We have teamed up with our accountancy partner, Mazuma, to provide a comprehensive guide full of professional tax-saving advice for freelancers and small businesses.
Below is a selection of tips and advice taken from the guide – all focussed on choosing the right business structure. To read the tax-saving guide in full, download it for free here: Tax-saving advice for freelancers and small businesses
Choosing your business structure
Get the right business structure – having a limited company can change the tax rate of a 41% taxpayer from 41% to 19%, over halving their tax bill.
The exact tax savings do depend on how much of the profit you leave to reinvest in your business. All taxpayers who run their business through a limited company can also avoid paying any national insurance at all by using dividends. For someone earning £30,000 in a year as a sole trader, the approximate amount of tax and national insurance to be saved is just under £600.
If you have two distinct sets of customers, perhaps businesses and private households you could benefit by splitting your business in two to serve these customers separately. One business could run as a Limited Company and one as a sole trader/partnership to get the best of both structures. This can also save VAT costs.
Where you have business partners who want to restrict their exposure to business risks, you can use a partnership but with one of the partners being a limited company. Alternatively, you can operate through a Limited Liability Partnership (LLP). There is a lot that is possible once you start to put your mind to it.
Especially for Limited Companies
By taking dividends instead of salary you can avoid both employees and employer’s national insurance altogether. On a straightforward situation of a small Limited Company where the choice is between taking £40,000 salary or £40,000 dividend the National Insurance savings can come to just under £8,000 per year. There are issues to consider (like keeping your NI contributions up to date) but for the vast majority of small businesses, this is perfectly achievable. Dividends can be taken more than once a year, ideally quarterly but monthly is possible as well.
As long as you pay more than £6,240 a year in salary, you will still be entitled to all the main state benefits including your primary old age pension and there is still no National Insurance to pay until the salary gets to £8,784. Amazing, you really can get something for nothing. So the best mixture is to often to pay yourself a salary of this level and take all your other income needs as dividends.
If you don’t pay the dividends correctly there is a real risk HMRC won’t accept they are dividends and attempt to treat them as a loan or even salary with adverse consequences. Make sure you use all the proper procedures at the time the dividend is paid, do not leave the checks and paper work until the year-end when your accountant has to deal with any money you’ve taken from your company. Check you have the profits available either in the current year, or brought forward from an earlier year before proposing a dividend. Make sure all the directors vote on the dividend and record their votes. Pay the dividends into the shareholders’ personal bank accounts and issue dividend vouchers. If you fail to take these precautions you and your company could both pay higher taxes.
Use different classes of shares held by different shareholders to pay different levels of dividends to different shareholders. In this way shareholders who put varying amounts of effort into the business can be rewarded differently. Where there is only one class of shares you need to pay all the shareholders at the same rate per share, whenever you pay a dividend.
By treating the company bank account as your own you run the risk of being taxed on a benefit in kind, when you take a cash advance or have the company pay expenses on your behalf. So make sure if you take money from the company treat it correctly as a salary paid under PAYE, or a valid dividend, and not deal with the matter after your year end. Avoid paying your personal bills through the company account.
If you have an overdrawn directors loan account and it is not practical to declare a dividend to clear it, you may write off the loan account and have the write off treated as a dividend. This should be done in your capacity as a shareholder, not a director.
If you have created some intellectual property such as a design for a product, or software programme, why not allow your company to use it under a licence. The tax advantage is that there is no National Insurance payable on the licence fees the company pays to you. Alternatively, you could sell the intellectual property to the company, the proceeds of which would normally be treated as a capital gain in your hands. Where the gain is no more than £12,300 you will not pay any tax, as this is below the annual Capital Gains Tax exemption. The sales value of the intellectual property must be a fair market value, as you will be subject to income tax on any amount paid in excess of the market value.
Beware having more than one Limited Company under your control or under the control of close relatives. It can mean these companies end up paying a higher rate of corporation tax. Try to include all the various businesses within one company, using different divisions to keep the trade separate instead.
You can look to use Inter Company Management Charges to move profits from one company to another. This could help to even out the profits of the companies and reduce the total amount of corporation tax paid by the whole group.
By owning your business premises personally you can avoid a potential double tax charge when you come to sell it. The double charge arises from the gain when your company sells it and then again when you have to get your money out of the company. You can also charge a rent to your company which is a way of getting money out of your company and avoiding national insurance
Another option is to get your pension fund to purchase the property so that any gain would be completely tax-free but any profits would be locked in your pension fund until you retire.
To read the tax-saving guide in full, download it for free here: Tax-saving advice for freelancers and small businesses
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