If you don’t plan there is a good chance that you and your business will pay more tax than is necessary. What action can you take to avoid overpaying?
Show income in correct period
If you normally receive money before carrying out work, the income should be shown in your accounts when you’ve performed the work, matched with the costs and expenses of doing the work. Say you’ve received £5,000 in March for a consultancy project to be delivered in April. This should not be shown as income (hence profits) in your March accounts to avoid overpaying your taxes early.
Check you’re not missing out on these expenses
Where you’ve incurred expenses wholly and exclusively for the purpose of your trade or business with evidence to back this up, claim these first. Then review and claim, for example: Interest paid, including on loans you have made to the business, use of home as office (reasonable amounts only to avoid more tax later), Bad debt provision (make sure you have taken steps to recover the money). There will be more your accountant can discuss with you.
Claim for R&D
Normally when you incur a legitimate business expense wholly and exclusively for the purpose of your trade, you can claim 100% of these expenses against your business income. But what if the tax rules allow you to claim a lot more than 100%?
That’s exactly what the Research and Development (R&D) tax relief allows you to do. If you have a company in the creative, engineering, software or any innovative industry where you’re solving difficult problems for customers and raising the bar in your industry, please speak to your accountant or a specialist tax adviser about R&D tax relief.
Review your pensions and consider your contribution
Pensions provide one of the most tax efficient ways to save so review how much you are contributing.
If you’re a director of your own company, it is possible for the company to pay into your pension pot (say SIPP or SSAS) for you as part of your remuneration. Then you can leverage the funds and get a second bite of the tax cherry. How? These pension schemes (say a SIPP) subject to certain rules can be used to buy, say, a commercial property and the rental income gets additional tax benefits.
Use capital allowance or crystallise your losses
Your tax-free capital gains allowance is £11,700. If it makes financial sense to sell some of your investments, then doing so just before the tax year and just after the tax year will reduce your tax bill. Why? Because you get to use two allowances and defer the tax on the second sale until January 2021.
Where your investments have not done well or have fallen in value then selling them before the tax year means that you crystallise any losses you’ve made which can be used against any profits from your other investments or carried forward into future years.
Use and leverage income tax allowances
Adding up the income tax allowance, savings allowance and dividends allowance you get about £14,850 tax free income for single people and £29,700 for married couples. The action is to generate enough income to fully utilise personal allowances.
For higher rate tax payers, the personal allowance is reduced by £1 for every £2 of income above £100,000. For those with income band of £100,000 to £123,700, the effective rate of income tax is 60%.
The action is to reduce your taxable income by making pension contributions or transferring other income producing assets to your spouse. However, you do need to take care and get expert advice/help.
Don’t lose your ISA allowance
Consider making full use of the stocks and shares ISA allowance for each tax year.
For example, for 2018/19 if you’re over 18 and a UK resident, you can contribute up to £20,000 to a stocks and shares ISA this tax year and there’s no UK income or capital gains tax to pay on your investments. And although it’s designed for the long term, you can take money out if you really need to. Speak to your financial adviser about this.
Careful planning will help reduce the tax you pay. Regarding all the guidance and tips given in this article, please speak with a qualified professional before proceeding with any tax or investment decisions. You may be surprised what you can save.
ABOUT THE AUTHOR
Jonathan Amponsah CTA FCCA is an award winning chartered tax adviser and accountant who advises business owners on entrepreneurial tax reliefs. Jonathan is the founder and CEO of The Tax Guys.