Dividend and Corporation Tax Calculator

We have added a simple dividend and corporation tax calculator on our main dividend page on the website.

The calculator contains the following input fields:

  • Company Revenue
  • Salary
  • Other Running Costs & Expenses
  • Corporation Tax Rate
  • Financial Year

and calculates the following:

  • Company Net Profit
  • Corporation Tax Due
  • Net Dividend Amount (money available for dividends)
  • Dividend Tax Credit
  • Extra Personal Tax to Pay

Using the calculator is really easy, you just have to enter or select values to see the output. You don’t even have to click a submit button as the calculated values change dynamically.

The calculator works for basic and higher rate tax payers ie incomes up to £150,000 per year.

A bit about dividends

Dividends provide an efficient way of extracting funds from a limited company because they are not subject to national insurance (NI). For this reason, it is common for IT contractors, for example, to pay themselves a very small salary – something in the region of £7000 per year – and to take the rest of their income in the form of dividends.

If your salary plus dividend income comes to less than the higher rate tax threshold (about £32000 for the financial year 2013-2014), there is no tax at all to pay. On the other hand, if your dividend income takes you annual earnings over the tax threshold, you will have to pay some additional tax.

For example, if your salary is £7000 and your dividend income is £30000, giving a total income of £37000, you will have to pay 25% tax on £5000 (£37000 – £32000), which comes to £1250.

 

Sage Accounting / Bookkeeping Software and Services Review

Sage LogoSage (www.sage.co.uk) is the biggest player in the accounting software market in the UK and offers a range of solutions to suit different businesses, ranging from tiny one-person companies to large multi-nationals. As well as accounting software, the company offers a range of financial/business software, covering the following areas:

 

  • Finance
  • CRM
  • Enterprise Resource Planning (ERP)
  • Accountants and Bookkeepers
  • HR and Payroll
  • Retail and eCommerce
  • Manufacturing
  • Planning and Forecasting
  • Service Management
  • Construction

The area that we will look at in this review is the Finance software as this includes Sage’s accounting and bookkeeping software offerings. The list below is not exhaustive, and you should visit the Sage website to see the full range of products and services available.

Sage Finance Software

According to Sage’s website (see above for link), the company has 30 years’ experience in the area of finance software, and has hundreds of thousands of users. The company offers several accounting/bookkeeping software solutions, and there should (within reason) be something that is suitable for most businesses. In this review, we’ll look at the accounting / bookkeeping solutions that the company offers that are suitable for small to medium sized businesses.

Sage One Accounts (online accounting service)
This is a single-user online accounting service that lets you create invoices, submit your VAT return and track who owes you money. It is ideal for very small businesses with between one and five employees. Price starts from £10+VAT per month. Support: 24 hour telephone and email support included in the price of the service. Free Trial: Yes

Sage Instant Accounts (bookkeeping software that you install on your computer)
Easy-to-use single-user bookkeeping software for small businesses of up to 50 employees. The software is available for one-off payment starting from £130+VAT. Support: Free support for 45 days. Free Trial: Online free Test Drive service that lets you try out the software using real sample data.

Sage One Accounts Extra (online accounting service)
A multi-user (up to 20) online accounting service suitable for businesses that have between five and 20 employees. The price of this service is £25+VAT per month. Support: 24 hour telephone and email support included in the price of the service. Free Trial: Yes

 

Sage 50 Accounts (accounts software that you install on your computer)
Accounts software to help simplify and manage your day-to-day finances, customers, suppliers and VAT. This software (for two users) is ideal for established small to medium sized businesses (with up to 50 employees) who need to take more control of their finances. The software is priced from £619+VAT. Support: Free 45 days SageCover support. Then, from £15.50 per month. Free Trial: Online free Test Drive service that lets you try out the software using real sample data.

Sage One Cashbook (online service)
This is an online service aimed at sole traders who are looking for a simple cash-based accounting tool. It offers a single user license and is suitable for businesses that have a maximum of five employees. Starting at only £5+VAT per month, this online service offers an affordable solution for people who are looking for a simple accounting product. Support: 24/7 telephone support team as well as email support and the online help centre. Free Trial: Yes, free 30 day trial.

