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Employment Allowance guide for company directors
2nd May  J.Halliwell

 

If you have employees, the Employment Allowance (EA) can reduce your company’s national insurance bill by up to £5,000 each year. In this guide for the 2024/25 tax year – we explain how the EA works in practice, and if your company is eligible

What is the Employment Allowance?

The Employment Allowance reduces the amount of Class 1 Employers’ National Insurance that businesses have to pay by up to £5,000 each tax year.

Your business can claim if its total NI bill was £100,000 or less during the previous tax year. If your business is part of a group, this limit applies to the group as a whole.

It can only be paid against Class 1 NICs, up to the threshold every tax year. This rule applies even if you pay a smaller amount than £5,000 per annum.

This means – of course – you can only benefit if you have employees – and they earn enough for you to pay Employers’ NI.

Can your limited company claim the EA?

The EA is an attractive incentive, but is your limited company eligible to claim it?

Firstly, you need to be a business or a charity that is registered as an employer with HMRC.

However, your company is not eligible if:

  • You are the sole director of your company and the only employee earning above the secondary threshold (£9,100 in 2023/24).

  • You employ someone to perform domestic, personal, or household work, such as a gardener or nanny.

  • You are a business or public body performing over half your work within the public sector and are not a charity.

  • You are a service company that operates within the IR35 rules.

 

Will a typical small company director benefit?

If your company can claim the EA, it only benefits if any employees earn above the current employers’ NIC threshold.

This secondary threshold is currently £9,100 per year.

Many small companies pay their director(s) low salaries, which are subject to small amounts of NI, or no NI at all.

The EA in practice, during the 24/25 tax year

£12,570 is a tax-efficient salary for directors during the 2024/25 tax year. The cost of employers’ NICs is offset by the Employment Allowance.

  • If the employee earns £12,570, there is no income tax to pay, as this is covered by the personal allowance.

  • The EA offsets £478.86 in Employers’ NICs.

  • The employee pays no employees’ NICs below the Primary Threshold (£12,570).

  • But you save £659.30 in additional Corporation Tax compared to paying a £9,100 salary (no Employers’ NICs are payable below this ‘secondary threshold’).

  • So, the company’s overall tax burden is £659.30 per year less (per employee) if it can claim the EA, and pay an employee a £12,570 salary compared to a £9,100 salary.

Talk to the HAS team as every company’s situation is different

The EA was introduced to encourage businesses to take on new employees.

However, as you can see, the Treasury has made it increasingly difficult for small limited company owners to benefit from this incentive by tightening up the eligibility criteria over time.

How to claim the Employment Allowance

To claim via your payroll software, indicate ‘yes’ in the ‘Employment Allowance indicator’ field when you next submit your EPS (Employment Payment Summary) to HMRC.

Alternatively, if you use the Basic PAYE Tools, you need to:

  • On the home page, select your name in the ‘Employer’.

  • Click on ‘Change employer details’.

  • Tick ‘Yes’ in the ‘Employment Allowance indicator’ field.

  • Submit your EPS.

The EA is classed as de minimis state aid (government help) if you make or sell goods and services. State aid rules only apply to a small number of businesses in Northern Ireland. In all other cases, select ‘State Aid rules do not apply’.

You need to apply to claim the EA each tax year as it no longer automatically renews.

Can I backdate my Employment Allowance claim?

Yes – you can claim for up to 4 previous tax years. You need to submit a separate EPS for each year in question.

What if my company is no longer eligible to claim the EA?

In the ‘Employment Allowance indicator’ field mentioned above, you need to click ‘No’ if your company no longer meets the eligibility criteria.

Don’t check ‘no’ if you’ve simply used up the EA for the tax year, as your company is still eligible for future years.

If you no longer have any employees, again, don’t select ‘no’, as the EA will automatically expire at the end of the tax year.

7 ways the Spring 2024 budget will affect your small business
17th March  J.Halliwell

 

VAT registration threshold increase

From the start of April 2024, the VAT registration threshold will increase from £85,000 to £90,000. This is great news for small businesses that are currently bordering on the existing VAT threshold limit year-on-year, and now have an extra £5,000 of potential income before they have to register.

