For most small business owners, having a limited company still remains an extremely popular and tax efficient way to grow a business and save tax.
The principal difference to a sole trader is you are personally taxed on your profit. As a limited company owner, your profit is split between that taxed on the company and that taxed on what the individual draws from the business. This can result in significantly different tax liabilities.
For example, for 2019/20 a sole trader called Jane earns £60,000 taxable profit. Her tax bill with no tax planning is £15,579.
Jane’s friend Mary has a limited company and also earns £60,000 taxable profit. Mary draws a salary of £8,632 and takes dividends of £20,000. Her tax bill with no other planning is £10,820 a tax saving of £4,759!
This is the first easy win for a business owner; trade through a limited company but look to shelter profits in the company. Keep profits back by reinvesting in stock, finance work done or retain cash balances for future investment. The profits retained are taxed at just 19% corporation tax (falling to 17% from April 2020) rather than potentially 42% for a sole trader or 19% corporation tax plus 7.5% or 32.5% dividend tax if you extract the profits as dividends.
The second easy win is to make sure that as a company director you carry out remuneration planning.
We do this for all our corporate clients. We meet to talk about goals and plans for the future. We discuss personal circumstances, how much you really need to draw from your company and the tax implications of what you are doing. By doing this we can minimise your tax, depending on your income requirements, by avoiding:
- going into higher rates of tax
- losing child benefit
- losing your personal allowance.
That way you stay in control and get to keep these valuable allowances. This is just one of the standard services for all our company director clients. At the meeting we will:
- set a salary level
- agree expected levels of dividends and, where beneficial, restrict the dividends in a tax year
- ensure that we take advantage of your spouse’s tax allowances and tax bands
- review other forms of earnings.
Through careful planning you could secure child benefit which might otherwise be lost and minimise your tax liabilities. By discussing your plans and the tax impact of different levels of income and considering options you will know in advance (sometimes up to 2 years in advance) what your tax bills will be. Not only will you save tax, but you will be able to start planning for future liabilities. Simple but effective, we have saved our clients thousands of pounds in tax.
The third tax planning idea is to charge loan interest on your loan to your company. Many business owners have financed their company with a loan. Currently as a director you might draw dividends from the company, paying either 7.5% dividend tax as a basic rate taxpayer or 32.5% for a higher rate taxpayer.
Alternatively, if you had lent the company £50,000 you could charge interest say at 10%- i.e. £5,000 of interest charged. The interest will have 20% tax stopped. The company gets tax relief on the £5,000 at 19% so in effect is down by £50.
But, the director does not have to pay dividend tax on the interest they receive and will be over £250 better off. This saving could increase by a further £1,000 if your income is structured correctly. Charging interest on a loan account could potentially generate significant tax savings.
Our fourth tax planning idea is an extra service we offer to our highly profitable clients- pre year-end tax planning. Once your year-end has gone, there is little that we can do to reduce your corporation tax liability.
If we are to save tax, it’s essential to meet with you before your year-end and discuss the many ways in which we can reduce tax. This could be items such as investing in equipment, motor vehicles or pensions, plus many other ways of reducing the company’s tax liability. You have choices but only if your accountant meets with you before the year-end.
Finally our fifth tax saving method involves using many of the simple tax reliefs available such as trivial benefits, tax efficient death in service benefits, allowances for annual events plus much more. We have a whole list of tax saving opportunities to discuss with you.
These are five simple strategies which all company directors should be using. These can only be implemented through having a close working relationship with your accountant.
If you are a client of Friend & Grant you will know that our service is built on strong relationships. Annual meetings and discussions about your business and personal goals are standard. We will go through all these strategies with you in detail so if you have any specific queries please call your account manager.
If you are not a client yet, why not book a discovery meeting and we will discuss with you how tax planning is built in as standard in our service package. Our offering is ideal for business owners who value service and want a strong working relationship with a trusted advisor.
Sounds interesting? Would like to find out more about easy wins? Then come and meet with us.
The content in this blog is correct as at 26th February 2019. See terms and conditions.