Reduce what you pay on account
As you probably know, the tax owed on 31st Jan includes a balancing payment for the 2011-12 tax year but most usually the majority of what is paid is money on account for profits in 2012-13. You may not know that you can request to reduce your payments on account if you anticipate that you are paying too much.
Most commonly this occurs if your trading this year is less profitable than last year. Let us say that last year your pre-tax profit was £30k and tax £2.5k in January HMRC will be asking for £1,250 at 31st Jan. Let us also say that your pre-tax profit this year is only £15k and tax on that is £1k, simply phone HMRC and request to reduce the payment at 31st Jan to £500.
It is important to note that this only works if your tax bill really is going to be lower. If it turns out you have not paid enough on account for the year you will be charged interest on the underpayment.
Bring forward Capital Expenditure
Imagine you know that you will be buying new equipment in April or May this year. You also know that you will struggle to meet the payments on account in January.
If you can bring forward buying the equipment to March then your expenditure falls in this tax year. This reduces what you will need to pay in tax for 2012-13. As we set out above, if you reduce your profits for this year, you can potentially reduce what you pay in tax on account in January.
The proviso with this tactic is that the capital expenditure actually reduces your tax bill to levels that are lower than 2011-12. If it doesn’t you cannot reduce your payments on account.
For example profits in 2011-12 might be £30k and predicted profits in 2012-13 might be £40k. For most small business with capital expenditure under the Annual Investment Allowance, you would need to spend more than £10k on capital expenditure to have an effect on the tax owed at 31st Jan.
Set up a Limited Company
We would not advise this tactic without careful consideration to all the implications of running a Ltd Company (administrative, accountants fees, restrictions on drawing money, Director’s responsibilities etc). However if you setting up a Limited Company is the right thing for you to do generally, setting one up by now has the potential to reduce your tax bill at 31st Jan.
When you set up a Limited Company that takes over your sole trader business, your sole trader business stops trading. Clearly this means there is less profit in the tax year 2012-13. If the reduction in profit brings your profit to levels that are less than the 2011-12 tax year, you can reduce the amount you pay on account at 31st Jan.
The added bonus to this is that once a Limited Company has been set up it does not pay tax for 21 months. If cashflow now is a problem this may present an opportunity. For example you may be able to stop setting aside tax for a time.
Start paying into a pension
This tactic makes a difference if you fall into the higher rate tax earner bracket. Higher rate tax of 40% starts when you earn more than £42,475 (for tax year 2011-12). The point is that pension contributions extend your basic 20% band and if you can afford to make the contribitions you reduce the amount you pay in tax.
As with everything else we have described above. If you can start this now you reduce the amount you need to pay in January because typically most of what you are paying in January is money on account for the 2012-13 tax year we are in.
Pay a spouse or teenage family member who hasn’t used their taxable allowance
Everyone has an allowance of £7,475 in the 2011-12 tax year that they can earn without being taxed. There may be someone within your household who has not used their taxable allowance. If you can find work for them to do that contributes to your business, you are entitled to employ them for that work.
These payments reduce your taxable profit and as long as the payments do not exceed the £7,475 they pay no tax on their earnings.
The note with this tactic is that they need to do work for you and they need to actually get paid. They will need to get paid through PAYE unless they fulfil HMRC’s conditions for being self-employed themselves.
Nevertheless the tax savings are potentially very significant. For a higher rate tax earner with three family members they can find employment for in the business, the tax saving would be just under £9k.