If you want to improve your cash balance in the year ahead it’s a good idea to start by looking at your tax arrangements. You may well be able to reduce the amount of tax you pay personally or for your business.
Let’s look at some areas that may be relevant for you in the year ahead.
It is good to start by getting your business structure right. Structuring your business for tax optimisation goes well beyond choosing between a limited company or a sole trader. You need to get this basic area right; have you thought of an LLP (limited liability partnership) or a group structure? There are many tax benefits with these two structures, and they are not just for professional firms or big corporates. Speak to a tax adviser or your accountant about these.
Have a Tax plan
Unless you plan to save tax this year, it’s unlikely to happen and you’re likely to pay more tax than necessary. Avoid retrospective tax planning and aggressive tax schemes – go through this article to see if there are areas you or your accountant have neglected. Despite what you may have heard, there are still plenty of legitimate ways to save tax and sleep well at night. Also, avoid leaving all your taxes till the last minute.
Claim this generous corporate tax relief
Normally when you incur a legitimate business expenses wholly and exclusively for the purpose of your trade, you get to claim 100% of these expenses against your business income to reduce your tax bill. But what if the tax rules allow you to claim a lot more than 100%? Say you get to claim £230 even though you’ve only physically spent £100?
Well that’s exactly what the Research and Development (R&D) tax relief allows you to do. So if you have a company in the creative, engineering, software or any innovative industry where you’re solving difficult problems for customers and raising the bar in your industry, please speak to your accountant or a specialist tax adviser about R&D tax relief before 31 March.
Many companies miss out of this valuable relief due to lack of awareness as well as the misconception that R&D is only available to big Laboratories and pharmaceutical industries.
Reward staff tax efficiently
When it comes to rewarding staff, consider approved share schemes and staff suggestion awards to encourage your staff to get involved and to reward them tax efficiently.
There are two kinds of staff awards:
- encouragement awards – for good suggestions, or to reward your employees for special effort
- financial benefit awards – for suggestions that will save or make your business money
Encouragement awards are tax free up to £25. But financial benefit awards are exempt up to £5,000. That’s right £5,000.
But before you go ahead and pay your staff tax free income, please note that as with all tax reliefs and tax exemptions, there are conditions to meet. Speak to your tax adviser first.
The other tax efficient reward schemes are the various share option schemes including EMI (Enterprise Management Incentive). Why is this tax efficient? Because when staff sell their shares, they pay 10% tax instead of 20, 30 or 40% if they meet the strict conditions. But again, please beware that these rules come with strings attached and always seek advice.
Save Income Tax by Using A Property Company
If you’re a landlord with a portfolio of properties in your name, you’re likely to be paying more tax via the self-assessment system because of the recent changes in property tax and, notably, the mortgage interest restriction. Companies are not affected by the mortgage interest restriction and they do pay lower rates of tax. However please do seek specialist tax advice because there are some tax traps to beware of before of proceed.
Use £78,000 tax allowances first
At the heart of every sensible tax planning is the use and leverage of the tax-free allowances HMRC give us. Make the most of these allowances first as they get wasted if not used. And don’t forget about the allowances of your spouse and children. Did you know that if you add up the income tax allowance, capital gains tax allowance, savings allowance and dividends allowance, you get a whopping £26,000 plus allowances in the year? That’s just for starters. And if you have a spouse or a child who are not using their allowances, then that’s a potential tax-free income of £78,000 (26,000 x 3).
Claim This £4,800 Tax Savings
No one likes to talk about death. But it’s a reality. And very often people pay unnecessary inheritance tax by not claiming the right reliefs.
Gifts of up to £3,000 per year can be made free of Inheritance Tax. Unlike most of the tax allowances, the limit increases to £6,000 if the previous year’s annual exemption was not used. So you get to use last year’s allowance of £3,000. A married couple can therefore make Inheritance Tax exempt gifts including cash totalling £12,000 per tax year.
This simple planning can save a possible tax bill of £4,800 in the event of your demise.
Engage specialist tax advisers
Most business owners naturally turn to their accountants for all things tax. Accountancy and tax are two different professions, although there are many similarities.
However savvy entrepreneurs normally have both an accountant and a tax adviser. Because they know that accountants are like your GP, who is good and knows all the general rules, but tax advisers are like your surgeons, who are specialists in their field and know the exceptions to the rules. So whilst an accountant will rightly tell you that entertainment is not tax deductible, a tax adviser will usually lift the rocks and find you some exceptions to the general rule that allows you to claim the entertainment.
Embrace tax efficient pensions
Do think long term and make use of tax efficient retirement planning. So instead of merely contributing to a pension scheme (which you get tax relief for, by the way) and leaving the funds in there, why not consider vehicles like SSAS or SIPPS to help you leverage the funds and get a second bite of the tax cherry. These pension schemes, subject to certain rules, are then used to buy, say, a commercial property and the rental income gets additional tax benefits.
With some planning there are a wide range of ways in which you can lower your tax bills. Please note that as with all tax matters, always speak to a tax adviser first. I hope your cash balance will improve in the year ahead.
ABOUT THE AUTHOR
Jonathan Amponsah CTA FCCA is an award winning chartered tax adviser and accountant who advises business owners on entrepreneurial tax reliefs. Jonathan is the founder and CEO of The Tax Guys.