Associated Companies for Corporation Tax 2023

Posted on September 22, 2023 by admin

Associated Companies for Corporation Tax – New Rules from April 2023

The rules around corporation tax changed on 1 April 2023. The amount of corporation tax that a company will pay will depend on the level of its profits, and also whether or not it has any associated companies.

From 1 April 2023, companies with profits below £50,000 will pay corporation tax at the small profits rate of 19% whilst companies whose profits exceed the upper limit of £250,000 will pay corporation tax at the main rate of 25%.

Where two or more companies are “associated” with each other, the Corporation tax limits are divided by the number of companies concerned.

What is an Associated Company?

A company is an associated company of another at any time when:

One of the two has control of the other or
Both are under the control of the same person or persons

Companies are considered associated for the full accounting period, even if they are only associated for part of that period. Associated companies can also include both UK and Non-UK tax resident companies.

Dormant Companies which are not carrying on any trade or business are excluded from the associated company calculation.

When considering whether a person has control over more than one company, the most common test for “control” is the voting power of a shareholder. In a simple case, where each of the company’s shares carries one vote, any person or persons who own more than 50% of the shares will “control” the company.

It is important to understand the number of associated companies as soon as possible to estimate tax liabilities. If you are forecasting to produce significant profits for your company and you have one or more Associated Companies, you may wish to considering restructuring your activities to minimise any loss of marginal relief.

If you wish to discuss any aspect covered in this article please don’t hesitate to call 01386 366741 or email us here.

10 Reasons Why You Should File Your Tax Return Early

Posted on August 23, 2023 by admin

It’s a job we all dread but being in control of your tax affairs is hugely important.

Every limited company director and self employed individual will usually need to complete a tax return and pay the income tax they’re liable for.

Filing your tax return is the very start of this rather time consuming and stressful process. Here are our 10 reasons to file your tax return before the mad rush:

1: The task doesn’t get overlooked and you will avoid a £100 late filing penalty.
2: Less risk of errors. When you’re rushing and short on time, it’s less likely that you’ll check things through thoroughly.
3: It reduces stress by giving you plenty of time to organise the documents you need.
4: It gives you a greater amount of time to consider future tax planning strategies.
5: The earlier you know what your tax liability is the sooner you can start to plan for the payment. After Christmas, personal finances can be pretty stretched!
6: If you’re due a tax refund from HMRC you’ll receive it sooner too. You may also be able to reduce your payment on account for July!
7: The sooner you complete and file your tax return, the sooner you’ll have an extra year’s worth of tax information which is essential if you’re considering applying for a mortgage or loan.
8: You’ll be able to contact HMRC far easier should the need arise.
9: You can sit back and enjoy Christmas with a smile on your face knowing that you don’t need to worry about sorting your tax return in the New Year.
10: It will make your accountant very happy!

To guarantee filing your tax return on time, our latest internal deadline for receiving your tax return information is 31st October 2023. If we receive your information after this date, we cannot guarantee that we will have sufficient time to file the return. You will also incur additional fees from us for receiving your information late.

Only in exceptional circumstances will we consider preparing self assessment tax returns after the Christmas break, subject to availability and additional charges. We’re a small team working hard to provide the best possible service we can to our clients and hundreds of last minute tax returns prevent us from doing this.

If you wish to discuss any aspect of your accounts or need any help with getting your records up to date or what you can or can’t claim as a business expense, please don’t hesitate to call 01386 366741 or email us.

Thank you very much for your help in supporting our efforts to have an organised and stress free tax return season!

Do I need an Accountant if I’m using Xero?

Posted on August 23, 2023 by admin

As much as we love Xero, yes you do! Don’t be fooled – it’s great software but it doesn’t replace professional advice!

You may expect us to say that because we’re accountants but here’s a few reasons why we strongly advise that every business owner still needs an accountant, even if they’re using fantastic software such as Xero.

1: Software is a tool. It automates labour intensive tasks, enabling the user to perform specific tasks far more efficiently. It doesn’t replace the knowledge of a highly skilled bookkeeper or accountant. The software relies on the user entering data correctly and it doesn’t identify errors made by the user. Mistakes happen, it’s human nature but mistakes can sometimes be costly, if not identified and corrected promptly.

