How to keep as much of your hard-earned cash as possible

Tax is something that we all have to pay, both personally and through our businesses.  In this guest blog post Edit Gardner, Accountancy and Tax Partner at Gardner Web Accounting shares her top tips with us.

 

When I was first asked to write this article, three things popped into my head. The first was a famous phrase, the second a common gripe I hear from many business owners about their accountants, and the third was one of our own office mantras. It’s only fair I share these with you. So, let’s dive in.

That famous phrase

As the saying goes, “Nothing is certain, but death and taxes.”. Unpalatable it may be, but very true. Remember reading in the news about famous people being exposed for using questionable tax schemes? Actually, it wasn’t just famous people.

My firm belief is that the days of the clever twisting of the letter of the law are long gone. I would put the chances of using tax avoidance schemes successfully nowadays similar to that of me being a young, slim twenty-year-old again. Remember, if it doesn’t feel right, it probably isn’t.

So, my first suggestion is to accept that we all have to carry our fair share of the tax burden. But accepting this inevitability doesn’t mean we shouldn’t optimise our tax position. Being well versed in the legislation still has the potential to make the overall tax we pay lower – in a completely legal way.

A common gripe against accountants

“My accountant says I can’t put this against the business, even though I use it for business!” If only I had a pound for every time someone said that about their accountant…

All accountants have been ‘guilty’ of saying “no, you can’t put that against the business” to their clients at some point. In our defence – we were looking out for you. But perhaps communicated it rather poorly.

Remember that fabulous car you bought a few years ago and you wanted to put it through the company? Or the extension at home for your home office? And then maybe your accountant said you couldn’t do it? What your accountant should have said is “You can, but it’s not worth it.”

You see, it’s about interaction between many different taxes. Sometimes savings in one type of tax triggers a tax charge of another type. The trick is to know which combination will work best for you and cost you the least amount of money. None of us like to cheat ourselves out of our hard-earned cash.

Using the car example above, cars trigger ‘benefit in kind’ charges. By having a gas guzzling expensive company car, it’s true that you save corporation tax, but you will likely end up paying far more personal tax and national insurance than what you save in corporation tax. So next time your accountant says “you can’t do it”, ask them to clarify whether you really can’t do it, or whether it’s just not worth it. Believe me, they really are looking out for you.

One of our office mantras – CYA!

This was inevitable really. How on earth can I write this article and keep to the mantra that I’m so keen to drum into all my colleagues from the start? I can’t emphasise enough that there is no ‘One size fits all’ strategy – each of our clients are unique and different, and need different solutions. Some things work for some, and others for others. Make sure you check out the legal jargon at the end of the article now. With that out of the way…

Let’s get to the nitty gritty

Here are my top ten strategies to consider on how you could keep as much of your hard-earned cash as possible.

1) Choose the correct trading structure

One of the first major decisions you will have to make as you start your new business is what form of legal entity to operate as. The type of entity you choose will have a significant impact on the way you are protected under the law, and also the way you are affected by taxation rules and regulations. Each trading entity has its own benefits and drawbacks.

The impending corporation tax changes in 2023 make it even more important to take detailed professional advice at this early stage. The changes mean that the potential savings of operating as a limited company will be in a fairly narrow profit band, and at certain profit levels incorporation may actually cost a lot!

There is no one size fits all approach here. So please don’t skimp at this early stage and have a detailed conversation with a trusted advisor.

2) Is VAT registration a must, or optional?

There are certain situations when it’s compulsory to register for VAT – most notably when the taxable turnover of the business goes over £85,000. But what about when the business’s taxable turnover is below £85,000?

Have you considered whether it’s worthwhile registering for VAT voluntarily? You can certainly ‘win’ or ‘lose’ with this choice, and I’ve seen my fair share of both sides in my professional career. The two basic questions to start with is “Who are my customers?” and “What kind of expenses do I have?” Largely VAT registered customers and much of your expenses incurring VAT probably means you could be better off voluntarily registering. On the other hand, having largely non-VAT registered / B2C consumers and little in the way of VAT incurred may just be a massive own goal. So, take advice and re-visit this point regularly.

