Many small business owners start out with a sole trader set up. Personal ownership enables you to ease yourself into self-employment without dealing with the additional obligations and responsibilities, including more complicated accounting and record-keeping requirements, that are part and parcel of operating as a limited company.
The majority of self-employed people follow a similar path in this respect. They start as a sole trader, work hard to get established, build a solid client base and grow their business. Then they incorporate to capitalise on the many benefits and advantages of operating as a limited company.
These benefits include limited liability, which means your personal assets including your home, investments and car should be protected if your business ran into financial difficulties and became insolvent.
Limited companies are also considered to be more credible and they can claim a wider range of expenses including travel, equipment and phones which increases take home pay. Self-employed people operating through a limited company also have significant scope to maximise their take home pay through efficient tax planning to reduce the amount of tax they pay.
At Gorilla Accounting, we’re all about maximising your profits and reducing tax payments. We know everything there is to know about tax reliefs, allowances, and more to help increase your take home. So if you think you’re paying too much tax, or would like to pay less, read on to find out how you can reduce your tax liability and get in touch if you’d like one of our expert accountants to handle it all for you.
Tax-Efficient Remuneration
If you operate through a limited company and are outside of IR35, you have more control and flexibility to pay yourself by structuring your remuneration through a combination of salary and dividends. Dividends are company profits that are distributed between the shareholders of a company. If you’re the only shareholder in the business, the dividends are all yours!
Dividend tax rates are lower than income tax rates, so if you pay yourself a small salary and make up the difference in dividends, you can cut down your income tax and National Insurance contributions which results in more take home pay.
It would be wise, however, to not withdraw all your company profits as dividends. If you keep some money in your business you have the flexibility to take a break or perhaps a couple of weeks in the sun. You also have a buffer if your business has a lean spell.
Retaining funds in the business can also help you to pay less tax as it could keep you in a lower tax band. If you withdraw all your earnings, you might move into a higher tax band. Use our Salary & Dividend Tax Calculator to see how much you can save by paying yourself through a combination of salary and dividends.
Give Gifts to Charity
You can pay a reduced amount of corporation tax when you make donations to charity such as money, shares, property, equipment or land. The value of the donations are deducted from company profits before tax is applied.
Donations can be made through personal contributions or Gift Aid. This tax relief is available to sole traders, partnerships and limited companies but the rules are slightly different for limited companies.
Records of any donations made will need to be kept if you intend to take them off your taxable income.
Utilise the Flat Rate VAT Scheme
Many self-employed people operating outside IR35 use the Flat Rate VAT scheme. This scheme is designed to make the process of charging and reclaiming VAT simpler for small businesses, removing part of the administrative burden associated with being VAT registered.
VAT is charged to suppliers and customers in the same way, but your VAT returns, and how VAT is calculated is different.
Through the flat rate scheme, a fixed rate of VAT is paid to HMRC and you keep the difference between what you charge to your customers and what you pay HMRC. VAT can’t be reclaimed on purchases with the exception of specific capital assets over £2,000.
The flat rate VAT percentage you pay is dependent on the sector your business operates in and the cost of goods used. If you’re in your first year as a VAT-registered business you will get a 1% discount.
You have to apply to HMRC and meet certain requirements to be eligible for the scheme, including:
- VAT taxable turnover must be less than £150k
- Your business can’t be closely associated with another business
- You can’t have been found guilty of a VAT offence, or paid a penalty for VAT evasion, within the last year
Use Your ISA Allowance
You can use an ISA to easily reduce your tax bill. Up to £20,000 can be put into an ISA each tax year. This could be all in one ISA, or split between a cash ISA, stocks & shares ISA, innovative finance ISA or a lifetime ISA.
Any interest that’s earned from a cash ISA isn’t subject to income tax, so it’s tax free. You also don’t have to pay tax on any dividends received or capital gains realised from shares held in a stocks & shares ISA.
Make Contributions To Your Pension
Another way to trim the amount of tax you pay as a limited company owner is through pension contributions. Pension contributions are an allowable expense which enables you to lower the amount of corporation tax you pay.
Personal contributions can be made, or alternatively you can make contributions through your limited company from pre-taxed company income which is viewed as a business expense due to the company getting tax relief against corporation tax. In the current tax year, you can contribute up to £40,000.
Take Advantage of Research & Development Tax Credit
As a small business owner, you might be undertaking Research & Development (R&D) work to develop new products, processes or services. This is especially relevant for new businesses that are just starting out and investing in developing a new offering. But with R&D comes expense, and with expense comes an element of financial risk.
The financial risk can be mitigated through R&D Tax Credits – a Government incentive scheme designed to encourage innovation and growth for UK businesses by allowing a percentage of investment in innovation to be claimed back.
The scheme allows up to 33.35% of R&D spend to be recovered as a cash repayment or through corporation tax. Eligibility is not limited by industry but making a claim can be complex. Gorilla Accounting are experts in R&D tax credit applications and can guide you through the full process from checking eligibility to submitting the application.
Work With The Right Accountant
An easy way to pay less tax is to work with an accountant. Although this will require you to pay a monthly fee for their services, having the expertise of an accountant in your corner will mean you get the best advice to leverage all available tax efficiencies and increase your take home pay. Not to mention the amount of time you’ll save from not having to handle your accounts and record keeping yourself – time that can be focused on growing your business.
Gorilla Accounting are expert accountants for small businesses and the self-employed. We can provide expert advice to reduce your tax liability as well as preparing and submitting key documentation to HMRC. We know how to best maximise your profits so that you’re paying only the amount of tax you should pay to HMRC, and not a penny more.
Our fixed-fee pricing structure is transparent so there are no nasty surprises. With Gorilla Accounting, you’ll get your own dedicated accountant, full inclusive access to market-leading FreeAgent accounting software and a same day response to any query submitted on a working day before 3pm.
As company formation experts, we can set up your limited company for just £50 + VAT so you can leverage the tax savings that incorporation presents. Don’t forget to check out our salary tax calculator to see how much you could save by incorporating and splitting your remuneration between salary and dividends. Our accountants are on hand should you have any queries so call 0330 107 9678 or request a call back for expert tax advice.
