A recent report issued by the Cornwall Chamber of Commerce shows that the international tax system benefits large corporations rather than small businesses. The report confirms suspicions that most small and medium-sized businesses have known for years, the system is biased towards corporations.
The report was initiated following the uproar created by the loophole that allows international corporations to avoid paying UK tax by using offshore sister companies, and George Osborne´s decision to reduce capital gains tax for corporations to 20 per cent by 2015 stoked the fire. So what can small business owners legally do to reduce tax repayments by using “loopholes.”
Each member of your family over the age of 16 is entitled to a personal allowance, currently £9,440. You will have to employ members of your family of course, but the wages are tax deductable. Maybe you have a child who is a budding accountant and can take some of the admin roles and account keeping from you.
Capital Gains Tax
Small businesses can save a small fortune on capital gains tax, yet it is a widely unknown money saver. Everyone over the age of 16 in the UK has an annual capital gains tax allowance of £10,900 which is not taxable. By employing your partner, or any other member of your family you can save a total of £20,340 each for the 2013/14 tax year.
The tax rules are slightly different when it comes to sole traders, partnerships and limited companies – and unsurprisingly the tax rules favour the big hitter of the three. Limited companies that earn around £25,000 to £30,000 or more have less tax liabilities and National Insurance payments than sole traders and partnerships, although this figure differentiates depending on the companies circumstances such as your annual investment. Although additional accounting work is required, sole traders and partnerships can still reduce tax liabilities by converting to a limited company.
Pay yourself a wage
One of the most effective methods of legally reducing your tax bill is to pay yourself a salary rather than a dividend. For this tax year you are entitled to a total £7,690 although has to be paid as a “director´s fee” rather than a salary otherwise you will be fined for breaching the National Minimum Wage regulations. Also be careful not to pay yourself more than the maximum allowance otherwise you pay National Insurance contributions twice.
You can save money by saving money in tax free accounts such as ISA´s, pensions and trusts. The most well known are ISA´s which allow you to invest up to £11,280 of which £5,640 can be in cash. Pension contributions also provide tax relief up to £50k and you can invest up to £200,000 in a Venture Capital Trust which gives you 30 per cent tax relief and is free of Capital Gains Tax.
If you would like more information about any of the tax saving tactics mentioned above, or advice on any other tax related matter give us, accountant in London, a call today on 08000 235 234 or email firstname.lastname@example.org.