Tag Archives: savings

Finding Efficiency Savings Is Just The First Step

Finding Efficiency Savings Is Just The First Step

I think the vast majority of business would agree that there are inefficiencies in their day to day operations. The scale of these inefficiencies varies depending on any number of variables including the size of the business, the number of staff, delegation of duties and numerous other factors. Trying to change how you operate to plug these gaps is certainly an effective way of increasing profitability. However, you should make sure the cuts don’t suffocate your ability to generate revenue. But the process of making efficiency savings involves one final step that many neglect.

1. Identifying Inefficiencies

The first step in the process involves identifying where you business is losing time and/or money where it shouldn’t be. Are there bottle-necks in certain departments? Are there subscriptions or services you signed up to years ago and no longer use but are still paying for? Have you surplus cash that would be better spent on capital projects rather than sitting in the bank?

Some inefficiencies will be blatantly obvious; other will be more subtle. It could simply be the case that within say the stock ordering process you have an extra step that serves no real purpose. Once an audit of time and cash resources is carried out, they need to be prioritised. My advice here is to go for the low hanging fruit – the biggest numbers on the P&L or the things that take the most time should offer plentiful scope for savings.

2. Removing Inefficiencies

You may find this the most difficult part of the process. Sometimes it may involve making really difficult decisions such as discontinuing a part of your business or letting staff go. The question needs to be, is it in the best interest of the business? Not just in the short term but over the next 3-30 years. Some savings may, on the other hand, be very easy to make. Some might even involve spending more money than you are now. Maybe one of your suppliers offers a price break for orders over a certain level so instead of ordering every week, you order in bulk once a month to get a better price. In one business I was involved in, I identified a potential saving of £14,000 per year by doing this.

You should also be remembered that time is as valuable, if not more valuable, than money. This is something I firmly believe in. For example, if you are suffering a nominal amount of breakage or shrinkage in stock every year and the solution is to add an extra process or check to try and combat this, it is only worth doing if the time dedicated to doing this is less than the expected saving. If you’re losing £50 a month on stock getting damaged, it is not worth having some one spend 5 hours a month policing this. You just have to suck it up.

3. Converting Savings

Very often once inefficiencies are identified and rectified, businesses think it is job done. Not the case. The time or money you saved now needs to be put to use. No point in freeing up 2 hours of a workers time per week without then deciding on the best way of reallocating this time. For all you know, if left to employee judgement, this time will then go back in to something that is just as inefficient as the time-suck you’re just after fixing.

The same goes with cash. If you find an extra £10,000 a year from inefficiencies and let it wallow in the bank earning <1% per annum, you may as well have not saved it. Find something with a better return to spend it on or use it to pay down financing with higher interest rates. If this step is done correctly, you’ll effectively get double savings – the initial saving plus the return on time and money being invested smartly.

Tax return submitted? Time to start planning for next year’s.

So another 31st January deadline has been and passed. Your tax return is filed and the whole subject of tax can be ignored for another year.

Well, not quite. There are quite a few changes to Income Tax being introduced from 6th April 2016. Leaving everything until then means that you’re at the mercy of these new rules. If you act now however, you should be able to do some pretty minimal tax planning that could save you quite a lot of money.

If you have income from dividends, rental property or interest then these rules will affect you.


For basic rate taxpayers, dividends were always a tax efficient type of income as they didn’t attract any further income tax (the thinking being that, as dividends came from the profits of a company, they had already been taxed before being paid). However, from 6th April, this changes.

Rather than attracting a notional 10% tax credit, dividends will instead have a £5,000 nil rate band, so the first £5,000 will be tax free). The excess will then be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for those in the additional rate band.

With just over two months to go until the new tax year, and the new rules, you are best to bring forward any dividends and utilise all of your basic rate band. Be careful though – there had been talk of the Chancellor introducing anti-avoidance legislation in anticipation of this. If you are considering bringing forward dividends, make sure you prepare all the necessary paperwork – minutes of the meeting, management accounts etc.

And don’t forget to look at dividends in the context of your total income. Dividends are always the last “slice” of income to be taxed so will attract the highest rate if there are other earning in the mix.

Rental Income

HMRC appear to have a particular grudge against landlords at the minute. A number of new changes to the rules around rental income mean one thing – more tax to pay!

Firstly, the 10% Wear & Tear allowance is to be abolished. This allowance allowed landlords to take 10% of their rental income off their profits as a deduction for the wear and tear of furnishings regardless of whether or not the actually incurred any expense in this respect (or even if they incurred more than the allowance).

From 6th April this will be replaced with 100% relief for the full replacement cost of furnishings. It is still the case that there is no relief for the first furnishing of a rental property.

So, it would follow that, if you are a landlord and are considering replacing any furnishings in your property, hold off until 6th April. You will still get the 10% W&T allowance in the current year and then get full tax relief on the full replacement cost in the 2016/17 tax year.

If you are a landlord who pays tax at the higher 40% rate, then there is more bad news for you. From 7th April 2017 your tax relief in respect of mortgage interest is going to be restricted to 20% tax relief whereas at the minute you will be getting 40% or possibly even 45% relief. This is being introduced on a phased basis between 2017/18 and 2020/21 tax years. Taken together with an expected increase in interest rates in 2017, landlords are certainly going to find themselves more out of pocket than before.

