Let's Talk Tax
Special thanks to Claire
from CB Accounting for her support.
Hi Souls!
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Following our Let's Talk Tax session back in March we are hearing the outputs below with helpful links that may support further questions.
Claire is happy for you to reach out to her directly:
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Email: claire@cbaccounting.co.uk
Tel: 07734 084280
A quick summary of a few things that we discussed and further follow up:
Making Tax Digital
This is on most people's minds right now if you are self employed but the key is not to panic. The process will hopefully be fairly straightforward otherwise HMRC will have a right mess on their hands and as discussed no matter what you submit at the current time the numbers will not be treated as final until the actual self assessment is submitted. In addition to this HMRC won't be issuing any fines or penalties for at least the first year!
Helpful online guides are here:
https://makingtaxdigital.campaign.gov.uk/
https://www.freeagent.com/guides/making-tax-digital/
In terms of what counts as qualifying income if you have multiple sources of income from self-employment and/or property HMRC will look at your combined income from these sources to determine if and when you need to start using MTD for Income Tax. This is the point I wasn't sure on yesterday. So for example if you have income of £40,000 from self-employment and another £20,000 from property - your qualifying income total will be £60,000. You’ll therefore need to start using MTD for Income Tax from April 2026.
HMRC hasn't confirmed when partnerships need to start following MTD rules. They were removed from the scope in December 2022 and no new date has been set.
Staying up to date with Tax Changes
I would recommend signing up for newsletters from the top software providers such as Quickbooks, Freeagent, Xero and Sage as a start. Just be aware that they may also badger you with offers to sign up to their software but you can simply ignore those - it will also mean though that you are first in the know when they have special offers on if you do want to sign up!
https://www.freeagent.com/blog/
https://quickbooks.intuit.com/uk/blog/
On a general personal finance perspective I would definitely recommend signing up to the MoneySavingExpert newsletter - I have a bit of a love hate relationship with Martin Lewis but if there is something you need to know it's normally in this newsletter!
Also as discussed definitely set up an HMRC personal tax account https://www.gov.uk/personal-tax-account - this will help you keep an eye on your national insurance contributions and entitlement to state pension.
Other Questions
Depreciation and how this impacts your corporation tax?
Short answer it doesn't - depreciation sounds important, but for tax it actually doesn’t really matter. So in your accounts depreciation is just spreading the cost of something like equipment or a van over a few years so your profit looks realistic but HMRC basically ignore that. For tax you usually get the relief much faster through something called capital allowances often all in the year you buy the asset.
So the takeaway is depreciation affects your accounts, but your tax saving comes from capital allowances — not depreciation.
VAT flat rate scheme and how to run the numbers to determine if you’re better off signing up rather than current VAT accounting.
The only real way to know is to run the numbers usually over a couple of quarters and compare it to what you’re currently paying on normal VAT. One key thing people miss is on the flat rate scheme you pay a percentage on your gross sales so that’s including the VAT you’ve charged not just your net income. Now generally speaking if you’re a service based business and you don’t have many expenses with VAT on them the flat rate scheme can work really well because you’re not losing much by not reclaiming VAT. But if you’ve got a lot of costs (stock, equipment, materials) then normal VAT accounting often comes out better.
What’s is the sweet spot for a directors salary?
There isn't one really - it used by a straightforward use up for tax free allowance per year answer but now due to the changes around employers national insurance and corporation and dividend tax rates the calculations need to be run based on the specific circumstances. In most cases we still aim for a relatively low salary and top up with dividends but the exact mix really depends on the individual and the business.
As a sole trader are there limits on what you can claim? For example, can a cleaner claim for shoes used specifically for cleaning?
Good question and this comes up all the time. So technically there aren’t set ‘limits’ on what you can claim as a sole trader. The rule is actually quite simple - you can claim anything that’s used wholly and exclusively for your business. Now that’s where it gets a bit grey in real life:
if something is genuinely 100% for work you’re fine but if there’s any personal use or even the possibility of it HMRC can push back.
Clothing is a classic example. If it’s protective gear like steel toe cap boots or branded uniform no problem that’s clearly for work but something like regular clothes or shoes even if you only wear them for cleaning HMRC could argue you could wear them outside of work too so they often don’t allow it. My general rule of thumb is before you claim anything ask yourself could I confidently justify this if I had to explain it to a very grumpy tax inspector? If the answer’s yes you’re probably on solid ground. If you’re hesitating it might be a stretch. So it’s less about strict limits and more about how defensible the claim is!
We hope all of the above helps :)