7 small business tax myths exploded
Originally written by Stuart Clark about small business
On the way to a new tax year, I am always amazed how many tax myths small business owners believe when you know that the truth could actually put more money in their pockets.
For example, did you know that (depending on your circumstances) you may be able to deduct more than £ 25,000 tax free from your company (better than tax free in fact, as the company can get corporate tax breaks so the cost is less than £ 21,500).
This often means speaking to professionals (your accountant and / or IFA), but here are some brief myths and tips about small business tax:
# 1 – There is no difference between salary and dividend
A while back I made a video showing the business owner a nearly £ 6,000 increase in cash on hand on a £ 50,000 profit (based on 2019/20 tax rates). What would you be able to do for an additional £ 500 per month?
# 2 – I can just take money out of the company if I want, and the accountant will sort my dividends when I do my financial statements
This could be illegal and open the company to PAYE liabilities. Backdated dividends are illegal. It is important that the tax planning is done in the year, board meetings are held, minutes of that meeting are taken, and vouchers are made. If not, HMRC can argue that the payments were a salary.
Bonus tip – Make sure your dividends are paid on different days from payroll and have a different reference. If it’s still set up to say “payroll,” guess what the HMRC is going to argue.
> See also: How to Master Year-End Payroll During Covid-19
# 3 – My buddy puts his car through the company and doesn’t pay any taxes
Your buddy may do that well, but if HMRC opens an investigation into him, he’ll be in trouble. Company cars are a form of salary and are referred to as “benefits in kind” (as well as health insurance, gym membership, etc.). Although electric cars / hybrids may be more tax-efficient (all-electric cars became more tax-efficient from April 6, 2020 due to a benefit of 0 percent), I’ve examined that 99 percent of the cases for gasoline / diesel cars are actually more tax-efficient to get extra Paying dividends than having a company car.
Bonus tip – You can provide a mobile phone to any employee with no benefits in kind, as long as the contract is in the name of the company (if you reimburse an employee for the cost of a mobile phone, there is a benefit in kind that is subject to the employer’s social security contribution [NIC]).
# 4 – There is no point in making a pension contribution
Not correct! Well, depending on your circumstances.
You are entitled to a £ 40,000 deposit into your pension each year. If you have enough cash to support your lifestyle but are on high corporate income tax and have excess cash, a company pension contribution could be the answer. Not only do you save corporation tax, but you also start saving for your future. What kind of lifestyle do you want in retirement and how are you going to fund it? (A qualified IFA can help you here.)
As an added attraction, reducing excess cash could help reduce potential inheritance tax liabilities (see below).
Bonus tip – If you have not made any contributions in the past, you can use the last three years. For example, if you haven’t made any contributions in the past three years, the company could make a payment of £ 80,000 during the year by April 5, 2021 to use your allowance for 2020/21 as well as 2017/18.
If you do this for the next 2 years (2018/19, 2021/22 and 2019/20, 2022/23) you can “wipe off” any available allowances (you can also earn as little as £ 160,000 in one payment and catch at once , depending on your cash position). It is important that the money is actually paid in order to receive corporate tax relief.
> See also: VAT on taxi costs, vehicles, fuel and staff travel – what can I claim?
# 5 – I own my company so there is no inheritance tax on it
Shares in a private company may be eligible for business ownership facilitation. However, if you hold more than 20 percent of your assets in cash or the trade is not qualified (e.g. some residential rentals), inheritance tax may be due.
# 6 – I don’t do research and development
We hear that a lot. Often times, owners think this is just part of day-to-day business operations, but it can be real R&D, especially if you can’t solve the problem on the first try.
- Try to improve the shelf life of your product by using different ingredients – R & E.
- Trying to overcome an obstacle / improve an engineering process – this can be an option for R&D
R&D is not limited to men in white coats, it is carried out by many companies every day without even realizing it.
# 7 – The maximum tax rate is 45% once I make more than £ 150,000 so the planning doesn’t make that much of a difference to me
In fact, there are far more tax bands than you’d think when you get social security, Scottish tax rates (salary is captured by this but dividends are paid under Westminster tax bands), high income child benefit fee (income over £ 50,000) or loss Your personal allowance (income over £ 100,000).
If your salary increased from £ 50,000 to £ 60,000, your net wage would only increase by £ 5,798.
However, if you have children, you are now subject to high income tax on child support. With three children, you’d have an additional £ 2,545 in taxes, so for a £ 10,000 increase your net wage increase would be just £ 3,253 (an effective tax rate of over 67 percent). If you make between £ 100,000 and £ 125,000, the effective tax rate can be over 60 percent.
As mentioned above, personal pension contributions can help you avoid these nasty gangs and plan ahead.
If there is one thing you want to take out of this article, it is: Plan ahead during the tax year and speak to your accountant regularly.
If you buy a piece of machinery worth £ 100,000 and you have a year by the end of March 31st, the purchase compared to April 1st will help lower your corporate tax by £ 19,000 (closer) to December 2021 than December 2022, if you buy it on April 1st).
While this is a cash flow saving, wondering what you could do with an extra £ 19,000 in your bank for 12 months.
Remember, don’t let the dog wag its tail. Instead of focusing on tax savings, do what’s right for the company. Sure, you could put £ 100,000 into a pension, but if that puts the company under cash flow pressure, why save 19p on the pound?
Last bonus tip – If you plan ahead, you can be clear about your liabilities and adjust cash accordingly.
Stuart Clark is the Managing Director of Russell & Russell in Glasgow, which operates owner-managed companies throughout the west of Scotland
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7 small business tax myths exploded