“I want help with my tax return.”
“I need tax advice for my small business.”
“I want to pay less income tax.”
There are many reasons new clients come to The Accountancy People, here are two examples:
- We give free accounting advice for small business owners when they come to an initial meeting with us.
- We’re also accountants for self-employed people and they too get a free initial meeting.
What are the main ways to pay less tax?
If you are a tax payer – especially a higher rate tax payer – then there are 3 main ways that you can pay less income tax:
- Pensions – the tax relief is amazing
- Spread income through the family – use your tax allowances wisely
- Research & development tax credits – not just for white coats and test tubes
Always take advice about your personal circumstances before taking action.
The tax relief on pensions is amazing. Such a system would never be invented now because it gives huge tax relief to higher rate tax payers. So take advantage of it if you can. Higher paid people pay tax deductions at an effective rate of between 40% and 74%. By putting money into a pension you can get full tax relief. So if you have £10,000 and are paying tax at 45% you have a choice between £5,500 in your hand or £10,000 in your pension.
So what’s the catch? There are restrictions on when you can take the money out and on the amount of money you can invest in this way tax free. Also the Government can change the rules.
For me it works like this. I have access to my pensions when I’m 55 at which time I can take 25% tax free so that money is never taxed. I can then draw the rest down as an income which is taxed but not subject to national insurance – the trick being that if I’m a higher rate tax payer now I might not be when I retire.
Pensions also sort of work like a family trust fund. If I die early and before touching my pension it’s great – from a tax planning point of view – because the money is never taxed. If I have money left in my pension after me and my wife shuffle off then the children can have access to the money. It’s not part of my estate for inheritance tax purposes.
Pension rules are really complicated and I have simplified them for ease of reading. If you would like help with any areas of tax saving then please get in touch.
Everyone is entitled to a tax-free personal allowance. In 2019-20 it’s £12,500.
So if you have your own business and you have family members working for you, then everyone can have a salary of up to £12,500 that won’t be taxed.
That soon adds up.
For instance, if you, your partner and two adult children all get a salary of at least £12,500 that’s £50,000 HMRC won’t touch. Whereas if you just take the £50,000 yourself, there’s a fair chance you’ll be looking at a tax and national insurance bill around £10,000.
Once you hit the initial tax paying threshold, it may make sense to pay everyone a salary below the next threshold, £50,000 in 2019-20, rather than paying one person a big salary that attracts a lot of tax.
For instance, 4 family members paid £49,500 each adds up to £198,000.
If one person takes the £198,000 as a salary they’ll say goodbye to around £80,000 in payments to HMRC.
But each person taking a salary of £49,500 will be looking at a bill for around £10,000 – so less than £40,000 in total going to HMRC.
If you are interested in the accounting advice for small business owners that we here at Manchester accountants The Accountancy People provide, then email or ring us.
Research & Development Tax Credits
This is a specialist area of tax in which Manchester accountants The Accountancy People have considerable experience and success.
You don’t need to use test tubes and wear a white coat to qualify for research and development tax credits.
If you are developing an established business – perhaps by moving from a paper-based stocktaking and billing process to a bespoke IT system – then you could qualify for the tax relief.
It’s worth investigating.
Here’s a simple example:
If a company is in profit then the following applies:
If they have spent £10,000 on R&D then this figure is multiplied by 2.3.
This gives £23,000.
The difference between these two figures gives £13,000.
This is known as the enhanced expenditure.
This figure is then multiplied by the Corporation Tax figure, currently 19%.
So in this simple example, £13,000 x 19% gives £2,470.
The figure of £2,470 is therefore what the tax benefit would be – i.e. the figure that HMRC would rebate to the claiming firm.
To find out more, please ring or email us. We’ll be happy to help.