One of my many resolutions for 2019 was to read more books. Although some of the other resolutions were quietly abandoned, I'm pleased to report that I read 120 books. Yes, that's a lot. This is partly because did a great deal of train travel last year, and also because my idea of a holiday is to solidly read books and eat crisps for a week. Some of those books really changed my thinking, or at least clarified it significantly. Here are my top three in the categories of self-improvement (one of my obsessions), business, marketing, and money.
I did read some fiction, too. Highlights included My Name is Leon by Kit De Waal, Unsheltered by Barbara Kingsolver, and White Houses by Amy Bloom.
If you're a fellow business-minded bookworm, you might enjoy the Read to Lead podcast, hosted by Jeff Brown.
Let me know below if you have any recommendations, I love hearing about new books. I'm off to read another one now.
Wishing you a very happy, successful, and book-filled 2020.
NB: If you click on the book links above and buy anything, I get a tiny amount of money ... which I'll probably spend on even more self-improvement books.
Although it’s easy-peasy to create a limited company, it’s much harder to navigate the taxes associated with becoming a director. As a sole trader, it’s more straightforward and similar to being an employee. Once you’re a company director, you’re both a corporation/employer and an individual/employee. Yes, you get a dual identity. And you pay taxes through both identities.
In this post, I’ll explain the various taxes you pay as a company director and give a worked example, based on a typical setup. This is no substitute for seeking advice from an accountant, though. They can give you specific guidance on your situation. I won’t address taxes that apply only in certain niches, or cover people with income from multiple companies or employers.
Once you’ve deducted your costs from your turnover, that leaves your profit. You’re then taxed at 19% on all your profits. Unlike personal income tax, there’s no tax-free threshold. Even if you make £100 in profit, you need to stump up £19 in corporation tax. You’re right, this is very unfair on new businesses.
You should complete a Corporation Tax return each year. Your tax payment is usually due nine months and one day after the end of your company’s financial year. This is different from personal tax returns, which are due in January.
If you pay a salary to yourself or anyone else and it’s above £8,632, you must pay Employer’s National Insurance (NI) at a rate of 13.8%. There’s an upper limit of £50,000, beyond which no NI is due. Accountants often recommend paying yourself a salary of £8,632 so you avoid NI as both an employer and an employee (see below).
NI payments are made through your monthly payroll system.
If you’re VAT registered, you need to charge VAT on sales and then pay it to HMRC every quarter. The good news is that the amount due is reduced by however much VAT you’ve spent on products and services for your business. Assuming you’re managing your cash flow properly and aren’t spending the VAT revenue between quarters, this tax shouldn’t make a dent in your finances.
No doubt you’re already familiar with income tax. As a company director, though, you often don’t pay it – depending on how you pay yourself. As I mentioned earlier, accountants often recommend that company directors pay themselves a salary of just £8,632. This falls below the personal tax allowance of £12,500 and the NI threshold.
Your salary counts as a cost to your business, so it’s not included in the profits on which Corporation Tax is applied.
As an employer, you pay NI only above £8,632 and it’s the same for employees.
So, a salary of £8,632 isn’t liable for either NI or income tax. As a director, you often pay yourself an additional income in dividends, which are taxed differently.
Now, this is where the sums get more complicated. Dividends are taxed at three different rates, depending on where they fall within the income tax bands. The first £2,000 of dividends are tax-free, then they’re taxed as follows:
£12,501 to £50,000
£50,001 to £150,000
Note, these rates are different from the rates applied to salaried income.
To calculate how much dividend tax you pay, follow these steps:
Dividend Tax - Step by Step
It’s sensible, of course, to use a calculator, but it’s good to understand how it works so you can spot any discrepancies.
Dividend tax is paid through your personal self-assessment tax return, which is due in January.
There’s lots more on dividend tax on the HMRC website.
Here’s an example to show you how it works.
Mel runs her own graphic design business. The turnover is £70,000 and her costs are £20,000. She pays herself a salary of £8,632 and dividends of £30,000. Her tax breaks down as follows:
Company profits = £50,000 (remember, her salary is included in the business costs)
Corporation tax = £9,500 (19% of £50,000)
Salary = £8,632, so no income tax or NI due
Dividends = £30,000
Mel still has some of her personal tax allowance left, as her salary was £8,632. The Personal Tax Allowance is £12,500, so another £3,868 of her dividends are also tax-free.
That takes us down to £28,132 that’s taxable.
Then we deduct the £2,000 dividend tax allowance, bringing the taxable figure to £24,132.
As this is within the basic rate tax band, it’s taxed at 7.5%.
As you can see, this is complex! This is why it’s a good idea to hire an accountant. You’re undoubtedly too busy to keep on top of an array of taxes that change each year. Make sure this cost is included in your pricing. Accounting software, such as Xero or Freeagent, should show how much tax your company needs to pay. You can use a dividend calculator to get an idea of your personal dividend tax liability.
Taxes aren’t desperately exciting, but you don’t really want the excitement of a nasty surprise.
This blog post does not constitute financial advice. Please seek advice from a qualified accountant.
Do you feel as though you know what you should be doing with money, but it’s not quite happening? It could be because there’s a monkey in charge. We start out with great intentions, then those plans go awry.
The Chimp Paradox is a mind management model developed by Professor Steve Peters. Under this model, the mind is separated into three teams, each with its own agenda and way of working:
The Human and the Chimp can act independently, in cahoots, or against each other. The Chimp paradox is that our monkey sidekick can be either our best friend or our worst enemy. If we repeatedly sabotage our efforts and act impulsively, it means the Chimp has the upper hand. The challenge is to store information in the Computer to help us manage the Chimp.
The Computer part of your brain is where you store the processes that govern the Chimp. Once you recognise the tactics your Chimp uses, you can program scripts to ensure that you, the Human, remains firmly in charge.
For most of us, scripts are essentially routines – a series of tasks we follow without thinking. What routines could you establish for managing finances?
Here’s a template you can use for building routines:
Preparation – what you do to create the right environment. This might involve organising paperwork so you can do your accounts, or ensuring a clear workspace. It’s much easier when all the information is easily accessible.
Trigger – a signal that you’re going to do something. You could either link it to other activities – e.g. after dinner – or set an alarm. You probably have a device that’ll give you a nudge.
Action(s) – this is what you want to do. Actions could include recording expenses, chasing invoices, or reviewing budgets.
Result – what you aim to achieve by completing this action. That might be clarity, higher income, or peace of mind.
Reward – an incentive for you to pursue these actions. Peace of mind might be a sufficient incentive in itself, but some of us require a stronger motivation, such as a glass of wine, a chocolate biscuit, or a Netflix binge.
As we’ve seen, our chimp isn’t a good influence. Here’s how we can exert our human authority:
The best way to build a routine is through dogged repetition. Once that routine is stored in your computer, you’re less susceptible to the chimp. Repetition is especially important during the early stages – this means doing it daily.
Download and print this 30-Day Challenge sheet to measure your progress. Every day you complete your task, put a cross in the box. The trick is not to break the chain of crosses. You could use this with the Pomodoro Technique to improve your focus and set a time limit. By Day 30, this’ll be an established habit and you might not need the chart any more. Or if it’s helpful, keep using it.
You can build this in to the routine template I outlined above:
I’ve just had dinner, so now I’m going to record all my expenses. This means I’ll reimburse myself for everything and not end up out of pocket. When I’ve done it, I’ll put an X in the box.
You’re doing this automatically and not giving your chimp an opportunity to decide the agenda. Once you’ve done it, then the chimp can decide what to watch on Netflix.
Monkeying around is fine, but only after you’ve addressed your priorities.