 2026, it is expected to see personal allowance and high rate threshold frozen at their 2021/22 level.

IHT Nil-rate Band to Remain the Same

Currently, the inheritance tax nil-rate band stands at £325,000 – it is set to remain stagnant. Wherever the main residence belongs to a direct descendant, the resident nil rate band takes effect. In such an area, the current level of $175,000 is expected to continue till April 2026.

Capital Gains Tax Annual Exempt Amount stands still.

For the 2021/22 period, the capital gains tax annual exempt amount experiences no change and will remain so for the next half-a-decade (2025/26).

Zero change to Pension Lifetime Allowance

Currently, the pension lifetime allowance stands at £1,073,100. The allowance that places a cap on tax-relieved pension savings is expected to remain the same until 2021. Expectedly, the situation will affect people having pension savings close to or at the level by limiting future tax-relieved pension savings.

Huge deduction for Capital Expenditure

Companies having investment in plant and machinery with incurred expenditure between 1 April 2021 and 31 March 2023 will benefit from enhanced capital allowances for the investment in question. For expenditure on plant and machinery that qualifies for main rate capital allowances of 18%, there will be a first-year allowance of 130%. At the same time, expenditure on plant and machinery qualifying for special rate capital allowances of 6% can utilize the 50% first-year allowance. This doesn’t influence the Annual Investment Allowance, which is claimable when more rewarding.

A temporary increment of the carry-back period for losses

Companies and businesses that are unincorporated stand a chance to benefit from a momentary extension concerning the carry-back period for losses. The period has been increased by three years for a limited period. The unincorporated businesses can utilize the prolonged carry-back for losses suffered between 2020 and 2022. As for company groups, the offer is applicable to losses incurred between 1 April 2020 and 31 March 2021, as well as 1 April 2021 and 31 March 2022 – however, the offer is capped at £2 million for both accounting periods.

There will be a relief for the profits secured in the latter year before those meant for the earlier year.

There might be a need for tax repayment to benefit from the offer concerning the carry-back losses incurred due to the pandemic.

Corporation Tax to rise in the future

An increase of 6% has been added to the current rate of 19% for corporation tax that organizations having taxable profits of £250,000 or more need to pay. This new development will commence by 1 April 2023. For small companies with £50,000 profits or less, they have to pay 19% corporation tax while a 25% rate applies to companies making between £50,000 and £250,000. However, the latter can take advantage of the marginal relief. Taking into account the number of relevant companies and accounting periods below twelve months, the limits may reduce.

Covid-19 Antigen tests to come with tax exemption

If an employer chooses to refund a staff for the coronavirus antigen test cost, an income tax exemption will apply retrospectively for 2020/2021 and 2021/2022. The same exemption will cover National Insurance purposes.

Prolonged Temporary SDLT threshold

Before now, the Stamp Duty Land Tax (SDLT) residential threshold, which was increased to £500,000, is expected to close by 31st of March 2021. However, it has been prolonged until 30 June 2021. Starting from 1 July 2021, the threshold will come down to £250,000 and get back to the normal level of £125,000 by 1 October 2021. While SDLT is applicable to the property purchased in Northern Ireland and England only, Land Transaction Tax (LTT) applies in Wales as Land and Buildings Transaction Tax (LBTT) is applicable in Scotland.

VAT Registration Thresholds Stands Still at £85,000

The current £85,000 cap for VAT registration threshold will remain the same for 2021/22 and the subsequent two years.

Extended Temporary 5% VAT rate for Leisure and Hospitality

Until 30 September 2021, the current 5% VAT rate for holiday accommodation, leisure attractions, and hospitality will be the same. However, starting from 1 October 2021 till 31 March 2022, a new 12.5% rate applies. From there, it will revert to the normal rate of 20% by 1 October 2022.