3) Employing family members

Although we do operate the concept of independent taxation in the UK, it’s still worth looking at the family unit to see if tax can be saved for the family as a whole. Consider employing family members if they have no or little other income. Don’t forget to ensure that you comply with employment legislation and national minimum wage legislation.

Whatever salary you pay, it is very important that it is commercially justifiable, and commensurate with the duties performed, to avoid an attack from HMRC. Simply put, pay what you would pay an employee who is not related to you, and have as much evidence to justify your decision as you can.

4) Pay a small salary to retain your entitlement to state pension

If your business is run as a company, and you are a director / shareholder, you will need to extract funds in a tax efficient manner. Often this is going to be a combination of salaries, benefits and dividends, and it takes some number crunching to find the ideal mixture.

But what if there are little or no profits at the beginning, or no cash available to take funds out? I would still consider whether a small salary should be processed through for the director. If you don’t have the funds to take the money out there and then, you can have it credited to your director loan account instead and take it out later without incurring an extra tax charge.

Something between £6,240 and £8,840 a year should not incur a national insurance charge, but count as a qualifying year towards your entitlement to state pension and certain benefits.

You can further fine tune the plan depending on whether NIC employment allowance is available to the company or not.

5) Utilise the dividend allowance

All taxpayers in the UK are entitled to a dividend allowance set at £2,000 for 2021/22. This means that the first £2,000 dividend income in a tax year doesn’t attract a tax charge.

If there are accumulated profits in the company that are available for distribution, consider using this allowance, whether you need the cash or not. As with the salaries, you can always have the dividend due to you credited to the director loan account, and take later when you actually need the money.

6) ‘Smooth’ your income

Chances are some years you will need more money to live on, some years you will need less. Some years the company’s cash flow might be stronger, some years less so. But in tax terms, the ‘smoother’ your taxable income curve over the years, the better off you might be.

Let’s make the assumptions that you operate your business as a limited company, the business has retained profits available to vote dividends, and you don’t have any other income. Remember, the company will pay corporation tax on its profits. What you do with the balance afterwards is largely up to you. Now, consider this scenario.

Because you’ve taken on board my suggestion in point 4 above, you pay yourself a salary of £8,840. The company has sufficient accumulated profits, so a dividend of £40,000 is voted to you. You don’t really need all the money now, so you take £18,000 in the year, and have the rest of the monies that are due to you credited to your director loan account to be taken at a later date.

Let’s say you do this for three years. In year 3 you really want the rest of the money you haven’t taken earlier, and the company can afford to pay it out. You take the money and treat yourself to a nice holiday in the Bahamas, plus a few life essentials to reward you for your hard work.

Overall, it cost you £7,710 in tax to extract £146,520 over the three years.

Contrast this with paying yourself £8,840 salaries and £9,160 dividends in years 1 and 2 (the amount you are physically drawing out), and then paying yourself £8,840 in salaries and £101,680 in dividends in year 3. That’s the same amount of £146,520 as in the above scenario. But sadly, your overall tax bill for the three years in this scenario would be £24,674.

I could have made this scarier. I could have made the setup even less efficient. Or mentioned that in the second scenario you would have issues with being taxed on child benefits, or some and other little ‘quirk’. But I wanted to keep it realistic. I think the point is made.

Do you still think good accountancy and tax advice is expensive?

7) Consider making pension contributions

This is one of those things that generally works well for sole traders, company owners and employees alike. For years now at every budget, advisors got a big knot in their stomach, fearing that the government would curb the tax relief available on pension contributions made. But, so far, the tax reliefs are still there. It’s almost like the government wants to encourage us to save for our retirement! So please don’t overlook this very valued opportunity and make use of it if you can – while it lasts.

There are traps to watch – making sure you actually have relevant pensionable earnings, not exceeding annual, and staying within lifetime allowances being the three main ones. But with a good accountant and a financial advisor in your corner, you could turn pension contributions to a great advantage.