2: If you don’t understand the purpose of a journal in your accounting records, you probably should leave it to a professional that does. Bookkeeping is a highly skilled job and is far more than data entry. If you don’t understand double entry bookkeeping, you probably won’t understand how to correct any mistakes you make. Journal entries are often required to make corrections to your accounting records.

3: Your accounting software won’t accurately calculate the tax you owe. Various adjustments to the accounts are required to arrive at your taxable profit. This will include adding back items such as personal expenses and depreciation. Capital allowances also need to be considered. These items are adjusted on the tax return. Your accountant will ensure your tax bill is minimised and that everything is claimed correctly.

4: Many small businesses start off with a great idea but lack the financial knowledge required to make good commercial decisions. Many businesses fail due to incorrect accounting data, lack of legislation knowledge, poor advice and lack of expert guidance. Your accountant will be able to support you through all these challenges, ensuring you make timely and accurate decisions to ensure successful business growth – and to keep your business running smoothly.

5: The human touch. People forget that many accountants also serve as business advisers. Keeping your business on track, identifying mistakes and offering support throughout the year whenever it’s needed, are just a few things your accountant can help with. Accountants carry a wealth of knowledge through working with clients from all walks of business. Most experienced accountants will have seen most of the problems and challenges that a business may encounter. As a result, an accountant can provide an unbiased sounding board for your ideas, warn you of potential risks and alert you to any opportunities that you may have missed.

6: Running a business is tough and extremely time consuming. Your accountant should be a partner to your business, taking care of the many financial tasks involved in running your business – reducing your workload and saving you both time and money.

7: Using an accountant that specialises in Xero will ensure that you’re getting the most from the software. They will be able to provide you with training in using Xero but also suggest other add-on applications that will integrate with Xero and automate your processes, saving you time.

8: If you’re looking for financial borrowing, you will need the help of an accountant to support any financial applications such as mortgages and bank loans.

9: Tax laws are always changing. With the full roll-out of Making Tax Digital around the corner, you will need an accountant on side to help you understand and implement the changes.

10: Your accountant will act on your behalf with HM Revenue & Customs. Contacting HM HM Revenue & Customs can be a very time consuming process so your accountant. Your accountant can save you lots of time by speaking to them for you, saving you the pleasure!

For qualified advice on Xero Accountants contact The Accountancy Office in Evesham were we will be happy to discuss your requirements. Visit us at our website, email us or call us on 01386 764761

Summer Holidays Tips for Working parents

Posted on July 19, 2023 by admin

This week marks the start of the school summer holidays for most in the UK.

🤯 It often brings about mixed feelings – a chance to spend extra quality time with the family whilst also raising huge challenges in terms of managing work and childcare.

Flexibility is probably the main reason you decided to be your own boss! Try to enjoy the extra time with your children as much as you can.

Here are a few tips below, shared recently by some of the wonderful parents that we work with:

1) Plan in advance your work schedule and don’t be tempted to take on too much additional work. Prioritise – what must be done and what can wait.

2) Manage expectations – be clear with customers and colleagues that timescales may be a little longer than usual if that’s the case. Your out of office message should clearly state when a response can be expected.

3) Build in flexibility to your work schedule to allow for unforeseen events.

4) Work from home when you can to decrease travelling time and to increase ‘working’ time. Set up a workspace area where you can work without distractions if you don’t have one.

5) Enlist the help of friends and family to share childcare where you can, helping each other out wherever possible. Set up play dates. If you have a partner, divide the responsibility wherever possible.

6) Make use of school summer clubs and other local clubs where needed – booking in advance is usually essential.

7) Book weekly grocery deliveries to keep the cupboards stocked (we all know how much children can eat!) and consider subscriptions for everyday items such as pet food that you’re constantly re-ordering. This can save time and is also one less thing to think about over the holidays!

8) Schedule in all the back-to-school stuff – uniform fittings, school shoes etc

9) Keep all the usual household chores to the necessary minimum – get the basics done and don’t worry too much about anything else.

10) Take time for yourself when you can as it should be a break for you as well!

