Not all accountancy firms were created equal. Whether you know it or not, a lack of sound proactive advice from your accountant could be costing your business (and you!) money.
Marden & Co are changing accountancy to focus on the things that count. As Foxton’s changed the face of estate agency, and MetroBank changed the banking gets done, we’re doing the same for payroll, bookkeeping and professional accountancy services.
Here’s some taster sample advice on company bonuses and expenses to get you started.
How should we handle bonuses?
So your accountant has began preparing your year-end figures. They ask you about unbilled liabilities that are due in the coming year. Should you mention staff bonuses? If you did, what will be the impact on the company tax bill…
If staff and Directors of your company have bonuses based on company performance in any given year, then these should be incorporated as an expense when calculating the profit for the given year if:
Bear in mind that tax relief for a bonus isn’t permitted unless they are paid within nine months of the end of the financial year they were due for. Otherwise HMRC have no problem in working in this way.
Here’s an example. Acme Ltd’s financial year ends on 31 December. For 2018 it calculates bonuses for employees are £100,000 in total, but actually doesn’t pay them until October 2019. So, while the accounts for the year ended 31 December 2018 show the bonuses as an expense, Acme doesn’t receive tax relief for them from its corresponding corporation tax bill. Instead, it must wait until it pays its CT for the 2019 accounts.
Income and expenditure
For most business accounts must be prepared on an accrual basis which means taking into account income earned (even if not received) as well as expenses incurred (even if not paid). So preparing your annual accounts is not simply a matter of us adding up income and expenses in a given year as this will present a skewed picture of how the business has performed and have an impact on tax payable.
Be aware of pitfalls
Accounting rules for bonuses are the same for both directors and employees. However when it comes to tax, there is a notable difference in classification between the two. A director is considered to have been paid a bonus when it shows in the company records, so for example once approved by the board, even before payment has been made or the director isn’t allowed to make the withdrawal until a later date. So, this can mean the company is liable for the PAYE and NI before a director has even been paid the money.
But here’s a handy tip from Marden & Co… as this doesn’t apply to employees bonuses then your company could chose to accrue them as an expense for accounting and corporation tax purposes. In this case PAYE and NI isn’t payable until the employees can draw the bonus (which usually means an issue in their salary).
Before your annual accounts are drafted, double check legal or constructive obligations to pay bonuses to directors or other staff. If these are present then notify your accountant to ensure they are represented in the accounts to allow tax relief to be claimed. Working in this way will also serve as a reminder to account for the PAYE and NI on directors’ bonuses before getting into any trouble with HMRC.
Marden & Co do employ a strategic approach with various courses of action personal situation to ensure that your business maximises the legal tax saving opportunities available to you. We are always willing to go that extra mile to offer advice on areas where you can restructure things just a little, to make a large saving.
Get in touch with Marden & Co today – you can give us a call on 01737 851761 for a no-obligation chat or drop us an email on firstname.lastname@example.org