Question
I have changed to a limited company from being a sole trader to reduce tax(50%).I am the earner with my wife and 2 children(age 24 and 17)as additional shareholders and employees.What can I do to reduce tax?
I am very happy to pay my wife and children pensions(all three have SIPPwith Alliance Trusts) or any other contributions such as dividends.My wife is a 40% taxpayer and son not yet but will be in 2 years.
Can I pay my daughter any dividends to help with school fees and uni fees later? Me and my wife have NHS jobs and NHS pensions and SIPPs with Alliance Trust.Answer
Companies are generally subject to lower tax rates than individuals, for example companies with annual profits of up to £300,000 pay 20% corporation tax, much lower than the 50% you'd pay as a sole trader.
However, that's only of benefit if the money stays in your company. If you want to spend it personally you'll need to withdraw it (via a salary or dividends) and it then becomes subject to the usual rates of personal income tax, i.e. up to 50%. So, on the surface, there's not much tax benefit unless you plan to leave profits in the company - not very practical if you need the money to live on. And, in any case, unless the company will use the money to expand or invest it'll be of little use just sat there as cash (banks tend to pay low rates of interest on corporate deposits - see my answer to this earlier question).
You can avoid National Insurance Contributions by withdrawing money as dividends rather than salary, but the taxman will need to be convinced you're not trying to evade tax. This used to be a popular route with IT contractors - maybe they'd earn £100,000 a year, pay themselves a £20,000 salary and the rest as dividends, avoiding NICs on £80,000 of income. But HMRC has clamped down on this and general wisdom seems to be that you should pay yourself a salary that is commensurate with what you'd earn if you carried out the same job as an employee for another company. So perhaps the contractor might instead pay themselves £60,000 a year and take £40,000 as dividends.
Employing family members is another way to try and save tax if they're in a lower income tax bracket than you. Plus, you can pay them dividends if they're shareholders. However, you should again be careful you're not seen to be evading tax. You'd need to able to demonstrate that family members are bona fide employees carrying out work that justifies the salary you're paying them. For example, you can't just pay a spouse £20,000 a year for typing a handful of letters, they'd need to carry out a role in the company that justifies the salary. Again, a good benchmark is how much they'd earn if they carried out the same tasks for another company.
Paying dividends to family members who are shareholders is feasible, but bear in mind a dividend distribution must be applied across the board. So, if you decide to pay £40,000 of dividends then each shareholder will have to receive their share based on the number of shares owned. For this to be worthwhile the family members will need to own quite a large proportion of the company, which risks the taxman viewing this as tax evasion unless you can justify why they have such a large shareholding.
As ever with the taxman, the key is to do what would seen as reasonable. Try to push things too far and you could risk a tax investigation, demands for unpaid tax, fines and possibly even imprisonment. I'd strongly advise speaking to an accountant to gauge what they think would be allowable in your position, so that you can try to save tax without risk of upsetting the taxman.
Otherwise, allowable deductions for business expenditures are broadly similar for both companies and sole traders, as is the pension position. You can pay pension contributions on behalf of your wife and children regardless of whether they're employees of your company. However, tax relief will be subject to the usual rules, i.e. non-taxpayers get basic rate tax relief on annual contributions of up to £3,600 while taxpayers enjoy tax relief on the lower of their annual earnings and £50,000 (including any employer contributions).
If any readers know of other (legitimate) ways to avoid tax using a limited company please post below.
I have changed to a limited company from being a sole trader to reduce tax(50%).I am the earner with my wife and 2 children(age 24 and 17)as additional shareholders and employees.What can I do to reduce tax?
I am very happy to pay my wife and children pensions(all three have SIPPwith Alliance Trusts) or any other contributions such as dividends.My wife is a 40% taxpayer and son not yet but will be in 2 years.
Can I pay my daughter any dividends to help with school fees and uni fees later? Me and my wife have NHS jobs and NHS pensions and SIPPs with Alliance Trust.Answer
Companies are generally subject to lower tax rates than individuals, for example companies with annual profits of up to £300,000 pay 20% corporation tax, much lower than the 50% you'd pay as a sole trader.
However, that's only of benefit if the money stays in your company. If you want to spend it personally you'll need to withdraw it (via a salary or dividends) and it then becomes subject to the usual rates of personal income tax, i.e. up to 50%. So, on the surface, there's not much tax benefit unless you plan to leave profits in the company - not very practical if you need the money to live on. And, in any case, unless the company will use the money to expand or invest it'll be of little use just sat there as cash (banks tend to pay low rates of interest on corporate deposits - see my answer to this earlier question).
You can avoid National Insurance Contributions by withdrawing money as dividends rather than salary, but the taxman will need to be convinced you're not trying to evade tax. This used to be a popular route with IT contractors - maybe they'd earn £100,000 a year, pay themselves a £20,000 salary and the rest as dividends, avoiding NICs on £80,000 of income. But HMRC has clamped down on this and general wisdom seems to be that you should pay yourself a salary that is commensurate with what you'd earn if you carried out the same job as an employee for another company. So perhaps the contractor might instead pay themselves £60,000 a year and take £40,000 as dividends.
Employing family members is another way to try and save tax if they're in a lower income tax bracket than you. Plus, you can pay them dividends if they're shareholders. However, you should again be careful you're not seen to be evading tax. You'd need to able to demonstrate that family members are bona fide employees carrying out work that justifies the salary you're paying them. For example, you can't just pay a spouse £20,000 a year for typing a handful of letters, they'd need to carry out a role in the company that justifies the salary. Again, a good benchmark is how much they'd earn if they carried out the same tasks for another company.
Paying dividends to family members who are shareholders is feasible, but bear in mind a dividend distribution must be applied across the board. So, if you decide to pay £40,000 of dividends then each shareholder will have to receive their share based on the number of shares owned. For this to be worthwhile the family members will need to own quite a large proportion of the company, which risks the taxman viewing this as tax evasion unless you can justify why they have such a large shareholding.
As ever with the taxman, the key is to do what would seen as reasonable. Try to push things too far and you could risk a tax investigation, demands for unpaid tax, fines and possibly even imprisonment. I'd strongly advise speaking to an accountant to gauge what they think would be allowable in your position, so that you can try to save tax without risk of upsetting the taxman.
Otherwise, allowable deductions for business expenditures are broadly similar for both companies and sole traders, as is the pension position. You can pay pension contributions on behalf of your wife and children regardless of whether they're employees of your company. However, tax relief will be subject to the usual rules, i.e. non-taxpayers get basic rate tax relief on annual contributions of up to £3,600 while taxpayers enjoy tax relief on the lower of their annual earnings and £50,000 (including any employer contributions).
If any readers know of other (legitimate) ways to avoid tax using a limited company please post below.
Read this Q and A at http://www.candidmoney.com/questions/question557.aspx
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