How To Avoid Tax Like The Tax Man Does

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TV presenters are doing it. HMRC employees are doing it. It wouldn’t surprise me if other civil servants are doing it: not paying your dues to HMRC is all the rage and I’m guessing you’re here because you want to know know how to avoid tax?

Before we get started, refusing to pay any tax at all is illegal. What we’re going to look at today is a relatively simple way to reduce the amount of tax you pay to Uncle George for loony pet projects like HS2!

Ok, here we go, a 5 point guide to minimising the amount of money you pay in taxes.

How Does It Work?

Rather than paying you a monthly salary, your employer pays your wages to a service company. You then become an employee of your service company. No third parties are required and I’ll show you how it’s done shortly.

Instead of being taxed at 20%, 40% and 50% you then become liable for Corporation Tax (currently 20%) across all income. Corporation Tax is a fixed sum regardless of how much money your company earns.

You then pay yourself a dividend of up to £42,000 per year (effectively tax free). In the meantime, your business continues to build up cash until you decide to close it down and extract the money that’s left. Oh, if you employ your wife, husband, partner (or whatever you want to call them) you can pay them a salary and dividends as well.

Other Benefits

Lower rates of tax aren’t the only incentive to set up your own company. Here are a few others:

  • You no longer pay National Insurance
  • You can claim back expenses for mileage and travel costs
  • Stationery, phone calls and office costs can be claimed back from your business

How do you get a piece of the action?

Before you can start avoiding minimising your tax bill there are a few things you need to know, such as….

How Set Up A Service Company

Setting up your company is relatively easy. You have two options: you can apply directly to Companies House but the process can be quite slow. Alternatively, the list of companies below can have your service company up and running in as little as 48 hours:

Fill in the paperwork, pay a small fee (as little as £4.99) and a few hours later you will officially be a company director.

Do I Need A Business Bank Account

Yes. Your business account is where all of your money goes before you pay yourself. A word of warning: don’t be tempted to dip into your business account if you’re short of cash. You might get a nasty smelling tax bill!

Before you set up your bank account you’ll need all the documentation issued when you created your business. Take your Certificate of Incorporation and a business plan along with the usual paperwork needed to open an account (passport, proof of residence, etc).

Hire A Good Accountant

If you don’t know how to handle our tax affairs, this step is vital. A good accountant will not only do your VAT and Corporation Tax returns but will also keep you advised of changes to tax laws.

When I first set up my own company I knew nothing. My accountant was referred to me by some colleagues. For £80 a month he handles all the paperwork and keeps me up to date with how tax rule changes affect me.

Getting A Contract

You can’t just set up a business and expect your current employer to play ball. First, they will need to agree to pay you as a service supplier rather than an employee. You’ll also need a contract between you and your employer. Don’t worry, this is not as scary as it sounds. If you’re employed you already have a contract to work – it just needs renegotiating.

Tip: get a solicitor or accountant to check the wording of your contract.

Liability Insurance

You’re probably going to need insurance. At a minimum, most companies ask their service suppliers to have Public and Private Liability insurance. Cover of up £1,000,000 will cost you a few hundred pounds a year and can be paid for by your business.

The Negatives

As with just about everything in life, there are negatives points to consider:

  • Accounting – your accountant will do the returns but you still need to track all your expenses
  • Renegotiating contracts – your employer might find someone cheaper or renegotiate your contract to save money
  • HMRC – they constantly make a mess of their own accounting so don’t be surprised when they think you’ve paid yourself more than you actually have. A good accountant is key
  • Changes to tax laws – the government is constantly tweaking the rules to get more money and you at least need to aware of what’s going on (which requires some reading)

Is It Worth The Effort?

Definitely. If, for example, you earn £100,000 as a salaried employee you will take home about £64,000 per year. By using your own company, and avoiding NIC’s, this figure will jump to about £71,000.

Now you can see why Fiona Bruce, Chris Evans and members of HMRC have been funnelling their pay into their own service companies!

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