With the end of the financial year fast approaching, now is typically the time when limited company contractors look at how to reduce tax liabilities for the year and make sure they have put plans in place to ensure they are mitigating their tax bills, therefore making the most of their hard-earned cash. (That said I would suggest that it is always best to consider tax planning early on in the tax year to ensure you have enough time to make the most of these).
What planning measures can you put in place to make sure you have taken advantage of all the tax breaks available to you and work out how to reduce tax liabilities?
Here are my top 10 tips to help you reduce your tax liability:
How to reduce tax liabilities:
1. Mitigate any national insurance costs
“Ensure that your Directors fee is set to the optimum level for the current tax year. Be mindful of IR35”
The biggest tax advantage of operating as a limited company contractor is the opportunity to mitigate any national insurance costs. This can be achieved by ensuring that the Director’s Fee that your company pays to you is set at the optimum level. For the current tax year, in most cases, this is £10,600 for the year from 6 April 2015 to 5 April 2016, providing you remember to claim the NI “Employment Allowance” via your RTI (Real Time Information) submissions. We hear stories of many accountants advising their clients to pay a directors fee in excess of this amount to “stay off the radar” in terms of IR35 inspections, we see no evidence of this being true – every £1 taken as a Director’s fee above the £10,600 represents NI “leakage” so is costing you money.
Remember not to overlook IR35 though – you should ensure that all of your contracts are reviewed by an IR35 specialist and re-reviewed on a regular basis as being captured by IR35 removes most (but not all!) of the financial benefits afforded to limited company contractors.
2. Ensure you’re claiming tax relief on expenses
“Claiming mileage, professional subscriptions, accommodation & mobile phones could help you recover tax”
This will save you a minimum of 20% in tax relief. Don’t forget to also claim reimbursement of any personally incurred expenses which are “wholly, exclusively and necessarily” incurred in the performance of your duties, for example, mileage, professional subscriptions and accommodation costs which you may have paid for personally. Other tax-efficient expenses to consider are company-owned mobile phones, childcare costs and relevant life insurance policies. Claiming these will enable you to extract profits from your company free of tax thereby saving you up to 40% of the cost. Remember to seek advice from your accountant if you are unsure on whether an expense is allowable.
3. Keep up to date on your company’s tax position
“By always knowing your tax situation, you will know the amount you can take as a dividend”
Once you have got your directors fee set at the optimum level, recognised your company expenses and claimed reimbursement for personally incurred costs you will be able to work out how much profit your company has made at any point in time. After factoring in accrued VAT and corporation tax (and minimal PAYE) you will then know your company’s profit after tax – this is the maximum amount you are allowed to take as a dividend, anything over this is not permitted under Company Law. Visibility and accuracy of this number is one of the key benefits that engaging with a good accountant can bring – Brookson customers have real-time access to number this 24/7 through Connect.
4. Know how much you can take as a dividend
“Be careful how much you take out as a dividend, by taking too much, 25% of it could be lost in personal tax”
This ensures you can plan how much more you can draw from the company and consider the tax implications associated with it – you don’t need to take all company profits as a dividend. You can choose to take what you need to fund your lifestyle or simply take the most tax-efficient amount to ensure you do not breach the higher rate tax threshold. Assuming your directors fee is £10,600 for the current tax year, you can safely take an additional £28,606 from your company as a dividend without incurring any personal tax liability (assuming you do not have any other income). If you take more, 25% of it will be lost in personal tax – this is where considering appointing another shareholder may be appropriate – however, seek advice before doing so.
You should also be aware of the forthcoming changes to the taxation of dividends. this will impose an additional 7.5% income tax on dividends taken over £5,000 from 6 April 2016. You should, therefore, consider taking additional dividends prior to this date to avoid this tax hike. Be careful though when doing this that you don’t inadvertently breach the higher or additional rate tax bands and incur more tax than you are trying to save.
You can find out more about the changes to the taxation of dividends here
5. Register for flat rate VAT
“Advantageous if you have a low level of expenses going through your company”
If your company turnover is under £150,000 per year, you have low expenses as a proportion to turnover and you work for clients who are VAT registered (and you don’t make zero-rated or exempt supplies) then registering for the flat rate VAT scheme is a no brainer and can save you hundreds of pounds a year. The flat rate VAT scheme differs from standard VAT accounting as you pay a percentage of turnover rather than paying VAT on the difference between sales and purchases.
If your accountant hasn’t discussed this with you speak to them about it ASAP, or consider finding a new one!
6. Business mobile phone
“Your limited company can provide you with a mobile phone and you will save up to 40% of the cost”
Most people now own a mobile but many are not aware that HMRC will allow an employer to provide its employees with a mobile phone for business use (which can also be used personally) and claim corporation tax on the cost and not incur a benefit in kind on the employee. This applies to limited company contractors, so your limited company can provide you with a mobile phone and you will save 40% of the cost (if you are higher rate taxpayer). Brookson customers are able to run their business from their smartphone using Connect, thereby justifying the business use. The only caveats are that the phone contract is taken out by the company (adding the company name to a personal contract/invoice will not suffice) and the company pays for the contract. Even better news is that HMRC have confirmed that they accept that iPhone’s, Blackberry’s and other smartphones are mobile phones. Remember though, you are only allowed one per employee.
7. The staff party (not just for Christmas!)
“A limited company can pay for your staff party and you can claim back the corporation tax”
Each year a company can pay for a staff party for its staff, up to the value of £150 (including VAT) per guest, and claim corporation tax relief on the cost and not incur a benefit in kind charge on the staff member. Again, this applies to a limited company, so your limited company can pay for a staff party and you will save 40% of the cost (if you are a higher rate taxpayer). Caveats here are that the cost must not exceed £150 (including VAT) in each tax year, if it does the whole cost is taxable, not just the excess. The limit is per guest so you could bring your spouse or partner and providing the cost does not exceed £300 (including VAT) it will be tax-free. I wouldn’t recommend inviting all your friends and family though as HMRC will argue this was not a staff party.
8. Financial products
“Setting up a company pension scheme is a tax-efficient way of extracting profit from your company”
One of the perceived disadvantages of working as a limited company contractor as opposed to a full-time employee is the lack of benefits such as life insurance and pensions. As a director of the company you are able to set up these benefits for yourself, many contractors have a company pension scheme which not only helps save for retirement but is also a tax-efficient way of extracting profits from the company. In addition, there are several life insurance products in the market which are tax advantageous. Brookson Financial Service specialises in advising on these types of products.
9. Extracting company profits
“By considering tax planning, you could extract company profits at a tax rate of 10%”
If you think that your contracting business is ceasing and may not be required for at least the next 2 years, for example, you are planning on retiring or seeking a permanent role, you should start, sooner rather than later, to consider a tax planning opportunity enabling you to extract the company profits at a rate of 10% (as opposed to 25% if you are a higher rate taxpayer). This form of planning is becoming ever more popular but may require the assistance of an Insolvency Practitioner, thereby bringing excess costs, so discuss this with your accountant before making any decisions.
10. Support services
“Think about the support you need to manage your business efficiently and compliantly”
Consider the support you need to help you to run your business efficiently, make the most of the tax breaks available to you and stay safe. Do you just need an accountant to do your year-end accounts and tax return or do you need an accountant, bookkeeper, tax advisor, financial advisor and legal expert who specialises in supporting limited company contractors – Brookson can provide all this and more for a fixed monthly fee!