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Tax tips for business owners to ease the pressure of the cost of living crisis

by Christian Roberts

With the cost of living crisis continuing to bite, now is a good time, as a business owner, to consider actions to help ease your tax burden.

Avoiding the personal allowance taper

Following the increase to the tax rates for dividend income, and with future tax rises not ruled out, it is now even more important than ever to maximise your tax allowances each year. The personal allowance gives you the opportunity to earn up to £12,570 of income each year before you start to pay tax.

For individuals whose earnings exceed £100,000, the personal allowance is reduced by £1 for every £2 of income that exceeds £100,000. The loss of personal allowance means that you are effectively facing a marginal tax rate of 60% for income in that bracket; however, steps can be taken to help prevent the personal allowance taper. One such step is considering pension contributions.

Pension contributions

Pension contributions are a popular method of preserving personal allowance. Individuals with income can contribute up to £40,000 (gross) into their pension scheme during the current tax year subject to the annual allowance tapering rules. Pension contributions made by yourself personally will receive basic rate tax relief at source, which means a £40,000 gross contribution requires a £32,000 personal payment.

If you are a higher or additional rate taxpayer, you will also receive further relief on your contributions by way of an extension to your basic and higher rate tax bands, resulting in more income benefitting from the lower rates of tax. Furthermore, personal pension contributions increase the threshold at which your personal allowance is reduced.

If you are a director of your own limited company, you may wish to consider making contributions through your limited company. Employee contributions are limited by the relevant earnings threshold, which, for directors who chose to pay themselves a smaller salary, may be low. However, employer pension contributions made through the company will not be limited by this cap which means additional funds can be contributed irrespective of what salary you as a director are receiving. Please contact your usual Rickard Luckin contact if this is an option you would like to consider.

Pension contributions made this way are a tax efficient way of extracting cash from the company, as they will not be subject to income tax or employers National Insurance. They will also be tax deductible for corporation tax, provided they are wholly and exclusively for business purposes. For this to apply, a number of criteria must be met.

Home office expenses

Working from home will certainly not be a novelty to most people over the last couple of years. Business owners who regularly work from home can claim a tax deduction for their additional costs without having to provide receipts and bills by using HMRC’s simplified expenses. It is possible to claim up to £26 per month to cover your use of home.

If your home office costs are much larger than this, a larger deduction may be claimed provided the business element of the expenses can be clearly separated from your personal expenses. Care should be taken when using this method, as if you are using an area of your property exclusively for business you may lose out on Principal Private Residence relief when selling your home.

Keeping it in the family

If you are a self-employed trader or run a family-owned company, you may wish to consider employing your spouse, or taking them into partnership to allow potential redistribution of income. This can help enable you both to benefit from your personal allowances and the lower rate tax bands, although care should be taken to ensure you do not fall foul of HMRC’s anti-avoidance rules.

If you would like any further information in relation to any of the above points, please fill in our online enquiry form or contact one of our offices directly.

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