Changes to how self employed business profits are taxed from 2023/24 – Basis Period Reform

Posted on June 27, 2023 by admin

Are you self-employed or a partner in a trading partnership?

If so, you should be aware of how the ‘basis period reform’ may affect you.

A major change in tax is being introduced from 6 April 2024, resulting in self employed individuals being taxed on the profits made within the tax year irrespective of when their accounting year ends.

This will impact businesses who do not have a 31 March or 5 April year end and who previously have only been taxed on the profits of the accounting year which ended within the tax year.

Self employed people who have an accounting period that aligns with the tax year will continue as normal.

What is a ‘basis period’?

Self employed generally prepare accounts to the same fixed date each year. This is known as the ‘basis period’.

Specific rules determine the basis period in certain cases, including during the early years of trading. These rules can create overlapping basis periods which can result in profits being taxed twice which generate ‘overlap relief.’ This is usually released on cessation of the business or retirement. Overall, this basis of taxation is called the ‘current year basis.’

For example, currently, if a business draws up its accounts to 30 April, in the 2022/23 tax year, it will be taxed on the profits for the year ended 30 April 2022.

The change in ‘basis period’ will result in a significant impact for the tax year to 5 April 2024 as businesses without a 31 March (or 5 April) year end will be taxed on more than 12 months profit, being the profits to their current accounting year end plus the profit between that date and 5 April.

Transitional rules for the 2023/2024 tax year

In the transitional year, self employed businesses that do not have an accounting year end date between 31 March and 5 April will need to recognise two profit elements:

The usual profits of the accounting period ending in the 2023/24 tax year; and

The profits from the period starting immediately after the end of that accounting period to 5 April 2024, less any available overlap relief brought forward

A self employed business with a 30th April year end will be exposed to paying tax on nearly 2 years profit under the new rules, creating a significant cashflow disadvantage.

There are two ways that this can be managed:

Where an individual has unused overlap relief available from the start of their trade (or a previous year end change), this can be offset against the profits of the additional period; and

Businesses can elect to spread the additional profits over 5 years.

If you fall within the criteria which requires a change in the basis period for your business, it’s important to realise that you will not pay additional tax, but there may be an acceleration in the payments of tax you owe.

What to consider:

These changes are intended to simplify tax for the self employed but they can create complexity for those affected. The change to the basis period will simplify reporting requirements as the Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) changes are eventually rolled out.

Think about the cashflow implications of the changes and how you will manage them.

Give some thought to changing your year end to 31 March to make the calculation of taxable profits from 2024/25 clearer.

The changes may result in significant tax balances owing through the transitional period, so it pays to plan ahead and be prepared for the change.

For further information visit: https://www.gov.uk/government/news/how-hmrc-assesses-profits-for-some-sole-traders-and-partnerships-to-change#:~:text=Changing%20your%20accounting%20period,31%20March%20or%205%20April.

For qualified advice and help contact The Accountancy Office in Evesham were we will be happy to discuss your requirements. Visit us at our website, email us or call us on 01386 764761

What is a Group Company structure

Posted on May 12, 2023 by admin

Accountancy services Evesham

A group company structure may often be useful for a business with multiple income streams.

Should you keep all those income streams within one company or split the different streams into a different structure?

When you start a business you may set out with one product or service income. As time goes on, you may find that you expand into different areas and you may find yourself offering a number of different products or services.

Firstly, you can do nothing and keep all the income streams within one company. Alternatively, you can consider splitting all of your trades into a group structure.

A group company structure is a business model in which a parent company (often referred to as a holding company) with you as the shareholder owning the shares in the parent company.

The parent company then has subsidiary companies underneath it, with each subsidiary having it’s own trade. A holding company does not produce any goods or services by itself. Its main purpose is to own shares of other companies to form a corporate group.

Each subsidiary is a separate legal entity, often with its own separate management and operations teams, but they are ultimately owned and controlled by the parent company.

What are the benefits of a group structure?

Minimise risk

This is the most important reason for considering a group structure.

The greatest risk with running any company is insolvency. A group structure minimises risk in that it is not obliged to pay for any of its subsidiaries liabilities, providing that it has not given it any corporate guarantees.

