Every year tax rules change. Inevitably it means more taxes and fewer savings. When you run your own company it’s important to know every single opportunity to save tax. This isn’t about complex tax avoidance, it’s about making the most of the tax savings you are entitled to. This guide helps you understand how to save tax.
There are a number of taxes in play when running your own company. Corporation Tax – paid by the company on its profits, VAT – charged on every sale you make, but offset by your purchases, income taxes – paid on your salary, benefits and dividends, National Insurance – paid by both the company and directors and employees on their salary and benefits. Each of them needs to be considered when trying to save taxes.
Let’s first focus on the basics. When your company spends money this reduces both your Corporation Tax and VAT bill. With Corporation Tax currently at 19% and VAT mainly at 20%, if your company spends £120 (£100 + VAT) you save VAT of £20 and Corporation Tax of £19.
So what would cost you £120 as an individual, costs you £81 when put through your business.
So this sounds simple, put every expense through your business and save lots of tax. If only things were that easy. Sadly many tax rules exist that stop you from claiming tax relief in many circumstances – mainly when you are having fun.
Spending money on yourself
If only you could spend company money on yourself and save corporation tax and VAT in the process. If it were this easy all of your household expenses would go through the company!
Sadly, HMRC wasn’t born yesterday. They have rules called “benefit in kind” rules. Essentially, anything you spend on yourself does indeed get a tax deduction in the company, but you as an individual then get taxed on it.
With the company saving tax at 19% (Corporation Tax rate) and personal tax rates of 20%/40%/45% depending on your earnings, there is a real risk that the company saves money at 19% and you pay tax at 40%. And that’s before National Insurance is slapped on top.
Clearly, this isn’t great planning.
So how do you save money?
Whilst the list gets smaller and smaller each year. Luckily there remain a number of exceptions to the above. The trick is to maximise spending on these genuine exceptions. So the company will still save tax, but you won’t end up paying any tax. Now, this is genuinely free money!
Tax free delights
In the section below we set out a summary of the most common areas on which you can save tax. Tax is complex, and every company and individual has different circumstances. So these should be treated as a general guide and not specific tax advice.
Treat yourself to an annual party or maybe a summer and Christmas meal out. As long as you don’t spend more than £150 per person (including VAT) the company gets a tax deduction and you as an individual pay nothing. Everyone attending has to be a staff member, and there can be no extra guests.
A company can spend small amounts of money on its directors and employees without causing them an extra tax bill. As long as the item costs less than £50 and isn’t cash or a voucher, the company gets tax relief, and the individual pays nothing.
If you are a company director (or a family member of one) then there is a cap of £300 per year on these trivial benefits
As long as the company holds a mobile phone contract, this gets full tax relief within the company. And in a 21st century move from HMRC, there will be no extra tax on the individual. Only one phone per person though.
Laptops and tablets
This is where it starts to get complex. If the item is only for business use then all is good – the company gets tax relief and there is no tax on the individual. However, if there is personal use than because the laptop has “dual purpose” there will be tax to pay by the individual.
However, if the personal use is merely incidental then nobody minds and this is another example of a tax free purchase.
Loans to the company
If your company needs funds, you as a director can lend the money. Better still you can charge the company a commercial rate of interest. Check out some bank rates – they are quite high.
And because there is a up to £1000 of tax free personal savings allowance, not all of this interest will get taxed when you receive it. Another money spinner.
But, you can’t go stuffing the company with loans unnecessarily!
In general company cars are a terrible idea. However, there is one exception – electric cars. If the company buys an electric car there are very generous tax reliefs available.
For petrol and diesel cars, there are very punitive taxes on the individual. However, for pure electric cars it’s only 2%. So these cars make sense from a tax perspective.
Company travel and subsistence
Many people will have to undertake some level of travel to win and deliver work. If the company pays for all of these costs it gets full tax relief.
Within certain limits, there will be no further tax on the individual. So enjoy the hospitality on the company’s account.
This includes meals and drinks while you are on the road.
