Here we present a useful round up of tax saving tips for small businesses:
1. A limited company structure is usually the best way to legitimately and compliantly minimise your tax bill. This is because you can take remuneration through an efficient mix of salary and dividends, claim a wide range of legitimate business expenses and choose to keep money in the business for reinvestment, where it will incur less tax.
2. If you are investing funds in your own business, doing so by way of a director’s loan into a limited company is tax-efficient, as it means you can draw up to the amount invested back from the company, as income, completely tax free
3. Splitting the ownership of your company with a non-earning spouse can reduce the tax you pay, perhaps keeping you out of the 40% tax-bracket altogether – he or she would be able to receive a dividend income from the company each year meaning you can both earn up to the higher rate tax bracket without incurring the 40% rate
4. Taking advantage of the flat rate VAT scheme, in many circumstances, can also add benefit equal to several percentage points of your net invoiced value each year
5. Make sure you claim all of the expenses possible against your tax bill – for example, business-related mileage and mobile phone calls and an allowance for using your home as your place of work, or a share of household bills
6. Other claimable expenses include: business travel, professional subscriptions or training, insurance, accounting fees, protective clothing, pensions, IT equipment, internet and software, costs of advertising your services, printing, copying, postage, stationery and consumables
7. It is normally (though not always) more tax-effective to purchase a car outside of your company and claim the business-related mileage back at the rate specified by HMRC
8. If you are a self-employed consultant or freelance contractor, make sure your individual contracts do not fall foul of IR35 legislation – your accountant should be able to advise you on this
9. Salary sacrifice – paying salaries is an expensive affair with Employers’ National Insurance at nearly 14%. Converting some of your and /or your employees’ salary into applicable ‘benefits’ such as approved Childcare Vouchers, or employer pension contributions, generally means a tax saving for both the employee and the employer
10. Investing in a pension is one of the most tax-efficient decisions you can make and will reduce both your company and personal tax bill. Pension contributions can be deducted from company profits or your income when calculating tax due. These days a pension can be used to do all sorts of things, such as buying property on which it can then receive tax-free rent and a qualifying pension scheme can borrow up to 50% of its value to help fund such investments
11. The marginal rate of tax on income above £100,000 is significant, due to the fact that you gradually lose your personal allowance between £100k and £120k. So, if you don’t need all of the money you earn through your company to live on, leave it in the company account – it will incur substantially less tax that way. It can be used to provide for lean periods, or between assignments, or for reinvestment in developing the business and it will attract less tax if/when you decide to close the company down
12. If you reinvest the money in certain business assets, you can claim an annual investment allowance of up to £500,000 (currently) – this means you can buy up to this value in qualifying business-related assets (such as plant and machinery, commercial vehicles or IT equipment) and receive a 100% tax deduction for it in any given year – the value is deducted from your business profits before they are calculated for tax purposes
13. Look at investing the first slice of any surplus funds in a tax-free ISA. Up to £15,000 can be invested each year (before the end of March) and will generate tax-free returns and your money is instantly available.
14. Surplus funds in your company account can be invested in 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 completely legitimate
15. If you close or sell your business, as long as you own more than 15% of it and are a director or employee, you will probably be able to claim Entrepreneur’s Relief, meaning you only pay 10% Capital Gains Tax on the profit made
16. If you are looking for investment, ensuring your business qualifies for the Enterprise Investment Scheme, will make it tax-efficient for potential investors, as they will be able to claim income tax relief and will not pay tax when they eventually exit the business and sell the shares: http://www.hmrc.gov.uk/eis/index.htm
17. Don’t get caught out by Child Benefit tax – the introduction of the claw back of child benefit for those families where one partner earns over £50,000 in a year brought over 1 million people into the bracket of those who must complete a self-assessment tax return every year. In such cases, the child benefit has to be repaid at the rate of 1% for every £100 earned between £50k and £60k, so by £60k it all has to be repaid. If your earnings are at these levels, you can choose to stop receiving the benefit, to avoid the hassle of completing a return, or you may want to continue receiving it and put in it an interest-bearing account until the tax element is due, which will be nine months after the tax year in which the benefit is received. It is also worth being careful as to how the £50k earning threshold is calculated – this includes all income such interest, dividends and rent, as well as your salary, but is also reduced by qualifying items such as pension contributions – so you could be just above or below the limit in terms of gross salary alone but in a different position when taking into account other income or allowances. There is a calculator to help at: https://www.gov.uk/child-benefit-tax-calculator
18. Take professional advice from a specialist accountant and/or financial adviser – tax is complicated and the correct action to take in any individual case will be affected by specific circumstances. We advise all businesses to go through their specific circumstances with a professional adviser before making any decisions or structuring their affairs. We recommend that any decisions relating to pensions or investments should be made in conjunction with a qualified, independent financial adviser.