Sage Instant Accounts Plus (accounts software that you install on your computer)
This software is aimed at very small businesses (up to 50 people) who are looking for a basic bookkeeping software application that enables them to keep track of stock, sales and other day-to-day finances. This two-user software is available for a one-off fee starting at £215+VAT. Support: Free telephone support for 45 days. Free Trial: Online free Test Drive service that lets you try out the software using real sample data.

Sage 50 Accounts Plus (accounts software that you install on your computer)
Heavy weight accounts software to manage finances, customers, suppliers and VAT, with additional stock, project costing and pricing tools. This accounting software is ideal foe established small to medium sized businesses who are able to take control of their own finances, to manage stock and flexible pricing options and project costing. The software allows for two users and is suitable for businesses of up to 50 employees. The price of this software starts at £899+VAT. Support: Free telephone support for 45 days. Free Trial: Yes, online test drive.

Sage 50 Accounts Professional (accounts software that you install on your computer)
This really is the daddy of the bunch, and offers accounts software for managing finances, customers, suppliers, and VAT. The software features purchase order, sales order and foreign trading tools, and is suitable for established small to medium sized businesses who want to take control of their day-to-day finances, to produce sales and purchase orders and trade overseas. As you would expect, this software comes at a fairly hefty price starting at £1219+VAT. It allows up to 10 uses and is suitable for businesses with up to 50 employees. Support: 45 days free support. Free Trial: Yes, online test drive.

Which Sage Product Should I Choose?

You can see from the list above that Sage gives you plenty of choice when it comes to accounting / bookkeeping software. The possible problem, if you decide to go down the Sage route, is knowing which product is right for you. One of the features on the Sage website though is the option to compare similar Sage products with each other, which will probably help you to narrow down the possibilities.

Also, if you look at the above list of products, you’ll see that some are available as online accounting solutions, whilst others are available as downloadable software that you install on the computer. Whether you prefer online (web-based / cloud) solutions or the more traditional approach whereby you install the software on your computer is really a matter of taste. Note though that the online versions have ongoing free support, whereas the installable software comes with free support for a fixed period of times and then you have to pay for support.

Draw up a list of all the accounting / bookkeeping activities that you know you need to be able to do and then go through the various products and draw up a short list of two or three and try them out.

Free Trials

As mentioned above, all of the accounting and bookkeeping solutions offer some sort of free trail or software test drive. As you’ll notice, I have not included any screen captures in this review. The reason for this is because in order to gain access to either a free trial or test drive, you have to enter a lot of details about yourself – more than I think is necessary in order to carry out a trial of the software. For that reason, I decided not to register.

Other Accounting Software Reviews

You might be interested in reading the following review(s):

Clear Books

KashFlow

All Accounting / Bookkeeping Software Reviews

Clear Books Online Accounting Software Review

ClearBooks LogoClear Books (www.clearbooks.co.uk) is online (web-based / cloud) accounting software aimed at small businesses (limited companies), sole traders, and accountants.

Features

Clear Book features include a dashboard giving you visibility of all your accounts and payments, tailored invoicing, reporting that you can export in PDF or CSV format, the ability to import bank transactions, integrated payroll, and online filing of VAT returns directly to HMRC.

 

Invoicing
Clear Books includes a ‘theming’ tool that lets you create customised invoices yourself, or you can choose from existing pre-defined themes, many of which have been created by Clear Books users. You can also set up email reminders that are automatically sent to customers who are behind on their payment(s).

Banking
An tool enables you to import transactions into the Clear Books software, and also allows you to re-create bank statements. By providing explanations to the software at the time you import a transaction, Clear Books can learn from that and auto-fill transaction details the next time a similar transaction is imported. As well as being able to import bank statements, you can also import credit card statements and PayPal statements.

Accounting
Accounting features include visibility of your businesses monthly profit and loss statement, your company’s balance sheet so you can see how much cash you have, how much money you are owed, and how much you owe. The software also includes a full general ledger audit trail containing all of your accounting transactions.

VAT
Clear Books is able to handle VAT-registered and non-registered businesses, and is also able to handle businesses that are using the VAT Flat Rate Scheme. The software also generates a VAT report that you can use when submitting your quarterly VAT Return.