Registering for VAT means charging customers VAT, filing VAT returns every 3 months with HMRC and paying and receiving VAT payments with HMRC. So it can be costly and take up a lot of time (unless you’re a HAS client of course – because we help to make managing your VAT easy and affordable).

VAT deregistration increase

And that’s not the only VAT news. From 1 April the VAT deregistration threshold is also being increased to £88,000. So if your VAT-able sales dip below this figure you’ll be eligible to deregister from VAT registration. At the moment, the threshold stands at £83,000.

Leased assets can now be offset against tax

‘Full expensing’ lets businesses offset investment in items like new factory machinery and IT equipment against tax. However, until now this didn’t apply to items that were leased. Now, if you have a laptop on lease and the total value of that rented laptop is £2k, you’d now be able to claim back £380 in corporation tax (if you’re paying corporation tax at 19%).

Lower National Insurance contributions for employees

From 6 April the National Insurance contributions that come out of your wages through PAYE will go down 2% to 8%. Whether you’re a director on the payroll or an employee, this means more take-home pay. Someone on an average salary of £35,000 per year will have an extra £450 a year in their pocket.

Further cuts to National Insurance for the self-employed

From 6 April the main rate of Class 4 self-employed NI contributions will drop to 6%, which is a 2% decrease from the previous rate. This reduction comes on top of the 1% cut announced in the Autumn Statement.

These changes mean that the average self-employed person earning £28,000 could save £650 per year.

And that's not all – when combined with the abolition of Class 2 NICs announced in the Autumn Statement, you’ll no longer be paying these contributions at £3.45 per week if your profits exceed the lower profits threshold of £12,570.

(To clarify, Class 2 and Class 4 National Insurance Contributions are payments made by the self-employed to qualify for state benefits, with Class 2 being a flat-rate contribution and Class 4 being based on profits).

These cuts to National Insurance will provide some modest relief to the self-employed.

Furnished Holiday Lettings regime abolished

The Furnished Holiday Lets (FHL) regime, which provided tax benefits to people renting out properties for short-term holiday stays - rather than long-term lets -  is set to be abolished in April 2025. 

Second home-owners who make extra income from their holiday home (by making it available on platforms like Airbnb, for example) will be affected, making this a less attractive investment opportunity. This announcement effectively means that short-term and long-term rentals will be treated the same for tax purposes, doing away with the status of second homes being treated as a business rather than a property rental.

Previously, an owner of a property earning £30,000 in rent could save up to £4,000 per year in income tax through the furnished holiday lettings (FHL) regime, which allowed capital allowances, capital gains tax reliefs and deductions of finance costs, which aren’t available through normal property rental income rules.

Higher rate of Capital Gains Tax on properties has been reduced

It’s not all bad news for holiday-let property owners though, as the higher rate of capital gains tax rate on selling residential property has been reduced from 28% to 24% - providing some relief if they decide to sell the property. The lower rate capital gains tax rate remains at 18%.

Tax deductions UK: Allowable expenses you can claim if you’re self-employed
9th December 2023  J.Halliwell

If you're a sole trader, you can deduct expenses to reduce your tax bill. Find out what costs qualify and how to claim.

If you’re self-employed, allowable expenses can reduce your Self Assessment tax bill.

In this article, we talk about how your business can claim back money.

Here’s what we cover:

  • Income tax relief: How you can reduce your tax by claiming on business expenses

  • Self-employed allowable expenses list

  • What expenses can I claim when working from home?

  • How can I track my allowable expenses?

  • How do I claim my self-employed business expenses?

  • Final thoughts on allowable expenses

  • Frequently asked questions about allowable expenses

 

Income tax relief: How you can reduce your tax by claiming on business expenses

As a sole trader or freelancer, it’s crucial to understand your basic allowable expenses.

You can claim tax back on some of the costs of running your business—what HMRC calls allowable expenses. These appear as costs in your business accounts deducted from the profit you pay tax on.

Expenses can reduce the average sole trader’s tax bill—often significantly.

For example, if your turnover is £80,000 and you claim £20,000 in allowable expenses, you only pay tax on the remaining £60,000—a substantial saving.

You can also use simplified expenses.

These flat rates allow you to quickly calculate tax relief on vehicles, working from home and living on your business premises. It can make working your expenses significantly easier.

