A contractor's guide to year-end tax planning
As much as January sees contractors rush to get their self-assessments forms returned, their focus in February is on year-end tax planning -- or at least it should be.
Well if February is the ‘traditional’ time to wind-up one tax year and usher in a new one, bear in mind that such a time is practically here – it starts this Sunday in fact.
So, asks Matthew Fryer of contractor accountancy firm Brookson, what measures can a limited company contractor put in place to ensure they’re taking advantage of all the tax breaks available for their business?
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 April 6th 2014 to April 5th 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, but we see no evidence of this being sound. Remember, every £1 taken as a director’s fee above the £10,000 mark represents NI ‘leakage’ so is costing you money.
Having said that IR35 is not an issue to be overlooked. You should ensure that all of your contracts are reviewed by an IR35 specialist and re-reviewed on a regular basis, because being captured by IR35 removes most (but not all) of the financial benefits afforded to being a limited company contractor.
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. But do always seek advice from your accountant if you are unsure 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 director’s 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. Visibility and accuracy of this number is one of the key benefits that engaging with a good accountant can bring.
4. Know 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 director’s 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% of it will be lost in personal tax – this is where considering appointing another shareholder may be appropriate – however, seek professional 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. If your accountant hasn’t discussed this with you speak to them about it ASAP, or consider finding a new one!
6. Mobile phones
Most people now own a mobile but many are not aware that HM Revenue & Customs 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). 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 for some is that HMRC has confirmed that they will accept iPhones and Blackberrys as ‘mobile phones.’ But the taxman also says you’re only allowed one per employee.
7. The staff party (not just for Christmas!)
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% 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
The truth is though that 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% (as opposed to 25% 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. Ask yourself, 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? Maybe you need insurance or advice from an employment status specialist? Taking on these experts and/or services will of course impact your bottom line in the short-term but could pay dividends to you and your company in the long-term.
One more thing...
As you can see, there are a number of ways to reduce your business tax liabilities ahead of the new tax year (2015/2016), which commences on April 6th . Keep in mind though, most of the tax planning measures that can be put in place need consideration and implementation before your year-end date.