Construction Industry Scheme (CIS)
The Construction Industry Scheme (CIS) is how HMRC ensures that subcontractors are taxed correctly on payments they receive from primary contractors working in the construction industry. Clear Books supports CIS recording for both contractors and subcontractors, verification with HMRC of a subcontractor’s details, and preparation and online submission of a contractor’s CIS Returns.

Manage Your Contacts Online
Clear Books lets you easily keep track of your suppliers, customers and any other contacts. You can send a staement to customers via email so they can see the current state of their account, including a list of invoices they have paid, and those still to be paid. For each contact you can set up default VAT rates, account codes and other items to speed up invoicing.

Adding a New Customer in Clear Books

Adding a New Customer in Clear Books

Integrations, Plugins and Add-ons
To help streamline your business, Clear Books lets you integrate and connect plugins and add-ons such as payroll software.

Pricing

Clear Books comes in three flavours to suit different sizes of business, slightly different levels of service and functionality being available for each one. The three levels of pricing are:

MIcro – £9+VAT per month
Expansion – £19+VAT per month
Connect – £39+VAT per month

Free Trial

Clear Books comes with a 30 day free trial, which gives you plenty of time to play with the software, although I did have a very slight problem logging in the first time because I either didn’t receive or accidentally deleted (probably this one) the email asking me to verify my email address. You can just get this resent though, so not an issue.

 

When you first log in you are taken to your dashboard, which shows your sales and customers, purchase and supplies, bank accounts, financial reports, and VAT. This is very nice as it gives you an overview of your businesses financial affairs all on one page.

Partial View of Clear Books Dashboard

Partial View of Clear Books Dashboard

If you’re not sure where to go from here, you can click on the Need help? link at the top right of the screen and that gives you access to some nice, easy, quick start guides.

As with all software with this level of functionality, you need to sit down and spend some serious time using the application to find out its true capabilities. This is why it’s good to have a whole month in which to evaluate the software.

Support

Support for the product looks as though it’s pretty good. There’s the usual FAQs, but there’s also community discussion link, as well as a good selection of tutorials and guides. You can also email support questions or give them a call.

Conclusion

Clear Books is a good accounting package that will suit a lot of small businesses. The software is intuitive and easy to use and contains a lot of functionality. I particularly like the Dashboard, which gives you an overview of the current financial state of your business.

Value for money? If you can get by using the Micro version of the software at only £9+VAT per month then, yes, I think the product offers excellent value for money.

Other Accounting Software Reviews

You might be interested in reading the following review(s):

KashFlow

Sage

FreeAgent

Xero

All Accounting / Bookkeeping Software Reviews

Accounting and Bookkeeping Software Reviews

Welcome to our accounting and bookkeeping software review page. Here, you’ll find a list of accounting/bookkeeping products along with short descriptions and a link to our review of the software in question. Use this list and the corresponding reviews to compare the products available on the market to see which ones best suit your requirements.

Name Brief Description Price* Link to
Review
Clear Books Online (web-based / cloud) accounting software that offers good functionality, including a useful dashboard that gives you visibility of the current state of your company’s finances.The software also offers tailored invoicing, reporting (PDF or CSV), the ability to import bank transactions, integrated payroll, and online filing of VAT returns. Per month:
Micro:£9+VAT
Expansion:
£19+VAT
Connect:
£39+VAT
Clear Books
Earnings Tracker Very basic bookkeeping software aimed at one person limited companies such as IT contractors. Good for calculating dividend payments; can be used as a calculator. Not a fully blown accounting package. Can be used online (web-based / cloud) or downloaded and installed. Free Earnings Tracker
Free Agent Online (web-based / cloud) accounting software for limited companies, sole traders and partnerships. Lets you keep track of tax, file VAT returns, see you owes you money, import bank transactions, complete your Self Assessment Tax Return, plus much more. £15+VAT, £20+VAT, or £25+VAT per month Free Agent
KashFlow Powerful online (web-based / cloud) accounting software containing a lot of functionality. Aimed at small to medium sized companies requiring good, robust, financial software. Good product support. £18+VAT per month KashFlow
My Bookkeeping Manager Online bookkeeping software for tiny limited companies, typically IT contractors. Easy to use, but basic, accounting functionality that aims to just provide the financial facts and figures required by such companies. Good for calculating dividends, VAT (Flat Rate Scheme) and corporation tax. can also handle non-VATable income. Single Payment of £3.49 My Bookkeeping Manager
Sage Sage offers a lot of financial products and services, including a large range of accounting and bookkeeping software – both online (web-based / cloud) as well as more traditional software that you can install on your computer. Various – see review Sage
Xero Xero is an online (web-based / cloud) accounting software that is claimed, by its owners, to be the World’s easiest accounting software. The product offs a good range of features, including a real-time view of your cashflow, the ability to import bank transactions, as well as being able to create and send invoices. There are also add-ons available. £9+VAT per month, £20+VAT per month, and £25+VAT per month Xero

