One question accountants get asked up and down the country is, How can I save tax? The answer depends heavily on your personal and business circumstances. In this blog, we’ll outline some methods applicable to most people.
Plan in advance
Reducing potential future tax bills is much easier than attempting to reduce tax bills in hindsight. If the tax liability is left until after the year end, your accountant is very much restricted to processing what has taken place and understandably, tax law allows very little alternative treatment of the figures.
Personal allowance
Every UK resident gets a tax free “personal allowance” each year. The standard rate for 2015/16 is £10,600. This means you won’t pay any tax until you earn at least £10,600. Pay yourself a basic salary if you operate your business through a limited company; paying £672 a month also falls below the National Insurance threshold.
If you are a basic rate taxpayer and your spouse or civil partner earns less than £10,600 per year, they may transfer 10% of their allowance to you. This could save you up to £212 in tax each year. To be informed how to sign up for this, register your interest at https://www.gov.uk/marriage-allowance
Legal Structure
You may benefit by changing the legal structure of your business, such as from a sole trader to a limited company. Trading through a limited company can normally reduce tax liabilities as most of the profits are paid as dividends which do not attract National Insurance. There are many aspects to consider before incorporating your business, so talk to us first to establish whether taking this step would be appropriate for you.
Pension contributions and charitable donations
If you donate to registered charities, donations made from your limited company will save 20% corporation tax on the donation. Employer’s pension contributions by your company can also reduce your corporation tax bill: see a financial advisor if this is something of interest to you. Donations and pension contributions you pay personally will normally only help reduce your tax bill if you are a higher rate taxpayer.
ISAs
Cash, stocks and shares held in ISAs (Individual Savings Accounts) are tax-free. You can pay up to £15,240 into an ISA in the tax year up to 5th April 2016. If the income you’ll receive from an ISA is less than the net amount you’d receive from taxable income, then it might not be advantageous for you to have an ISA. However, bear in mind that income from an ISA doesn’t appear on your tax return at all. If you’re keen to keep your income below £50,000 so you don’t lose out on child benefits, it could be worth investing in ISAs.
Pay tax on time
This will avoid unnecessary loss of money on fines, surcharges, penalties and interest. If you have fallen behind on several of your taxes, ask us for the most efficient way of clearing your debt. While some taxes accrue interest, others simply have fixed penalties. Naturally it is more sensible to pay off the debts accruing interest first.
If the above has given you some ideas and you would like to discuss further, please feel free to contact Southside Accountants Wimbledon & London.