Going Ltd or even Leasing a Vehicle to Cut My Tax?

JosephBrown

Hi everyone,

My current situation is that I'm a self-employed plasterer working for a contractor, I have earnt approx £45k profit the last few years. However, this year with the fact that I've just brought two properties to let out, my profits this year are going to be either right on the edge of the 40% bracket or a few grand over, so £50k up to £54k.

This march I also plan to move into my partners house and rent out my house and then in a couple of years we'd like to go traveling before moving to Guernsey (She works in the medical profession and they're always hiring there for such people.) Therefore, from this April for the following two years I will have a 'property' income (considering section 24 which means interest can't be used as an expense, but a 20% relief is given instead) of around 22.5k for the three houses.

This of-course means, in order to not go into the higher rate bands I will need to keep my earn income profits from self-employed plastering below £27.5k which I actually think I'll struggle to do without spending half my week fed up at home. Longer term I'm not so fussed as like I say, we would like to live in Guernsey anyway where there is no 'higher rate' tax band at all. In this case, longer term, I would have my UK property income taxed at 20% in the UK and my Guernsey income from working also taxed at 20% in Guernsey. Therefore, the costly suggestion of me putting my properties in a ltd company doesn't really work for what is just a short term fix, and it's something I did consider as a long term option previous to buying them but decided against as I felt the increase in ltd company mortgage interest rates wiped out the tax savings made by no section 24.

However, I still have the issue of the next few years before that. One idea I had was to setup a ltd company for my plastering work, take dividends as far as would get me to the higher rate band, pay some dividends to my lower income partner as a shareholder and then let the rest build up in the company year on year until I closed it down in a few years time, possibly using entrepreneurs relief to minimise the tax on this??

Alternatively, I could sell my car now for £7k cash into my personal pocket, and take a business lease out on a brand new commercial pickup truck for two years (ending just before going traveling). This would allow me to put say £3000-4000 upfront now (whatever I was over the 40% threshold this tax year) and then pay £300-400 a month for the next two years before handing it back, so reducing my profits by £5k a year for the use of a nice vehicle while not depreciating my own. On one hand, this completely goes against my grain as I'm really quite frugal and would prefer to run my older car about, but on the other hand if it's more tax efficient and is being practically half paid for by savings in tax and national insurance, then maybe it's a good idea??

Any thoughts would be really great, whether it's on the ideas above or any new ones I can think about for my plan!
As with all things tax, it's so complicated, every situation is different but it's stressing me out knowing if I get it wrong it could be completely inefficient and cost me thousands!

Thanks, Joe

Dazed_and_C0nfused

Have you thought of getting professional (paid for) advice?

oldbikebloke

why are you so afraid of increasing your income by an extra 60%?

alternatively, since you are a) frugal and b) apparently in no need of extra income, why have you missed the obvious solution ... pay the excess into a pension and get 40% tax relief on that pension contribution = win win since you have an eye on long term plans and no need of extra money until retirement

Grumpy_chap

You need an Accountant.

Swapping property already owned as BTL into a Ltd Co is not straightforward.

[Deleted User]

Is this another case where someone would rather have no additional income as opposed to additional income less 40% tax?

JosephBrown

Dazed_and_C0nfused said:

Have you thought of getting professional (paid for) advice?

Hi, I have but aren’t really sure who I’d speak to. An accountant, tax advisor, property tax advisor, financial planner? I also that’s a bit of a trust issue with professionals and think that nobody knows your business, ideas and plans better than yourself   

oldbikebloke said:

why are you so afraid of increasing your income by an extra 60%?

alternatively, since you are a) frugal and b) apparently in no need of extra income, why have missed the obvious solution ... pay the excess into a pension and get 40% tax relief on that pension contribution = win win since you have an eye on long term plans

It’s not 60% when you consider national insurance also. I’d be going and doing plastering jobs and then immediately giving half of it away to the tax man. So I’m considering whether there’s a better way of setting up my business for the next few years to minimise this, or whether there’s better things to do with my time saved if I choose not to do some jobs like taking a new course and learning a new skill.