* These are the prices that were in place at the time we carried out the software review. Although we do try to keep the prices up-to-date by visiting the product websites from time to time, it is possible that some of the prices are out of date.

When choosing accounting / bookkeeping software for your business, draw up a list of the features you need the software to have. Although, all the products reviewed here offer good value for money, there is no point in paying for functionality that you don’t need and will never use.

There is no such thing as the “best accounting software” because in most cases it will be a personal choice – some software applications will just feel better than others, and will be easier and more intuitive for you personally.

The reviews we have included are fairly high level and are designed to give you a feel for the software. Look through the reviews and pick maybe three or four applications, sign up for free trials, and then see which suits you the best. Try to use sensible data when testing an application in order to get as accurate a feel for whether the software will suit your needs.

Earnings Tracker Basic Bookkeeping Software Review

Earnings Tracker (www.dixondevelopment.co.uk/earningstracker.htm) is a very basic, free, bookkeeping application that can be used online (web-based / cloud) or downloaded and installed. In fact, it’s so basic that you could even refer to it as a financial calculator on steroids ! It is software that is well and truly aimed at tiny limited companies that have only one or two employees, for example IT contractors.

 

As with the KashFlow online accounting application, Earnings Tracker was set up in 2005, again in response to a requirement for an accounting/bookkeeping tool to fit a particular need. Unlike KashFlow though, Earnings Tracker is still very much a niche product with only a few hundred, rather than a few thousand, users. That’s not to put the product down though – it has a place in the market and it serves that market very well.

Features

As mentioned above, Earnings Tracker is designed for use by tiny limited companies and as such its feature set has been designed with those types of company in mind. If you’re looking for a fully featured accounting application that lets you keep track of stock and has a profit and loss account, etc, this is not the accounting application for you. If, on the other hand, you’re interested in knowing the size of dividends you can take, or how much corporation tax you owe, Earnings Tracker might be the right choice for you.

Earnings Tracker tends to not use traditional accounting terminology, but instead uses terms such as ‘money coming in’ and ‘money going out’ when adding financial data.

Add new month to Earnings Tracker

Add month screen for Earnings Tracker bookkeeping software

On the main ‘Add Month’ screen, shown above, you can add up to eight invoices per month, plus up to six ‘other revenue’ amounts, which would be things such as Google AdSense revenue or any other revenue for which you have not raised an invoice. You can record the total salary figures (including the amount of tax and NI paid) for the month, plus items such as accountancy fees, dividend payments, and other expenses. If you’re an IT contractor, you may well find that the data you have to add, and the resulting information that is churned out, is right up your street.

Setting Default Data
To speed things up slightly while you’re using the software, you can add some default data, which are values that remain fairly constant from one month to the next, for example, the salary that you draw from the company, your accountancy fees, tax rates, and so on.

Setting up default data in Earnings Tracker

Setting up default data in Earnings Tracker

Viewing the Main Financial Spreadsheet
When you add a new month to the software, it is added to a financial spreadsheet that contains one row per month, and which also spans years. This is useful for being able to compare figures for different years.

Earnings Tracker Monthly Spreadsheet

Earnings Tracker Monthly Spreadsheet

Recording Dividend Payments
If you’re an IT contractor you will almost certainly make dividend payments to yourself and perhaps one or two other shareholders, unless of course you are caught by the awful IR35, in which case you will have to take all of your company’s revenue (within reason) as salary.

Earnings Tracker calculates the size of dividends that can be paid to shareholders based on the revenue, salary and expenses figures you enter when adding a new month to the software, it then lets you record dividends and create dividend tax vouchers.

