4 Advanced Tax-Saving Tips

It’s a new tax year and a great time to look at your company and personal finances to ensure you are taking advantage of all the tax efficiencies you can as a director of a company.

The great accounting spring clean

As a seasoned contractor you’re probably well-practiced in the usual tax efficiencies around salary and dividend splits and company expenses but here’s a quick round up of the top 4 more unusual tips for saving tax.

1. Tax breaks for green cars

If you have a company car, the tax and NICs are based on the CO2 emissions and the list price of the car plus accessories.

Owning a green company vehicle for company use only can save you hundreds of pounds a year on vehicle excise duty and benefit in kind tax. Standard company car benefit in kind tax rates start at 11% for conventional petrol and 14% for diesel vehicles. The maximum level is 37% for the biggest CO2 emitters.

The greener the car in terms of emissions, the more you can save. Owning a hybrid can decrease your benefit in kind rate by at least 5%. Low and ultra-low carbon emissions vehicles (such as plug-in hybrids and all electric vehicles) attract the lowest benefit in kind rates at just 5%.

Benefits in kind are any personal benefits received from your company that are taxable such as a company car, loan, gym membership etc. They must be declared to HMRC using a form known as a P11D and as a result additional Income Tax will be due plus your company will have to pay Class 1A National Insurance on the value of the benefits.

2. Tax-efficient entertaining

Business entertainment isn’t tax deductible, but there are ways to claim VAT back on certain expenses that would otherwise be seen as entertainment.

• Quid pro quo – put simply you can provide proper and sufficient quid pro quo (something of equivalent value given in return for cash/goods or services) to suppliers, customers or potential customers. The key to ensuring you comply with this interpretation is that it is equivalent value.

An example of this would be refreshments and nibbles on a trade stand for feedback questionnaires. A full lunch and travel expenses would be considered for more input – say, a full day of product testing or a workshop.

• If it is part of a contractual agreement the hospitality provided needs to be an explicit part of a contractual agreement so it is not classed as business entertainment. There must be a compulsion to provide a service or reciprocate. An example of this is if you have a co-supplier and you agree to provide the accommodation and subsistence for their workers whilst they work onsite with you with the contractual understanding that they provide the same (the equivalent value) for you.

For HMRC guidance click here.

3. Director’s tax-free loans

The ability for directors to take out tax-free loans from their company for a specified period of time has been in place for some time. There are some important rules to consider; one is the amount you can borrow as a director without attracting BiK, the other is the length of time you can borrow the money without your company being taxed on the amount borrowed.

• You can now borrow up to £10,000 without attracting benefit in kind tax
• You must repay the company loan within 9 months of the company financial year end to avoid the 25% company tax bill. In addition to repaying the loan you need to ensure that there is a gap of at least 30 days before you take another loan from the company, or HMRC consider the arrangement as tax avoidance.
• Loans over £15,000 that are repaid and then taken out after a short-term loan facility is utilised attract the 25% charge under the avoidance rules too.

In short, you can borrow £10,000 completely tax free, providing you repay the loan to the company within 9 months of its accounting year end, and wait 30 days before re-applying for a loan from the company.

Arrange a short-term overdraft or loan facility to cover the thirty days (or borrow from a relative) and you can borrow £10,000 from your company almost indefinitely.

4. Tax-free income protection insurance

Income protection insurance is valuable protection should the worst happen and you are unable to work for a while due to illness, for example. But premiums can be expensive, up to thousands of pounds in some instances.

You can set up corporate IPI for yourself or multiple employees, this means that you pay the insurance premium out of company funds (not your taxed income).

HMRC allows you as a company to choose the way in which you are taxed for the IPI cost; declare it as BiK and pay tax on the premium or choose not to declare it as BiK and pay tax on any associated pay-outs in the event of a claim. To make the most of tax savings:

• Opt not to declare the premium as BiK for any claim-free years.
• Opt to declare the premium as BiK for any claimants on the policy for the year of claim.

This way, you maximise tax efficiencies by only paying tax in the event of a claim being made, and it is only on the premium rather than the more substantial pay-out.

Next steps

Be as tax efficient as you can be by looking at all your expenses related to your company; make sure you also check the full list of allowable expenses. Taking ten minutes each year to ensure you are claiming everything you are entitled to can take hundreds if not thousands of pounds off your tax bill.