So it’s February and chances are you’ve just paid your personal tax bill. Having already paid your corporation tax.
As a small company director, it’s always useful to look at your combined tax bill (both personal and company) to ensure you’re not robbing Peter to pay Paul. So we asked Jonathan Amponsah of The Tax Guys to uncover ways you can reduce your tax bills and boost your cash balance this year.
Remember that even if you save £1,200 in tax, that’s money that you don’t have to work hard for. And if your day rate is £600, well that’s 2 days off work to spend with loved ones.
If you are a company director, here are 9 timeless ways you can cut how much tax you pay;
1. Proactive tax planning
Did you know that according to a research carried out by unbiased.co.uk, UK tax payers overpay their tax bills by a whopping £4.9billion? And the main reason is lack of tax planning.
Let me ask you this. When was the last time your accountant came up to you and said here are 5 ways to reduce your tax this year?
And when was the last time you went to your accountant and asked, how can I save £1,200 off my overall tax bill this year?
You see without these questions, it’s unlikely you will plan to reduce your tax bills.
2. Go beyond dividends & salary planning
Does your tax planning still revolve around minimum salaries and maximum dividends?
This used to work well until HMRC decided to reduce the tax free dividends allowance to £2,000 per year. So, if you find that some or most of your dividends are being taxed at the higher rate, then consider the following 3 actions:
- Bring family members on board commercially,
- Pay some dividends into tax exempt structures like Pensions,
- Use trusts.
3. Defend your self employment status
If you’re a contractor or consultant, defend your status by making sure you’re operating as an independent business and not a disguised employee of the end user. None of the tax planning ideas in this article will work if you are an employee.
Despite all the negative headlines about IR35, HMRC do find it difficult to win some of the cases that have gone to court and it’s not as easy as they may have you believe.
4. Claim all expenses
If you have a limited company, did you know that you can claim things like school fees, golf lessons and holidays though your company and save money?
Yes you can and HMRC allows you to do this through the benefit in kind system.
And don’t forget to claim these overlooked expenses
- Provision for director’s remuneration to be paid up to nine months after your accounting year
- Bad debt provision (make sure you have taken steps to recover the money)
- Interest paid, including on loans you have made to the business
- Use of home as office (reasonable amounts only to avoid more tax later)
5. Leverage all your tax allowances
There will always be tax free allowances within the UK tax system. And these are like your muscles. If you don’t use them, you lose them.
Did you know that if you add up the income tax allowance, capital gains tax allowance, savings allowance and dividends allowance, you get a whopping £26,000 plus allowances in the year?
That’s just for starters. And if you have a spouse or a child who are not using their allowances, then that’s a potential tax free income of £78,000 (26,000 x 3). Leverage and maximise these allowances every year.
6. Think capital not income
Historically, income tax rates have always been higher than capital gains tax rates. A timeless way to ensure you keep more of your cash is to plan your affairs so that you get taxed at the lower capital tax rates instead of the higher income tax rates.
Whilst this idea might seem like a no brainer, it needs careful planning because HMRC are quick to tax at income tax levels.
So let’s say you have a small company and you only need £3,500 per month to live comfortably. But your company has another £1,000 excess cash to draw on.
There is no point in taking this money out to be taxed at 32.5% income tax rate. You can leave it in the company as part of your working capital to later extract tax efficiently as capital gains at say 10% tax.
7. Keep proper records
As a small company director, it’s no fun collating and keeping all those pesky receipts.
But you also know that by not keeping your receipts or not having any other evidence to prove the expenses, you could literally be giving away your piggy bank to HMRC. So the next time you fail to get that VAT receipt, consider whether you will also dip into your pocket, grab those coins and throw them away.
The good news is that with so many apps on the market, the task of keeping proper tax records has become less taxing.
8. Consider a hybrid business structure
Structuring your business for tax optimisation goes well beyond choosing between a limited company or a sole trader.
You need to get this basic area right; have you thought of an LLP (limited liability partnership with you and your company as partners) or a group structure?
There are many tax benefits with a these two structures and they are not just for professional firms or big corporates. Speak to a tax adviser or your accountant about these.
9. Do it with an adviser
Tax rules change but there are always good tax advisers around. Fear of tax, busy lives and complicated tax rules are some of the reasons why tax payers overpay their tax bills.
Engage an accountant who can take the burden from you and who can ensure you keep more of what you earn. Yes, good tax accountants do not come cheap but the trick is to look at the return on investment you’re getting from the fee you pay them.
For example whilst you may pay £1,000 to a general accountant who will rightly tell you that entertainment is not tax deductible, a good tax adviser will usually lift the rocks and find you some exceptions to the general rule that allows you to claim the entertainment, ensuring you get more from your relationship with them.
About the author
This guide has been written exclusively for ByteStart by Jonathan Amponsah CTA FCCA, and CEO of The Tax Guys. He is an award-winning chartered tax adviser and accountantwho advises business owners on entrepreneurial tax reliefs. Jonathan is a regular ByteStart contributor and is other tax-saving articles include;
- 10 Things Savvy Entrepreneurs Do to Reduce Their Tax Bills
- How to Cut Your Accountancy Bill
- 9 Ways to Make Christmas Tax Deductible
More tax help on ByteStart
ByteStart has lots of help and advice on all aspects of tax for small businesses, try some of our most popular guides;
- 10 Tax-Saving Ideas for Small Business Owners
- How are Limited Company Dividends Taxed?
- 10 Common Self-Assessment Tax Return Mistakes & How to Avoid Them
- Setting Up Accounts for a Sole Trader – A Beginner’s Guide
- Understanding Your Accounts – The Key Numbers & What They Mean For Your Business
- A Guide to Bookkeeping for New Business Owners
Funding your business
- How to Choose the Right Business Loan
- A Start-Up’s Guide to the Seed Enterprise Investment Scheme (SEIS)
- How the Enterprise Investment Scheme (EIS) Can Help You Raise Funding to Grow Your Business