Create a dividend tax voucher and maintain dividend payments

Create a dividend tax voucher and maintain dividend payments

As dividends can be paid out of retained earnings held in the company ie profit that has been built up over the years, and Earnings Tracker works across multiple years, you can easily see at any stage what funds are available in the company for dividend payments.

Financial Reports
Earnings Tracker lets you generate a range of reports, for example, a list of invoices, expenses, dividends, and so on. These can then be exported in .csv format so that they can be imported into a spreadsheet package such as Microsoft Windows.

Pricing

Here’s the really good bit – Earnings Tracker is completely free – just go to the website (see above for address), register, and away you go. You can either use the online version or, if you prefer, download the software and install it on a web server (this requires a bit of effort, but it’s not too difficult).

 

If you are feeling really adventurous, you can even edit the source code to create your own customised version of the software. You need to be comfortable with PHP and MySQL in order to do this though. But, if you mess it up, you can just download the software again, so there’s nothing to lose really.

Support

Remember, this is free software, so don’t expect huge amounts of technical support. There is an email address though, and if you contact the support department you will get a response.

Conclusion

Earnings Tracker is aimed at a very specific market – one person limited companies. If this isn’t you, you’ll probably be wasting your time with this software. If you are an IT contractor though, it might be worth setting up an account because, if nothing else, you can use the software as a dividend, corporation tax, and VAT (Flat Rate Scheme only) calculator.

Other Accounting Software Reviews

You might be interested in reading the following review(s):

All Accounting / Bookkeeping Software Reviews

 

KashFlow Online Accounting / Bookkeeping Software Review

KashFlow LogoKashFlow (www.kashflow.com) is a very popular online (web-based / cloud) accounting / bookkeeping software applications for small and medium sized businesses on the market today, and has grown over the years to its current standing whereby it has tens of thousands of users.

 

The application was initially developed in 2005 by the founder and current CEO, Duane Jackson, an ex web developer who at the time needed a suitable accounting package for his own use. He developed KashFlow, which was almost called Lollymate, and soon found that other small business owners were interested in the product. Duane gradually added new functionality, with help from the Prince’s Trust, and slowly the software has developed into the accounting application we have today.

Summary of the main KashFlow features

Here is a quick list of the main features of KashFlow. As you would expect, you can find out more information about the features on the KashFlow website (see link above).

  • Invoicing
  • Quotes and Estimates
  • Purchases
  • Customers and Suppliers
  • Reports
  • Banking
  • Credit Control
  • Settings
  • API and Integrations
  • Accounting (miscellaneous)

Invoicing
You can edit and customise invoices, and set up the system so that they are generated automatically. The software can also notify you when they become overdue.

Quotes and Estimates
You are able to easily create quotes or estimates, or pro-forma invoices.

Purchases
You can set up both individual purchases and recurring purchases, and notify suppliers by email when you’ve paid them. You can also scan and upload attachments relevant to your purchases, and pay multiple purchases with a single transaction.

Customers and Suppliers
KashFlow lets you record details about all your customers and suppliers, including details about invoices relating to them. Information can be printed or exported in PDF or CSV formats.

The initial screen to add a new supplier in KashFlow

The initial screen to add a new supplier in KashFlow

Reports
A range of reports can be generated, including: profit & loss, balance sheet, and trial balance.

Banking
You can set up all of the bank accounts you use, whether personal (for expenses) or business, and view their balances on the KashFlow dashboard. Repeat transactions can be set up and you can quickly record transfers between accounts. Bank transaction information can be exported/imported in CSV format.

Adding a new bank account in KashFlow

Adding a new bank account in KashFlow

Credit Control
Quickly see how much money you are owed and what is overdue. The software lets you create pre-written reminder letters, which can be sent automatically to someone who is late settling an invoice.

Settings
In order to keep the software as easy-to-use as possible, a lot of the functionality can be switched off if you don’t need it.

APIs and Integrations
KashFlow has a secure interface that allows other programs to enter data into your account and/or retrieve data. As well as being able to integrate with a number of pre-made addons, there is a full-featured API that lets people build their own integrations.