On the Gov.uk website, you can find the most common expenses you can claim for self-employed and the most common expenses you can claim for if you rent out a property.

 

 

Self-employed allowable expenses list

Below, we cover some of the things you can claim for. To reiterate, we assume you’re using cash basis accounting, as the rules for traditional accounting can be slightly different.

Office equipment and tools

You can claim expenses for business equipment such as laptops, PCs, printers, and computer software that your business has used for less than two years.

 

Stationery and communications

As well as the usual paper, envelopes and pens, you can also claim back tax on postage and printing, including the costs of printer ink and cartridges you use as part of your business.

With more businesses now trading online, this allowance also applies to electronic communications – so you can claim tax back on your business phone, mobile and internet bills.

 

Phone and internet

If you use your phone, mobile and internet for personal and business use, you’ll need to demonstrate a realistic way of dividing the costs and can only claim tax back on the part for business use.

 

Professional and financial services

If you get advice from an accountant, lawyer or other professional as part of your business, you can claim tax back on their fees.

You can also claim allowable expenses for hiring surveyors and architects for your business—not for personal home improvements.

If you have a business bank account, you can claim tax relief on bank, overdraft and credit card charges or interest on business loans.

You can also claim tax back on hire purchase, lease, or other financial payments for equipment you use in your business.

 

Staff and employee costs

You can claim tax relief on employee and staff salaries, bonuses, pensions, benefits, staff and employee costs, agency fees, subcontractors, and employer’s National Insurance contributions.

 

Travel costs

You can claim allowable expenses if you need to travel for business, including train, bus, taxi, airfares, and accommodation costs.

But these only apply if the primary reason for your journey or stay was for business.

If you take a trip that combines business and pleasure, you can only claim tax relief on costs you can show are separate from the private part of your journey.

 

Car and vehicle costs

If you use a vehicle as part of your business, you can claim tax relief for expenses such as petrol, insurance, and repairs.

Mileage allowance

As a self-employed person, you can add up all your motor expenses for the year and work out the separate business element of the total cost.

However, keeping track and working this out takes time and effort.

Instead, you can claim mileage allowance, a simplified expense that lets you calculate the costs of running your vehicle.

Other vehicle-related areas you can claim expenses on include:

  • Congestion and low-emission zone charges

  • Parking

  • Breakdown cover

  • Hire charges.

Again, tax relief only applies to these if they are business rather than private expenses.

You can’t claim tax back on parking fines or other fines incurred while driving. There’s no tax relief for breaking the law.

 

Food and clothing

Everybody needs food and clothing, but claiming for them on expenses depends on what you’re using them for.

Clothing

Generally, you can’t claim for clothing if you’d wear it as part of an everyday wardrobe. So, even if you’ve bought a suit for work, you can’t claim for its cost.

But, if you must buy a uniform that identifies what you do or needs special protective clothing to do your job, you can claim for that.

You can’t claim for non-uniform items such as shoes and socks.

If you’re an entertainer, and the clothes you’re buying are a costume for a stage, TV or film performance, then you can claim tax relief on those.

Clowns, magicians, acrobats and Elvis impersonators – we bet HMRC enjoys reading your clothing claims!

Cleaning & Laundry

If you wear a uniform or special protective clothing, you can claim expenses if you wash, repair, or replace it.

Food

You can only claim money back on food and drink if it’s a business expense, meaning it must be outside your usual working routine, such as a business trip.

 

Stock and materials

You can claim tax back on the following:

  • Items that you resell, such as stock

  • Raw materials that you use to make goods for sale

  • Direct costs from producing goods.

 

Marketing and advertising

You can claim tax back on the costs of advertising and marketing your business, including costs for hosting and maintaining your company website.

But beware, you may think that treating a customer or supplier to lunch is ‘marketing’, but HMRC considers it as ‘entertaining’, which you can’t claim tax back for.

If you’re a member of a professional trade body or organisation as part of your business, you can claim tax relief on your membership fees. Subscriptions to trade or professional journals are also allowable expenses, so claim for those.

 

Pension contributions

Contributions to your pension are not a business expense, so they don’t affect your self-employed profits. However, you are eligible for tax relief on any contributions you make, which you can claim on your tax return.

