Following on from our blog last week about ways to save tax on a personal basis, we’re using this week to introduce a few ways you can save tax if you run your own business. This could be a limited company, a sole trader or a partnership, although there are usually slightly different rules for each and we’ve stated which entity the tip applies to below.
As we mentioned last week, what works for one person may not always work for another, which is why you should seek your own professional advice based on your own individual circumstances before you take any action. However, these tips should give you some interesting food for thought!
Choose the Right Year End – If you’re self employed you will need to prepare accounts each year to enable completion of your tax return. The year end you chose is very important as it will determine how much tax you pay in your first year – anything other than 31st March or 5th April will very likely mean that you’re taxed twice on the same profits, and you will have to wait until you cease trading for relief for that double tax. This doesn’t apply if you’re running a limited company, but is an exceptionally important consideration if you’re self employed or in partnership.
Pre-trading Expenditure – If you bought goods or services before you started trading that you then use in your business you may be able to claim the cost of them against your profits, and even reclaim the VAT in some circumstances. Keep the receipts and check with your adviser.
Mobile Phones – A limited company can provide a mobile to each employee with no benefit in kind implications, provided the contract is in the company name. No matter how much the phone is used personally the whole cost is tax deductible for the company.
Party! – A company can spend up to £150 per person on annual events, whether that’s Christmas parties or Summer BBQ’s. The events do have to be annual, so you have to repeat them each year, and you do need to physically spend the money and keep receipts. There’s no limit on attendees though, so if it’s just you in the company you can have a Christmas dinner for you and your partner for up to £300. Go careful though, 1p over the limit and the whole bill becomes a fully taxable benefit in kind.
Choose the Right VAT Scheme – If you run your own business and you exceed the VAT limit you have to register with HMRC, but make sure you’re taking advantage of the various VAT schemes available. For many smaller companies the VAT Flat Rate Scheme can be beneficial both from a tax and time saving point of view.
Pay Dividends – If you run your own limited company and are also a shareholder then make sure you’re taking the right mix of salary and dividends to be most tax efficient. Your adviser should be able to help with this, taking into account all other income you have during the year. Also consider the use of alphabet shares and splitting income with your spouse, taking due regard of income shifting rules.
Annual Investment Allowance (AIA) – You can write off up to £200,000 in capital goods with the AIA, meaning you get 100% relief against your business profits from 1 January 2016. If you’re looking at making a big purchase around the time of your accounting year end then you could accelerate the tax relief by an entire year simply by buying within the year.
Pay Pensions – If there’s nothing to gain by paying into a pension personally then consider making payments through your own limited company instead, if you run one. The payments will attract Corporation Tax (CT) relief, reducing the company’s liability. As with anything pension related you should discuss it with your IFA first as there are limits to how much you can contribute, and whether company contributions amounts are suitable for you.
Buy a Van – Company cars are generally very expensive from a benefit in kind point of view, unless you’re looking to buy an electric car or one with incredibly low emissions. If you’re looking for an alternative then consider a van instead. The rules for what classes as a van are quite strict, for example it must have a payload of over 1 tonne, but the benefit in kind values for both the cost of the van and the annual petrol charge are much lower as a result.
Incorporation – If you’re currently self employed, either alone or in partnership, then consider incorporation. The rates of Corporation Tax can be less than Income Tax and NI, and you will have more flexibility on how and when you’re paid. If you transfer a business into a company make sure you take advantage of Incorporation Relief if it’s available. In addition to this, there may be commercial advantages to going Limited.
Disincorporation – On the other side of the coin, if you run your own company and your trade has decreased to such a level that being “Limited” no longer makes sense financially, disincorporate the company and revert to being a sole trader. The admin is less and you’ll find your professional fees should decrease considerably too.
Employment Allowance – Provided there are at least “two people”, you are entitled to claim this allowance which can save your business up to £3,000 a year in Employer’s NI.
Ensure You’re Claiming All Expenses – Make sure you’re aware of everything you can claim, from use of home as office to training, from sponsorship to your annual Christmas party. Some of these are obvious, but not all, and the rules differ between companies and sole traders If you’re in any doubt you should ask your adviser to explain what you can claim, and double check anything you’re not sure about – you may be surprised at their answer so it’s worth checking.
Get a Good Adviser – A good adviser will save you more money than they cost you, saving you both tax and time. You should be able to trust the advice they give you, and feel comfortable recommending them to others – if you don’t, why not? If it takes you hours every month to update their system, they aren’t proactive with the advice, they treat you as a number and they just don’t inspire trust –maybe it’s time to change.
Please note that this blog is intended as an overall introduction to the subject matter, and should not be taken to be exhaustive or specific advice. You should discuss your individual personal circumstances with your own professional adviser before taking any action.