Implication of Change from Self-employment to an Employee of West London Ltd - Essay Example

?Question Table Taxable Trading Income of Sam Smith for 12 Item Amount in ? Amount in ? Business income (fees)   90000 Expenses     motor vehicle capital allowance (50% of 1687.50) 843.75   Computer capital allowance 0   Motor insurance (50% of 800) 400   Repairs and servicing (50% of 650) 325   Road license (50% of 150) 75   Petrol – home to office 400   branch visits (no refunds) 1,200   Repairs and software for the computer 1,500   Hotel bills regarding branch visits (50% of 2400) 1,200   Stationery (50% of 150) 150   Telephone (50% of 360) 360   Trade subscription (50% of 500) 500   Books and reference materials (50% of 3750) 1,875   charity under the Gift Aid scheme 400     9228.75 9228.75 Trade Taxable income   80771.25 Notes The general assumption is that 50% of the total expenses are identified with the business for unspecified items such as road license, hotel bills, stationary, motor insurance, trade subscriptions, repairs and servicing, books and reference materials and telephone bills. Bank interest is deducted at source at the rate of 20%. Therefore, they cannot be included as taxable income. Depreciation reflects how fixed assets of business reduce in value through wear and tear. However, depreciation is just an accounting concept with nothing to do with taxation. Depreciation can be manipulated and taxmen do not recognize it as an allowable tax. Instead, annual capital allowance is computed. Vehicle of businesses have a standard rate of 25% on a reducing balance. In April 2008, Annual Investment Allowance (AIA) of ?50,000 per annum was introduced. This allowed business entities to spend ?50,000 annually and claim the full cost against tax. For Sam’s case, the tax written down value for the car in 2012 is ?6,750. According to the tax law in the UK the capital allowance on the car is the lower of 25% of the written down value of the car or ?3000 each year. Therefore, 25% of ?6750 is ?1687.50, which forms vehicle capital allowance for Sam. The tax written down value of computer is 0. Therefore, there is no writing down allowance on computers. Question 2 Table- 2 Sam’s Income Tax and National Insurance Computation and for 2011/12 PAYE ? 23,813.10 Add NIC (class4 ) ? 7,384.98 Add taxable dividends ? 234.00 Add Car Tax (178 g/km) ? 210.00 Less those form charity ? 100.00   ? 31,542.08 Notes PAYE tax and NIC thresholds are ?7,475 and ?7,225 per year respectively. Table 3- Computation of PAYE Income  Rate  Amount Amount ?7,475.00 ?35,000.00 20% ?27,525.00 ? 5,505.00 ?35,001.00 ?80,771.25 40% ?45,770.25 ? 18,308.10  Total ?23,813.10 Table 4- Computation National Insurance Contribution (Sam is categorized as in class 4) Income  Rate  Amount Amount ?7,225.00 ?42,475.00 9% ?35,250.00 ? 3,172.50 ?42,476.00 ?80,771.25 11% ?38,295.25 ?4,212.48 Total ?7,384.98 The dividends paid as tax was 32.5% of ?720=?234 Car tax for a car producing 178 g/km CO2 is ? 210.00. Contribution to charity is computed taking into consideration that Sam declared that he is UK’s tax payer. Therefore, Sam has to be refunded some money, which is computed as follows. The amount to be refunded = ?400? ((40-20) ?80) = ?100 Question 3 Table 5- Sam’s Income Tax and National Insurance Computation for 2011/12 if he is classified as an employee of West London Ltd. Add PAYE ?22,303.12 Add NIC class 1D ? 11174.06 Add taxable dividends ?234.00 Add Car Tax (178 g/km) ?210.00 Income tax ? 3,477.18 Notes Table 6- Taxable income Item Amount Basic Salary ? 76,996.31 Benefits 0  Taxable income ? 76,996.31 Table 7- PAYE computation Income Amount Used Rate Amount ?7475.00 ?35000.00 ?27525.00 20% ?5505.00 ?35001.00 ?76996.31 ?41995.31 40% ?16798.12 Total PAYE   ?22303.12 Sam earns higher income and will be paid ?90,000 annually inclusive of National Insurance Contributions. No reimbursement for any travelling or accommodation when away from home on branch visits and no refund for trade subscription and reference materials. Mileage payments for business travel. The mileage expenses are qualifying amounts and within the range for both NIC and travel. Therefore, they are no benefits to Sam. Table 8- Travel and NIC allowances Travel Miles Rates Home to office 1,600 45 p/m 720 Branch visits 6,400 45 p/m 2880 NIC purposes Home to office 1,600 25 p/m 400 Branch visits 6,400 25 p/m 1600 No reimbursement for any travelling or accommodation when away from home on branch visits NIC Computations If Sam is employed he will fall into NIC class1 category D because he