Ways a Limited Company Can Save Tax
Posted: Jun 10, 2016
There are a number of different ways to devise a tax-efficient method of extracting profits from a small business. The best way to do this for each business may vary so it is always worth talking to a professional accountant for the best advice. However, the points outlined below are generally useful methods for most small businesses to save tax.
Taking Profits out of a Limited Company
If an employee's salary is between the lower earnings limit for Class 1 National Insurance Contributions (NICs) and the primary earnings threshold they are considered to have paid NIC at zero per cent. Therefore, if a small business pays the directors or employees a salary within these boundaries they effectively maintain NI contributions and, hence, entitlement to a state pension without it actually costing them anything.
So by extracting profits from a small business mainly through dividends National Insurance contributions for both employer and employee can be avoided without losing any benefits.
A salary that is not liable for NICs is also below the income tax threshold although employers must still report the salary information to HMRC.
If the company only has one employee/director or no employees who are paid above the secondary threshold consideration should be given to setting the right level of salary to take advantage of the Employment Allowance that Employers are able to claim, which can minimise the amount of employers NIC that the company is liable for.
The Employment Allowance is available where a small salary is being paid to preserve pension entitlements but NI is charged at zero per cent, as described above.
Be aware that it is sometimes beneficial in a one-man company to pay the 12% NICs in order to save some corporation tax at 20%.
A typical strategy for small businesses to save NIC and income tax is to pay directorsa salary above the lower earnings limit (LEL) and below the secondary threshold for NI. This maintains entitlement to the state
pensionat no cost but also keeps the salary below the level when income tax becomes due.
And provided the company has made enough profit to issue dividends then the directors can withdraw money from the company in the form of dividends, which do not attract NI contributions, unlike, for example, a bonus.
In paying dividends it is possible to save even more tax by only paying them out up to the higher rate threshold. Of course, this depends on how much money you wish to, or need to, extract from the company.
Another way that dividends can be used to advantage is to alternate large and small dividend payments each year. The company may not then have to make payments on account. This delays the date on which tax has to be paid which can help with cashflow.
Bonus payments can be declared in the company accounts for one tax year but actually paid out the following tax year (or at least within the first 9 months of the following tax year).If business income is lower in that subsequent tax year then the tax liability is less.
Loans To Directors
There are ways in which Director's Loans can be used as a short-term source of finance without incurring tax. This is only an option for loans over periods up to 9 months and f the loan is large (more than £10,000 for the 2014/2015 tax year) it will be counted as a benefit in kind for tax purposes.
These are just some ways that a limited company in the UK can save tax. Talk to a chartered professional for more advice on how to avoid paying too much tax. Any company that does not use an accountant may be missing out on these, and other, potential ways to minimise your tax liability.
The author has written and published articles on a wide range of topics including Small Business Advice, Tax and Accounting, Interior Design, House Renovation and Project Management.