Miscellaneous Accounting
The software also contains functionality that doesn’t neatly fit into the other sections listed above. The software supports a number of different VAT schemes, including Standard VAT, Cash Accounting and the Flat Rate Scheme. If you are a contractor or sub-contractor, KashFlow also works in conjunction with CIS.

Pricing

At the time of writing this post (January 2014), KashFlow costs £18 + VAT per month. There is a two week free trial though, as detailed below. (Note: I think there is a limited offer whereby the software is slightly cheaper, which runs until July 2014.)

Free Trial – using the software

So that you can try before you buy, you can use KashFlow for free for 14 days. This isn’t very long though – a month would have been better – so if you intend to try the software, make sure you start playing around with it as soon as you’ve registered. There’s a lot of functionality to try and you may well find that you run out of time – ie your trial ends – before you’ve tried everything. I find the best thing to do when I’m testing a bit of software is to try to complete certain tasks rather than randomly clicking on buttons and links.

 

Registering is straightforward, which is what you would expect from an online (web-based) application. You have to provide the usual user name and password, plus a ‘memorable’ word. Make sure you use a word that you can remember though because you will have to enter three characters from that word whenever you log on.

Once you’ve registered you are taken to an opening page where you can optionally set up some company details, such as your company name, address, business type and whether you are registered for VAT. If you don’t want to do this at this initial stage, you can come back to it any time you want to,

This moves you onto the Getting Started page, which gives some very quick instructions on what you can do along with links to popular tasks. (Note – if you ever want to get back to the Getting Started page, click the Overview link in the top right hand area of the screen.)

KashFlow Getting Started screen

Part of the KashFlow Getting Started screen

You’ll probably need to spend a bit of time finding your way around the software, which is to be expected for a program as sophisticated as KashFlow. Try to use the software properly, ie set up one or two customers, create a few invoices, create a few reports, and so on. This way you’ll get a feel for whether the software suits your business. (Note: A day or so after I registered, I received an email from KashFlow that contained some useful links as an aid to using the software.)

On the whole I found the screen layout to be clear and the navigation to be straightforward. On some screens though the text seems a bit light – too light for me in fact – I like text to be dark on a light background.

Support

If you need a bit of help with the software, click the Support button in the top right hand area of the screen. From here you can download the KashFlow user guide or, if you have a specific query, search the knowledge base for an answer. If you are still stuck, you can send an email to the support department. You can also call them up if you need to.

Conclusion

KashFlow is powerful accounting software and it will suit many small and medium-sized businesses. If you’re an IT contractor though, or someone whose accounting/bookkeeping requirements are very basic, you may find that you won’t have any need for a lot of the functionality on offer which, after all, you will be paying for. If this applies to you, you might be better off looking at a very basic bookkeeping tool such as Earnings Tracker.

Does KashFlow offer value for money? Yes, I would say so – you get a lot of accounting functionality for your money. Remember though, £18+VAT per month adds up, and you’ll be looking at £259.20 per year, which takes you into the Sage accounting arena. If you intend to use most of the features on offer though, you’ll probably be getting your money’s worth.

Other Accounting Software Reviews

You might be interested in reading the following review(s):

Clear Books

Sage

All Accounting / Bookkeeping Software Reviews

Keeping an Eye on the Figures

 

Whether you are running a huge multi-national company or a tiny micro-business, it is essential that someone in the organization is keeping a close eye on the figures – essentially, how much money is coming in and how much is going out. In a large business, it may be a whole team of accountants and accounts clerks who are responsible for keeping track of the figures, but in a small business, it will often be the person or people responsible for the day-to-day running of the business who have to make sure that the figures are in order.

Cash Flow

Cash flow is quite possibly the single most important aspect of any business and can, when things go wrong, cause businesses to go under. Sometimes, even when a business is making plenty of sales, it can still go gust.  However, making plenty of sales and having money in the bank is not the same thing. It’s quite possible that you are signing plenty of deals but until you collect the money you can’t, in many cases, afford to spend it. Consequently, if sufficient money isn’t flowing into the business to satisfy creditors and suppliers when it’s needed, then trouble is probably on the horizon. In such circumstances, even profitable businesses can go bust.