will be a member of salary-related contracted-out scheme. Income from 0-Upper earning level is ?42,475. However, NIC to the upper level limit is (primary NIC + secondary NIC) = ?3704.96 + ?3844.37= ?7549.33 Salary and Total NIC up to the Upper earning Limit = ?42,475 + ?7549.33=?50024.33 Therefore, Salary and NIC after the upper earning limit= ?90000-?50024.33=?39975.67 However, rate of secondary NIC is 13.8% and Primary is NIC 2%. The total NIC rate is 15.8% Salary + NIC is equivalent to 1.158 Salary= (1/1.158) ? ?39975.67= ?34521.31 Therefore, NIC= (0.158/1) ? ?34521.31= ?5454.37 The Salary above Upper earning level=?34521.31 Therefore, total NIC for Sam as employed = ?7549.33+ ?5454.37- (rebates) = ?13003.70- ?1829.629 =?11174.06 Table 9- Primary NIC contributions NIC Class 1 Category of letter D Earnings at or above LEL up to and including ST Earnings above ST up to and including PT Earnings above PT up to and including UAP Earnings above UAP up to and including UEL Balance of earnings above UEL NICs rebate on earnings above LEL, up to and including ST Thresholds ?5,304 ?7,225 ?40,040 ?42,475 Primary contributions ?5304 ?1768 ?32815 ?2435 ?34521.31 0% 0% 10.40% 12% 2% 1.6% Contribution 0 0 ?3412.76 ?292.2 ?690.4262 (?552.34) Total Primary contribution =?3843.05 including rebates Table 10- Secondary NIC contributions NIC Class 1 Category of letter D Earnings at or above LEL up to and including ST Earnings above ST up to and including PT Earnings above PT up to and including UAP Earnings above UAP up to and including UEL Balance of earnings above UEL NICs rebate on earnings above LEL, up to and including ST Thresholds ?5304 ?7225 ?40040 ?42475 ?76996.307 Secondary contributions ?5304 ?1921 ?32815 ?2435 ?34521.31 3.70% Primary contributions 0% 10.10% 10.10% 13.80% 13.80% NIC 0 ?194.021 ?3314.315 ?336.03 ?4763.94 (?1277.288) Total Secondary contribution =?7331.018 including rebates Question 4 Report on Implication of Change from Self-employment to an Employee of West London Ltd Vision Consulting Limited has analysed the impact of change of Sam’s status from self-employment to an employee at West London Ltd as suggested by the Revenue Department. First, if Sam chooses to be an employee of West London Ltd, he will be treated as an employee and all his expenses will no longer be tax allowable deductibles. Therefore, all expenses in form of road license, repairs and servicing and motor insurance; hotel bills, accommodation and travelling; stationary, trade subscriptions, books and reference materials; and telephone bills will be paid by him only. In addition, there are no longer capital allowances of any kind and contribution to charity will not be refunded to him. As a result of the above, Sam will pay additional ? 1,935.10 (? 33,477.18 - ?31,542.08) income tax. Secondly, considering that both primary and secondary National Insurance Contributions are included in his initial salary of ?90,000 annually, Sam will pay more ?3,789.07(?11,174.06 - ?7,384.98) if his status changes. Thirdly, income tax and NIC payments must reach HMRC on or before 22nd of the following month. However, the burden of remitting PAYE and NIC will lie squarely with Sam’s employer who must ensure that they are paid before the deadline of Finally, Sam’s disposable income will reduce significantly by ?23,489.66 from ?53,572.92 to ? 30,083.26. This is because as an employee, the company Sam is working for should help him pay costs that are directly incurred in the cause of duty. Table 11- Comparison between self employment and employment Sam as a business person   Sam as an employee of West London Ltd Fees ?90,000.00   Salary ?76,996.30 Total expenses ? 4,885.00   Total expenses ?12,260.00 Add PAYE ? 23,813.10   Add PAYE ? 23,034.97 Add NIC (class 4 ) ? 7,384.98   Add NIC class 1D ? 11,174.06 Add taxable dividends ? 234.00   Add taxable dividends ? 234.00 Add Car Tax (178 g/km) ? 210.00   Add Car Tax (178 g/km) ? 210.00 Less those form charity ? 100.00   Less those form charity ? - Disposable income ?53,572.92     ? 30,083.26 From above analysis, Sam will be worse off in employment than when you were self employed. Therefore, he should try as much as possible to remain self employed to reduce his tax burden. References HMRC n.d. HM revenue and Customes National Insurance - the basics. [online]. Available at: http://www.hmrc.gov.uk/ni/intro/basics.htm [Accessed 13 November 2011]. HMRC1 n.d. PAYE and NICs rates and limits for 2011–12. [online]. Available at: http://www.hmrc.gov.uk/helpsheets/e12.pdf [Accessed 13 November 2011]. Read More