Rent A Room Relief

This tax relief has been around for ages and hasn’t changed in ages either. In fact, it has been 18 years since it has been increased. At present, you can rent a (furnished) bedroom in the house you live in for up to £4,250 per year and no income tax is payable. From 6th April 2016, this increases to £7,500. So income up to this level, whether from a lodger or via something like Airbnb is tax free.

Personal Savings Allowance

From 6th April you may notice that your bank will stop deducting tax from the interest it pays you on your savings. This is because of the introduction of a new £1,000 Personal Savings Allowance. This means that essentially the first £1,000 of interest you earn is tax free. The £1,000 allowance is available to everyone with income below £42,700. If you income is above this but below £150,000 you still get a £500 allowance.

This allowance may well go unused by the vast majority of us given that to earn £1,000 of interest at current rates you would need to have around £30-50k stashed away. However, if your income is mainly derived from interest this allowance coupled with the £15,000 ISA allowance and the 0% tax rate on savings income up to £5,000 you have plenty of options to spread your savings and not suffer any tax.

Additionally, with banks now not deducting interest, it makes the comparing the true interest rate of savings accounts with ISA’s much simpler as before you would have needed to factor in the tax deducted.


So, lots changing at the minute in tax and the outlook for the years ahead is the same. The governments online tax account project has begun rolling out. The planned result for this scheme is to do away with annual tax returns and, instead, update HMRC on your earnings as you go along and pay the tax as you go along. Developers are already working on integration with bookkeeping software to make it easy for you to send across your up to date profit and loss, VAT and PAYE details and square them up sooner rather than later.

So, whilst you may still have 12 months to sort out your 2015/16 tax return, you should be planning to out the next three months to make it as tax efficient as possible. On the bright side, you may not have many tax returns left to complete.


The above is general commentary on the changes is tax rules and should not be taken as advice. The application of the above rules will be determined by the specific circumstances of the individual. I accept no responsibility for any loss incurred by action or inaction based on the above article.

Changes to taxation of savings income can benefit owner-managed businesses

From the 6th April 2015, individuals deriving their income from interest on savings will notice a marked reduction in the amount of tax they are likely to suffer on this income. The Chancellor announced in his Budget 2014 speech back in March that the starting rate of tax for savings would be reduced to 0% for the first £5,000 of savings income over and above the personal allowance (PA).

As has always been the case with the starting rate for savings, if there is other income falling above the PA the reduced rate of tax is ignored and the income is taxed at the basic rate (20%).

When the 0% rate kicks in from 2015-16, the standard personal allowance will be at £10,500. Add to this the savings rate threshold of £5,000 and an individual earning £15,500 from savings (and notably nothing else) will have no tax bill. A husband and wife with joint savings will be able to earn £31k of interest without a penny going to the taxman.

Anyone whose main source of income is in fact savings and are having tax deducted at source by the bank can apply to receive the interest gross if the changes mentioned above are likely to mean you won’t have any tax to pay. To do this you will need to fill out form R85.

However, given typical savings rates are currently around 2-3%, to earn £15k in interest per annum, you need £500,000 – £750,000 sitting on deposit. So it’s not necessarily going to affect most people while interest rates remain low.

However, there is a distinct opportunity here for owner managed businesses to save tax on both their own earnings and the income of their owners.

Charging Interest on Directors Loan Credit Balances

If the company owners invested personal funds into the company for which they are still to be reimbursed, they are entitled to charge interest on this balance. The interest is deductible for the company and is taxed at 0% if no other income is earned in the hands of the business owners.

Previously, directors would have taken a salary equal to the personal allowance and then declared dividends to keep their income within the basic rate band of tax and therefore avoided any further charge to tax. Whilst this is still the most efficient manner of getting circa £40k a year from the company, it is certainly worth considering looking at charging interest on directors loan credit balances; especially in years of poor earnings or perhaps when accounting losses deplete reserves to the point where dividends are not an option.

The Tax Savings

The advantage here is for, say, a husband and wife who own and run their own company. They can pull an extra £10k from the company in the year, pay no income tax and save an extra £2,000 in Corporation Tax, not to mention the Employers NIC saving.

If we compare a salary of £15,500 to an interest charge of £15,500, the effect is the company is better off by £814 and the owner by £1,885. So overall almost £2,700 more stays with the company and its owners for each individual who is charging interest.

The trade-off then is the restriction of earnings. If you choose to take dividends as well you lose the 0% bracket but still get the CT deduction and NIC saving.

The key to this though is having sufficient funds owed by the company to its owners and being consistent and reasonable in the rate of interest you charge. Scenarios I’ve seen in the past that lead to this mechanism being utilised are typically when business owners secure funds personally to buy premises or high value assets for the company. In this instance, further savings can be made by claiming Qualifying Loan Interest relief on the interest charged to the owner. This effectively recharges the interest to the company (assuming similar interest rates) but this will counteract the utlisation of the savings rate band.


So while the above mechanism may have limited uses, it can still provide significant savings when the conditions are right. The relief for Qualifying Loan Interest, whilst it can counteract the usability of the savings rate band, can also help. The relief is given regardless of the type of income so if owners do wish to take dividends for their tax efficiency, the relief on the interest being suffered can help increase the amount of dividend that can be taken before hitting the higher rate threshold.

Engineering the above scenario simply to get the tax deduction would be inefficient. However, if the circumstances are in place, or the owners are considering transactions that might put them in place such as providing finance for the purchase of premises, then this interest income offers some flexibility to owners wishing to extract funds from their company in a tax efficient manner.