Here are a few reasons why poor cash flow can cause businesses to get into difficulty:

  • Focusing on profit instead of cash flow (for example, a business whose fixed assets base is high and/or requires high working capital is likely to require more of the profits to be reinvested back into the business, thus reducing the cash available to service debts)
  • Ignoring the relationship between receivables and payables
  • Paying a supplier too quickly (always look at the terms of a contract and leave paying a bill for as is contractually acceptable)
  • Carrying surplus stock (until you sell a piece of stock it hasn’r made any money for you, and may well be costing you money in storage costs)
  • Being too slow to invoice (always get your invoices out as quickly as you can – the sooner you invoice, the sooner you will be paid)
  • Giving credit to the wrong customers (not always easy to avoid, but don’t ever get caught twice)

Gross Profit

Gross Profit is the difference between what an item costs and what it sells for. So, for example, if you pay £1 for an item, and you sell it for £5, the gross profit is £4.

If there are costs associated with, for example, the production of a product or service, these costs will play a part in the gross profit. For example, if a product costs £1 to buy and a further £1 to modify before it can be sold, and you sell it for £5, the gross profit will now be £3.

Gross Profit Margin

The gross profit margin is expressed as a percentage and is what remains from sales after a company pays out the costs of producing a product or service.

To obtain gross profit margin, divide gross profit by sales.

So, looking at the example above, if you receive £5 for the sale of an item, and it costs £1 to buy and a further £1 to modify, the gross profit margin will be:

Step 1: £5 – £1 -£1 = £3 (this is the gross profit)

Step 2: (£3 / £5) x 100% = 60% (this is the gross profit margin)

So, 60% gross profit margin means that for every £1 generated in sales, the company has 60 pence left over to cover operating costs (see below) and profit.

Here is a link to a Gross Profit Margin Calculator.

Net Profit

Net Profit is the difference between what an item sells for (£5 in our example above) and the costs associated with selling it. Here is an example:

Step 1: Add costs like rent, power, wages, advertising, delivery, and loan interest. These are the operating costs.

Step 2: Divide this figure by the number of items that you have (to sell). For example, £800 divided by 1700 (items) is 47 pence.

Step 3: Add this figure to the basic costs associated with the item (£2 + 47p = £2.47), giving you a net profit of £2.53 pence per item (£5 – £2.47).

Note that net profit is always smaller than gross profit.

Retained Earnings

Retained earnings refers to money that has not been paid out to shareholders in the form of dividends (see below for more information about dividends), but has instead been kept (retained) in the business. This money could then be re-invested in the business, for example, by training staff, buying new equipment, paying off debt, etc.

If the money is left in the company, it can be referred to as retained profit – money that has been kept in the company after all taxes, etc have been paid. It could then be used in future years, either to make dividend payments or to re-invest in the business.

If a business makes a loss, that loss is retained and called retained losses, accumulated losses or accumulated deficit.

Corporation Tax

Corporation Tax is a tax on the taxable profits of limited companies and other organisations including clubs, societies, associations and other unincorporated bodies. In the example given above, the taxable profits would be the net profit.

Taxable profits for Corporation Tax include:

  • profits from taxable income, for example, trading profits and investment profits (except dividend income which is taxed differently – see below for more information about dividends)
  • capital gains – known as ‘chargeable gains’ for Corporation Tax purposes

If a company or organisation is based in the UK, Corporation Tax will have to be paid on all the taxable profits of that company – irrespective of where in the world those profits are generated.

If a company is not based in the UK, but operates in the UK – for example through an office or branch (known to HMRC as a ‘permanent establishment’) – the company will only have to pay Corporation Tax on any taxable profits arising from its UK activities.

Corporation Tax – Financial Years

For Corporation Tax, the tax year is called the ‘financial year’ or ‘fiscal year’ and runs from 1 April to 31 March. This is different from the tax year for individual UK taxpayers, which runs from 6 April to 5 April.

Corporation Tax – Rates

There are currently two rates of Corporation Tax, depending on the size of a company or organisation’s taxable profits:

  • the lower rate – known as the ‘small profits’ rate
  • the upper rate – known as the ‘full’ rate or ‘main’ rate

There is also a sliding scale between the lower and upper rates known as ‘Marginal Relief’.

This means if a company or organisation’s profits fall between certain limits, it pays the full rate of Corporation Tax, which is then reduced by Marginal Relief.

