Top 7 tax reliefs all small businesses should know
Setting up and running a small business brings challenge, excitement and rewards. One of those challenges can be navigating the minefield of tax and tax reliefs. Here is a quick rundown of seven schemes that are applicable to many small businesses in the UK.
1. Small business rate relief
Small business rate relief is essentially a discount on the business rates that are charged by a local authority on property that you occupy. As a small business, regardless as to whether you are a sole trader or limited company, If you occupy just one property that has a rateable value of less than £15,000, you will be eligible for a discount.
That discount is 100% for property with a rateable value less than £12,000. Properties with a rateable value between £12,001 and £15,000 attract a discount on a sliding scale.
The rateable value of a property is determined by the VOA (Valuation Office Agency) and is based on the open market rental value as at 1st April 2015.
2. Employment allowance
A limited company that pays its employees through PAYE may benefit from up to £3,000 off its National Insurance Class 1 contributions. The savings are made automatically when you submit PAYE returns and are easily claimed using PAYE software, just click “yes” in the Employment Allowance field. If you outsource your payroll administration, make sure that the team apply this.
In April 2020 there will be changes to Employment Allowance that will limit relief to businesses that have class 1 National Insurance Contributions of less than £100,000.
3. Annual investment allowance
Investing in assets such as machinery is expensive but you will be eligible for relief on purchases up to the value of £1,000,000 until 31 Dec 2020. Companies can deduct the cash spent on qualifying equipment from taxable profits and so reduce their tax bill.
The annual investment allowance (AIA) was increased considerably in 2019 to encourage small businesses to invest and stimulate the economy. AIA is available to limited companies, sole traders and partnerships.
The allowable value of purchases will reduce to £200,000 in January 2021, unless the Government makes any changes to this allowance, so it is worth considering any investments in machinery or plant before the end of 2020.
Examples of purchases that qualify for AIA include (but are not limited to) computers and office furniture, vans, trucks, building fixtures and business machines such as printing presses, Company cars do not qualify for this allowance.
4. Marginal relief
Another tax break for limited companies is marginal relief which allows a reduction of corporation tax for businesses with profits between £300,000 and £1.5million.
5. Entrepreneurs’ relief
If your exit strategy is to sell your business at some point then entrepreneurs’ relief is a scheme that allows you to sell or give away your business at a reduced tax rate of 10%. Entrepreneurs’ relief is available to sole traders or partnerships and to directors and employees who own more than 5% shares.
It is worth noting that there are some criteria or conditions to entrepreneurs’ relief that must be met, not least that you must have owned the business for 24 months.
6. Research and development tax relief
Businesses that invest in research and development (R&D) in the areas of science and technology can benefit from Research and Development Tax Relief of up to 230%. It is important to note that HMRC expects the R & D to meet specific criteria but if it does then the tax savings are quite substantial. Research and development tax relief is not applicable to advances in social science or theoretical fields.
R & D tax relief is a complicated process and, as ever, it would be beneficial to consult a professional with experience in this area.
7. The patent box
Businesses that hold or develop patented products and pay corporation tax can benefit from a little-understood scheme called Patent Box Relief. Simply put, any income from patents or patented products is subject to a lower rate of corporation tax of 10%. The rules and calculations relating to this scheme are complex so it is advisable to seek professional advice if you are going to take advantage of patent box relief.
This is just a summary of some of the most popular tax reliefs for small businesses that can help you save on your bottom line. Depending upon your industry and business size there may be additional reliefs to investigate including: Creative Industries tax relief, Seed Enterprise Investment Schemes (SEIS) or Enterprise Investment Scheme (EIS).