If you are a contractor who is working through a limited company, it is quite possible that your company gives you your income both in the form of a salary as well as a dividend. Contractors also often think that personal tax planning is a complicated and messy ordeal. Usually, good tax planning practices are easy to employ, but not everyone knows how to carry out this process efficiently. Therefore, this post will help you with some tips to plan your personal taxes in a limited company easily and in a hassle-free manner. Let’s check them out!
1. Define Your Employment Status
The IR35 status needs to be defined correctly by you. If you are the director of your company, you will have a unique relationship with every assignment as a part of IR35 status. So, if anything falls under the category of IR35, it will have a different set of tax liabilities. Therefore, it is essential for you to understand the significance of the status that you work with and the relationship between the projects and your business.
2. Streamline Your Expenses
If you organise and streamline your expenses well, you can significantly reduce the corporate tax that you pay every year. However, this requires you to be super organised in terms of tracking and recording all the expenses. The best way to do it is to update the bills immediately in an excel or some other tracker and also save the bills in the form of a soft copy or a hard copy. Tax filing is significant, and it requires you to have all the bills handy in case of an audit. Therefore, you must only show genuine expenses and not add any fake bills. That might cause big problems in case you get caught. So, make sure you go through your expenses and update them in real time.
3. Have Pension Funds
Adding some pension funds every year is also a good idea. There are many reasons for it. First of all, you get to save taxes on your pension funds. If you see a lot of surplus money in your personal income in a particular month, you can put it in your pension funds. If you plan it well, you can effectively reduce or completely eliminate tax liabilities with the help of your pension contributions. Therefore, if you opt for a pension scheme that is approved of tax liability, you can get a lot of relief in your personal taxes.
4. Plan Your Dividend Splits Well
You can plan to split the dividend if you are working with a partner or a second shareholder. In that case, both of you can be taxed separately based on the dividends shared. While doing this, you must document everything accurately so that there are no errors at the time of filing the taxes. There are also potential risks involved in splitting the dividends. Therefore, you must understand the tax laws perfectly well before doing it.
5. Make Sure Your Tax Payments Are Updated
Making sure that your tax payments are updated has more to do with a proper public representation when it comes to your business than for tax saving purposes. It is also pertinent to mention here that HMRC charges a hefty interest in case of late tax payments as well as can even get in touch with debt collectors for any outstanding amounts.
6. Capital Expenditure
Any tangible thing that you buy for your company for any kind of future use is referred to as capital expenditure. This includes significant pieces of equipment, software or tools as well as computer equipment. Capital allowances are also relevant here when you are planning your personal taxes in a limited company as there are also several corporate tax deductions that take place on the price of an item when you buy something for your company.
7. Consider an Executive Pension Scheme
It is a good idea also to consider setting up for yourself an executive pension scheme. You can also save a considerable amount of money as your limited company can invest the pre-tax income directly into the pension.
And there you go! These are some top tips that can prove to be handy when it is time for you to plan your personal taxes while operating through a limited company. Remember to be prudent and plan your taxes well because ultimately, the fate of your entire company depends on how well you do your taxes.
However, if you still encounter challenges, it can serve you in good stead to get in touch with a reliable accountancy company like Limelight Accountancy. The company is an expert in the field with an experience of several years under its belt and can help you plan your personal taxes in a jiffy!