Current rates of corporation tax for the financial year 2013-2014 are:

Small Profits Rate (up to £300,000 profit) = 20%
Marginal Relief Lower Limit = £300,000
Marginal Relief Upper Limit = £1,500,000
Main Rate of Corporation Tax = 23% (this will drop to 21% in 2014-2015)

Here is a link to a corporation tax calculator.

Dividends

Dividends provide a tax-efficient way of extracting funds from a company to make payments to shareholders of that company. In order for a dividend payment to be made, a company must have made sufficient net profit (see above) in either the current year, or have sufficient retained earnings in the company to allow the dividend payment to be made. For example, if a company has a gross profit of £10,000, corporation tax will be £2000 (using 20% as the corporation tax rate), leaving £8000 that can be distributed to shareholders in the form of dividends.

Dividend Tax Vouchers

When a dividend payment is made, a tax voucher must be raised and issued to the shareholder. In days gone by, this would have been done by post, but these days it is common to issue tax vouchers electronically.

The dividend tax voucher shows the size of the dividend and the amount of tax credit. The tax credit shows the amount of tax paid by the company on behalf of the shareholder. Dividends are paid after tax (at the basic rate) has been deducted. If you are a higher rate tax payer, you will probably have additional tax to pay on the dividends you receive. This will often be worked out by HMRC at the time of completing your self assessment tax return.

References

Corporation Tax – HMRC website

IT Contractor Expenses – Other Business Expenses

In addition to the expenses that we looked at in earlier posts, namely accommodation, travel, and subsistence, there are other business expenses that you might be able to claim during a contract assignment, or whilst trying to secure a contract. As with any expenses though, if you are unsure whether you can legitimately claim them, check with your accountant. For an overview of contractor expenses, see the Introduction.

The list of possible ‘other’ business expenses is:

  • Accountancy Fees
  • Approved Childcare Schemes
  • Bank Charges
  • Broadband
  • Business Insurances
  • Charitable Donations
  • Clothing
  • Computer and Other IT Equipment
  • Company Credit Card (fees associated with)
  • Company Secretary
  • Company Vehicles
  • Dry Cleaning
  • Entertaining Clients
  • Expenses incurred whilst trying to secure new contracts
  • Mobile Phones
  • Pension Scheme
  • Renting
  • Salary
  • Stationery
  • Subscriptions and Memberships
  • Training
  • Use of home for business purposes
  • Website Design and Hosting

MyBookkeepingManager Website Relaunch

Well, it’s now December 19th 2013 and I’ve finally relaunched the MyBookkeepingManager website.

I’ve added a new CSS style sheet and updated various bits of text that were either out of date, or were in need of approving. I’m quite please with the new look of the site – I think it’s more modern and fresh than the old design, and will hopefully encourage visitors to the site to hang around for a little longer.

The site itself is now three years old, and I think it’s about time that I put some serious effort into making the MyBookkeepingManager product work – I have to admit that I haven’t done much with it since I originally developed the MyBookkeepingManager accounting software and accompanying website, but I think the time is right to give it a go.

It will be difficult though as the market is flooded with plenty of competition, but I do genuinely feel that MyBookkeepingManager offers something a bit different to other products on the market.

Now that the hosting site is done, I can start to think about updates to the actual software itself. I have a few ideas about what I want to do next year – perhaps adding some invoicing functionality or perhaps modifying the dividend tax voucher so that it also includes board meeting minutes…. all food for thought.

I might also look at the visual design of the software, bringing it in line with the website. I also would like to add some HTML5 features.

IT Contractor Expenses – Subsistence

In the introduction, we took a look at contractor expenses and how they can be used to legitimately reduce a company’s corporation tax bill. In this post we will look at subsistence expenses in more detail. If you want to know about travel expenses, click here; if you want to know more about accommodation expenses, click here; if you want to know about other business expenses you might be able to claim, click here.

Subsistence claims are allowed if you have travelled in the course of your business, so long as you can prove that it was necessary to purchase a meal or drink whilst carrying out your contracting duties. You will need to keep receipts to support any claims you make.

Whilst claims for hot or cold drinks and food are allowed, HMRC will not accept claims for alcoholic drinks unless they are purchased as part of an evening meal.