While Tax may be a necessary part of any business, nobody wants to pay more than they have to. But many Small to Medium Sized Businesses (SME's) appear to be doing just that. By simply struggling to calculate their tax liability accurately.
Detailed research carried out as part of the Office for Tax Simplification (OTS) small business review found that around half of the SME's consulted were concerned about applying tax rules incorrectly. In addition, around 20% (potentially 700,000 businesses) reported are finding it difficult to calculate exactly how much tax they should pay.
1. Getting the business structure right
The way a company is set up has significant implications for the amount of tax payable. Whilst many small businesses still trade as sole traders or partnerships, the majority would actually pay less tax and NI if they converted to a limited company. The key is to structure pay and dividends efficiently. As a guideline, any company with profitability in excess of £20k should consider becoming a Limited company.
The structure involving both a limited company and an unincorporated business can be very tax efficient, especially if anticipating high growth and profitability in the future. This utilises advantageous tax rules relating to Goodwill and involves building up the unincorporated business until it has a decent value. It can then be sold to the limited company for its market value, with significant tax benefits.
2. Making use of family tax allowances
If spouses, children or other relatives aren’t using their Personal Allowance (£9,440 for 2013/14 and £8105 for 2012/13), there may be legitimate ways of ensuring this is maximised. For example, children can legally work from the age of 13, which means that children and other relatives are eligible to carry out basic tasks for your business. However, these activities must be relevant and justifiable. There are also ways of splitting assets to reduce the tax rate on the income.
If you have children over 18 with skills that are useful to the business, they can either be paid as an employee or can form their own company and invoice you. For example, they may be able to help with design work, IT, website administration or creating business apps. This can also be a good way of funding university costs, rather than from your own income, taxed at up to 40%.
3. Director Dividends
Paying a low salary topped up with dividends has been an effective method for remunerating business owners for many years. From 6th April 2013, the optimum salary for a director/shareholder would be £7,690 p/a. The maximum amount of dividends payable without incurring the 40% tax rate would then be £30,384. The salary should be paid as a director’s fee rather than as a wage to avoid National Minimum Wage regulations.
4. Manage the finances smartly
Lots of business owners want to pay off their mortgage. However, doing so may well mean taking dividends from their company which could get taxed at 25% or more. This poses the question: is it wise to incur a 25% cost in order to save interest which can be as low as 1.5%? It may be more tax efficient to keep funds in your company as long as possible, because if you eventually sell the company or close it down, these funds could be released to you after only 10% tax. However, it is advisable to avoid becoming an ‘investment company’ which could dilute your entitlement to Entrepreneurs’ Relief.
5. Child Benefit advantages
Changes to Child Benefit mean that it will now have to be repaid totally if one half of a couple earns over £60k, and repaid in part if earnings exceed £50k. If both partners earn £50k or less, there would be no repayment. This means that there may be scope for you to review your earnings levels and split of earnings to make savings.
6. If earnings are over £100,000 per annum
If your taxable income is between £100k and £116,210 (or from 6th April 2013 £118,880), your marginal tax rate will be 60%. It then reduces down to 40% before increasing to 50% (45% from 6th April 2013) if you earn over £150k. You could make substantial tax savings by taking steps to reduce your taxable income, most notably by making additional pension contributions.
7. Making use of tax efficient payments and investments
Pension contributions provide tax relief at your marginal tax rate so could save up to 60% in tax, subject to the annual maximum of £50k in 2012-13 and 2013-14. You can also take advantage of any unused allowance from the previous three years.
ISA's provide tax free income. The annual contribution limit is £11,280, of which £5640 can be in cash. It’s also worth considering the new Junior ISA for under 18s where £3600 can be invested.
Other tax efficient investments include Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCT) and Seed EIS (which may be suitable for small business investments where your shareholding is less than 30%).
You can invest up to £200,000 in a VCT which gives you 30% tax relief on the initial investment (if you hold it for 5 years); the VCT is also free of Capital Gains Tax (CGT). After 5 years you may be able to reinvest your initial investment and obtain a further 30% tax relief.
With EIS investments you can invest up to £1m and get 30% tax relief if you hold them for 3 years. There is an added benefit for an investor who has a CGT liability – this can be deferred by investing in EIS and after three years will become exempt.
8. Inheritance Tax Saving
You work hard to save tax for all these years, and then when you get old you may lose most of it paying for long term care or Inheritance Tax (IHT). However, there are ways of protecting your assets. Ironically, HMRC save the largest tax until you’re not around to protest. However, there are many things you can do to avoid IHT. Whilst some people aren’t bothered about this form of tax because they won’t be around, it is also important to consider the IHT planning carried out by your parents. With careful planning you could increase your inheritance by 67%.