 

What expenses can I claim when working from home?

As a sole trader, you may run your businesses from home.

In this case, you can only claim tax back on the proportion of those expenses that relate to the space you use for your business, including heating, electricity, council tax and mortgage interest.

You’ll need to find a realistic way of dividing the costs.

You may divide your bills according to the number of rooms you use for your business or your time working from home.

How can I track my allowable expenses?

You should track your business expenses throughout the year and keep organised records. If you are unincorporated or a sole trader, you must keep records for five years after 31 January of the relevant tax year.

Ideally, you’d use accounting software, which saves time and is more accurate than spreadsheets.

It should let you import expenses and receipts—if you have paper receipts, you can often snap and capture them digitally.  

How do I claim my self-employed business expenses?

You work out what you can claim back and these are added to your tax retrun.

This process will be easier if you’ve kept your expenses organised (adding them to accounting software will help you achieve this).

And ultimately, it could be a matter of giving a single figure for your allowable expenses or providing a detailed breakdown on your tax return.

Either way, you should accurately work out your expenses in case HMRC comes back with questions.

Final thoughts on allowable expenses

Understanding allowable expenses can make all the difference to your cash flow.

Knowing what you can and can’t claim back makes things much easier come tax return time.

While we’ve covered some key expenses you can claim back, getting support from an accountant or tax adviser can make all the difference here.

Give yourself plenty of time to get your head around your allowable expenses, speak to the experts if needed, and ensure you don’t have to pay more tax than is required.

 

How do I distinguish between capital and revenue expenses?

Capital expenses are investments in assets that will benefit your business over a long period, while revenue expenses are day-to-day costs.

What records do I need to keep for my allowable expenses?

Keep invoices, bank statements, and receipts related to your business expenses. Organise these digitally to make it easier at tax return time.

 

What happens if I get audited by HMRC?

If HMRC decides to audit your business, you must provide proof of your allowable expenses. Failure to do so could result in fines or additional tax payments.

 

Are startup costs considered allowable expenses?

Although limitations or special rules may exist, certain startup costs could be considered allowable expenses.

 

Is business insurance an allowable expense?

Yes, you can claim business insurance premiums as an allowable expense.

 

Can I claim costs for business-related education or training?

Generally, you can claim educational expenses directly related to your current business.

However, training costs that qualify you for a new trade are not allowable.

 

What if I have a side hustle? Can I claim allowable expenses for it as well?

Yes, if you have multiple businesses—each business can have its own set of allowable expenses. You’ll need to keep these separate for accounting purposes.

 

Can I claim costs incurred before my business officially started?

You could claim some pre-trading expenses, but specific rules and limitations may apply.

 

Are there special allowable expenses for businesses that are scaling up?

Expenses related to business growth (such as hiring new staff or moving to a larger office) can be allowable expenses. You might need to claim certain other capital expenditures differently.

Tax advantages of a limited company versus sole trader

16th October 2023  J.Halliwell

Being a sole trader means that you run your own business as an individual and are essentially self-employed. This is the most popular way of trading in the UK, with 3.1m sole proprietorships recorded at the beginning of 2022.

By contrast, a limited liability company is a separate legal entity to you, with separate finances.

Each option has its own advantages and disadvantages, and anyone starting out in business will need to decide what will work best for them.

Here, we look at some of the major differences in terms of legal liability, taxes and bureaucracy.

Liability

A key advantage of a limited company structure is that it ringfences your personal assets. If your business fails or is sued, you will only lose any investment in the business and won’t be personally liable for meeting charges such as litigation costs or damages from your own finances. Although, in some cases, lenders may require personal guarantees.

As a sole trader, you and your business are one single legal entity. You are personally liable for any debts and liabilities you incur in the running of your business, including taxes, putting you at greater financial risk should something go wrong.

However, the sole trader structure can offer some financial benefits.

Any losses you incur as a sole trader can be offset against your other income for tax purposes, something that can’t be done in a limited company structure as the company is a separate legal entity. For many business start-ups, where losses may be initially incurred while the business gets established and finds its feet, operating as a sole trader can provide an advantage by allowing you to offset any losses against other income to reduce your tax bill.

