Top tips for saving on small business taxes
Accounting for and paying taxes comes with the territory when running a business. However, there is some good news; as a small business owner, you can consider a range of entirely legal ways to reduce your tax liability. Managing your tax affairs can be complicated particularly for new business owners so it is always advisable to work with an accountant who will support you in navigating the complexities of the taxation regime.
Here are some pointers when considering how to reduce your taxation liability.
The right business entity
Your current business entity may be costing you money. Are you a sole trader who may benefit from becoming a limited company or vice versa? As a sole trader, you will complete a self-assessment tax return, you will pay income tax and National Insurance contributions on your business profits.
If you are running a limited company, this will be liable to Corporation Tax plus as a director or employee of a limited company you will also need to report any income or dividends you earn in a self-assessment return.
It may be worth reviewing your entity type with your accountant as there are pros and cons to the different options. Variables that may require adjustment include accounting periods and shareholdership. Further to this, the filing requirements with both HMRC and Companies House differ significantly across the various entity types. Similarly, the timing of payments will vary.
The right accountant
It is worth reiterating again that taxation is complex and so having a trusted and reliable accountant will almost invariably pay for itself. Talk to them regularly and keep them updated to changes in your business. Your accountant should be able to advise you on appropriate strategies.
Outsourcing or employing someone to work on your books will give you more time to work on and in your business. Unless accountancy is within your core competencies, it almost always pays to have someone else to do this for you.
If you are self-employed, there are a whole range of allowable expenses that may serve to reduce your tax bill. Examples include fuel used for business purposes, business rates, cleaning & rent. The expenses you can claim will differ depending upon whether you use business premises or you work from home.
Working from home
If you are self-employed and work from home, you can claim a proportionate level of home expenses for running your business. Examples include lighting, heating, insurance, mortgage interest and general maintenance. This is by no means an exhaustive list and you will need to calculate the correct proportion to claim depending on the time you work at home and the percentage of the space you use.
Losses carried forward
No one wants to think about making a loss in business, but it is worth considering that if you make a loss in one tax year, this can be carried forward so you can offset against the next year’s profits.
Married person’s tax allowance
The married persons’ allowance means that you can transfer a proportion of unused personal allowance from a lower-earning spouse or civil partner resulting in savings for the higher-earning partner.
Employee benefit schemes
If you employ staff, there are some tax-free benefits that can be paid to employees that save money for both you and your staff. Many of these benefits can be great incentives and help with staff retention, which is an added bonus for your business. Examples of such schemes include Cycle to Work Schemes, tax-free childcare, travel allowances and mobile phones or company laptops.
The way you pay yourself will impact on your tax bill. If you are running a limited company, you will have the option of paying yourself a salary, dividends and also benefits in kind such as a company car or healthcare. Consider the most efficient way of paying yourself using all the options available.
Our final tip is to plan ahead, not just in being organised and ensuring that you submit your tax returns on time but also in the timing of purchases in your business. For example, if you are considering investing in a new vehicle or new equipment, it makes sense to purchase them shortly before year-end rather than waiting.
Hopefully, these tips will provide you with some useful pointers for discussion with your accountant.