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Top tax planning tips for the self-employed working through limited companies

Top Tax Planning TipsWhat can you do to ensure you only pay the tax you are legally obliged to pay?

The last few months have seen some increasingly strong rhetoric in the media and from politicians about the morals and ethics of tax avoidance.  Up until this point, the long recognised distinction was between tax avoidance (use of existing legislation legitimately to minimise your tax) and tax evasion (breaking the law to avoid paying the tax that you actually owe).

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Morally repugnant?

Tax evasion is illegal and tax avoidance is not.  Recently we have seen the media and politicians positioning aggressive tax avoidance as wrong (‘morally repugnant’ was one of the phrases used I think!).  I don’t intend to enter that debate directly here – although I would like to hear the views of others.  I just want to recognise that the law defines what tax all self-employed individuals are required to pay, and offer a few areas where such individuals can ensure they don’t pay more than they need to.

Don’t pay a penny more!

In my view, the things I will cover below are sensible tax planning opportunities and all self-employed individuals should be encouraged to consider these things to ensure they pay the legally required amount of tax and not a penny more.

I have looked at this in terms of self-employed individuals who are running their own limited company business.  Some of these apply to those who are operating on an unincorporated basis as well, but some don’t.

So what are these tips?

  • Make sure you have secured your self-employment status
  • Ensure you have identified and accounted for all relevant business expenses
  • Consider your pension position
  • Ensure your business shareholding is appropriate
  • Consider the timing of any dividend payments you make

Let’s briefly consider each in turn

Have you secured your self-employed status?

The most important piece of tax planning advice we ever give to freelancers and contractors is around their self-employed status.  If you are genuinely self-employed, make sure that you can demonstrate this clearly, and with documented evidence, should it ever be challenged.  Your employment status has a direct and material impact on the tax you are required to pay.  At Brookson we have a team of employment law specialists who provide free and unlimited support and assistance to our customers around this matter.

Have you ensured you have identified all of the right business expenses?

In the day-to-day running of a business, many expenses are incurred. These can be incurred both personally, and then reimbursed by the business, or directly from the business bank account.

Business expenses can be reimbursed without any tax implications and, at the same time, reduce the tax paid by the business. By ensuring all expenses that are incurred are recognised in the year they actually relate to, you can ensure you get this tax advantage as soon as possible. Late claimed expenses will get tax relief but you will have to wait a further 12 months.

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This might seem like a ‘daft’ tax planning point but it is surprising how often we come across individuals who haven’t bothered to offset legitimate business expenses through their business or who have left if a number of years to recognise them.

Why are pensions relevant?

Personal contributions into an approved pension scheme attract tax relief at your highest Personal Tax rate and can, therefore, be used to reduce a potential higher rate Personal Tax liability.

Contributions made by your company into a pension scheme for you are deductible for Corporation Tax purposes and there are no personal tax implications.

With effective tax planning you can often reduce or eliminate any higher rate tax liability through your pension contributions.

Such planning obviously needs to ensure that the required pension provision is appropriate in the individual circumstances.

Ensuring your company shareholding is appropriate

If your company has a second shareholder you are, in certain circumstances, able to split the dividends and each be taxed on your share. This can enable both shareholders to use the basic rate band of Income Tax efficiently.

As with the pensions opportunity above, this is something that should only be done in circumstances where it is genuinely appropriate for you and your business.

Are you paying dividends at the best time in the tax year?

Dividends are taxed when they are paid.  This creates opportunities where such amounts are being paid around the end of a tax year.  Dividends paid at the start of the new tax year, rather than at the end of the old one, can generate real benefit in terms of delaying the point at which tax becomes due on that dividend payment.  This doesn’t result in any actual reduction in the tax that is due, it simply means you need to pay it at a later date.

There are other tax planning opportunities for those running a small limited company business and those running an equivalent unincorporated business, but I just wanted to share a few of the genuine opportunities that do exist.

I strongly believe that hard working freelancers, contractors and other self-employed professionals should only pay the tax they are required to do under the law as it stands.  The above types of tax planning considerations are helpful in ensuring that is what happens.

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2 Comments

  1. salah Al-Jeboori

    My apology to raise this point, I am raising it as many locum doctors still have a confusion regarding these points.
    I run a limited company as I am a locum doctor. Can I include my spouse and/or my children as shareholders or not as my accountant told me that according to a new legislation I can not include either of them as shareholders?
    MY wife is a house wife and not working in other professions, as my accountant told me that unless my wife is a locum doctor as well I can not register her as a share holder.
    Also can we consider our limited companies as a micro-entity company due to its limited income or not.

    Many thanks

    • Hi Salah,

      There are benefits with setting up limited company with regards to the tax efficiencies of extracting an optimum salary and residual profits as dividends, which have been extensively documented elsewhere.
      Appointing your wife as a shareholder is a good idea as the tax legislation (Jones V Garnett) allows you to review husband and wife tax planning arrangements favourably.
      You do not state the age of your children, however, they are not covered by this legislation and would therefore need to demonstrate an active role in your business- from a pragmatic point of view, their contribution would be limited to an administrative capacity which would already be met by your wife’s position in the business.

      I am unclear with regards to your accountants stance, however, there are a couple of issues which may have influenced their position:

      IR 35
      The nature of the services you provide are personal as a doctor, and if you are acting as a disguised employee, then the set up of accompany is not beneficial as you would be taxed in essence on a PAYE basis, (with minor amendments).
      A review of your contract would indicate this and certain provisions such as the requirement for Public liability insurance, reciprocal arrangements and variable day working would evidence the fact that you were perhaps not working on an employed basis and would be providing a contract for services. This would allow you take advantage of working via limited company.

      NHS Superannuation
      Any income earned through a limited company by the locum cannot be included as pensionable income and so this would have a detrimental effect on your pension entitlement. The key to this is to balance up the loss of contributions to the NHS superannuation scheme against the potential tax and NI saving of operating through a company.

      Micro-entities
      For accounts periods ending after 30th September 2013, companies are able to file a directors report, Profit and Loss account and Balance Sheet with basic notes at the foot of the balance sheet –in effect, much simplified accounts can be prepared.
      However, accounts will still be required to prepared under the true and fair view.

      To qualify as a micro-entity, 2 out of 3 of the following must be met:

      • Turnover not more than £632,000
      • Gross assets (balance sheet total) not more than £316,000
      • Average number of employees not more than 10

      There is still some consultation in place in conjunction with The Financial Reporting Council and HMRC’s stance in respect of micro-entities does also require clarification with regards to the filing of company tax returns, therefore we will update you with regards to same when further information is available.

      If you require more advice, tailored to you specific circumstances, please do not hesitate to get in touch. You may also want to have a look at our Limited company service, which allows you to maximise your take home pay with advice around tax planning.

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