As for the pension, I’m planning long term but not as far as 30+ years away. I’m only 24 and feel like I’d rather either keep the money to put towards developing my education, business, or property portfolio, or just work less and have more spare time to put towards learning a new skill. The idea to me of putting money away for 30+ years seems wrong to me right now and is something I think I’d look into more in another 10 years when it’s not so far away and I’ve already developed myself and my businesses as far as I want to and have settled down. Maybe I have the wrong philosophy on this but it’s how I feel at the minute.

Thanks for your time and thoughts, Joe

purdyoaten2 said:

Is this another case where someone would rather have no additional income as opposed to additional income less 40% tax?

I think that’s put wrong mate - it’s not 40%, it’s 50% with national insurance and as I said above, I’m just considering whether there’s a better way of setting up my business for the next few years to minimise this, or whether there’s better things to do with my time saved if I choose not to do some jobs like taking a new course and learning a new skill. 

Either way, i don’t have a salaried job in an office, I’m a self employed plasterer and who on earth would choose to take on jobs, to go out early in the morning, to work all day in the cold, in dust, doing a manual physical job, to be paid x amount for it at the end of the day, to then go and give half of it away and basically be taking home peanuts for that days work? 

It’s hard enough work without doing it for 50% less. Now most trades would rather sit at home, but I’d rather look for an alternative to make sure I remain productive and achieving my full potential for my family. What’s wrong with that?

[Deleted User]

Your 50% is inaccurate. The deductions above higher rate level are 40% tax and 2% NIC.

it is your decision - if you believe that taking home 58% of any additional earnings is not worth it, who am I to question that?

JosephBrown

purdyoaten2 said:

Your 50% is inaccurate. The deductions above higher rate level are 40% tax and 2% NIC.

it is your decision - if you believe that taking home 58% of any additional earnings is not worth it, who am I to question that?

That’s something I hadn’t realised, a 13% increase from 29% to 42% wouldn’t be too bad. However....

I don’t think it would work like that, as I think HMRC would calculate it as my property income being the one pushing me over the 50k threshold and property income is 0% national insurance anyway as it’s investment income, not trading income. This is shown in Rashid v Garcia 2002.

So would the SA work out as say £20k property income first at 20% and 0%, plus the next £30k self employed income at 20% and 9%, and say the next £10k self employed income at 40% and 2%. = total due, Minus the 20% section 24 relief on property finance costs. And somehow taking your personal allowances into account too.

Or, £40k self employed income at 20% and 9%, then 10k property income at 20% and 0%, and 10k at 40% and 0%. = total due, Minus the 20% section 24 relief on property finance costs. Again taking personal allowances into account.

I feel like it would be calculated as the later which means the 7% NI reduction above 50k wouldn’t apply, even though the 20% increase in tax would.

Hopefully you can advise, as you seem knowledgeable on all this!

[Deleted User]

I have to say, for someone so young, you have some grasp of tax and that’s to be admired. Not all correct though. Treat the sources of income together for tax and separately for NI. 

Your income is 60k. You have a tax free allowance of 12500, the next 37500 is taxed at 20% and the remaining 10000 at 40%. That is a total of 11500. Any additional income, up to 100000, is taxed at 40%.

You pay class 4 NI on your self-employed profits. The first 9500 is NI free. The next 40500 is at 9% with anything above that at 2%. So, if you did earn another 10000 in self -employed profits you would pay 40% tax and 9% NI. Looks like you were correct after all. 

Above that 40% tax and 2% NI applies

mcplumb

Get the higher rate out of your head and focus on total percentage of deductions from pound 1. I'm guessing 25-28% would cover you upto 60k of se earnings.  The "I'm not working to loose over half of it" is so counter productive, thats like spending to avoid tax - madness.