How to prepare for the end of the 2020/21 tax year
This is a guest blog article written by our friends at Crunch. All views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of that of 123 Reg. Be sure to seek advice from a qualified expert if you need financial advice.
The dawning of the new tax year is almost upon us. You won’t see any fireworks or midnight countdowns, but when the clock strikes midnight on 6th April, we’ll be living in the 2021/22 tax year.
A new tax year is an excellent opportunity to take a look at your business finances: to examine your bookkeeping practices and analyse what worked and what could’ve been better over the last 12 months, and to set new standards for the tax year to come.
Of course, before you start writing up your new tax year resolutions, you need to make sure you’re finishing this tax year as strongly as possible. So, what do you need to take care of before 5th April, and what changes should you be aware of as we head into the new tax year? Let’s take a look.
Getting ready if your a self-employed sole trader (or partnership)
Firstly, let’s cover sole traders. Things are simpler for you, since you need to make sure that you’ve logged all your invoices and expenses.
Claiming all the business expenses you’re entitled to reduces the profits you report on your annual Self Assessment, and means you pay less tax. We’ve got an article with all the information on the type of expenses you should be claiming as a sole trader. Make sure you’re not missing out on any!
If you manage your accounts on a ‘Cash basis’, you need to account for any invoices on the date you receive payment, and log expenses when you actually make a payment. It’s basically just what’s going in and out of your bank account, but not forgetting to include any amounts for transactions in cash you pay or receive.
If you do your accounting on an accrual basis (which is how most accountants and most accounting software works) you account for invoices when you issue them to the client (not when they pay you), and account for any expenses on the date of invoice from the supplier.
As soon as you’ve got all your expenses and invoices up to date in your books, you can start thinking about filing your Self Assessment tax return early, and saving yourself from any last minute panics next January!
Getting ready if you’re a limited company director
You’ll need to make sure you’ve issued all your invoices and recorded all your business expenses. Claiming all the limited company business expenses you’re entitled to will reduce your company’s Corporation Tax Bill. You’ll want to make sure that you know how your business is performing.
For users of online accounting software (such as Crunch!), you need to make sure all your transactions have been uploaded from your business bank account and that you’ve reconciled your accounting software, with all expenses, pension contributions, salaries, and sales invoices that have been issued to your clients.
Once your records are up to date, you’re able to make an accurate assessment of your company profits and any Corporation Tax due. You can then calculate the dividend you can pay yourself and any other shareholders.
If you use Crunch online accounting software, then as long as you keep your software up to date, you’ll have an at-a-glance view of the tax you owe and how much you can pay yourself.
Speaking of which…
Taking a salary – Payroll deadlines and submissions
Usually it’s a good idea to pay yourself a regular salary from your limited company, as it’s an allowable business expense. If you’re taking a salary, you need to run a regular payroll, even if it’s just for you as a single director/employee. One important thing you mustn’t forget is to file your final Full Payment Submission (FPS). This is an HMRC Real Time Information (RTI) requirement, and you could face a £100 fine if you don’t file your end of year Full Payroll Submission (FPS) by 5th April 2021.
You should record a payroll run for March 2021 to maximise your tax-efficient salary. If you have no other sources of income, this would usually mean paying yourself up to the National Insurance threshold of £8,788 for the 2020/21 tax year. It’s therefore worth checking the amount of salary you’ve been paid since the start of the tax year on 6th April 2020. If you have any other sources of income, this may affect the amount you wish to take, you should speak to an accountant for help.
We have an article, “How much salary should I take from my limited company”, which explains everything in more detail. Our Crunch accountancy packages come with all the support and advice you need to make keeping on top of things easy, including setting up a director payroll with all your payslips and filing taken care of.
Take company dividends before 5th April 2021
One of the most important steps you need to take ahead of the end of the tax year is to issue any remaining dividends, from your company profits, to be included in your personal Self Assessment for the 2020/21 tax year. This will help maximise your tax-efficiency by fully utilising your personal tax-free allowances and making the most of the HMRC tax thresholds which usually change each year.
The tax-free Dividend Allowance of £2,000 (in the 2020/21 tax year) hasn’t actually changed for a number of years, but both of the Personal Allowance and tax thresholds affect the amount of tax you’ll pay on any dividends you take. The amount you can take as a dividend depends on how much profit your company has made (after accounting for the Corporation Tax the company will need to pay).
For the 2020/21 tax year, provided your only personal income before dividends is a salary of £8,788, you can take up to £5,712 in dividends tax-free. In our “Get ready for the end of the tax year” article, you’ll find a complete breakdown of how to accurately calculate your tax-free dividends, as well as the dividends you can take if you earn above the Basic Rate and Higher Rate thresholds.
Again, our Crunch limited company packages include a really simple dividend function that shows you how much you have available to take, and lets you produce all the records you need to have for HMRC. Don’t forget that any dividends must be paid from available company profits. If you take more than is allowed, you could face penalties and interest as it’s treated as a Director Loan.
Don’t miss out on your tax-breaks
Whether you’re a sole trader or a limited company, you should try to take advantage of all the tax breaks that are available to you by 5th April or risk losing them. These include:
- Making any payments a pension (if you’re a limited company, usually it’s best to make pension contributions through your limited company)
- Making any ISA contributions – there’s a £20,000 allowance each year.
Please speak to your financial advisor for more information and bespoke advice. If you don’t have an advisor, we can help. Find out more about Investments and Pensions advice from our partner, Hargreaves Lansdown.
What changes will there be from 6th April 2021?
One of the biggest changes that the new tax year will bring are HMRC’s changes to IR35 legislation in the private sector. You’ll need to be aware of how these may affect you and your business, as incorrectly determining your IR35 status could lead to an investigation from HMRC.
Here’s a breakdown of some of the biggest changes coming in the 2021/22 tax year:
- New rules for IR35 in the private sector
- VAT reverse charge in the construction industry (from 1st March 2021)
- National Insurance contribution threshold changes
- UK Income tax allowance and threshold changes
- Scottish income tax thresholds changed
- Changes to Student Loan deductions
If you’d like a more comprehensive breakdown of the 2021/22 tax year changes, check out our comprehensive article with the highlights from the 3rd March 2021 Budget. Don’t forget to bookmark our “UK tax rates and thresholds” article for all the latest figures you need to manage your finances efficiently.
Of course, the easiest way to manage your accounts and prepare for the changing of the tax year is to get an accountant! If you think you’d benefit from accountancy support, Crunch offers a complete accountancy service with unlimited support for limited companies and sole traders.
Thanks to our exclusive joint offer with 123 Reg, you can enjoy a 10% discount on our Crunch limited company packages and a £5 per month discount on our sole trader packages for the first year! All you need to do is quote code CRUNCH123 when you speak to our friendly advisors.