Tax tips for limited companies
In this article we explore simple tax and finance tips which could help you save money as a limited company owner. Information based on experiences of running limited companies, dealing with accountants and tax advisors has been combined to produce the information.
Are you paying more tax than you actually need to?
- Dividends are not subject to National Insurance Contributions, which represents a significant tax saving compared to the sole trader route, where you will find NICs are payable on all income.
- As a limited company director, you may consider paying yourself in dividendsand a small salary. You may pay no PAYE (income tax) or NICs at all on your salary if it falls below the current threshold.
There are four rates of dividend tax payable, depending on the tax bands you fall in to.
- First £2,000 of dividends is tax-free.
- 7.5% rate on dividends for basic rate taxpayers (up to £34,500 on top of the personal allowance for the 2018/19 tax year).
- 32.5% on dividend income between the higher rate threshold (£34,500) and the additional rate threshold (£150,000).
- 38.1% on dividend income above the additional rate threshold of £150,000.
- 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 substantial.
- Subject to eligibility, for example 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.
- You can 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). It’s probably wise to seek professional advice from an accountant before considering this option, as so-called ‘income shifting’ is a contentious issue in accounting circles.
- Always ensure you only declare dividends when there are sufficient accumulated profits in the company to do so. Penalties will apply to any dividends that have been illegally declared.
- 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.
- You can 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 cash flow benefit than ‘tax saving’ as 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 and when your turnover reaches £85,000 over the past 12 months (2018/19 tax year). HMRC have recently been clamping down on businesses that have failed to do so, and this can result in being issued a fine.
- Another option is to 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.
It’s always advisable to seek professional advice if you are unsure about any of the information and are seeking clarity. It’s best to get it right first time to avoid penalties for any mistakes.