Is your limited company set up in a way to help you get the best returns possible?
When your responsibilities and assignments begin to take off as a contractor, the limited company you’re running needs a sound structure. If you know what you have to gain from running a limited company with a tax conscious approach, you might be surprised at how much running a limited company benefits you (and your entire household).
Here are five particular ways to effectively manage your limited company and maximise your income:
1. You can keep it in the family
If your spouse or another family member works for your limited company in some capacity, it could really pay off. One particular area is within the matter of issuing shares. If you don’t hold 100% of the shares yourself, a spouse or child with a vested interest in helping build the limited company is a smart person to issue some to.
It can be substantial, like having a spouse take over admin duties and assuming 45% of the limited company shares. Or it can be as simple as giving your son or daughter on break from University some useful pocket money. Done right (and with the help of expert accountants), you can reduce your tax liability significantly and increase your net household income.
For tax purposes, however, it’s important to justify the work that spouses or NI number holding children on the payroll are doing. Beyond tax purposes, there is no time for sentimentality: it is business at the end of the day.
2. You can do some advanced tax planning
As we wrote in Tax saving opportunities, loads of opportunities exist to help contractors get more out of their money.
Two of the main ways come through advancing expenditures (which can reduce your Corporate Tax liability) or buying business-related assets (and claiming capital allowances).
Do these tactics well (and with the help of a contractor accounting specialist), and you can allocate budget for all kinds of things.
- paid social advertising campaign
- much needed equipment
- in some cases, a new business-necessary vehicle
All can contribute to a more efficient way of managing your Limited Company tax bill.
Additionally, if you have some longer term financial considerations to make (for example, a child going to university), it’s worthwhile to place a call to Foster Denovo. As our tailored partner, Foster Denovo and ClearSky Financial Services offer tailored tax advice for contractors, the self-employed and business owners.
3. You can turn purchases into tax-reducing charitable donations
Here it is in a nutshell: the equipment or the vehicles might become unnecessary or replaceable. Buying and subsequently donating your equipment (either immediately or over time) allows you to receive corporate tax relief since the cost will be classed as a donation.
Do remember that there are many charitable things your limited company can donate, be it money for a local sports organisation, or equipment for an after school club. Even sponsoring a charity has its advantages: you can deduct them from your company’s pre-tax profits by treating them as a business expense.
Don't forget the good will you can build, either. Charitable donations benefit you through aligning your company with that of a charitable brand. Such collaborations provide a link to your website, put your logo on their literature or even allow for sale of any goods you might have. With help from good content specialists, the PR can be useful as well.
Admittedly, this point is particularly useful if your limited company has evolved into a small business, much like Parasol and ClearSky have over the years. But as we've noted in other contractor guides, incorporating as a limited company means you have this option at your disposal if you need it.
4. You can get paid while reducing and delaying tax obligations
One particular perk you’ll realise through becoming a company director is the ability to pay yourself a combination of salary and dividends. You’ll benefit from saving a significant amount on contributions to tax this way.
The catch lies in how you do it: if you can hold off on dividend payments until the new tax year, you’ve bought yourself a 12 month break from paying the extra tax due on those dividends.
Here is another example of taking home more income by incorporating dividends effectively and reducing your tax obligations. We take it from a previous post titled How are dividends taxed?
If you pay yourself a salary of £5,000, the remaining £6,000 of your personal allowance can be added to your dividend allowance. This means the first £11,000 of dividends will be tax-free.
How do I work out how much tax I owe?
To work out how much tax you’ll pay, you first of all have to factor in your dividend allowance. Anything left over will be taxed at the relevant rate band...You pay yourself a salary of £6,000 and withdraw £32,000 in dividends. Because you’ve only used £6,000 of your personal allowance, the remaining £5,000 can be added to your dividend allowance. This means that your first £10,000 of dividends will be tax-free.
The remaining £22,000 of dividends will be taxed at 7.5%, meaning you'll be charged a total of £1,650.
Remember: this illustration was for take home pay of £38,000. Follow those steps, and - as that £1,650 figure shows - you’ll have paid less than 5% tax on that. Insights like these are all the more reason to give us a call.
5. You can borrow nearly five figures interest free
A director's loan allows you to take out up to £10,000 interest-free from your business. Be prudent with paying it back: it will need to be done within nine months of your company’s year end.
As with all of these tips, we recommend that you call up one of our experienced accountants to get the full scope of the matter. Our dedicated team of accountants are on hand to help you understand the ways running a limited company benefits you.
Ring us on 08007 870 503 or request a call-back to make sure you’re making the most of being a Limited Company director.