One could utilise contributions to remove clients from the punitive 60% tax rate by safeguarding their personal allowance, to ‘smooth’ taxable income for sole traders, to avoid child benefit tax charge for those on the cusp of the higher rate, to reduce one’s marginal tax rate for higher rate tax payers, to reduce a corporation tax bill, etc. – and that’s all before your financial advisor starts growing your pension pot tax free!

8) Join the electric revolution

Did I mention I drive an electric Jaguar? It’s a company car. My accountant said yes, I could put it through the company. I love talking to myself!

The point I’m making here is that whilst the government has done their best to tax company car drivers more and more over the years, right now electric company cars enjoy a super advantageous tax treatment. Even hybrids with long electric ranges might be worth a shot.

There is quite a bit of number crunching to do around leasing vs purchasing, new with a big depreciation hit vs second hand with less of a hit, but I would say if you are considering changing your car, and you are prepared to consider electric, give your accountant a buzz.

Also, a word of warning – the car industry seem to think that you can reclaim VAT on purchasing an electric car. I’ve heard this from many sources over the last few months. Trust me, you can’t.

9) Make use of exempt benefits

If you operate your business as a limited company, check these out (but please – not with your mate down the pub!). It’s extra monies you can extract from the business without having to pay extra tax.

  • If you work from home (or had to work from home for a while due to Covid) you can claim a working from home allowance of £6 per week. Sole traders also have a similar concept to enable them to claim working home expenses.
  • Who doesn’t have a mobile phone these days? You can have one mobile phone per employee with unlimited private use for no extra tax. The contract must be in the company’s name though – having a contract in your name and the company paying for the bill doesn’t work.
  • Have a party! There is an exemption in tax legislation from employee taxes where an employer hosts an annual event, such as a Christmas party or a summer barbeque. Although it could be held at any time of the year, it has to be an annual event. It has to be made available to all employees, and the cost must be less than £150 per head (not per employee). Be careful not to exceed the £150 per head per year, though, otherwise the whole amount will become taxable, not just amounts over £150.
  • Treat yourself to small “trivial” benefits. You could consider making a small gift to an employee (or yourself, the director) if all of the very specific conditions set out are met. Check them out with your accountant. Bottom line is, whilst you can’t just give out £50 cash tax free, you could consider giving out a store voucher that is only exchangeable for goods, or flowers, hampers, a turkey at Christmas, etc. Just watch the limit and don’t go over the £50 at a time, as all amounts will then become taxable. The best bit? Even for a director, office holder or members of their family you can do this six times a year (a maximum £300 in total) without incurring a tax charge.

10) When it’s time to cash out and hang up your boots

My final suggestion is to keep your accountant involved and allow them to hold your hand all the way through the lifetime of your business. And that includes the final stage – selling up or retiring. Giving your accountant a heads up a few years before you plan to retire and / or sell up could prove very beneficial. There are various ways to exit the business, and some proper planning can result in a significantly lower tax bill.

Final thought

I’m only just warming up. There’s so much more I could talk about. I hope you can now see how useful the toolkit of a good advisor could be to help you keep hold of your hard-earned cash. Talk to them like you would to your doctor. They have years of learning and experience you can utilise to your advantage to achieve healthy finances.

 

Disclaimer:

The content of this article is for guidance only. You should always seek professional advice tailored and suitable to your own individual circumstances before undertaking tax planning of any sort. This article is provided “as is”, without express or implied warranty. To the fullest extent permitted by law the author and Gardner Webb Accounting Limited do not accept liability to you or any other third parties for any direct, indirect, special, consequential or other losses or damages of whatsoever kind arising from using or refraining to use the material contained in this article.

 

Edit Gardner is a Chartered Tax Advisor and Accountant. Her and her team at Gardner Webb Accounting primarily work with owner managed businesses, UK subsidiaries of foreign entities and individual taxpayers.

E-commerce businesses, B2B service providers, construction and trades businesses and QuickBooks users are of particular interest to her. She also represents taxpayers in HMRC disputes, disclosures and enquiries.