Being a small business, saving money in any way possible can be absolutely crucial to achieving year on year success during the first few years of trading. For a small business to become successful it’s crucial for its owner/owners to get up to speed as fast as possible with money saving and tax planning as it can play a huge part in any success story. We typically find there are many businesses that will not fully comprehend the amount of detail required to deal effectively with tax. To help you ensure you are paying the right amount of tax and saving as much as possible – we have put together a list of tax planning tips and tactics.
Ensure your business is the correct type
Making sure your business is trading under the correct business structure will determine what sort of tax code you are using. You should always consider whether your business would be better off as a sole trader, partnership, limited company or limited liability partnership. This will usually depend on your size, the amount of employees you have and your legal requirements.
For most businesses, if you have several employees you will probably have decided in favour of becoming a limited company. However, for a few others it may be better to go back to or remain as being a sole trader or partnership, especially if you only have one or a few employees.
Make sure you are VAT registered
Being VAT registered can be a great way to save on value added tax when purchasing items or business inventory. The threshold for for VAT is £85,000 per year over a 12-month period but you can choose to voluntarily register earlier if you have a high expenditure on goods and services to support your business. For example, if you own a small carpentry business you might find you have a high expenditure on materials and tools, by being VAT registered you’ll be able to claim all your VAT back. It is also important to remember that you will need to add VAT on to the cost of your products and services and pay this to HMRC.
Don’t miss your tax deadlines
Making a calendar that lists all of your businesses tax submission dates with HM Revenue & Customs helps ensure your business is facing tax requirements head on and is never missing any of its tax duties. This is not easy, especially if things are not going as well as you would like them to, but dealing with tax as quick as possible allows you to avoid any potential penalties.
However, some small businesses can sometimes struggle to find the time to put together such a calendar. If this is the case, we recommend getting in touch with an accountant who will be able to support your business.
Take out your money in the most tax efficient way
As the owner of a limited company, you should make sure you check that you are taking money out of your business in the most tax-efficient way possible. We typically recommend a sensible mix of salary and dividends that will ensure your business is paying less tax. There are also other tax-efficient strategies to explore to maximise tax savings – a reliable accountant can support you with these decisions.
Make use of your spouse and family
The personal allowance is currently £11,500 of tax-free income. If you’re married or in a civil partnership you can make use of this allowance by making the most of each personal allowance. Depending on your family situation you may be able to fully utilise these personal allowances by paying some of your non-working family members the tax-free income. Alternatively, you could transfer income-producing assets to your spouse again taking advantage of their tax allowance threshold.
It’s important to remember that pension contributions made by your business are totally tax deductible. Set up a favourable auto-enrollment scheme that is favourable in tax for all your employees, this will save your business on salaries and give your business tax efficiencies. On a personal note, as a business owner, it’s recommended paying some of your salary into a pension scheme to lower your personal tax contributions.
Reinvest in your business
It’s highly recommended to reinvest a certain amount of profit back into your business. Not only will this help your business to grow and expand, it’s also tax deductible. The current annual investment allowance is £200,000 over a 12 month period, this allows you to buy up to this value in qualifying business-related assets such as technology, vehicles, machinery etc. When using your businesses investment allowance the value of your expenditure is deducted from your business profits before they are calculated for tax purposes.
For more small business tips and help ensuring your business is paying the right amount of tax, at 3 Wise Bears we offer an accounting service delivered by Small Business experts. Find out more.