How to reduce your tax bill

Ever wondered what TIPS AND TRICKS accountants use to bring your tax bill down?

Here’s the ULTIMATE list on reducing your taxable profits and taking money out of your business in the MOST EFFICIENT way!

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How does it work?

More often than not, it’s a case of knowing what expenses you can include to help lower your taxable profits.

There’s all sorts of expenditure most people don’t realise they can include for fear of making a mistake.

At Xoba, we check with all of our clients if any of these apply – so you’ll never miss out!

Pay family members a salary

If someone in your family is earning less than £12,500 and they help you out in the business, you can pay them a salary. This brings taxable profits down and there’s no additional tax to pay on the salary as their income will be less than their personal allowance of £12,500.

Claim mileage

Do you have a vehicle outside of the business and do you make business related trips in it? If so, keep a record of all the miles you do, we can claim 45p per mile in your accounts for the first 10,000 miles and 25p thereafter. Don’t mistake this with fuel however, that’s different. You would claim for fuel AND repairs AND all other motor costs if you had a vehicle IN the business. I.e. a company van.

Claiming mileage is a pretty good alternative as 45p per mile is worth a lot more than the cost of fuel per mile alone.

Make sure all your assets are accounted for

For many assets, such as plant and machinery, a business can get 100% tax relief in what’s called capital allowances. Basically, the cost of any assets you’ve purchased reduce your taxable profits by that amount.

Often, business owners tend to forget assets they’ve purchased outside of the business, perhaps because they where purchased before it was fully operational and they didn’t realise that the assets should be included.

Assets to look out for are computer equipment, equipment for your home office, vehicles, even computer glasses if you only use them for the business! 

Charging interest on Director's loans

Charging interest on your directors loan is great as it increases the amount owed to you from your business which you can legitimately take out in cash and it also helps to reduce the companies taxable profits. Interest on Director’s loans due for repayment in over a years time should have an interest element declared anyway, so it’s a good idea to start charging it at a market rate of interest.

Just remember, any interest received counts as investment income for personal tax purposes. But, you have a £1k allowance if you’re a basic rate taxpayer and £500 if you’re a higher rate taxpayer. Also, if your total income is less than £17,500, you can have up to £5,000 investment income tax free!

 

Home office charge

Do you use your home office for your business?

If so, we can take a proportion of ALL OF YOUR HOME EXPENSES, such as:

  • rent/mortgage interest
  • heat and light
  • utilities
  • telephone and internet
  • council tax
  • maintenance costs such as cleaning

and charge it to the business.

What a fantastic way to save money! 

Make an R&D claim (research and development)

For applicable businesses, an R&D claim can be a fantastic way to bring your Corporation Tax bill down.

At Xoba, our fees are 15% for making a claim. Here is a rough idea of how a claim might affect your business:

 

Expenditure

Amount (£)

Staff costs

10,000

Subcontractors (£2,000, limited to 65%)

1,300

Software and other costs

5,000

Net total

16,300

Enhanced claim ( x 130%)

21,190

Total R&D claim

37,490

 

Assuming the costs above are already in your corporation tax calculation, the R&D claim would then mean an additional £21,190 gets deducted from taxable profits. With corporation tax at 19%, this means a saving of £4,026

Xoba charges a fee of 15% of the corporation tax saving, resulting in 15% x £4,026 = £604.

Your net saving as a result of the R&D claim would be £4,026 – 604 = £3,422.

This may come in the form of a reduction to your corporation tax bills (which may be spread over more than one year). Or, if you are making a taxable loss, you could be eligible for a tax credit – i.e. generally you receive a cheque equal to 14.5% of the lower of:

  1. Tax loss
  2. Total R&D claim

Check out HMRC’s guidance for more information.

Mobile phones

Did you know every member of staff is allowed one mobile phone and it’s tax deductible? That means the cost of the mobile and the contract helps reduce your tax bill.

Make sure you move your direct debits to come out of your business account or simply let us know if you have a mobile not showing in your business accounts and we will deduct the cost from your taxable profits! 

Christmas parties

If you have a Christmas party for staff (and only staff), then the cost of the party is deductible from taxable profits.

The party must cost £150 or less per head and be open to all employees.

So, say you are a director and you have three staff, that could mean a deduction of up to £600 from taxable profits!

Just bear in mind you do actually need to have spent the money on a party!

Gifts to staff (including directors)

Small gifts such as alcohol and food can be tax deductible as long as the following conditions are met:

  •  The gift doesn’t exceed £50
  • It’s not cash or a voucher
  • It’s not part of a contractual obligation
  • It’s not received in recognition of the performance of duties.

Trivial gifts to Directors can not exceed £300 for any tax year.

Accounting for all travel expenditure

Food when you’re out and about on business and away from home is legitimate business expenditure. Don’t forget to record the receipts and put it through the business. 

