How to Reduce Your Tax Liability
Let’s face it! Paying your taxes is one of the most important financial priorities which you cannot possibly overlook. When it is about paying taxes for your business, it can become quite difficult to manage the tax payment when you are struggling for holding up the capital to run your business.
Here are five common areas where your and any other business should address to for reducing tax liabilities.
Efficient tax structure
The company’s set up structure has important tax proposition. The most effective tax system totally depends on the future plans for the company, the stage of the business and the risk environment. If you are a self-employed, consider a limited company structure for minimizing the impact of the income tax rate.
Payment by salary or dividend
The tax payable varies according to the method of payment used i.e. either by salary or dividend which involves two different levels of taxation. While a salary payment is an allowable deduction which reduces the Corporation Tax payable, a dividend is not allowable for Corporation Tax purposes and is treated as a distribution of profits after taxation.
Drawing a dividend receives a personal saving unlike the salary payment. Payment by dividend also improves cash flow through Pay as You Earn (PAYE) which requires a monthly cash outflow of tax and NI contributions. Remember, it needs to be carefully planned because this type of profit must be distributed to all shareholders. If you decide to take payment by dividend, you can forget about the right to pension fund and the benefits of a sickness insurance scheme.
Claiming the Amount in Research & Product Development
If your business is involved in research and product development (R&D), you can claim the tax deduction amount back. Due to the announcement of April 2012 Budget, there has seen a major rise in the tax deduction among the such businesses. At present, if the business’ work during the last two years, present or future qualifies, relief up to 225% against Corporation Tax is certain which sadly many businesses fail to consider. Since, the application process is quite complex, having a professional
tax accountant will help.
Enterprise Management Incentives Scheme (EMI)
The EMI is a share scheme which more companies are inclined towards today for attracting the key employees. If you are to apply for EMI scheme, it allows £120,000 of options to be granted with no income tax charge. However, the employees must be eligible and performance conditions must be met that are added to employees’ shares.
Tax shelter
Tax shelter is one of the best legal ways of decreasing the tax liability. There is mostly three shelters- Pension Scheme, Enterprise Investment Scheme and Venture Capital Trust from which a company or individual can get benefit from.
While pension scheme is an allowable deduction when arriving at taxable profits, Enterprise Investment Scheme provides Capital Gains Tax (CGT) relief to investors. If the tax reliefs are reinvested into a new company, any charged CGT can be delayed. When a company invest in various risky new businesses, individuals are allowed to buy shares in the Venture Capital Trust.
Paying taxes is one of the obligations that you must obey to. Nevertheless, by considering all these points, you can retain a certain amount from the tax liability helpful for the growth of your business.
For the above and more tax saving structures, please contact us for a free tax review at info@harleystreetaccountants.co.uk.
