Top 10 tax tools for directors of companies:
1. Dividends
Due to the reduction of dividend allowance to £2,000, many small company shareholders are paying significantly higher amounts of tax than they used to. However, by bringing in family members as shareholders, you can split dividends amongst them. This is useful if you are funding your adult children (over 18 years old).
2. Wages to Family Members
You can employ your spouse or other family members whether you operate as a sole trader, partnership or through a company. Their wages must be above the current National Minimum Wage or National Living Wage. You must also ensure that the remuneration paid is reasonable for the work undertaken.
3. Working from Home
You may consider the following if your company is based at your own residence or you perform a substantial amount of your duties as a director working from home:
- You can recharge the company for a proportion of your bills and running costs.
- Formalise a license agreement with your company in order to allow it to occupy part of your property. The company will pay you rent and service charges that you can claim on your self-assessment.
You can obtain tax relief on the cost of converting your spare room or building a summerhouse to serve as an office in the garden.
4. Making Tax Digital and Transactions with Directors
From April 2019, it is proposed that VAT registered business will join the Making Tax Digital regime. Once it is underway, HMRC will be able to receive company transactional data.
This means that it will be able to interrogate data almost in real time as some directors do not always vote their dividends on time and some occasionally use the company as a bank account.
5. Repaying Overdrawn Loan Accounts
There are 2 rules:
- If a repayment of £5,000 is made and the same amount is withdrawn again within a 30 day period, the repayment is matched with the later withdrawal First In First Out (FIFO). The effect is that the original loan is not treated as being repaid.
- If a repayment of at least £5,000 is made against an outstanding loan of £15,000 or more, but there is an intention to withdraw at least the sum repaid again later, this won’t be treated as a repayment but it is instead matched against the subsequent drawing.
It may be preferable that loans should be repaid through salary or dividend rather than cash, if possible.
6. Loans to your Company
Interest:
You may wish to consider charging interest on loans to your company as interest rates rose from 0.5% to 0.75% in August 2018. You may also consider taking advantage of the tax saving allowances:
- £5,000 Starting Savings rate –
- If your income is less than £16,850, your starting rate for savings is a maximum of £5,000. Every £1 of earned income above your personal allowance reduces your starting rate for savings by £1. You are not eligible for the starting rate for savings if your income is £16,850 or more.
- £1,000 Personal Savings allowance – This allowance applies to interest earned from bank accounts, savings accounts, credit union accounts, building societies, corporate and government bonds and gifts. Higher rate tax payers can earn up to £500 tax free, additional rate tax payers don’t get any allowance.
Irrecoverable Loans:
Capital loss relief may be available if a UK resident individual or company makes a loan to another taxpayer and it becomes irrecoverable. However, the loan must be used wholly for the purposes of a trade or to start a trade.
7. Leaving Payments and Directors
When you leave employment or stepping down the office, you may be paid a lump sum. Leaving payments may form part of package of measures including:
- Cash payment that can fall within the £30,000 exemption
- Purchase of director’s shares by the company
- Writing off an outstanding loan account
8. Liability of the Directors for Company Taxes
You may be held personally accountable if your actions has caused financial loss to any of the company’s creditors including HMRC. HMRC can issue a personal liability notice if they find fraud or negligence.
9. Directors and Self-assessment There are three circumstances in which you should file a self-assessment:
- You have capital gains or income to report and you must also notify chargeability
- You received a notice to file by HMRC
- You wish to claim a refund or make a claim for relief
10. Personal Service Companies / IR35
HMRC has issued a consultation regarding ‘Off-payroll working in the private sector’. This considers whether private personal service companies (PSC) should be mandated into PAYE like their public sector counterparts.