We are often asked about income tax and a popular question from our clients is in relation to minimising income tax. We understand why this question is often asked as no-one wants to overpay tax.
This blog post will explain two strategies that can be used to reduce your personal income tax. Each taxpayer has different circumstances but the two options can be used by a large number of people and suit a number of circumstances.
This option involves the receipt of salary and dividends from a limited company. This is the single most effective method of reducing the income tax you will pay and can lead to significant savings in income tax.
This option is suitable for a wide range of people such as contractors and most people who trade through their own business. Registering and operating a limited company allows you to receive a small salary from the company and larger dividend income from the company.
This is a very tax efficient method of receiving income mainly due to reduced National Insurance contributions. You can even reduce your National Insurance contributions to nil by receiving a salary below the NI threshold and then extracting income from the company via dividends which do not attract NI contributions.
You need to remember that your limited company will pay corporation tax on company profits after the deduction of your salary. This will be at a rate of 20%. However, due to the payment of corporation tax dividends do not attract income tax if you’re a basic rate taxpayer.
We realise that option one can’t be used by everyone. Those individuals who are employed in the general sense cannot simply opt to receive their salary through a limited company so we have another option that can be used by a large number of employees.
The second option relates to claiming the cost of professional memberships as an allowable tax deduction. There are a large number of people who pay fees to members of a professional body and in general terms these payments can be used to reduce your income tax.
This method can be utilised in one of two ways. You can record the expense on your tax return and claim the income tax reduction via the tax return. Or if you’re not required to complete a tax return you can simply write to your local tax office and ask them to adjust your personal tax code to incorporate the fee paid to your professional body.
One of our accountants can help you with a range of tax strategies. So take a look at our website and request a free quote today.