That's why we have complied our top four ways that contractors can save on taxes, and in turn, relieve a little bit of financial pressure.
To find out how you can reduce your corporation tax bill on your personal service company, just read on…
Donate to charities
When a limited company supports a charity, it can reduce its corporation tax bill. How?
Whatever amount you donate to your charity of choice is deducted from your pre-tax business profits and this deduction reduces the amount of corporation tax that your business will pay.
However, your company doesn't have to just donate money. There are a variety of contributions that you can make, such as:
- Trading stock which are items that you make or sell
- Property, land and any shares in another company
If you are a director of a limited company, then you can take out tax-free loans from your own business for a certain period. You should take note that these tax-free loans have important rules regulating how much money you can borrow and how long for.
When you take out a loan from your own limited company, you can borrow as much as £10,000 before the taxman gets involved.
If you take out a loan, you need to repay the sum of money within nine months to your company's financial year-end. Fail to do this and you could actually add 32.5% to the company tax bill – you can claim all that back when you've repaid the loan but you'll have to wait a while to get it.
After you have repaid the loan, you need to wait 30 days before you can take out another loan or HMRC will view your actions as tax avoidance.
Tax-free income protection insurance
Tax-free protection is income protection insurance which pays out when you can't work. This type of protection could be especially valuable if you're a contractor who could fall ill or have an injury, either of which would result in your not being able to work for some time. Beware of the cost though – these policies can be expensive.
However, directors can set up corporate income protection insurance for themselves. By doing this, you can pay your insurance premium from your company's funds instead of from your personal income.
When you do this, you can choose the way that you are taxed for the cost of the insurance. You can either declare it as a benefit-in-kin and then pay tax on the insurance premium or you can opt not to declare it and pay any tax on any pay-outs you receive if you have a claim.
Properly planning for your retirement has never been easy but it's worth it. Contractors looking to secure a comfortable future can use a pension scheme to set themselves up to be comfortable financially when they retire and they can save on tax at the same time.
Depending on the pension scheme that you select, contributions you make will either lower the amount of corporation tax you pay or you can choose to receive tax relief on your personal contributes instead.
You should note that there is an annual limit for the tax-free pension contributions which is currently at £40,000.
Are you a contractor who needs help?
Whether you're seeking expert advice from an experienced professional or looking to hire an accountant to manage your finances, Sunny Accountants are here to help. At Sunny Accountants, we specialise in working with contractors and small businesses. Our goal is to save you more in tax than you pay us in fees and, more often than not, that's exactly what we do for our clients.
Contact Sunny Accountants on 01623 559 362 or email us on [email protected] for advice and support.
For a free chat on how we can help you, please complete the contact form below and we will be in touch.