Tax saving opportunities for limited companies

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As a busy contractor, you’ll want to make the most of your hard-earned money and reduce tax liability – and who can blame you?

One way you can make your cash go further is to plan ahead and take advantage of the tax-saving opportunities you get by setting up your own company. Tax laws are constantly changing, so it’s a good idea to check your figures every year to make sure you’re still within the rules.

But how can advance planning help you save tax? Here are just a few ideas to set the ball rolling.

Advancing expenditure

Buying things earlier than planned could reduce your Corporation Tax liability. Even if it’s just by a few weeks (from the beginning of the next tax year to the end of the current one), you could get your tax relief a lot sooner.

Here are a few things you could bring forward:

  • Buying equipment
  • Advertising and marketing campaigns
  • Website design and software development

Although you can get tax relief for payments into company pension schemes, this only qualifies if physical payments are made, rather than being charged to the company’s accounts.

Capital allowances

You can claim capital allowances when you buy assets for your business. Just like advancing expenditure, buying these items earlier could see you get tax relief sooner than planned. In most cases, you’ll receive 100% of the amount you paid.

Here’s a quick list of the types of assets you can buy:

  • Equipment – including laptops
  • Machinery
  • Business vehicles – including cars, vans or lorries

Because you’ve set up your own company, between 1 January 2019 and 31 December 2020 you’ll also get a £1,000,000 annual investment allowance (AIA), which provides 100% tax relief on plant and machinery (excluding cars).

Although you can still claim for cars using AIA, the amount of tax relief you’ll receive depends on its Co2 emissions.

For more information about capital allowances, head to our Capital Allowances guide.

Trading losses

These occur when your company’s expenditure is greater than the income you receive. If you find yourself in this situation, you can get tax relief on this loss.

There are three ways you can go about this:

  • Set your losses against any other income (for example bank interest) or capital gains in the current tax year
  • Carry them back for up to one year and set against profit made from the previous 12 months’ trade
  • Carry them forward and set against trading profits in future years

Extracting profits

One of the perks you can enjoy as a company director is the ability to pay yourself a combination of salary and dividends. By doing this, you can get substantial savings when it comes to National Insurance Contributions.

Timing is crucial when issuing dividends, especially if you’re a higher rate taxpayer. If you delay your dividend payment until the new tax year, you could give yourself an additional 12 months to pay the extra tax due.

Company loans

If you take money out of your business as a director’s loan, you won’t be charged interest on anything with a value of £10,000 or below. However if you have a directors loan outstanding at year end, that you do not repay within 9 months of the company year end, you’ll need to pay an S455 charge at 32.5% of the loan balance to HMRC with your Corporation Tax. HMRC have a useful guide to director's loans and the appropriate actions for each scenario.

Rollover relief

If you decide to sell one of your assets, you could avoid paying Capital Gains Tax if you reinvest the money you receive in something else – known as rollover relief. This only works if you buy your new item within four years of you selling the old one.

Need more help?

We hope this guide has managed to shed some light on the different ways you can minimise your tax liability as a limited company contractor. If you want a bit more advice, then help is close at hand.

At ClearSky Contractor Accounting, we understand that one size doesn’t always fit all. That’s why we tailor our expert advice to suit your own personal circumstances, whether they want to reduce tax liability.

We’ve helped thousands of contractors reap the rewards of their busy WorkStyle, so why not join them?

For more information, please call 0800 032 5326 or email