One of the advantages of running your own business – whether it be a sole trader operation or a large limited company – is that you can take advantage of a number of tax benefits.
We are not talking about tax evasion or even tax avoidance (the latter being legal but frowned upon).
What we are talking about is simply knowing how to carry out your business in the most tax efficient way.
This means taking advantage of tax breaks and schemes that have been put in place by the government to encourage and support businesses.
Tax Efficiency for Sole Traders
At the most basic level of tax efficiency you need to ensure that when filing your self-assessment, you are declaring all costs that have been incurred by your business activities.
This includes cash purchases – something many sole traders overlook.
Whilst it may only seem like a small amount for that pack of envelopes you bought – it soon adds up and will reduce your declared profits and therefore your tax bill.
You also need to know what you can, and cannot claim as there are several things you can claim for as expenses. For example costs of up to £4 a week for your utility bills (as of 2012/13) will not be questioned if you work from home. If you use your car for business use you may be able to claim for part of the costs of running it.
Tax Efficiency for Limited Companies
As a limited company you can use many of the same tax efficiency practices as sole traders in order to reduce your tax liability.
This includes claiming back cash purchases as expenses, claiming for the cost of working from home, and the usage of your car for business use.
However there are a number of other tax efficient benefits you can take advantage of. By far the biggest one is to pay yourself a low regular income via PAYE but to take larger dividends on the company profits.
This is usually more tax efficient as although you will pay corporation tax on company profits, you will only pay dividend tax starting around 10% on the dividend you take from the company (current rates can be found here).
This is one of the biggest advantages of a limited company and by paying yourself a salary only equal to the tax threshold and taking the rest as dividends will usually save you a lot of money over the course of a year. Whats more, you can pay yourself a dividend as often as you wish providing that the correct paperwork has been drawn up each time.
How to be Tax Efficient
If you are a sole trader then it’s simply a case of finding out what you can and cannot claim for and making use of it the best way you can to embrace tax efficiency.
Unfortunately the HMRC do not provide a guide outlining all of the benefits you can claim. It’s up to you to find out although we have mentioned the main ones in this article.
If you are a limited company then you would be strongly advised to consult with an accountant.
A good accountant will save you money as they will be fully up to speed on all of the current tax efficiency procedures and be aware of how you can take advantage of them.
The exact tax benefits and how much you stand to gain does change from year to year so you (or your accountant) will need to constantly remain aware of where the tax efficient benefits are for you and your business.
Once in place you can set about running your business safe in the knowledge you are operating in the most profitable way as possible. Of course, depending on the type of business you are running, or the level of income you are generating, you may need to look at VAT registration as your next tax efficiency step.