The parent company protects the assets of the entire group. A single company with multiple trades has all its assets and business exposed if there are any issues in any part of the business. The group company structure allows better asset management, better distribution of assets and efficient sale of assets. It also helps with loans, borrowings and business growth. The idea is the main ownership of assets and rights sits in the parent company.

If one trade is not performing well, or if something goes wrong with one of the trades and an insolvency claim is raised, the claim would be against that one company. The rest of the business is protected so you can continue without worry. Keeping trades separate ensures that the other trades are protected from business risks such as litigation, financial difficulties or insolvency of operating companies in the group.

Cash

With a group structure, you can transfer any excess cash from the subsidiaries to the parent company. You can then choose if you want to use that cash for investment or transfer it to yourself personally, obviously tax will become payable if transferring to yourself.

Asset Safeguarding

You can keep property and large value assets in the parent company, away from the subsidiaries. This is useful in the event of an insolvency claim as you do not want to risk losing title to your business premises as a result of a large claim.

Other benefits include:

Reputation – a group structure allows a new venture to build its own brand and reputation away from the other trades.

Reporting – if everything is recorded in one business it can be difficult to show exactly how each trade is performing,

Investment – it’s easier to raise capital for one specific trade. With all trades within one company, it is difficult to reliably assure investors that the funds are not being used for other trades. A group company structure can enable better access to finance. A lender might look more favourably upon a larger, more diversified business with a strong record of performance.

Sale – if you have one trade that is performing very well which you are considering selling in the future, it is far easier to sell a trade if it is within its own company.

Tax – a group structure is considered as a whole for tax purposes. If one company is generating a loss, that loss can be offset against another company’s profits.

VAT – you coul;d end up with multiple VAT registrations but you can look into a group registration. This all depends on the VAT status of your trades.

Disadvantages:

Administration & compliance – the more companies you have, the more compliance is needed. Each company is required to file annual accounts with Companies House and a corporation tax return to HMRC. Each company will also be required to file a confirmation statement each year too. The more companies you have, the higher the accountancy fees will be.

Software subscriptions – due to multiple accounting records being required, each company will require its own accounting software subscription to a product such as Xero.

Other considerations:

It’s always advisable to set up your group company structure at the earliest opportunity. However, if you decide that you wish to separate your existing trades and create a group at a later date, this is perfectly manageable, although there will be some professional legal fees involved due to an application process known as a “de-merger”.

Group companies are required to make QIPS (quarterly instalment payments) relating to your corporation tax liabilities, compared to a single company which would usually pay it’s corporation tax liability nine months and a day after the end of the financial year.

This means that the subsidiaries may have to prepay it’s corporation tax upfront in quarterly staged payments. This can be determinantal to cashflow.

Future planning is key so think about your business plans for the future. Setting up a group structure isn’t appropriate for every company. However, there are some circumstances where it makes strong commercial sense to have a group structure in place.

Consider the increased costs of compliance as well as the initial set up costs. There is a lot to manage and consider when setting up a group company structure. They can be complex and may involve multiple legal entities. For this reason, we suggest seeking professional assistance from a qualified tax advisor and legal expert to ensure the group structure is legally compliant and optimised for your business objectives.

For qualified advice and help contact The Accountancy office in Evesham were we will be happy to discuss your requirements. Visit us at our website, email us or call us on 01386 764761

Directors Salary 2023

Posted on April 11, 2023 by admin

Directors Salary 2023

If you operate your business through your own UK limited company you’ll most likely want to use the optimum tax planning strategy of extracting money from your company through a combination of shareholder dividends and a low salary.

Personal Allowance

The personal allowance (the amount of income that you can earn before you pay tax) in 2023/2024 remains the same as 2022/2023 at £12,570.

Income Tax Thresholds

Income between £12,570 and £37,700 (Basic tax rate) – 20%

Income between £37,701 and £125,140 (Higher tax rate) – 40%

Income over £125,140 (Additional tax rate) – 45%

Dividend Allowance

The Dividend Allowance is reduced to £1,000 from £2,000 for the 2023-2024 tax year. This is the amount of dividends you can receive from your limited company free of tax.

