Here are some tax and finance tips which could help you save money as a limited company owner, based on our experience of running limited companies, and dealing with accountants and tax advisors over the past 15 years.
Why pay more tax than you need to?
- Dividends are not subject to National Insurance Contributions, which represents a significant tax saving compared to the sole trader route, where NICs are payable on all income.
- As a limited company director, you may consider paying yourself in dividends and a small salary. You may pay no PAYE (income tax) or NICs at all on your salary if it falls below the current threshold.
- Whatever you do, make sure you meet your accounting and statutory deadlines, especially for submission of the Annual Return (AR01) and your company accounts. The penalties for late submission can be great.
- Subject to eligibility (e.g. you must have held shares in the company and been a director or employee for a year or more), you may qualify for Entrepreneurs’ Relief on the sale of your limited company. The current ER rate is a mere 10%, compared to standard CGT rates of 20% or 28% (higher rate).
- Consider the timing of your dividend declarations. You may save tax by delaying drawing down profits until a future tax year, if you have already reached the higher rate (or additional rate) threshold in the current year.
- Consider splitting your shareholding with your spouse, as you could benefit from using your other half’s tax allowance (especially if they have no other source of income). You should consult an accountant before considering this option, as so-called ‘income shifting’ is a thorny issue in accounting circles.
- Make sure you only declare dividends when there are sufficient accumulated profits in the company to do so. Penalties will apply to any dividends which have been declared illegal.
- Make the most out of the expenses you can put through your company. As long as you only ever claim for things that have been genuinely incurred on business duties, there are savings to be made. You may be able to claim for the costs of working from home, for example.
- Consider joining the Flat Rate VAT Scheme. Not only does this make your VAT accounting simpler, but you may pay less tax overall depending on the amount of VAT you charge and reclaim. During the first year, you receive an additional 1% discount on the flat rate you have to pay to HMRC.
- The VAT cash accounting scheme offers more of a cashflow benefit than ‘tax saving’ per se – it allows you to only account for VAT once an invoice has been paid, rather than when it has been issued.
- You must register for VAT if your turnover reaches £85,000 over the past 12 months (2019/20 tax year). HMRC have recently been clamping down on businesses who have failed to do so, and you could be fined.
- Consider setting up an executive pension scheme. Your company can invest pre-tax income into the pension, saving you a considerable sum compared to investing post-tax income in a personal pension. Talk to an Independent Financial Adviser for more information.
Try our money saving tips for limited companies for more ideas on how to make your business more lean and efficient.
As ever, please consult your accountant before acting on any of the information contained on Company Bug.
More on limited company tax rates.