There are plenty of tax mistakes I come across, but these are probably three of the most common and the interesting thing is, they aren’t necessarily complicated. Often, it’s simply about taking a step back and looking at what you’re doing and why you’re doing it.
So, here are my top three.
1. Taking money out of your business in the wrong way
This has got to be one of the biggest ones. Years ago, it was straightforward. Dividends were generally the clear winner. If you weren’t taking money out as dividends, there was a good chance you were doing it wrong. Now, it’s not quite that simple.
You’ve got different corporation tax rates, PAYE, National Insurance, Employment Allowance and various other things to consider. You need to look at the numbers rather than automatically choosing salary or dividends simply because that’s what you’ve always done.
But there’s another part to this that I think often gets missed and that is why are you taking the money out in the first place? If you’re taking it out to fund your lifestyle, fair enough. You need the money personally. But if you’re paying higher-rate tax to take £50,000 out of your company, only to put it straight into a personal savings account, is that really the best approach? Maybe it is. Maybe it isn’t.
That’s the point. It’s not just about how you take money out of the business, but understanding why you’re taking it out. Timing matters too. Could a dividend be taken in a different tax year? Could you take less this year and more next year?
The important thing is to consider your options rather than simply taking money out of the business because it’s there.
2. One spouse is paying a lot of tax whilst the other isn’t
This one obviously only applies if you’re married, but if you’re a business owner paying higher-rate tax while your spouse is still paying basic-rate tax, that would immediately make me want to take a closer look.
It doesn’t automatically mean you’re doing something wrong. There could be a perfectly good reason for it. But there could also be an opportunity to improve this. It might involve dividends, property income or employment income. It all depends on your circumstances. Unfortunately, you can’t just move income from one person to another because you fancy paying less tax. It must be done properly.
But if one of you is paying higher-rate tax and the other isn’t, particularly where there’s a family business involved, I’d certainly be asking the question: could we structure this better?
3. Not thinking about the big picture
This is probably the one I talk about most. Someone gets towards their year end and says, ‘I’ve made £40,000. What can I do to save tax?’ Well, I could tell you to go and spend £40,000 and you’ve saved the tax. You’ve also spent £40,000, and that’s the bit that sometimes gets overlooked.
What does the business need? Do you need that money for cash flow? Are you planning to invest in something next year? Are you looking to grow or build up cash in the business? What’s the plan?
It’s the same with your personal finances. Pensions are a good example. People sometimes say they’re too young to think about pensions. Well, maybe a pension isn’t the right thing for you. But maybe it is. You don’t know until you look at what you’re trying to achieve, and that’s really my point with tax planning.
I’m not a fan of doing something just because it saves tax. I’d rather start by asking what you’re trying to achieve; what does the business need and what do you need? What’s the short-term plan? What’s the long-term plan? Then we can look at the tax implications of those decisions.
Paying the least amount of tax possible isn’t always the best answer. Sometimes spending £10,000 to save £2,500 in tax is a great decision because you needed to spend the £10,000 anyway. Other times, it’s simply spending £10,000 to save £2,500.
There’s a big difference.
The Takeaway
Take money out of the business in the right way, look at your position as a family rather than just individually and think about what you’re trying to achieve before making decisions purely to save tax.
If you’d like to take a closer look at how you’re managing your tax and whether there’s a better way of doing things, get in touch at https://www.forrester-boyd.co.uk/about-us/meet-our-team/matthew-priest. I’m always happy to have a chat and explore your options. Preferably over a coffee.
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