Dividend Tax Rates

Dividends within basic tax rate – 8.75%

Dividends within the higher tax rate – 33.75%

Dividends within the additional tax rate – 39.35%

National Insurance Thresholds

Lower Earnings Limit

By paying a salary above this amount, you are protecting your entitlement to future state pension and benefits, without paying any national insurance.

£533 per month/£6,396 for the year

Primary Threshold

If you earn above this level you personally have to start paying national insurance contributions.

£1,048 per month/£12,570 for the year

Secondary Threshold

If you earn above this level, your company has to start paying employers national insurance contributions but you do not pay employee national insurance.

£758 per month/£9,100 for the year

Employers National Insurance Allowance

This scheme was implemented to help stimulate economic growth and encourage small firms to take on more employees. It is open to all businesses with a total national insurance bill of £100,000 or less during the previous tax year.

Sole director companies without additional employees cannot claim the allowance.

The Employers Annual Allowance continues for those companies employing staff, enabling your company to reduce its annual National Insurance bill by up to £5,000. This remains unchanged from last year.

You must be an ‘eligible employer’ to qualify for this allowance. Please check with us to make sure that you qualify for this allowance if you’re uncertain.

How much salary should I pay myself?

It is important to receive bespoke and tailored advice to your personal circumstances as everyone is different.

There are also more aspects to consider than just tax, including:

Tax Rates and Thresholds for the tax year
The number of other directors or employees in the company
Other sources of personal income (aside from the limited company)

Childcare arrangements, pension contributions and charitable donations all need to be taken into account.

It is also important to consider any future plans you may have. For instance, if you’re considering mortgage or finance applications as your pay structure may affect your eligibility.

Sole Director & Only Employee

If you’re the sole director and pay yourself a salary through your own limited company, the best amount to pay yourself is typically £9,100 per annum (or £758 a month).

This is because:

It’s at the secondary threshold so your company won’t need to pay employer’s NI on it.
This salary is lower than the primary threshold, so you won’t need to pay employee’s NI.
It’s above the lower earnings limit, so you will still earn NI credits, which is great news for your state pension.
This is less than the tax free Personal Allowance threshold, i.e £12,750, leaving some of your personal allowance free for other income.
A sole director cannot claim the £5,000 Employment Allowance.
The salary is deductible for corporation tax purposes (generating a tax saving for the company about £1,729) (£9,100@19%).

Please note dividends should always be transferred separately to your salary and must have a payment reference of ‘’Dividends’’.

Two or more directors (or employees)

Having two or more directors on the company payroll means that you’re eligible to claim the £5,000 Employment Allowance.

There are a couple of scenarios:

More than £5,000 employers national insurance is likely to be incurred

Depending on the number of employees and their salaries, more than £5k Employers NI may be incurred by other employees before even considering the Directors payroll.

In this scenario, adding Directors salary above £758 per month will simply add to the National Insurance bill and the optimal salary is therefore £758 per month as it is for sole Directors (see above).

Less than £5,000 employers national insurance is likely to be incurred

For companies with only two Directors or a small number of employees Employers NI incurred on salaries above £758 per month may be waived by the Employers Allowance.

In this scenario the optimal salary will be £1,048 per month/£12,750 per year. Although Employees NI will be incurred it will be more than compensated for by the tax saving in Corporation Tax.

Conclusion

Our general recommendation for two or more directors is to pay a gross salary of £1,048 per month/£12,570 for the year but this is dependent on your circumstances and how many other employees are within the company.

The salary is tax deductible, reducing the company’s profits and it’s tax liability
You do not need to pay any income tax or national insurance personally
You will need to operate a payroll system and submit an RTI (Real Time Information) return to HMRC for each pay period.
Your company will need to pay employer’s national insurance for the year but if you’re eligible to claim the Employers National Insurance Allowance, payment may not be required.
Your National Insurance record will be credited, even though you will have not actually paid any contributions. This protects your future entitlement to state benefits such as a pension.
If you would prefer to avoid the added administrative burden of making regular Employer’s National Insurance payments to HMRC or if you’re unable to claim the Employers National Insurance Allowance for any reason, you may prefer to opt for a lower salary of £758 per month/£9,100 for the year. Payment at this level avoids all National Insurance issues and is usually more suitable for those with additional sources of income.