Accommodation is also included and any other travel costs such as train fares, taxis, parking and tolls.

Box at the football club

Advertising and marketing comes in all forms. Promoting your business by having a box at the football club is tax deductible, but you must be able to show it is genuinly there to benefit the business and isn’t private expenditure.

Accounting for stock accurately

Stock is something which can be very hard to estimate. Normally, it is valued at the end of the accounting period as the lower of the cost and the “net realisable value” – which basically means “what you could get for it”.

Accountants have to adjust for stock when producing your accounts and it can have a significant impact on profits and therefore your tax bill.

Having a larger stock figure means increased profits (and tax)

Having a lower stock figure means decreased profits (and tax)

So be sure to record it accurately and you won’t pay any more tax than you need to. 

Taking money out of a Limited Company efficiently

As a director of a company, you have the option of how you extract money from a company.

Often the best combination is by doing the following:

  • taking a salary equal to your personal allowance of £12,500 (providing you have no other income).
  • taking the rest as dividends which are taxed a a lower rate than salaries.
Timing your dividends

As a shareholder of a company, you may be able to pay yourself dividends. Dividends are a great way to take money out of a company, not just because the tax rate is lower than other income, but because each tax year you get a dividend allowance of £2,000.

If your company accounting period isn’t in line with the tax year, it’s a good idea to take a dividend of £2,000 out before 5th April and another £2,000 after to take full advantage of the allowances available.

Employee suggestion scheme

 As an employer awarding employees for suggestions that benefit your business, you have no tax, National Insurance and reporting obligations – but only up to a certain limit.

 

There are 2 kinds of award:

  1. encouragement awards (up to £25) – for good suggestions, or to reward your employees for special effort
  2. financial benefit awards (up to £5,000) – for suggestions that will save or make your business money

Financial benefit awards are exempt up to £5,000. The amount that is exempt is the greater of:

  • 50% of the money you expect the suggestion to make or save your business the year after you put it into action
  • 10% of the money you expect it to make or save your business in the first 5 years after you put it into action

The scheme must be open to all employees or particular group. The suggestion must be about the business and be outside the normal scope of their work.

Home relocation costs

 If you have moved house house to be close to your new place of work, then you can claim for up to £8,000 of the relocation costs without the need to report anything.

Flat rate expenses for uniforms, work clothing and tools

 You can claim tax relief on work expenses for the cost of:

  • cleaning your uniform
  • repairing or replacing your small tools (for example scissors if you’re a hairdresser, trowels if you’re a plasterer and spanners if you’re a mechanic)
  • cleaning, replacing and repairing your specialist or protective clothing (for example hard hats, protective boots and overalls)

 Check if you can claim online.

Renting out a property? Claim £1,000

 A £1,000 deduction can be claimed for each partner of a rental property. The deduction is a good alternative to use when actual expenditure is lower than £1,000 per partner.

Scale rate payments for subsistence

If you provide your employees (including directors) with a set amount of cash to pay for some common business expenses like travel and meals, these are known as ‘scale rate payments’.

These scale rates are tax deductible and don’t need reporting as long as the payments are no more than HMRC’s benchmark scale rates:

Minimum journey time Maximum amount of meal allowance
5 hours £5
10 hours £10
15 hours (and ongoing at 8pm) £25

 Employers will still need to have a checking process in place and be able to demonstrate that they satisfy the travel and subsistence rules. See HMRC’s manual for more information.

Bikes for employees (and directors)

As an employer, lending or hiring bikes to employees doesn’t count as an expense or benefit – as long as they’re available to all employees and mainly used for getting to work.

You can use this to set up a ‘cycle to work’ scheme to encourage employees to travel to and from work by bike.

Purchasing a bike through a business means you can claim the VAT on the purchase claim 100% capital allowances on the cost to reduce your corporation tax bill.

Working from home due to coronavirus

You may be able to claim tax relief for additional household costs if you have to work at home on a regular basis, either for all or part of the week. This includes if you have to work from home because of coronavirus (COVID-19).

This is not applicable if you are already claiming a home office charge.

You can either claim tax relief on:

  • £6 a week from 6 April 2020 (for previous tax years the rate is £4 a week) – you will not need to keep evidence of your extra costs
  • the exact amount of extra costs you’ve incurred above the weekly amount – you’ll need evidence such as receipts, bills or contracts

Check if you can claim

Xoba is a chartered accountancy firm registered with the ICAEW. We have years of experience helping businesses save tax.

Speak to an advisor now to find out more!

Disclaimer

Please note the information on this page has been significantly simplified and is intended as a beginner’s guide for those looking to legitimately save money on their tax bill.

For a full, comprehensive list, you should view HMRC’s guidance or speak to one of our advisors.

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