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Specialist contractor accountants, Brookson, give their top ten tax planning tips..
1. Mitigate any national insurance costs
The biggest tax advantage of operating as a limited company contractor is the opportunity to mitigate any national insurance costs. This can be achieved by ensuring that the Director’s Fee that your company pays to you is set at the optimum level. For the current tax year this is £10,000 for the year from 6 April 2014 to 5 April 2015, providing you remember to claim the NI “Employment Allowance” via your RTI submissions. We hear stories of many accountants advising their clients to pay a directors fee in excess of this amount to “stay off the radar” in terms of IR35 inspections, we see no evidence of this being true – every £1 taken as a Director’s fee above the £10,000 represents NI “leakage” so is costing you money. Having said that IR35 is not an issue to be overlooked and you should ensure that all of your contracts are reviewed by an IR35 specialist and re-reviewed on a regular basis as being captured by IR35 removes most (but not all!) of the financial benefits afforded to limited company contractors.
2. Ensure you are claiming tax relief on all allowable expenses
This will save you a minimum of 20% in tax relief. Don’t forget to also claim reimbursement of any personally incurred expenses which are “wholly, exclusively and necessarily” incurred in the performance of your duties, for example mileage, professional subscriptions and accommodation costs which you may have paid for personally. Claiming these will enable you to extract profits from your company free of tax thereby saving you up to 40% of the cost. Remember to seek advice from your accountant if you are unsure on whether an expense is allowable!
3. Know your company’s tax position and ensure this is kept as up to date as possible.
Once you have got your directors fee set at the optimum level, recognised your company expenses and claimed reimbursement for personally incurred costs you will be able to work out how much profit your company has made at any point in time. After factoring in accrued VAT and corporation tax (and minimal PAYE) you will then know your company’s profit after tax – this is the maximum amount you are allowed to take as a dividend, anything over this is illegal.
4. Knowing how much you can take as a dividend
This ensures you can plan how much more you can draw from the company and consider the tax implications associated with it – you don’t need to take all company profits as a dividend. You can choose to take what you need to fund your lifestyle or simply take the most tax efficient amount to ensure you do not breach the higher rate tax threshold. Assuming your directors fee is £10,000 for the current tax year, you can safely take an additional £28,678 from your company as a dividend without incurring any personal tax liability (assuming you do not have any other income). If you take more, 25 per cent of it will be lost in personal tax – this is where considering appointing another shareholder may be appropriate – however, seek advice before doing so.
5. Flat rate VAT
If you have turnover under £150,000 per year, low expenses as a proportion to turnover and work for clients who are VAT registered (and you don’t make zero-rated or exempt supplies) Flat rate VAT is a no brainer and can save you thousands of pounds a year.
6. Mobile phones
Most people now own a mobile but many are not aware that HMRC will allow an employer to provide its employees with a mobile phone for business use (which can also be used personally) and claim corporation tax on the cost and not incur a benefit in kind on the employee. This applies to limited company contractors, so your limited company can provide you with a mobile phone and you will save 40% of the cost (if you are higher rate taxpayer). Brookson customers are able to run their business from their smart phone using Connect, thereby justifying the business use. The only caveats are that the phone contract is taken out by the company (adding the company name to a personal contract / invoice will not suffice) and the company pays for the contract. Even better news is that HMRC have confirmed that they are “appy” to accept that iPhone’s and Blackberry’s are mobile phones. Remember though, you are only allowed one per employee.
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Each year a company can pay for a staff party for its staff, up to the value of £150 (including VAT) per guest, and claim corporation tax relief on the cost and not incur a benefit in kind charge on the staff member. Again, this applies to a limited company, so your limited company can pay for a staff party and you will save 40 per cent of the cost (if you are a higher rate tax payer). Caveats here are that the cost must not exceed £150 (including VAT) in each tax year, if it does the whole cost is taxable, not just the excess. The limit is per guest so you could bring your spouse or partner and providing the cost does not exceed £300 (including VAT) it will be tax free. I wouldn’t recommend inviting all your friends and family though as HMRC will argue this was not a staff party.
8. Financial products
One of the perceived disadvantages of working as a limited company contractor as opposed to a full time employee is the lack of benefits such as life insurance and pensions. As a director of the company you are able to set up these benefits for yourself, many contractors have a company pension scheme which not only helps save for retirement but is also a tax efficient way of extracting profits from the company. In addition there are several life insurance products in the market which are tax advantageous.
9. Extracting the company profits
If you think that your company may not be required in the next few years, for example you are planning or retiring or taking a permanent role, you should start, sooner rather than later, to consider a tax planning opportunity enabling you to extract the company profits at a rate of 10 per cent (as opposed to 25 per cent if you are a higher rate taxpayer). This form of planning is becoming ever more popular but may require the assistance of an Insolvency Practitioner, thereby bringing excess costs, so discuss this with your accountant before making any decisions.
10. Support services
Consider the support you need to help you to run your business efficiently, make the most of the tax breaks available to you and stay safe. Do you just need an accountant to do your year end accounts and tax return or do you need an accountant, bookkeeper, tax advisor, financial advisor and legal expert who specialises on supporting limited company contractors?
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Susie Hughes © Shout99 2015
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