Please note numerous assumptions have been made when concluding the figures above. The amounts may not be the most appropriate for every Director. The figures in this article are only provided as guidance.

Tax Saving Tips For High Earners

Posted on April 11, 2023 by admin

According to the Office for National Statistics, in the 2021/22 tax year, just over 4.5 million people in the UK were paying higher or additional rate tax, a figure that has risen year on year.

Over two million more people are likely to be higher-rate taxpayers by 2028 due to the freezing of the higher rate tax threshold. This not only raises the rate of income tax you pay but it hikes the tax on capital gains and dividends and reduces your personal savings allowance.

There are several ways to reduce the tax you pay on your annual income as a high earner. Here are ten suggestions for you to consider.

Pay into a pension

Higher-rate taxpayers benefit from tax relief at their highest marginal rate, so you stand to get a 40% boost on your contributions.

However, it doesn’t necessarily stop there. It also has the benefit of reducing your net adjusted income. If you’re a parent earning over £50,000, cutting back towards £50,000 means you can reduce your high-income child benefit tax charge.

Remember money in a pension can’t normally be accessed until you reach the age of 55 (57 from 2028).

2. Salary Sacrifice

Asking your employer if you can enter into a salary sacrifice contribution arrangement to your pension, which will reduce the amount of money subjected to the highest rate of income tax. This can be quite complicated and more details can be found on the government website.

A key additional benefit of salary sacrifice arrangements is that depending on your employer, they may pay the National Insurance Contributions savings they make from the forgone salary into your pension.

3. Use pensions to deal with the £100,000 threshold

Investing in your pension pot is an attractive option to increase your savings in a tax efficient way. We actively encourage clients, when suitable, to contribute regular amounts to their pension to not only build up their pension pot but also to benefit from tax efficiencies.

If someone earning over £100,000 pays into their pension, and cuts their adjusted net income, it means they get back some of their personal allowance. So for every £2 their income falls, they’ll get £1 of their allowance back.

It means less of their income is subject to tax at an eye-watering 60%. Plus, if a parent can bring their income back under £100,000, they could also keep their eligibility for tax-free childcare.

4. Make full use of your annual allowance

The annual allowance will increase from £40,000 to £60,000 from 6 April 2023.

This is the maximum amount someone can contribute to a pension each year while still receiving tax relief. It’s also possible to carry forward unused allowances from the previous three tax years.

5. Child Benefit Charge

An individual can receive Child Benefit if they are responsible for raising a child who is either under 16 or under 20 if they stay in approved education or training.

If you are a couple claiming Child Benefit, where one or both individuals have an income above £50,000 per annum, or someone else claims Child Benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep, you may have to pay a tax charge. This is known as the ‘High Income Child Benefit Charge’. More details can be found on the government website here.

The tax charge is calculated through the tax return on any partner whose income is more than £50,000 a year. In the event that both partners have incomes over £50,000, the charge will apply to the partner with the higher income. The tax charge will be 1% of the amount of Child Benefit received for every £100 of excess income.

By making a personal pension contribution, you may avoid the tax charge as the adjusted net income used by HMRC will reduce. If the pension contribution is enough to reduce this to below £50,000, the High Income Child Benefit tax charge will be avoided.

6. Tax efficient investment schemes

An investment into a qualifying Venture Capital Trust (VCT), Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) attracts significant tax benefits. For an EIS or VCT, you can receive 30% income tax relief on the amount you invest, for SEIS this increases to 50% relief. This 30% is only achievable if you have paid sufficient tax for the year in question.

7. Make use of the Married Couple’s Allowance

High earners can also reduce their tax liability by making use of the married couple’s allowance. This allowance allows married couples to transfer some of their unused personal allowance to their partner, which can help to lower the overall tax bill.

8. Plan as a couple

If you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income producing assets into their name. That way you can both take advantage of your allowances and then the rest is taxed at their marginal rate rather than yours.

