GYOB (Growing your own business) means protecting your hard earned cash, and that includes the tax man. Planning for your growth and minimizing tax go hand in hand. They should be inseparable as far as you are concerned. You need profits, but tax is an overhead you don’t need.
The first thing you need in any tax planning exercise is profit. Enough to create a potential tax liability and ideally at least a little more than you need to live. If you have staff or family depending upon you, then you have a duty to make profits and don’t forget it.
If you are profitable then there is something we can work on.
Parliament, either one or the other, creates the rules of this “tax game” and it is our role to keep you legal and paying the right amount of tax. I think everyone accepts that government needs to collect tax, but only the right amount. No-one volunteers to make unnecessary donations to HMRC, or do they?
There are plenty of people who do make voluntary donations. Unnecessary payments that, with some simple planning could be avoided, so that they only pay what the law says they should, according to the rules laid down by Parliament.
Don’t let anyone tell you otherwise. If Parliament had intended that you pay more tax, they would have written different rules to this game.
For us, saving tax is not about offshore tax havens and shell companies with funny names. That is another world entirely. We use simple legal strategies according to the rule book of the “Tax Game”.
Let me give you an idea of what we do. Here are 5 simple ways in which you can use the rules of the “tax game” to your advantage.
Remember that these are just the ideas. You would be wise to come along and speak to us about the implementation. Tax is complicated and you could accidentally find one of the bear traps left lying around by Parliament, just waiting for an unwary.
1. Incorporation – it’s not hard to do.
A few years ago everyone was incorporation and saving shed loads of tax. Now the rules have changed and it is not so clear cut. Having said that, if you do not need to extract the profits out of the company there are still some impressive tax savings to be had. Just compare the rates of Income Tax that you pay with the rate of Corporation Tax that the company would pay on the same profits.
If you are using a company there is still merit in using a “low salary plus dividends” profit extraction strategy. We currently recommend a monthly salary of £719. At this level you pay no National Insurance but you are treated as if you did, so your NI record is complete. But, make sure the salary is recorded through a PAYE scheme.
Dividends may save you a little tax, but they will save you and your company heaps of National Insurance.
Working with a company also opens the doors to other simple legal tax planning strategies. Read on!
2. Pensions can be very flexible
Pension contributions are a tax-efficient means to extract money from your company. Unless you are putting huge amounts into pensions, your company will get tax relief for the payments and you have extracted funds from the company tax free at that point. Eventually you will draw on that pension. Around 25% of the money is tax free. The tax you pay on the rest depends on your circumstances.
Paying pension premiums out of your own pocket means that you must first have extracted the money from the company and potentially suffered tax and National Insurance at point of extraction. Get the company to pay the premiums.
There are limits to the amount that can be paid into pensions. But, the limits on corporate contributions to your personal pension are much more generous than you can get as an individual.
Using your pension funds now!
Do you need funds to buy an office or workshop. Use your pension. The one built up with money on which you got tax relief.
If you put your pension moneys into a SIPP (self-invested personal pension) you can us your SIPP to buy your office. You then rent it from your SIPP. The rent you pay then goes to build up your pension (the SIPP) still further.
Also, as you got tax relief on these pension premiums, you are effectively getting tax relief for a building that itself would not normally qualify for tax relief.
Your IFA will advise on getting this set up.
Want to come along for a chat.
Spread the joy
If you have a child at university, consider transferring shares in your Trading Company. There’s no capital gains tax on the gift, and you’re transferring enough shares so they get a dividend of £2,000 a year tax free, plus you can pay more dividends (or salary) to use up their personal allowance. If it’s a salary, they must work for it (in the holidays) so that’s a bonus.
There are a lot of other considerations in order to keep it tax efficient so come in and speak to us.
Are there others who you could give shares. This could be part of your retirement or succession planning or there may be people you want to lock into the business.
You could issue shares to your spouse. You could also pay them a salary. It depends upon their own circumstances but these are some things to consider.
Also bear in mind that the level of income at which you start to pay higher rates of tax is higher for dividends that it is for salary. Just something else to throw into the mix.
I told you it was complicated!
Getting close to Retirement
Are you close to retirement here’s a cunning plan? Stop taking so much out of the company as dividends and salary and borrow the money instead. The company pay 32.5% over to the revenue.
But then when you liquidate or sell your shares in the company and pay tax at only 10% because of entrepreneurs relief. You then repay your loan, and the company gets the tax back.
Here to help
These are just few ideas. There are plenty more. The rules of the tax game are constantly changing but we are here to help you to keep up.