As a wise person once said: it’s not what you earn, it’s what you pay. If you’re running your own business then you’ll want to ensure you’re as tax efficient as possible so that you get to keep more of your hard-earned cash.
So how can you be more tax-efficient? Working with a good accountancy firm will help maximise your profits as they will advise you on various tax saving opportunities that are relevant for your circumstances. However, it’s important to not let the tax tail wag the commercial dog. Taking into account your personal situation and business aspirations is essential when considering tax efficiency, as opting for a tax saving solution now could cause greater complications further down the line or affect your future commercial goals.
There are several simple tax saving opportunities available that are perfectly above board in HMRC’s eyes.
A company can pay into a directors’ personal pension scheme and this is one way to extract tax-free cash from your business whilst also reducing your corporation tax liability. Of course, pensions need to be the right option for you as the cash is tied up for now.
As an individual, there is a limit of £40,000 each tax year or 100% of your salaried earnings, whichever is lower, that can be paid into a pension scheme. There are some rules around higher earners so we recommend you speak to your accountant or financial advisor before considering this opportunity.
Work from home
With more of us now working from home, this is one easy tax break that is open to all.
If you’re self-employed, then claiming some tax benefit for working from home has always been an option and it doesn’t have to be difficult.
HMRC’s simplified expenses system means that if you work at your home for more than 25 hours a month you can claim a flat rate as follows:
- 25-20 hours working from home – £10/month
- 51-100 hours working from home – £18/month
- 101 hours or more working from home – £26/month
On top of this, you can also claim tax relief for expenses such as phone bills, internet costs and equipment.
Limited companies can also benefit from a flat rate for the use of their home as an office. The rate for this is £6 a week, you won’t need to provide receipts and it is an allowable expense. In addition, it’s not treated by HMRC as a benefit in kind so you therefore won’t have to pay tax on the amount either.
One of the biggest advantages of being a shareholder in a limited company is you can pay yourself dividends. Generally a combination of a small salary and dividends is the most tax efficient way of drawing income from the business, whilst still qualifying for state pension.
The first £2,000 of dividends won’t attract any tax, thereafter the tax rates are as follows for 2021/2022:
- Basic rate taxpayer: 7.5%
- Higher rate taxpayer: 32.5%
- Additional rate taxpayer: 38.1%
There could also be tax advantages of transferring some shares to your spouse and setting up an alphabet share structure. This will allow you to utilise their allowances also.
Do be aware though that the government is hiking dividend tax rates for 2022/2023: new rates will be 8.75% for basic, 33.75% for higher, and 39.35% for additional. Furthermore corporation tax rate is set to increase from April 2023 which will close the tax saving gap between salary and dividends.
Having a company car could be very expensive from a tax perspective so we generally do not recommend it. However should you wish to invest in an electric company car this can bring some worthwhile tax savings.
From April 2021 the benefit-in-kind tax rate for electric vehicles is 1% and will increase to 2% in 2022/2023. This means that should you wish to purchase a company electric car you will only pay 1% tax (in 2021/2022) on the value of the car and you may also get corporation tax relief on the lease payments. This is far more tax efficient than paying for the car personally.
If you’ve already maxed out your annual allowance and tried the business tactics above then you may wish to consider a tax-efficient investment scheme. Enterprise Investment Schemes (EIS) allow you to invest in small businesses (usually up to £1m, but in some cases, you can invest up to £2m) and claim tax relief on 30% of the amount you invested.
Venture Capital Trusts invest your money into a range of companies and are slightly less risky than EISs. The maximum you can invest is £200,000 and you’ll gain 30% income tax relief on this amount.
Investments can be complex and high risk so we’d always recommend seeking expert financial advice before committing to them.
Quick tax wins
There are a few simple quick wins mentioned above and we recommend talking these through with your accountant to ensure they are the best options for you and your business.
If you would like a second opinion please feel free to get in touch with Recruitment Accountants and arrange your free Business Review and start extracting maximum profit from your work.