9. ISAs

Higher-rate taxpayers pay tax on dividends at 33.75% with a tax-free allowance of only £1,000 in the 2023/24 tax year.

If you use the share exchange process to shelter income-producing shares in an ISA, you won’t pay tax on these dividends. Because the dividend tax rate is higher than the capital gains tax rate, it’s often worth prioritising this when deciding how to use your ISA allowance.

10. Make a charitable donation

This will cut your tax bill although clearly won’t leave you better off overall. The charity will receive 20% in gift aid and you can claim back the other 20% through your tax return.

To do this, you must register for gift aid with a ‘Gift Aid Declaration’, keep a record of your gifts and gift no more than four times your total income and capital gains tax payment for the tax year in question

Please note that this article isn’t personal advice. Tax rules change frequently and any benefits depend on your circumstances. If you’re not sure what’s right for you, please seek professional advice.

Gross Markup and Gross Profit Margin – What’s the difference?

Posted on March 28, 2023 by admin

Gross Markup and Gross Profit are two different ways of looking at your profit on a sale.

In today’s competitive business landscape, understanding your pricing strategies is crucial to achieving success. As a successful accountant, it’s essential to have a solid grasp of the difference between gross markup and gross profit to help our clients maximise their profit potential.

Gross markup is the amount by which you increase the price of the things you sell. It is often expressed as a percentage of the cost price. For example, if an item costs your client £5.00 to buy, and they add a 30% markup, the selling price would be £6.50. However, it’s important to note that adding a 30% markup to an item doesn’t necessarily mean your client is making a 30% profit.

Gross profit, on the other hand, is the money a business has left after paying for the goods and services it sold. It’s calculated by subtracting the cost of goods sold (COGS) from the total revenue. In the example above, the gross profit would be £1.50 (23% gross profit) because the sales price (£6.50) minus the item cost (£5.00) is equal to £1.50.

At The Accountancy Office , we know it’s crucial to understand both gross markup and gross profit margin percentages when pricing your client’s services. This is because the markup directly impacts the gross profit margin. The higher the gross profit, the more money our client has to cover operating expenses like rent, insurance, and office supplies.

In the above example, a 30% markup on a product or service will give your client a 23% gross margin. A 43% markup will give them a 30% gross margin, and a 100% markup will give them a 50% gross margin. It’s important to note that the markup percentage will always be more than the gross profit margin.

As professional accountants, we can help our clients unlock their true profit potential by advising them on effective pricing strategies. By understanding the difference between gross markup and gross profit, we can help our clients make informed decisions about pricing their products and services. This will not only help them increase their profits but also ensure they remain competitive in whatever their market is.

In conclusion, understanding the difference between gross markup and gross profit is essential for effective pricing strategies. Here at TheAccountancy Office we know that we play a crucial role in helping our clients maximise their profit potential. By providing them with expert advice on pricing strategies, we can help them achieve their business goals and stay ahead of the competition.

Do you know the gross markup and gross profit margins of your products and services? If not, give us a call on 01386 366741 or email us here and we’ll be happy to talk you through it.

The Budget Roundup 15th march 2023

Posted on March 16, 2023 by admin

Chancellor Jeremy Hunt delivered his first Budget on Wednesday 15 March, as a “Budget for growth”.

There was very little talk of tax in the Chancellor’s budget this March. However there were more policies directed at getting people into work and keeping them there, all central to the Budget – which have lead to key changes on childcare and pensions.

Here are the key points of interest to our clients:

Limited Companies

Corporation tax
The Chancellor confirmed that the main corporation tax rate will increase from 19% to 25 with effect from 1 April 2023, affecting companies with profits of £250,000 and over.

Small companies with profits up to £50,000 will continue to pay corporation tax at 19%, with profits between these two figures being subject to a tapered rate.

Capital Allowances
The super-deduction regime will end 31 March 2023 and will be replaced from 1 April 2023 with ‘full expensing’ 100% capital allowances for qualifying plant and machinery. This will last for three years, to 31 March 2026, although the Government indicated that it is their ambition to make this permanent.

