Operating through a limited company structure is usually the best way, for a self-employed individual, contractor or entrepreneur to legitimately and compliantly maximise your tax efficiency. This is because you can take remuneration through an efficient mix of salary and dividends and claim a wide range of legitimate business expenses.
Here are some top tips that could help you save tax either through your limited company or personally through your self-assessment.
Tax-Free Dividends Can Make a Huge Difference to Your Take-Home Pay
As a UK taxpayer, you can receive £2,000 of dividends tax-free per year on top of your ‘personal allowance’. Therefore it’s always best to take this irrespective of your salary.
Take Advantage of Lower Tax Rates
You can earn up to £50,000 in the current tax year ended 5th April 2020 before higher rate tax is charged, and maximise your allowances with a salary and dividend split.
Make Sure Your Contract is Outside IR35
It’s always best to ensure your individual contract you have with your end client or agency is outside of IR35. Your dedicated accountant will be able to advise you on this.
Take Advantage of Flat Rate VAT
Taking advantage of the flat rate VAT scheme in your first year of business can increase your income. This is because you would collect 20% of VAT on top of your daily rate, but only pay 15.5% to HMRC.
Sharing Company Ownership with a Spouse
Sharing part of the ownership of your company with a spouse can reduce the tax you pay personally and potentially keeping you out of the higher rate tax-bracket altogether. It is recommended that your spouse has an active role in the business, ideally as a fee-earner.
Marriage Allowance can Reduce Tax Burden
You may instead be able to utilise the marriage allowance by transferring any under-utilised allowance to or from your spouse. This can reduce your tax burden by up to £250 per year (Up to 10% of the personal allowance at 20%). This is not applicable to higher rate taxpayers.
Claim Back Your Expenses
A number of expenses can be claimed through your company if they are wholly and exclusively for business purposes. These include: business travel (mileage and train fairs), subsistence professional subscriptions or training, insurance, accounting fees, protective clothing, mobile telephone costs, pensions, private medical insurance, IT equipment internet, and software, costs of advertising your services, printing, copying, postage, stationery and consumables, trivial benefits… and more!
Do You Work From Home?
With the ever-increasing benefit-in-kind charges on company cars, it is normally more tax effective to purchase a car personally and claim the business-related mileage back at the rate specified by HMRC. This is currently 45 pence per mile for the first 10,000 miles then 25p thereafter. This is likely to change from April 2020 for zero and low emission vehicles though we will keep you updated when the changes take place. For more information, please see our Company Car benefit blog here.
Use Pension to Reduce Your Tax Bill
Investing in a pension is one of the most tax-efficient decisions you can make and will reduce both your company and personal tax bill, if contributions are made directly from the company. Furthermore, a pension can be used to do all sorts of things, such as buying property on which it can then receive tax-free rent – a qualifying pension scheme can borrow up to 50% of its value to help fund such investments. A pensions adviser will assist with this from the company and personal positions, allowing your accountant to advise from a tax perspective.
Check Your Figures
Ensuring all your income is correctly declared is increasingly important due to the growing digital power of HMRC and international co-operation against tax evasion.
Tax Implications for Annual Income Above £100K
The marginal rate of tax on income above £100,000 is significant, due to the fact that you gradually lose your personal allowance between £100k and £125k. So, if you don’t need all of the money you earn through your company to live on, leave it in the company account – it will incur substantially less tax that way. It can be used to provide for periods between assignments and will attract less tax if/when you decide to close the company down.
Investing in ISA to Save Tax
Look at investing the first slice of any surplus funds in a tax-free ISA – In the 2019 to 2020 tax year, the maximum you can save in ISAs is £20,000 tax-free, and your money is instantly available. Speak to your bank for more information.
Other Tax Efficient Investment Options
Surplus funds in your company account can be invested in higher-interest bank accounts or bonds which will receive higher interest rates and earn the company more money.
Payment on Account
If you made a ‘Payment on account’ of the current tax year’ in the last tax year, and made a second payment on account prior to the end of July 2019, you may have overpaid tax and be due a refund from HMRC. If your income to the 5th April 2019 was less than the previous year, completing your tax return as soon as possible will ensure the refund can be made, or if not, that you have sufficient time to save for any liability due 31st January 2020.
Not every circumstance is the same!
At Clever Accounts, we always try to give you the best possible advice, helping you be more tax-efficient through your company. As ever, it’s always best to speak with us for any tax saving tips as every circumstance is different.