Did you know that limited company owners can (legally) reduce the amount of tax they pay? At Gorilla Accounting, we’re all about helping you to maximise your profits, so we know everything there is to know about tax reliefs, allowances, and more.
If you think you’re paying too much tax, take a look at the different ways you can reduce that amount – and get in touch if you’d like a dedicated accountant to handle it all for you.
Make Pension Contributions
One way to reduce the tax you pay when you own a limited company is to make pension contributions. This is because paying into a pension counts as an allowable expense, which means you can lower your corporation tax amount.
You have two options: you can make personal pension contributions or make contributions through your company. If you’re unsure which one is best for you, we can easily help you as limited company accountants.
If you make personal contributions, you can get tax relief that reflects the amount of income tax you pay; however, there’s a limit to how much you can contribute while receiving this tax relief. At the moment, you can contribute up to £40,000 tax-free during the tax year.
You can also make contributions through your limited company. In this case, from pre-taxed company income (which is seen as a business expense), as your company gets tax relief against corporation tax.
We’ve written about how you can reduce your corporation tax before, so why not give it a read to find out other ways to pay less?
Give a Gift to Charity
You can also get some tax relief when you donate to charity. This can be done through Gift Aid contributions made personally. This applies to sole traders and partnerships.
As for limited companies, you can pay less corporation tax if you give money, equipment, property or land, etc., to charity. You’re able to deduct the value of your donations from your profits before tax is applied.
According to HMRC, certain things don’t count towards your donations, including dividends and loans that the charity will have to repay.
Transfer Personal Allowance to Partner
You may also want to consider the marriage allowance if you’re married or in a civil partnership, as HMRC allows you to transfer £1,260 of your personal allowance to your partner. By doing this, you can cut your tax bill by up to £252 in the current tax year.
To be eligible for this scheme, one partner’s income must be under £12,570 (the current personal allowance) and the other partner’s income must fall into the basic rate tax band.
The government has provided a marriage allowance calculator to make things easier, but you can also ask Gorilla about this scheme if you have any questions about it.
Use Your ISA Allowance
ISAs can help you to save money by cutting your tax bill, so don’t forget to consider this option as well.
For example, you can put your ISA allowance (which has been set at £20,000 for the tax year for a while now) into a Cash ISA or a Stocks and Shares ISA.
Interest earned from your Cash ISA is tax-free, and you don’t pay taxes on dividends from shares if you have a Stocks and Shares ISA.
Join the Flat Rate VAT Scheme
Many contractors prefer to use the Flat Rate VAT scheme instead of the standard one, since it simplifies VAT for small businesses. Another benefit is that you pay a fixed rate of VAT to HMRC, keep the difference between what you charge customers and what you pay HMRC. You can’t reclaim VAT on your purchases (unless specific capital assets over £2,000).
Your flat rate percentage will depend on the business you run and the cost of goods used by the business, and you even get a 1% discount if it’s your first year as a VAT-registered business, which is a solid reason to join this scheme, since it will save you money.
To be eligible for this scheme, however, you have to apply with HMRC and meet certain requirements, including:
- The total amount of sales that will have VAT applied to them must be under £150,000
- Your annual business income can’t be over £230,000
- Your business can’t be closely associated with another
- You can’t have been found guilty of a VAT offence (or forced to pay a penalty for VAT evasion) in the last 12 months
Choose Contracts Outside IR35
As a contractor, you’ll have to consider the off-payroll legislation, which has been controversial since the day it was implemented. Working outside of IR35 can help you to save on your tax bill but this is not always possible. Many contracts are considered to be inside IR35, and it’s important that you know where you stand.
If you can, seek out contracts that aren’t affected by this rule – make sure you familiarise yourself with what it means to be inside IR35, including learning about mutuality of obligation, the control you have over the job and your right to substitution.
For contractors inside IR35, charging higher rates can help you to absorb the costs of the income tax and National Insurance contributions you’ll have to pay. So, make sure to review your rates and look for opportunities to increase them, whether with your current contracts or with future gigs.
If you’re looking for expert IR35 advice, you can count on Gorilla to help. Our accountant team has many years of experience helping contractors navigate this complex legislation, and we can do the same for you.
What’s more, we’re also able to offer a comprehensive IR35 review to our clients through the Kingsbridge Status Tool, so make the most of this to find out whether you’re inside IR35, to learn more about the next steps, and more.
Consider Dividends
This is another way to reduce your tax bill. Dividends refer to the profits you distribute among all the shareholders of a company – if you’re the only shareholder, you can keep all the dividends you withdraw. You can also withdraw them after corporation tax is deducted.
Consider paying yourself a small salary and the rest in dividends, so that you can cut down your income tax and National Insurance contributions.
Additionally, you may want to keep some money in a pot within your business so that you’re free to take a break between gigs (or a holiday), which also helps you to stay within a lower tax band – after all, if you withdraw all your earnings, you may be considered a higher rate taxpayer.
Hire an Accountant
An efficient way to pay less taxes when you’re a contractor is to get an accountant! You may think that this is an expense you can do without, especially if you’re just starting out, but having your own dedicated accountant will help you to save a lot more money than if you opted to handle your accounts by yourself.
As small business accountants, Gorilla can help you to reduce your tax bill by providing expert advice and assist in preparing and submitting key documentation to HMRC. We fully understand UK tax law and know how to best maximise your profits so that you’re paying only the amount of tax you should pay to HMRC, not a penny more.
Also, we specialise in accounting for contractors, freelancers and locums, meaning we have in-depth knowledge of rules and legislation that are specific to self-employed individuals.
Not only this, but we can set up your limited company for you as well (and for just £50 + VAT)! If you need a registered office address, we can also supply you with one for just £10 + VAT a month, a very low amount that will sort out your business needs while still staying within your budget.
Other things we can do for you include assisting with your small business R&D tax credit, an initiative designed to help UK businesses develop themselves; this scheme allows up to 33.35% of a company’s research and development spend to be recovered as a corporation tax reduction or a cash repayment.
If you’re interested in what we have to offer – or simply wish to learn more about what it means to be a Gorilla Accounting customer – speak to us and we’ll be happy to discuss your business with you.
As a client, you’ll also receive an answer to your most pressing queries on the same day if you contact us before 3pm, so join the Gorilla Accounting family to benefit from countless perks!
