Looking for ways to minimise your tax bill? Filing taxes each year often leaves business owners feeling little sore. There is always that nagging feeling that you could be saving money on your tax bill, but you’re not sure how to actually do it. The good news is, there are ways to do this, and you don’t need to be a huge corporation or be involved in a dodgy loophole to do so, and they’re all perfectly legal.
In this blog, we take a brief look into some of the legal tips and tricks to reduce your tax bill.
1. Look at your pay structure
As a director, you may be paying yourself a salary from your business. Have you considered if taking a salary is the most take efficient way? Having a mixture of salary and dividends can save you hundreds, if not thousands in tax and national insurance contributions.
Dividends are taxed at a much lower rate of tax, starting at just 7.5% compared to 20% for salaries, so if there are profits available in your business, make use of the allowances available for dividends. Currently, an individual can take up to £2,000 in tax-free dividends (from 6th April 2018) on top of the personal allowance given to workers.
You can take up to £8,424 per annum for the 2018/19 tax year without paying any tax or national insurance contributions but still can count the contributing years towards your state pension.
2. Contribute to your pension
It’s a very good idea to take out a pension plan, as this can be a tax-efficient way to take money out of the business while also investing in your own long-term financial security.
Making contributions from the company into your personal pension scheme helps to build a nest egg for retirement.
The maximum you can personally invest into a pension and receive tax relief is 100% of your salary subject to an annual allowance limit which is currently £40,000.
Please note dividends are not classed as salary. If, as an example, you have a salary of £8,000 and dividends of £45,000 the maximum you can personally invest is £8,000. However, contributions that are made by your company into a pension for you are NOT restricted by your salary. Your company can invest the full annual allowance maximum of £40,000 and potentially more than this using carry forward rules.
Note; you will need to satisfy what is called a ‘wholly & exclusively’ requirement, but as a shareholding director this should not be a problem.
Company contributions into a pension will be a tax-deductible business expense and so reduce the amount of corporation tax your company pays.
Such a contribution is also NOT subject to National Insurance.
3. Marriage Allowance
If you’re a new start-up business, and not taking a salary from your new venture and have little or no other income, consider transferring some of your personal allowances to your spouse or civil partner.
You can transfer £1,190 of your allowance (tax year 18/19) to your husband/wife or civil partner. This can reduce their tax bill by up to £238 every year. This can also be backdated, which could mean an immediate tax refund in your pocket.
Your partner’s income must be between £11,851 and £46,350 to qualify (£43,430 in Scotland).
4. Research and development relief
R&D reliefs support companies that work on innovative projects in science and technology. It can be claimed by a range of companies that seek to research or develop an advance in their field. It can even be claimed on unsuccessful projects.
Small and medium-sized businesses can deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, meaning a total deduction of 230%. This could mean an immediate tax refund and a lump sum in your bank account.
HMRC has specific guidelines on this category of relief and each business must justify why its work qualifies for this relief. It’s best to consult with an expert if you intend to make use of this relief.
5. Creative industry tax reliefs
There’s good news for companies that make their profits from specific forms of media. You can claim relief if your company is directly involved in the production of the following:
- Certain films
- High-end and children’s television programmes
- Animation programmes
- Video games
- Theatrical productions and orchestral concerts
To reduce corporation tax in these industries, your company must pass a cultural test administered by the British Film Institute. Although the process is quite complex, the relief is significant.
6. Keeping a mileage log
If you use your personal car for business trips, you can claim mileage back from the company.
Keeping a log of this, either by using a spreadsheet or diary or by simply using one of the many apps available will help to reduce your business’s tax bill. Currently, you can reclaim 45p per mile up to 10,000 miles per annum. Anything above this is reclaimed at 25p per mile.
7. Working from home allowance
If you run your business from home, either part time or full time, don’t forget to claim your working from home allowance, sometimes called ‘use of home allowance’.
The HMRC will allow you to claim a portion of your home expenses if you work from home, and has two methods of calculating the outcome. Flat rate is the most simple called ‘simplified expenses’, and a more complex route.
And finally…There is no great secret to reducing tax bills. All you need is to be diligent with regards to accounting for all business expenses, and making sure you are aware of the options available to you for tax relief by engaging a good accountant!
Contact us for a free consultation today.