Make sure the company pays for that eye test. If you use a computer for work, the company can pay for the eye test and everything is tax free.
Glasses are a little more complex. If you buy a pair that you only use for business, then these too should be tax free. However, if you wear them at other times then sadly it’s going to be benefit in kind which means tax!
One of the best ways of paying yourself in a tax free way, is to have the company fund a pension. Now, this obviously comes with downsides – you can’t get the money for a long time.
But as well as the company getting full tax relief, HMRC will top up any payments made into the pension fund. So the fund gets another 20% or 25% depending on yout tax rate.
This is literally free money.
Now pensions do get complicated, and there are certain situations, particularly for very well paid people when further tax becomes due.
Working from home
A company can pay you a small tax free allowance for working from home. Whilst not a huge amount all of these things add up to make a difference
Not all companies have to register for VAT. Those with a turnover above £85,000 must register for VAT, but any company can voluntarily register. What does this mean and why would you do it?
VAT is complex and depends on your business. But in general, when you are VAT registered you can claim the VAT back from all purchases (saving you money), but you have to add VAT to any sales.
So will this make things more expensive for your customers?
That depends if they are VAT registered. If they are, and most businesses are, then they will claim this VAT back as well.
So the general rule is, if you sell your services or products to businesses rather than consumers it will likely make sense to register for VAT and enjoy those savings.
How to pay yourself
There are two main ways to pay yourself from a company – pay a salary or dividends. Now of course you can pay a combination of both. Actually, there is a third way and that is to leave money in the company for future investment and company spending.
So how do you use these options to minimise tax? It is very dependent on your individual circumstances, such as whether you have another job and how much money the company is making. But the general rules are relatively simple.
Firstly, it is important to make sure that you get sufficient National Insurance credits each year so that you qualify for the state pension. If you have no other income and just pay yourself dividends these won’t count. And by retirement, you will have missed out on a lot of money. So making sure you are paid to the penny the right amount to qualify for National Insurance contributions is the first step.
The first National Insurance rate for an employee is actually a 0% rate. So it’s worth maxing out this allowance. However, in theory, that would mean the company would also have to pay some employers’ National Insurance. However, by electing to claim the Employment Allowance, the company can avoid paying the first £5,000 of National Insurance!
For salary, you alwo need to consider other earnings. Because these might push you to a higher personal tax bracket. If that is the case, it might not be cost effective to pay you salary.
Dividends used to be a great tax efficient way of paying yourself. Sadly, things have got worse over the years, and tax reliefs have been reduced and new dividend taxes introduced. However, they still often work out better than salary.
When you pay a salary, the company gets tax relief, but for dividends it does not. Dividends and salary are taxed on the person at a different rate.
So all in all this is a complex area, that needs to be optimised on a case by case basis to ensure the minimum tax is paid.
If you choose to leave money in the company then those profits will be subject to Corporation Tax, but not subject to any further personal taxes.
Funding a company
Every company needs money to get going, and to expand. Often this money is invested in the form of share capital. This sits in the company and provides an amount of working capital.
A company can alwo borrow money, and that includes borrowing money from you the owner.
The advantage of having an appropriate amount of debt in the company is that any interest payments in the company get tax relief. So this reduces the company’s corporation tax bill.
Whilst in theory the interest is taxed on the person lending the money, we each have a number of potential tax free allowances, which often mean the interest is tax free. Personal allowances, personal savings allowances, and the starting rate for savings all mean that you can get a tax deduction in the company, and not pay any tax yourself!
Things to watch out for
As you can see there a large number of things to think about when planning tax savings for your company. Tax law is complex, and often there are caveats and exceptions to all of the above. In addition, the savings available often depend on your individual circumstances.
this is a general guide and can’t be relied upon for individual company or personal circumstances. Please contact your accountant and make sure you are getting all of the tax reliefs you are entitled to.
Mounthurst Tax and Accounting provide free initial consultations where all of these savings can be explained and understood better. Getting these tax savings is just one part of our normal service to clients.