The common perception is that tax planning involves complicated arrangements and structures that accountants or lawyers create to reduce the amount of tax you pay. This is not the case. Tax planning is available to everyone and the Government regularly introduces new legislation and allowances. Understanding these and how they might apply to your circumstances allows you to ensure you pay the right amount of tax, minimise your tax bill and comply with current rules.
It is important to point out the difference between avoidance and evasion of tax. Avoidance, deferring Dividends to a more convenient date and claiming the correct Business Expenses, is legal. Evasion, stashing money away and denying knowledge of it or claiming inappropriate Business Expenses, is illegal.
Good tax planning is about using the existing rules to structure your affairs in a tax-efficient way to your best advantage. With this in mind we also consider some Tax Beneficial Investments, some details on ISAs, Tax Relief on Pensions and ways of Extracting Profits from your Company. Also the New Personal Savings Allowance allows greater tax –free savings.
It is important to stress that this is general guidance and should not be relied upon in isolation as either tax or financial advice. Before choosing a course of action it is always advisable to seek a professional opinion, so your unique personal and business circumstances can be considered.
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So, what is good tax planning in practice?
Confirm your Employment Status (IR35)
It is an essential part of your Role as a Director to understand and confirm the IR35 status of each assignment/client relationship your business will have during the year. The PAYE and NICs your company pays to HMRC are dependent on your employment status (IR35). Should any of your assignments fall within the remit of IR35, it will affect your tax position and the amount of money you can withdraw from your company each week.
Plan your Second Shareholder dividend split
If your company has a Second Shareholder you are, in certain circumstances, able to split the Dividends and each be taxed separately on your share. This enables both shareholders to use the basic rate band of income tax efficiently. When allocating your dividend split it is important that you document what you have done accurately. Ensure your company is set up for two shareholders and the right shares have been issued. The dividend paperwork should always correctly show the split of funds between you before the monies are paid.
You can issue shares to a Second Shareholder at any time but this cannot be done retrospectively. Similarly, you can choose the split that suits you both and alter it should circumstances change. It is important that you understand the potential risks associated with this. In the Budget announcement of 2009 the Government confirmed that it would not introduce ‘income shifting’ proposals, but would keep this under review.
Consider your pension contributions
It is always advisable to consider the level of pension contributions made during the year and make sure you are comfortable with what you pay. If you believe that your personal income for the year, which will include Directors' Fees, dividends and other income, will take you over the higher rate threshold of £43,000 you will have a higher rate Personal Tax bill to pay once your Self-Assessment return is completed. With effective tax planning you can reduce or eliminate this liability through your pension contributions.
Personal contributions into an approved pension scheme attract tax relief at your highest Personal Tax rate. This can lower the amount of your personal income that would be taxed at the higher rate subsequently reducing you tax liability.
Contributions made by your company into a pension scheme for you are deductible for Corporation Tax purposes and there are no personal tax implications.
Claim the correct expenses
Business Expenses can be reimbursed to you without any tax implications and at the same time reduce your company’s Corporation Tax. The majority of expenses are incurred, recorded in your accounts and then paid out in the same tax year. By submitting your expenses in the year they actually relate to you can ensure you gain a tax advantage as soon as possible. Late claimed expenses will still gain tax relief but you will have to wait a further 12 months.
If you have incurred an expense wholly, exclusively and necessarily in the performance of your duties, reimbursement of these expenses is not income and should not therefore be taxable. If your company has incurred an expense directly, there should be no Benefit in Kind to you and the business should gain full tax relief.
Avoid Directors' Loans
Where amounts have been borrowed from the business but not identified as dividends or salary, they will be classified as directors' loans and shown in the accounts as such.
If you leave a directors' loan in the company at the year-end there may be additional tax to pay and your company will have to provide supplementary returns to HMRC.
If the balance of the directors’ loan exceeds £10,000 at any point during the financial year a taxable Benefit in Kind charge will arise. This will result in additional income tax and National Insurance being payable.
Should the directors’ loan remain outstanding, and not be repaid within 9 months of the year-end, the balance will incur a 32.5% tax charge for loans taken out after 6th April 2016. This tax charge is only refunded when the loan is repaid to the company. Again, to reclaim the tax an additional return to HMRC is required.
By avoiding taking loans from your company or by actively putting in place a repayment plan, both these issues can be avoided.
Dividends are only taxed when they are paid to you personally and, as a director, you have some control over when you pay those dividends.
You should plan your dividend withdrawals carefully in light of the changes to the dividend rates in force from 6th April 2016.
Capital expenditure refers to anything tangible that you purchase for your company for future use such as computer equipment, significant pieces of software or tools and equipment. Corporation Tax deductions for the cost of the item have historically been given over a number of years and were known as capital allowances.
For plant and machinery, etc. you can now claim up to £200,000 of capital purchases ( from 1st January 2016)-which means 100% of the cost of capital purchases can be deducted from the company profit before Corporation Tax is calculated.
Ensure tax payments are up-to-date
Ensuring your tax payments are up to date is more about your public presentation of your business than tax savings. HMRC will charge interest on late payments of tax however, and can even instruct debt collectors over outstanding amounts.