Another Free Agent Question!

[Fee Agent]

Hello,

Anyone else using FreeAgent? How accurate would you say its corporation tax predictions are?

On my dashboard area in the Profit and Loss section, when I log in, it says:
Income: £36,571
Expenses: £2,133 (is there any way to see what these expenses are in FreeAgent?)
Operating Profit: £34,437

£6,733 Corp. Tax
£0 Dividends

£6,733 Corp. Tax
£0 Dividends
£0 Adjustments

However, there will be two salaries of about £8,000 coming from the business. Plus a few other expenses I would imagine.

Would that £16,000 approx of salaries affect the corporation tax amount? Is there any way to add this to FreeAgent so that the rolling tax prediction is a bit more accurate?

Thanks!

 

[@aiteoconsulting]

Salaries will reduce your operating profit and hence your corporation tax. For the £16k of salaries, count on around a £3k reduction in corporation tax.

There is a payroll section on FreeAgent which adds this automatically, but if you're using a different payroll system you'll need to add the salary costs as a manual journal.

 

[UK Contractor Accountant]

Are you not paying out the salaries monthly?

otherwise it means processing a yearly salary under RTI.

 

[Fee Agent]

Salaries will reduce your operating profit and hence your corporation tax. For the £16k of salaries, count on around a £3k reduction in corporation tax.

There is a payroll section on FreeAgent which adds this automatically, but if you're using a different payroll system you'll need to add the salary costs as a manual journal.

Thanks. I'm not sure how my accountant will be recording the salaries.

At the moment I take the money out of the business account as it comes in (leaving 20% in the account for tax). These transactions appear in my bank account feed in FreeAgent but not as a salary or payroll.

I get paid from my clients multiple times per month (via PayPal), then take that money out of the business account into my personal account.

 

[Fee Agent]

Are you not paying out the salaries monthly?

otherwise it means processing a yearly salary under RTI.

Not through Free Agent. Is processing a yearly salary under RTI a problem?

Is there a training day I could go on to learn how to do this right (using FreeAgent and basic accounting)?

 

[@aiteoconsulting]

What you are doing is taking out a director's loan, which will then need to be offset with your salary. I presume your accountant is on top of this, but you do need to be careful that you don't inadvertently create a tax liability for yourself by leaving too much overdrawn in the loan account, or for too long. Ask your accountant what's happening with payroll.

 

[Fee Agent]

Thanks, I will ask them!

Out of interest, what is the best/proper way to this?

The business has two directors (50/50 shares) and both get a salary (enough to qualify for state pension) and then split the profits 50/50 as dividends.

Say the salary is £8000 per year each, should this be taken out of the business account each month at £666 per month? Then at the end of the year, the corporation tax is paid out of the business account.

Then whatever is left is split 50/50 between the two directors/shareholders as dividends. The two directors/shareholders then pay income tax on the dividends?

Thanks!

 

[@aiteoconsulting]

Broadly, yes. If you're taking salary monthly, you should be running a monthly RTI payroll and taking that out as salary. You can also take money out as interim dividends before year end if there is sufficient retained profit in the company after providing for corporation tax, but make sure you take account of any expenses the company needs to incur.

 

[TheCyclingProgrammer]

If you're simply taking money out without running payroll on your salary or doing the right dividend paperwork then as has been said already, these withdrawals are a director's loan.

If your director's loan account balance exceeds £10k then you need to pay interest on this loan or you will incur a BIK tax charge. You may also face a corporation tax charge (s455) if the loan is outstanding 9 months after your company year end.

In general doing things this way is a really messy way of doing things - I know some accountants seem to encourage this "just take the money and we'll sort it out at the end of the year" approach but IMO it's a really bad habit to get into.

Pay yourself a monthly salary and do it properly using FreeAgent's payroll feature - it's literally one click each month to submit your RTI submissions once you've set the payroll system up.

Take dividends whenever you like so long as there is sufficient retained profit. If you're declaring dividends for two shareholders, then you may want to consider writing your own dividend paperwork - I've read mixed opinions of whether or not FreeAgent's dividend paperwork is sufficient for multiple shareholders (when you classify multiple bank transactions as a dividend payment it creates separate sets of dividend minutes/vouchers which IMO is not strictly correct).

The way I do it in FreeAgent when dealing with a single dividend split between two shareholders is to create a single set of journal entries, titled "Dividend declared on xxxx", debiting the dividend account for each shareholder according to the shareholding and crediting the loan account for each shareholder. This IMO makes it very clear that a single dividend was declared and split accordingly. You can then simply do a bank transfer and explain the transactions as payments from the director's loan account (which is now in credit).