9. The next generation
If you have concerns about your children frittering away the assets you’ve worked so hard for, there are things you can do. Rather than leaving assets to them directly, they could be left in a trust. This way your children still have the same access to the assets, but if they get divorced or go bankrupt, for example, these assets won’t be lost but will still be in trust for your children’s benefit. As an added benefit, this kind of planning could also protect assets from care fees.
The four billion plus small businesses in the UK make a vital contribution to the British economy. However, with many still battling the financial pressures imposed by the recession, it is essential that business owners ensure the structure of their tax affairs is as cost effective as possible. Times are tough, so now more than ever, why pay more tax than you have to?
10. SECRET - Get the Best Help - don't struggle on your own!
The best advice is to always seek professional advice. Expert's like Tax Affinity Accountants are usually worth much, much more than the fee's they charge. Because simply the tax you will save year on year will usually be far greater than you could have done . It is after all the best kept secret of all the successful businesses.
Tax Affinity Accountants based in Kingston Upon Thames are experts in Tax and Accountancy for small businesses and provide essential help and support to businesses across London. To read more visit www.taxaffinity.com/blog
Actor Stephen Baldwin will avoid prison and have up to five years to pay back a tax bill of around $350,000 (£235,000), according to his legal representative.
Lawyer Russell Yankwitt explained the deal after a private conference with prosecutors and a judge in New York.
The youngest of the acting Baldwin brothers is accused of not paying state income taxes between 2008 and 2010.
Mr Yankwitt said that under a tentative agreement, Baldwin will plead guilty to tax charges later this month.
He added that if Baldwin pays the money within a year, his record will be wiped clean.
If not, he will be sentenced to probation and given five years to pay back the cash.
Prosecutor Anthony Dellicarri confirmed that a tentative agreement had been reached on a plea deal but would not detail the specifics.
Asked how Baldwin would pay back the money, Mr Yankwitt replied: "He's doing commercials, he's acting, he's out in the public."
Baldwin has been heard on New York radio in recent days, in a commercial for a teeth-whitening system.
"The economy is not what it was, and Mr. Baldwin is a faith-based actor, which makes it harder to get roles," said Mr Yankwitt, describing Baldwin as a born-again Christian.
"In the past, he did movies that portrayed violence and drugs. He no longer does those types of movies."
Baldwin's brother Alec was a star of TV's "30 Rock," and brothers William and Daniel also are actors.
When Mr Yankwitt was asked if they were helping Stephen, he said only: "Mr. Baldwin is thankful for the love and support of his family."
He claimed that Baldwin got into trouble because he "relied on others," including an accountant and a lawyer".
He added: "He never intended to defraud the government. The government understands that."
The 46-year-old was one of the stars of the critically-acclaimed 1995 hit The Usual Suspects, but later films in which he starred were less successful.
More recently, Baldwin has appeared in reality TV shows, including Celebrity Big Brother in 2010 and the US versions of I'm A Celebrity ... Get Me Out Of Here! and Celebrity Apprentice.
He filed for bankruptcy in July 2009, claiming he had debts of around $2.3m (£1.5m), while his New York property was worth only $1.1m (£0.7m).
Tax Affinity Accountants news. To read more visit our blog. Tax Affinity Accountants are expert in tax and accountancy in Kingston upon Thames.
We often get asked when is the best and worst time to call HMRC? And because at Tax Affinity Accountants, we already know this, we are happy to advise them.
The telephone help lines at HMRC have historically always had long waiting times. With thousands of callers who wait a long time simply giving up even though they have needed important help to get things right.
'The early bird catches the worm'
Its simple the best time to call HMRC is when everyone else is not calling. And this mean's doing it early in the morning between 8am and 10am Monday to Friday.
The worst time is towards the end of the day between 4pm and 8pm, when everyone is calling them.
Calling HMRC at the wrong time can cause a lot of stress and frustation. Plus imagine you ask one of your employees to do this at the wrong time and he/she does nothing for 45 minutes but hold the telephone. This a huge waste of wages and efficiency.
Worse still HMRC also use an automated recorded message to try to turn away callers at peak times by telling them to check HMRC's online system and resources or a “Sorry there is no one available to take your call, please try later”. message.
So plan ahead and try to call them early in the morning and if you must ask an important question just hold on in there until someone picks up and hope they give you the advice without referring you to another department!
By Anni Khan at Tax Affinity Accountants
Tax Affinity Accountants are experts in Tax and Accountancy. Based in Worcester Park and Kingston upon Thames they are considered in the Industry to be expert accountants and advisors for small businesses. Helping and supporting business throughout the UK, they regularly help clients grow their business providing tailored advice.
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