Spring clean your tax affairs for April

ONE of the drawbacks of starting your own business is that you have to become an expert in everything from day one. This includes the maze that is our tax laws. Come the new financial year, these are only going to become more complicated. So what can entrepreneurs do to put their financial houses in order before the end of this tax year on 5 April?

There are three things that you need to work out to ensure you are not paying too much tax.

Firstly, you need to decide whether your business is structured in the most tax efficient way. The question here is whether your business should be structured as a limited company, a partnership or as a sole trader. A limited company is good for some businesses since the lowest company tax rate is 21 per cent, and the maximum is 28 per cent. But if you extract money from the business, say in the form of dividends, then you are also subject to income tax.

For one-man-bands who need every penny of cash then it can actually be more tax efficient to be a partnership or sole trader, even if you are in the high-earner bracket, because as a partnership you are only subject to one level of tax.

Secondly, whether you can pay any dividends to shareholders with income over £150,000 then it should do so before 6 April. Remember that the tax rate for dividends will increase from 25 per cent by more than by 10 per cent in the next financial year.

Thirdly, consider whether you can reward your employees early. Don’t forget your highest-earning employees, who might also be subject to the 50 per cent tax rate. If you pay bonuses then you might want to think of paying them before 6 April when income tax rates will rise.

Looking ahead, there are also ways to make sure you are being tax-efficient in the financial year that starts on 6 April. Capital gains tax has been left unchanged at 18 per cent, and the rate for entrepreneurs for the first £1m of profits from shares they might sell is 10 per cent. A government-approved share scheme is, therefore, an attractive method to reward employees, while ensuring that as little as possible makes its way back to the tax-man.