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Limited Company Contractors: Top Tips for Being Tax Efficient

Limited Company

Trading through your Limited company can be the most tax efficient way to run your contracting business, depending on your circumstances and the quality of the advice you get. In this article we’ll share some top tax efficiency tips from our expert contractor accountants.

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De-registering for child benefit

When your adjusted net income is more than £60k, you might want to de-register for child benefit. At this level of income, the corresponding tax charge would wipe out 100% of your child benefit claim. You do have the option to continue claiming child benefit for the National Insurance credit, and opt out of receiving payments to avoid the tax charge.

Utilise your full personal allowance

You can earn £12,570 (2021/22) before you pay any income tax and it makes sense to make sure you use all of it if possible. Speak to your accountant about the best way to utilise your allowance.

Submit capital gains to HMRC on time

Any gains from UK residential property sales that are not your primary residence must be reported to HMRC and the Capital Gains Tax paid within 60 days of completion of the sale. Avoid penalties and interest by submitting and paying on time. 

Capital Gains allowance

The tax free allowance is £12,300 (2021/22). For jointly owned assets, this can be doubled to £24,600 (2021/22).

Pay into a pension scheme

Contributing to a pension scheme is one of the most tax efficient ways to save. Contributions up to your annual allowance will attract tax relief, your savings will grow largely tax free and you can take 25% as a tax-free lump sum when you retire.

You may be able to save even more by making an employer contribution through your Limited company – discuss this with your accountant to find out if this would work for you.

Your annual allowance for 2021/22 is £40,000 plus any unused allowance brought forward from the previous three tax years. This allowance must cover any pension contributions you make yourself, and any contributions paid for you by your employer. Contributions made in excess of your annual allowance will attract a tax charge at your marginal tax rate.

Claim Marriage Allowance

Marriage allowance allows the transfer of up to £1,260 in personal allowance from one civil partner to another, potentially reducing your tax by up to £252. For the couple to benefit, the lower earning partner should be earning less than their personal allowance of £12,570 (2021/22). Unused personal allowance can be transferred to the higher earning partner to reduce their income tax.

Avoid filing penalties

Missing the filing deadlines either for personal or company tax returns will mean you’ll incur penalty charges which in most cases could have been easily avoided. The best way to manage your tax returns is to file them as early as possible after the tax year ends in April. This gets them out of the way long before they become urgent, and leave you no chance of wasting money on penalty charges.

Claim tax free childcare

You can get up to £500 towards the cost of childcare every 3 months up to a maximum of £2,000 a year for each of your children. This goes up to £1,000 every three months up to £4,000 a year for a disabled child.

You claim Tax-Free childcare by setting up an online childcare account for your child. For every £8 you pay in to this account, the Government will pay £2. You then use the money in your childcare account to pay your childcare provider.  

Use your personal savings allowance

Interest on your savings is tax free up to £1,000 for a basic rate tax payer and £500 for a higher rate tax payer.

Save in an ISA

Your tax-free ISA allowance is £20,000 per year (2021/22) and interest will again be tax free. Where possible, make sure your ISA is fully funded before you save in a taxable savings account. 

Plan your cashflow in advance to reduce payments on account

Your payments on account are based on your personal tax liability in the last tax year, so if this year’s liability will be lower you may overpay.

In these circumstances, carefully planning your cash flow for the coming tax year may allow your accountant to adjust your payments on account, so your money doesn’t get tied up waiting for HMRC to process a refund.

It’s important that this planning is accurate, as you could incur late payment fees if the reduced payment isn’t reflected in your actual tax liability.

Use a junior ISA to invest money for your children

Junior ISAs must be opened by a legal parent or guardian but anyone can contribute. The deposit limit is £9,000/year (2021/22) and as with an adult ISA any interest earned is tax free. A junior ISA automatically rolls over to an adult ISA when the owner turns 18.

Invest with the Enterprise Investment Scheme (EIS)

The EIS is a government backed initiative that helps younger, higher-risk businesses raise finance by offering generous tax relief to investors. As an investor, you could claim relief on up to £1 million worth of investments in qualifying companies, or £2 million if investing in a knowledge intensive business. It’s a good idea to seek professional advice before deciding which investments will work for you.

Reducing inheritance tax

Gifts that you give more than seven years before your death avoid inheritance tax (IHT). If you die within seven years of giving a gift, IHT is due on a sliding scale, so giving the gift may still reduce the amount of tax due. You can give gifts totalling £3,000 a year free of IHT, and £5,000 on the occasion of a child’s wedding. 

Claiming allowable expenses through your Limited company

Claiming expenses through your company reduces your company’s Corporation Tax liability. What you can claim will depend very much on your circumstances, so it’s a good idea to discuss your situation with your accountant to ensure you’re claiming everything you can.

If you have questions of if we can help in any way, please call our expert team on 01296 468483 or email info@orangegenie.com.

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