Our Top 10 tax savings Tips

Business owners are in the unique situation of being able to manage how much tax they pay personally. Not so the case for most non business owning employees.

Here are a few golden rules that apply to all good, honest tax planning.

First of all, it must be legal, secondly, it must be simple to understand and finally, the cost must not outweigh the benefits. And of course for any tax planning to be successful, it must be done in advance. Doing something after the event simply does not work.

So onto my “top 10 tax planning tips”

Tax Tip 1. Make sure you use the right combination of salary, dividends and director loan account payments. As a business owner you are in the best position to choose how you pay yourself through salary, dividends, bonuses and directors loans. You can reduce your NI contributions by paying yourself dividends. However you can also reduce your personal income tax by paying yourself from the directors loan account. The company must have the funds to do this – at least on paper.

Tax Tip 2. Consider further pension contributions I know this is not a hugely popular choice, however the tax benefits should not be over looked. Firstly you will get tax relief against your contributions and secondly, the fund growth is free of Capital Gains Tax. Contributions are capped at £50,000, however you may be able to use unused allowances from previous years. Furthermore, and this is often overlooked, none of us want to work forever and pensions should be considered when planning for life after you stop working.

Tax Tip 3. Consider using your annual ISA Allowance The annual ISA for 2011/2012 is £10,680 per person, so a husband and wife can invest £21,360 this year. The advantage is that there is no CGT on any profits made and additionally there is no need for the information to be included on your tax return. This is a great way to build up medium to long terms funds that are tax free and readily available.

Tax Tip 4. Consider the timing of the sale of assets subject to capital gains tax (CGT) We all have an annual allowance for CGT (£10,600 each for 2011/2012), so your wife has the same allowance as well. If you do not use your allowance each year, then you will lose it. And don’t forget Entrepreneurs Relief up to £10 million – gains up to this amount are taxed at 10%.

Tax Tip 5. Minimizing the aggregate family tax bill If it possible, structure your financial affairs so that you use all your allowances. Within reason you can structure your income between you and your wife to efficiently pay reduced income tax. You should also use both CGT allowances if you can. Also if you have income producing assets in may be better to transfer these assets to a non tax payer.

Tax Tip 6. Tax efficient borrowing From a tax efficiency view point it is better to borrow again a commercial business asset rather than personally. Business loans are business expenses like all others and are treated as business expense. Not so for personal debt, whether it’s a mortgage or a personal loan.

Tax Tip 7. Consider IHT-free gifts. The annual gift exemption is £3,000 per person. So each year a married couple can gift away £6,000 in total and there will be no tax implications. This can be very useful when helping fund private education for grandchildren.

Tax Tip 8. Consider starting a pension for your children This one is often over looked by most people. You can invest £2,800 a year into a pension for your children even if they are non tax payers. This investment will be grossed up to £3,600 very kindly by HMRC. And it’s a great way to help your children’s long term future.

Tax Tip 9. Make sure you claim all your business expenses Always claim all your genuine business expenses. Wherever possible keep receipts for purchases of goods and services you use in your business. It’s often the case than not every item gets claimed for, as doing the paperwork it a tedious task, but it’s well worth it.

Tax Tip 10. Claim your Higher rate tax relief on your pension contributions If you are a Higher rate tax payer, make sure you claim the higher rate tax relief from HMRC. Basic rate tax relief is given at source automatically, however higher rate relief needs to be claimed. Make sure your accountant is claiming it for you, or if you do not use an accountant you will need to write to HMRC to claim it.

This is not an exhaustive list of potential tax planning opportunities. Always take professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.