The Government will also introduce 50% first year allowances for ‘special rate’ plant and machinery, including long life assets. These rules apply only for corporation tax purposes and will not be available for businesses which are subject to income tax, unless they are below the Annual Investment Allowance threshold of £1m per annum.

The Government has also confirmed that the 100% first-year allowance for qualifying expenditure on electric vehicle charge-point equipment will be extended until 31 March 2025 for corporation tax and 5 April 2025 for income tax.

R&D Tax Reliefs
From 1 April 2023, there will be an increased rate of relief for loss-making R&D intensive SMEs. Eligible companies will receive £27 from HMRC for every £100 of R&D investment.

A company is considered R&D intensive where its qualifying R&D expenditure is 40% or more of its total expenditure.

Previously announced restrictions on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023.

Personal Tax

Income Tax
The main personal tax-free allowance and the 40% tax rate threshold remain frozen at their 2022/23 levels until the end of 2027/28, representing a tax rise where income increases, a process known as ‘fiscal drag’. The 45% threshold is lowered from £150,000 to £125,140 for 2023/24.

Fiscal drag occurs when tax thresholds and allowances do not keep up with inflation or wage growth, resulting in more of a taxpayers’ income being taxable. This can also mean that more income is taxed at a higher rate – or more taxpayers are ‘dragged’ into paying tax at a higher rate.

The tax free dividend allowance falls from £2,000 to £1,000, and Capital Gains Tax annual exempt amount falls from £12,300 to £6,000, for 2023/24.

Pensions
The Government has announced three key changes to the tax relief you can get when saving towards your pension:

The annual allowance will rise from £40,000 to £60,000 in April 2023.

The lifetime allowance, currently £1,073,100, will be abolished entirely from April 2024.

The money purchase annual allowance will rise from £4,000 to £10,000 in April 2023.

The changes mean that many people will be able to contribute much more to their private pensions before having to pay tax.

Savings and ISAs

Savings & ISA allowances are frozen. The ‘starting rate’ for savings will be frozen at £5,000. This allows those earning less than £17,570 from employment to earn up to £5,000 in savings interest before paying any tax.

In addition, the maximum amount you can save into an ISA as an adult will stay the same at £20,000.

For junior ISAs, the limit will remain at £9,000. There is also no change to the Lifetime ISA limit of £4,000.

Energy Bills

Support with energy bills will continue for another three months, reversing a plan to make it less generous.

Under the Energy Price Guarantee, the government has been limiting energy bills for a typical household to £2,500 a year, plus a £400 winter discount.

The guarantee will continue at the same level until July, by which time the price of energy should have dropped sufficiently for it to become redundant.

Support with Childcare Costs

Working parents with three and four-year-olds are eligible for 30 hours of free childcare per week during term time. This will be extended to cover younger children in England, when both parents are working. Equivalent funding will be given to the authorities in Wales, Scotland and Northern Ireland.

The rising cost of childcare has been considered to be a deterrent for some parents to go back to work or work full-time. Yet there are questions over whether the policy will actually mean parents working more hours and whether there are the nursery places available for their children.

As a result, it will be a staged introduction, with 15 free hours of childcare for two-year-olds in April 2024, and in September 2024 for those aged over nine months, then 30 hours for all from September 2025.

National Living Wage and National Minimum Wage

The National Living Wage will increase by 9.7% for individuals aged 23 and over to £10.42 per hour from 1 April 2023.

Other rates of National Living Wage will rise from the same date by different percentages.

Action you need to consider now
Accountants Broadway

Given rising costs imposed on small businesses together with the rising cost of energy bills, the National Minimum Wage increases and the 10% inflation rate, you should take the opportunity to review your business and personal position:
If you haven’t already reviewed your business plan for 2023, you should model the impact of rising costs. Do you need to:

Increase your prices?
Reduce your overheads?
Increase your wages?
Consider other revenue streams?

Review your personal and business tax situation.

Would you be personally better off if you paid yourself more via PAYE or made more pension contributions? (particularly now you can add £60k into your pension each year tax free)
Would closing your limited company and trading as a sole trader now make more financial sense?

If you need help with any of the above, call us today on 01386 366741 and we’ll be pleased to help.