New tax year resolutions for business owners
Posted on 2nd April 2020
With everything going on in the world at the moment, you wouldn't be blamed for feeling distracted and somewhat discombobulated - after all, we've not ever been through anything like this in living memory.
However, the new tax year is just around the corner and it is the perfect time to get your finances in order. Last month I wrote about having a spring clean of your finances, which I highly recommend doing if you haven't already. Getting your financial affairs in order for the new tax year on April 6th is a natural next step after you've done your spring clean - and it honestly isn't as scary as it sounds!
There's no better time to get everything in order now - especially as many of us are experiencing a quieter time than usual in our businesses. So, what can you do to ensure you achieve success over the coming year? Here are my top five tips.
1. Improve your tax efficiency
First of all, check that you are taking the most tax efficient combination of salary and dividends.
A dividend is a payment made to shareholders of the limited company from the company profits – after corporation tax. It is normally the most tax-efficient way of taking money from the company, which is why we usually advise our clients to pay themselves (and other shareholders) a low salary, with high dividends.
A salary totalling more than your personal tax allowance (£12,500 for the next tax year commencing 6 April 2020) is taxable. This means that you can take home a salary of up to £12,500 per year without having to pay any tax. Once you start earning a salary of £12,501 or more, you will have to start paying the basic tax rate of 20%.
Dividend payments are taxed at lower rates, as they are not considered salary payments, but rather the sharing of a company’s profits between its shareholders. A company can pay dividends to its shareholders at any time while it is in profit – when a company is not in profit, it is unable to declare dividends. If it does, this is illegal and causes a mountain of issues.
When worked out properly, a low salary but high dividend payments means you can pay less tax than if you just pay yourself all your company’s profit as a salary - and is completely legal.
We must stress though that this is only the case when worked out properly. If in doubt, speak to your accountant or book a call with Nicola here.
2. Improve on or start a pension pot
Do you have a company pension in place? If not, could you make use of your pension annual allowances from the last three years?
Paying into a pension from your personal income enables you to receive tax relief based on the rate of income tax you pay. So for example, if you’re taxed at the basic rate of 20%, for every £80 you put into your pension, you will receive £20 tax relief.
Even though there is currently no limit as to how much you can pay into a personal pension, the amount you can invest and still claim tax relief on is restricted to 100% of your earned income – up to £40,000 a year. It’s also worth noting that if you earn less than £3,600 a year, you can match this in pension contributions and receive 100% tax relief.
You can make tax-free pension savings over your annual allowance if you have enough unused annual allowance from previous years to carry forward. You can carry forward unused allowance from the last three tax years - so that's 2017/18, 2018/19 and 2019/20 (as of April 6th 2020).
If you're not sure whether you have any unused annual allowance, use the free gov.uk calculator to check if you have to pay tax on your pension savings. Please feel free to book a call with Nicola to discuss further, and check out our blog about making pension contributions through your limited company here.
3. Maximise tax-free interest on savings
Since April 2016, any interest earned from your savings is tax-free. A cash ISA is a great option as cash ISA interest doesn't count towards your personal savings allowance, so you can earn all your ISA interest tax-free. The current PSA limit depends on the amount of tax you pay. Basic rate (20%) tax payers can earn £1,000 interest per year with no tax, higher rate (40%) taxpayers can earn £500 interest per year with no tax, and additional rate (45%) taxpayers do not get an allowance.
The great thing about an ISA, compared to 'normal' savings accounts, is that any interest earned from an ISA is tax-free - and it is not counted tpwards your PSA. This means that saving using an ISA can be extremely advantageous for people who have already used up their PSA on other savings.
For the current tax year, 2019/20, up to £20,000 can be saved into ISA accounts. From 6th April 2020, ISA allowances will be resetting across the board - which means you only have a few days left to take advantage of any allowances you have remaining.
You can only contribute to an ISA through your personal money - so this isn't strictly business related - but it can be very helpful in your wider financial affairs.
4. Do you have an accountant in place?
Is your accountant right for you? Is it time to consider whether you are getting the right advice, at the right time from your accountant? There are loads of really good reasons to outsource your finances to an accountant, and one that many people don't realise is that an accountant can help you with the legal side of your business, as well as your finances. We aren't just number crunchers you know!
A good accountant can also help you take home more money than you're taking home now - all completely legally (of course, do your due diligence on any accountant you potentially start working with!). They will be able to advise on the best way to run your business, ensuring it as tax efficient as possible. With some of these savings, you may possibly end up covering the fees they charge you.
It's a no brainer really - and of course, we would recommend ourselves! Book a free, no-obligation chat with Nicola here, and feel free to check out our customer testimonials on Google and Facebook. We have a perfect five-star record which we are extremely proud of.
5. Get your self-assessment done early
We know it's boring, but it's a necessary evil! Doing your self-assessment tax return early can make your life (and your accountant's) a whole lot easier come January.
First of all, you don’t actually have to pay your tax until the deadline – no matter how early you file. So getting your return in early is a great way of preparing for the money you have to pay out come January. You'll also avoid those long hold queues waiting to speak to somebody from HMRC if you end up needing help in January - plus the earlier you prepare, the less likely you are to make mistakes. Something else to look forward to - if you get your tax return done early, you’ll be able to relax over Christmas and New Year instead of scrabbling around in your office trying to get all your receipts and invoices together. Imagine that!
Nicola J Sorrell -
Founder | Xero Champion | IR35 Expert
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