In addition, because your finances and those of the business are legally one and the same, it also means you can freely borrow from the business’ funds to cover personal expenses if needed. It is important to remember, however, that you will still be taxed on any profits you withdraw from the business.

Tax differences

Limited company taxes

Limited companies must pay corporation tax.

As of April 6, 2023 it’s 25 per cent, up from 19 per cent previously. This applies to businesses with profits of £250,000 or more and applies to all profits. A small profit rate is in place for companies with profits of £50,000 or less. A system of taper relief is in place for companies whose profits fall between these thresholds – find out how much you’d pay using the government calculator.

There are potential further taxes payable when extracting value from the business, including income tax and National Insurance Contributions (NIC), based on the salary you decide to pay yourself (which will be deductible against company profits) and taxes on any dividends (paid out of post-tax profits). You do, however, have control over the timing and method of extraction.

Sole trader taxes

For sole traders the tax rules are different. You will pay income tax on the profits of your business regardless of whether or not you have extracted those profits for personal use or invested them in the business.

In addition to paying income tax on the business profits, sole traders, being self-employed, must also pay Class 2 NIC (£3.45 a week in the 2023/24 tax year if the Lower Profits Threshold of £12,570 per year is exceeded) and Class 4 NIC (9 per cent on profits of the business between £12,570 and £50,270 in the 2023/24 tax year, and 2 per cent on profits over £50,270). You must also register for VAT if your taxable turnover is above the VAT registration threshold, which is £85,000 in 2023/24. This is all calculated and reported to HMRC via the annual self-assessment process and completion of self-assessment tax returns.

Key differences

Due to the lower corporation tax rates, especially for businesses with lower turnover, limited companies are generally taxed less on their profits than a sole trader and therefore tend to be more tax efficient. This is especially so if the profits are invested back into the business rather than extracted, as profits ploughed back into the business are taxed at a lower rate than would be the case if a business operated as a sole trader.

Limited companies can also offer a wider range of tax-free benefits to directors and employees and open up access to certain tax reliefs that aren’t available to sole traders, such as R&D tax reliefs.

However, unlike a sole trader, money cannot be borrowed from the business’ bank account for personal use with impunity. Doing so in a limited company will be considered a ‘benefit in kind’ and carries potential tax ramifications.

Bureaucracy

While a limited company structure offers limited liability and potential tax advantages, it involves more bureaucracy to set up and manage, which you will either need to spend time doing yourself or paying others to do for you.

Overall, a limited company structure comes with more reporting requirements and, as a quid pro quo for the benefit of limited liability, the directors of the company have a wide range of duties and fiduciary responsibilities, which can, in turn, create additional costs and paperwork.

For example, as a director of a limited company you must register the business with HMRC and are legally required to set up a separate company bank account. Accounts must be prepared each year and submitted to HMRC – and they may need to be audited. This offers less privacy, as these accounts are publicly available to everyone online via Companies House, along with your details and those of any other directors.

However, the limited company structure offers greater flexibility in the way you can allocate shares and employ people, allowing you to issue shares in the company to spouses and family and/or appoint them as salaried directors to improve tax efficiency. A corporate structure can also help to create a more professional impression to your clients and suppliers.

Due to the additional formalities in forming a company, setting up as a sole trader is the simplest way to get your new business off the ground.

To become a sole trader, you must register with HMRC as self-employed. This consists of a straightforward online registration form. Timing does matter, however, since there can be financial penalties if you fail to register before the end of the relevant tax year once you’ve started trading.

Unlike in a limited company structure, as a sole trader you aren’t legally required to open a separate business bank account. That said, it’s generally advisable to do so in order to keep better track of business income and expenditure and assist in preparation of tax returns.

Sole trader profits must be calculated for each tax year (April 6 – April 5). Like a limited company, accounts (i.e. a record of business income and expenses) must be prepared to determine the profits of the business, but unlike a limited company they don’t need to be audited or submitted to HMRC, unless specifically requested.

It is possible to change from a sole trader to a limited company, and vice versa, but it is usually easier to start as a sole trader and incorporate later rather than the other way around.

Ultimately, it is important to think carefully about what works best for you and seek professional advice if you’re unsure. Having the right structure in place to suit your specific circumstances and ambitions will put you on a strong footing for future success.

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