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9 tips to reduce income tax for limited company contractors

Nine top tips for Limited Company contractors to reduce your income tax bill
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    It is not a secret that many business owners prefer to minimise their tax liability to avoid paying taxes unnecessarily, legally. Financial planning is a critical step that many business owners should pay attention to.

    It might help you reduce your tax bill and save money for future profitable investments.

    This blog will walk you through the top nine suggestions that you could consider in reducing your income tax bill and maximising your take-home pay.

    Be aware of the expenses you can claim from your company.

    A business expense is a cost that is exclusively and wholly incurred for business purposes. An organisation needs to identify these as they allow you to claim tax relief on that amount.

    The expenses that you claim from your company are deducted from the company’s profits, on which you will incur a corporation tax.

    Therefore, it indicates that the higher the business-related expenses, the lower the profit, which leads to a lower corporation tax. You can find out more in our article How to reduce corporation tax in 7 steps.

    However, it is worth noting that over-claiming expenses may lead you to face liquidity issues.

    Hence, it is advisable to seek assistance from a professional accountant in understanding the various types of expenses and amounts of expenses that you could claim to maintain your financial records efficiently and effectively. Contact us today to get in touch with our contractor accountants.

    Make contributions to pension funds.

    Taxpayers in the UK have the opportunity to save their allowances up to £40,000 into a pension scheme of their choice.

    If you are a contractor, self-employed or director and have income in your business that you are reluctant to withdraw due to increasing taxes, this is one of the highly beneficial methods that will be of great use.

    Pension contributions are considered an allowable business expense and can be deducted from your company’s pre-tax profit. Pension tax relief is one of the single most effective methods of reducing your tax burden and is available to you at the highest tax rate.

    If you have any unused pension allowance, ensure to reach your tax-free limit of £40,000 if you are a taxpayer and have sufficient funds to invest.

    Make charitable donations.

    Your company will be subject to tax relief on your corporation tax payments when you donate one or more of the following to a charity:

    • Trading stock or equipment
    • Money
    • Sponsorships
    • Shares, property, or land
    • Employees

    Suppose you donate money, shares, property, or land. In that case, you can record them under ‘Qualifying Donations’ in your tax return and deduct them from your profit, which will effectively reduce the corporation tax payable.

    If you decide on seconding your employees or sponsoring a charity, you can deduct them directly as an allowable business expense in your entity’s yearly accounts.

    Utilise your ISA allowances.

    ISAs help businesses to achieve gross interest or returns on savings. If you are in the higher income threshold bracket or close to the threshold, ISAs will not affect other allowances available to you, such as dividends and savings.

    ISAs can be in the form of investments, cash, or both. These are very useful sources of income for the future, and an entity can achieve them tax-free.

    Make use of the marriage allowance

    Under the marriage allowance, you can transfer £1,260 out of your allowance to your husband, wife or civil companion.

    This will bring down their tax by up to £252 annually (Considering the period between the 6th of April – the 5th of April).

    Although this might not seem like a very significant saving, this can reduce your potential tax liability.

    It is vital to pay attention to the fact that the lower earner should have an income level below the personal allowance to benefit as a couple. Therefore, under normal circumstances, this may not always be an option.

    Claim your R&D tax relief

    Suppose your business makes payments to introduce new products and invest in developing new processes and software. In that case, you are likely to have the chance of reducing your corporation tax by a significant amount.

    You can also experience tax savings on research and development allowances, which you have spent on research equipment or facilities.

    When companies invest in research and development activities, HMRC will be able to increase productivity, which is the main reason businesses are given this relief.

    Make investments in plant and machinery

    Businesses can claim immediate tax relief on specific assets up to a predefined limit, which is known as the “Annual Investment Allowance.”

    This allowance facilitates a form of faster tax relief since the company can claim the total expenses in the year of purchase rather than claiming it over a more extended period which may be over several years.

    Claim your business mileage expenses

    If you utilise your personal car for trips concerning the business, you are allowed to claim expenses from the entity on a tax-free basis under the legally enforced rates per mile as follows:

    • 45p up to 10,000 miles
    • 25p for miles above 10,000

    Claim the working from home allowance

    This “Working from Home allowance” is available mainly to contractors who are forced to work from home. However, this claim is not allowed for those who choose to work from home.

    From the 6th of April 2020, businesses were allowed to obtain £6 per week without any need for evidence of incurring extra costs. The benefit of this claim is that it is available irrespective of your method of contracting, Limited company, or third-party payroll company.

    Frequently asked questions about reducing your tax bill as a limited company contractor

    At WIS, one of our primary aims is to ensure that your tax bill is maintained at its most effective level and maximise your take-home pay.

    With years of experience combined with the knowledge in different areas that are quite complex to be understood by contractors and business owners, we make sure that our clients obtain the necessary advice on how to manage their business transactions to achieve high levels of tax efficiency and thereby reach their professional goals.

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