Tas' Top Ten Tax Tips
This guide covers some of the basic but also most important elements of tax planning.
1. Companies pay Corporation Tax on their net profits at a rate of 19%.
Corporation Tax is due nine months after your company's year end. The sooner we have the data to compute the net profits of your company the sooner we can check how to keep the tax bill to a minimum and then advise how much tax is payable.
Ring-fence these funds in a separate business savings account to cover this tax. As a rough estimate of how much you need to save, view your profit and loss report in Xero (Reports > Profit and Loss) and calculate 19% of your net profit.
2. The business bank account is only for business expenses.
Your company is a separate legal entity and personal expenses must be paid from your personal bank account. If you use your business account for personal expenses we have to make adjustments to help you avoid problems with the taxman.
3. There are four main ways to withdraw money from the business:
1 - Director's salary. Usually set at low levels for tax purposes, between £8k and £12k annually. Director's salaries are a tax deductible cost for the company.
2 - Dividends. These are withdrawals of business profits by shareholders. Dividends are not tax deductible for the company and are taxed as income on the recipient.
3 - Director's loan. A loan can be made to or from the business. Where a director owes money to the company, the taxman imposes a penalty tax charge so let us help you avoid this scenario.
4 - Pension contributions. The most tax efficient way to extract funds from the business as tax relief is obtained by both the director and the company. There's a catch though, the funds can't be accessed until retirement age.
4. The most tax efficient strategy for withdrawing money from a company is a carefully planned combination of the four methods above.
Directors will typically take a low salary (usually between £9k and £12k) with the remainder taken in dividends. We will advise on the appropriate structure for your situation.
The amount of director's loans and the pension contributions you pay will be at your discretion, but you should take our advice before doing either of these.
5. Dividends are taxed at a lower rate than salaries because there is no national insurance on dividends; however dividends are not tax deductible for the company and can only be taken from retained profits.
If a company has not earned any profits it cannot declare or pay any dividends.
6. Consider not joining your own company's workplace pension scheme.
The workplace pension scheme is typically for employees of the business and contributions are capped at the amount of salary that you receive which is typically low for a director (see point 4 above).
Instead you may want to set up a separate pension scheme for the directors and have the company pay in lump sum 'employer' contributions. Companies can contribute up to £40k per year under this method, and generally it is more tax efficient.
7. Treat yourself to a mobile phone.
Each director (and employee) is allowed to receive one mobile phone paid for by the company. This benefit is completely tax free, even if the phone is not always used for business. See our guide here on how to make full use of this exemption.
8. Open two business savings accounts.
One for corporation tax and one for VAT. Use Xero to track how much you owe for each of these and set the amount aside for safe keeping.
For VAT you should set aside around one sixth of your sales. For example if your sales are £1,200 in one month, you should set aside £200 for VAT. You can also view your draft VAT return in Xero (accounting > VAT Return) for a more accurate VAT estimate.
9. Directors and shareholders have to pay tax on their salaries and dividends.
This is done via a personal self assessment tax return which must be submitted to HMRC before 31 January each year. The tax is usually due in two instalments - 31 January and 31 July each year.
However if you don't have any taxable income (for example if all of your salary was paid through PAYE and you didn't receive any dividends) then you shouldn't need to complete a personal tax return.
10. Your business should be appropriately insured for professional indemnity, public liability, and business contents. Employer's liability insurance is a legal requirement if you hire staff.
Use a simple online brokers such as PolicyBee or Superscript to review your options and obtain a quote. For more advanced insurance strategies consider key-man insurance and director's insurance.
If you would like to know more, check out our more detailed guide on insurance here.