Are you thinking of setting up a Ltd company this year? We’ve asked Teresa Bowe from CCF Accountancy & Tax in Harrogate to share her advice on how to start planning for 2020.
The motivation for higher rate tax payers to earn supplementary income can often be quashed by the realisation that over 40% of it will disappear in taxes.
This can be where the flexibility of using a limited company can help reduce this burden.
It used to be that people would avoid the use of companies for tax planning as they were considered to be expensive to administer and more rigid that being self-employed, however they can be a very flexible solution with the right conditions present.
One of the first elements to look at is the family. If there is a spouse and/or children aged 14 or over, there could be unused personal tax free allowances to use or unused basic rate tax bands going begging. Income can be diverted to these lower tax rate payers.
Certain tax payers, such as Doctors may find that they are restricted from contributing into pension schemes, which is a shame not to be able to explore one of the major tax deferral strategies. Instead, where there is a spouse or partner who hasn’t used their lifetime allowance, there is the opportunity to divert contributions in their direction.
A key question to ask when limited company planning is surrounding the high earner’s spending habits. People who are inclined towards saving are likely to reap the benefits of the limited company tax efficiencies. Whilst a higher rate tax paying sole trade consultant will pay tax at 40% regardless of whether they have spent their profit, a limited company shareholder will see the company pay tax at 19% on the profit and will only pay tax on the dividends when they are paid out.
The company can use its savings to invest in various activities such as property. This can be done via the existing company or via a special purpose company, formed specifically for investing in property.
There are words of warning before looking at trading through a company.
A certain level of financial discipline is always required. For example saving towards the company tax bill throughout the year is always recommended, to avoid headaches later.
A limited company is a separate legal entity to an individual and so has to have its own bank account, its own accounts and tax return. Contracts need to be in the name of the company.
Whilst the company option is great for savers, spenders will find that it is definitely not the way to go. Equally those without spare personal allowances and basic rate bands in the family might find that unless they use the company as a piggy bank, there isn’t much opportunity to benefit.
Setting up a company right at the outset is critical to ensure that the tax efficiencies are achieved. The team at CCF Accountancy & Tax are on hand to both advise on the best structures and to arrange the set up as required.
Please note that details included in this blog are correct as of January 2020. Tax laws are always subject to change and it is important to check with a professional before taking action off the basis of information found in online content!