Name: Aileen Scott
Company: Campbell Dallas
Aileen Scott is a partner at Campbell Dallas, Charterted Accountants. Email Aileen with your financial queries and she will answer in following issues of BWS magazine. e: firstname.lastname@example.org
Reducing tax as an overhead
As a small business owner you are always looking at ways to bring in more business and increase profits. A review of business overheads is an important part of maximising the profits. Below are some simple tax saving ideas that even the smallest of businesses may benefit from.
Cars and Fuel
Whilst providing company cars is often a popular benefit, in the majority of cases providing a car allowance to an employee for them to provide their own car, together with reimbursement of fuel for business journeys will represent a saving to both company and individual. Providing the fuel allowance is within HMRC published advisory fuel rates, so the sum received in reimbursement of business journeys is not taxed.
For those businesses that do not operate through a corporate structure, such as a sole trader or partnership, the proprietor(s) may well benefit from their vehicle being acquired by the business as this can lead to recovery of 50% of the VAT costs associated with the vehicle, but without benefit in kind charges applying.
Timing of Expenditure
Try to incur expenditure just before rather than just after the year end, as this will accelerate the tax relief. Examples of the type of expenditure to consider bringing forward include building repairs and redecoration, advertising and marketing, and expenditure on plant and machinery.
Salary or Dividends
In most small companies the directors and the shareholders are one and the same and so they can choose to remunerate themselves in the most tax efficient way. Using dividends can result in savings in NIC.
Where shares in the business are also owned by your spouse then it may be prudent to ensure that, if they have any available lower rate band, that this is utilised by paying a dividend to them too. In general where possible tax is minimised if spouses equalise their income to ensure that all personal allowances are fully utilised and higher/ additional rates of tax are minimised.
For those with income in the range £100,000 – £120,000 the restriction in your personal allowance is the equivalent of a tax cost of 60%. You may in these circumstances wish to consider making or increasing certain payments which are tax deductible to minimise this cost. Examples include pension contributions (subject to limits) and charitable donations. It should also be borne in mind that there is nothing to stop you employing your children in the family business so as to take advantage of their personal allowance. There are age restrictions (generally the minimum age is 13). It is essential that payment is only made for work carried out at a reasonable commercial rate.
Other Tax Efficient Forms of Remuneration
Consider changes to the remuneration package offered to your staff to maximise tax efficient payments / benefits provided rather than simply providing salary. This might be childcare costs, which if paid for by an employer, are exempt from both income tax and NIC. This applies to either a placement in a workplace nursery or where the employer pays for registered or approved childcare, so long as the scheme meets certain requirements. In the latter case there is a limit to the exemption of £55 per week with any excess being subject to income tax and NIC.
Contributions by an employer to a registered pension scheme are generally tax and NIC free. As we move towards pension auto enrolment, where employers are required to make pension provision for their employees, it may make sense to have this as part of the employees package anyway. Other tax efficient things to consider include the provision of mobile phones which do not give rise to a benefit in kind even where there is personal use, the provision of a cycle to work scheme and implementation of approved share schemes to incentivise employees with little cost to the business.
Unincorporated businesses are taxed on the full amount of profits earned regardless of whether the profits are drawn from the business or not. This can lead to a tax charge of up to 45% arising on income which is left in the business as working capital. Particularly where business profits are not fully drawn, consideration should be given to incorporation. Whilst an income tax charge will still arise on the profits that are drawn from the business as salary or dividend, any funds which are left in the business as working capital will only suffer a corporation tax charge of 20% (21% for larger businesses). These are just some basic and simple general ideas but can add up in savings. Make the most of your accountants expertise and see what further ideas they can give you that are specific to your business sector and structure.