Category: Tax Tip

When we complete year end accounts for our clients, we complete a 10-point tax review for each business as standard to ensure that they are making the most of their various allowances.  

1. Are the using the most appropriate trading vehicle eg sole trader or partnership vs limited company 

2. Should they register for VAT voluntarily or if they have exceeded the rolling 12 month limit (currently £90k including reverse charge income)? If already VAT registered are they on the most suitable scheme? 

3. Should their spouse be a partner, shareholder, or employee? 

4. Are they taking the most appropriate salary vs dividends? 

5. Are they approaching certain cliff edges such as 25% corporation tax, higher income child benefit charge, etc and are there legitimate ways to keep their income below these limits? 

6. Are they investing in pensions? 

7. Should they be paying/receiving interest on their DLA? 

8. Are they using part of their home for business and should they claim these costs? 

9. Are they eligible for Research and Development tax credits and is it worth claiming (as the fees can be quite high for legitimate experts)? 

10.Would they benefit from an EIS/SEIS scheme?

If you work from home because you have no other premises, then you can claim £6pw tax free use of home allowance as a contribution to your bills.  

If you use a substantial part of your home for business then it may be beneficial for the director to rent part of their home to the business. (As this is a commercial letting it is not applicable for the rent a room allowance) 

You should have a rental licence between the director and the company showing the agreed rent and the hours available. The rent may be set at the level of the costs. This rent will reduce corporation tax for the business. The director will then show the rental income and costs on their income tax return. If the rent = costs there will be no tax to pay. If income exceeds costs, then the director will pay income tax on the profit but there is no national insurance. 

Costs that can be included are: 

• Rent 

• Ground rent 

• Council tax 

• Service charges 

• Maintenance 

• Utilities 

• Security 

• Cleaning 

There may also be some relief for mortgage interest (but not repayments so do ensure that you split the monthly charge) 

The costs should be apportioned across the available space by floor area or number of rooms (excluding kitchens and bathrooms). You can choose the most beneficial method, but you cannot keep changing it. In practice it is often simplest to allocate the household costs by the number of rooms. 

If the room is used full time for business, then, when you come to sell your home, you may have to pay capital gains tax on this portion of the property. In practice you will probably only use the room part time. If your spare room doubles as your office 5 days per week then 5/7 of the costs can be claimed to offset the rent from the business. 

You can pay into the pension of any of your directors/employees provided that it is proportionate to the work that they do. (See 9.pay your spouse a salary). This is useful as it reduces the amount of corporation tax that you pay. 

There are certain limits, and you should certainly speak to an IFA (independent financial adviser) about the detail. 

Each individual can only pay a maximum of £60kpa into ALL their pensions from ALL sources so do check what other contributions they are making/receiving. 

You can pay yourself up to £60k pension per tax year 6 April – 5 April.  
 
You can split this up and pay it throughout the tax year or in a lump sum just before we do your company accounts each year. For example, I pay a low amount into my pension each month then I top up just before my company year end (in July) when I know my profits, and again just before 5 April to maximise my annual payment.  
 
You will need management accounts to decide how much to pay. The tax saving for the company comes in the accounts year the pension is PAID so it actually needs to go out of the bank BEFORE your company year end (otherwise you claim it the following year). 

As your kids head off to university or out into the big wide world you may gift them some of the shares in your business. Alternatively, they can buy into the business themselves, and you can deduct this payment from their first dividend.

They might have the same class of share or a different class (see Alphabet shares which I’ll cover next week) so that you have more flexibility over the dividends that they receive. Paying them dividends would allow them to take advantage of the tax-free limit (currently £500) and any unused personal allowance.

They do not need to work in the business in order to receive shares. 

Save NI and maybe lower rate of personal tax.

This is a favourite bit of advice from ‘Dave at the pub’ and he may well be right as it reduces the corporation tax that you pay. If your spouse works in your business, then it would be right and fair to pay them for that work. The bit that ‘Dave’ forgets is that all expenses must be ‘wholly and necessarily for the purposes of business’ so, if your spouse doesn’t actually work in your business, it could be fraudulent.

We always ask our clients to provide a realistic job description (if we do your bookkeeping then you can’t include this as one of their tasks! Nor can you claim diary management if you trade from a mobile phone and book all your own appointments) and an estimate of the number of hours worked. This should show that the salary is reasonable for the work they do. You should pay them at least minimum wage and deduct relevant employment taxes.

Please don’t try to claim that minor children are working in your business! There is separate legislation covering minors in the workplace and you will need to get authorisation from their school and the local council as well as your insurance company.

Save corporation tax, pay PAYE/NI

If you are a director or working in your business, you can pay yourself a salary. If you are a shareholder, you can pay yourself dividends (provided that there are sufficient profits). In owner managed businesses it is common to take a slightly lower salary and higher dividends.  

Salaries are good because they will reduce your corporation tax. The company will need to pay employers’ national insurance (which may be offset by Employers Allowance) whilst the individual will pay PAYE and employees’ national insurance. Provided that the salary reaches the necessary limit, the employee will also qualify for certain benefits such as state pension. 

Dividends are good because there are no national insurance contributions to pay. They are paid out of post-tax profits so there is no corporation tax saving. Dividends can only be paid out of profits so, if the company is making a loss, there is nothing to pay out.  

Each year we calculate a tax efficient salary for our clients. For decades the most tax efficient route has been to take a lower salary and pay the balance in dividends but it’s not just tech that is changing as these days it is often better to take a higher salary so do check with your accountant. 

NB when selling your business any prospective buyer will adjust any salary to market rate when calculating the business profits. 

Paperwork (or the digital equivalent) is important.

If you are running a limited company, it is important that you don’t take any money out of the business without the correct paper trail. The company is a separate legal entity from the director/shareholder. It’s a bit like taking money out of your mother’s purse without permission.

The sort of paperwork you would need is: 

• Salary needs a payslip 
• Dividends need a minute and a tax voucher (contact us if you need a template) 
• Interest payments (if appropriate) need a form CT61 filed with HMRC 
• Expenses should be accompanied by receipts and a mileage log 
• Pension payments should be paid directly to the pension provider

Get in touch if you’d like our template minutes and dividend voucher

It seems really simple, you pay a very small fee and set up your own company on Companies House, but did you know that you have many legal responsibilities as a director? The sort that means you might personally be fined or go to jail? Here are some of them.

Whilst it might feel good to be the director of your own company you have several responsibilities as directors under the Companies Act 2006:

• To act within their powers (in the articles of association etc) 
• To promote the success of the company for the benefit of its members as a whole ie not benefitting one member above the company eg by allowing one director/shareholder to take out more dividends/loans that the company can afford 
• To exercise independent judgement – you can take advice but must decide for yourself 
• To exercise reasonable care, skill and diligence eg using a chartered accountant or professional bookkeeper if you don’t have those skills in house 
• To avoid conflict of interest  
• Not to accept benefits from third parties 
• To declare interests in transactions

(We cover these and more in our Governance for Directors course)