The mortgage market is once again firing on all cylinders and that’s great news. All of you, without a doubt, will be glad to see the back of the bleak years of 2008-2012 but from a tax perspective, at least, it’s worth remembering them.
After all, if you’ve suffered a loss in recent years, you might be able to claw some of those losses back. Confused? Don’t be.
Basically, if you made a loss in the past, there’s a chance you’ll be able to set this loss off against current and future profits.
There are a few conditions: losses can only be set off against income from the same type of trade, i.e. losses from broking against profits from broking and there are some critical time limits.
But it’s an opportunity to save money through income tax relief (for sole traders) and corporation tax relief (limited companies) that not enough business owners and self-employed individuals take advantage of – probably because they don’t realise it’s there.
So if you’ve had a tough time of it in recent years and have started to make money again, speak to an accountant and ask them how you could claw some money back.
In what other areas should brokers be ensuring their business is tax-effective?
Well it’s certainly worth considering how you structure your company. If you work for yourself, then setting up as a limited company is generally the most effective way to legitimately reduce your tax bill.
Limited companies allow you to pay yourself in the form of both salary and dividends, while also claiming a wide range of business expenses.
On the subject of expenses, all the business expenses you bring to your accounts will earn their keep by going towards money savings. So be thorough, and take every opportunity available to you. It all helps.
Typical expenses if you work for yourself include office and travel costs, work telephone calls, insurance, hardware (and the software you load onto it), marketing spend and accountancy fees.
If you work from your home, don’t forget there’s an allowance for using your home as a place of work, or at least a share of the household bills. Heating, lighting, internet and phone costs: all of these, to an extent, can be included in your tax return as bona fide expenses.
Splitting the ownership of your company with a spouse who doesn’t earn is another way of bringing down the amount of tax you’re obliged to pay.
In some cases, this act alone can be enough to keep you brokers out of the 40% tax bracket.
For brokers fortunate enough to be earning six figures, it’s important to understand that you gradually lose your personal allowance between £100k and £150k – and at this point, if you’re not careful, the tax rate can really hit home.
If you are starting to earn surplus income, pension contributions made through your company can be an extremely tax-efficient way to spend what you earn. Paying into a pension reduces both the personal and company tax bill.
Alternatively, consider investing any surplus funds in a tax-free ISA. Up to £11,500 can be invested tax-free each year and your money will often be available instantly.
Surplus funds in your company account can also be placed into higher-interest bank accounts or bonds. Some of the best tax-free rates are available offshore and as long as these are disclosed and the relevant tax is paid when the funds are returned to the UK, this is perfectly legitimate.
Or you could simply leave any surplus right there in the company bank account where you’ll pay considerably less tax. This also serves as a good financial buffer if business starts to slow up a bit.
Now let’s just hope that never happens.