Find Out How You Can Make Your Business More Tax Efficient

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 several tax benefits.

We are not talking about tax evasion or even avoidance (and trust us, you don’t want HMRC investigating your company). 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. The more you know, the more you can save.

In this guide we tell you all you need to know about business tax efficiency a small business needs to know.

How small businesses can save on tax bills

Whether you’re a sole trader or a limited company, there are several schemes and tips that you can use to lower your tax bill. If you haven’t already, you’ll want to ensure that your business uses these tips. 

1. Claim for your allowable expenses 

Allowable expenses are costs that are “wholly, exclusively, and necessary” for business purposes. They cover a variety of areas, including bills and utility for your office space, any stationary or equipment purchase, travel (outside of your normal commute) marketing fees, professional fees and much more. 

The more you claim, the less tax you pay. 

No matter how small a purchase it may be (even if it’s just a pack of post-its!) any business cost should not eat into your profits. Even the little expenses will soon add up – so it’s important that you’re keeping records of your expenses and making sure that you claim back for each and every one of them. 

The easiest way to do that is through accounting software, which can integrate with your bank to automatically track your ingoings and outgoings. To make things better, this software is a professional fee, meaning you can also claim it back on your expenses. 

To find out more information about what you can and can’t claim for, check out our guides to allowable expenses for limited companies, or allowable expenses for sole traders. 

If you’re still setting up your business, you may also be able to claim back some of the initial setup costs you incurred (such as legal fees, accounting costs, and marketing expenses) on your first tax return.

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2. Avoid IR35 if you can 

IR35 is a payroll legislation that’s designed to stop tax avoidance by companies classifying their employees as contractors. If you need to work with any freelancers or contractors, you need to make sure that you adhere to this policy and make sure that all your contractors fall outside of IR35 if possible. This will prevent you from having to pay the employer’s National Insurance contributions on top of the fees paid to contractors. 

However, it may not be possible to avoid IR35. 

If you do have to work inside IR35, you can claim a 5% deduction of the total contract expense if you are a small business. Find out more about what your business can claim inside IR35 here. 

3. Pay into a pension scheme

Preparing for your future can help you save money on your tax bill now. If you pay into a pension scheme, you lower your taxable income. For example – if you make £50,000 in profits during the year but make £10,000 pension scheme payment, your taxable income will become £40,000 instead.  

If you have a limited company and run your pension scheme through them, you can also claim relief on employer pension contributions, reducing your corporation tax liability. Find more guidance on pensions for limited company directors and which scheme fits your business here. 

4. Donate to charities 

Charity donations are tax-free. If you make any donations, you can claim the tax back through Gift Aid. 

5. Explore available reliefs and schemes 

There are dozens of tax relief schemes and allowances available for small businesses – it’s just about knowing where to look for them to access this help. As an example, your business might be eligible for: 

  • Research and Development (R&D) tax credits, which are given to businesses researching or developing an advance in their field. Even if your project isn’t successful, you can still claim relief available in this area. 
  • Local council business rate reliefs. Depending on where your business is based, your local council might be able to offer discounts on business rates to encourage growth in the area. 
  • The Patent Box, which gives companies a lower Corporation Tax rate on profits earned from eligible patented inventions. 

If you employ others, you can also explore other forms of employer contribution tax relief – particularly if you hire an apprentice or veteran. 

Using PAYE and dividends for Limited Companies 

One of the biggest tax-efficient benefits you can take advantage of as a limited company is to pay yourself a low regular income via PAYE but to take larger dividends on the company profits.

This is usually more efficient as, although you will pay corporation tax on company profits, you’ll only pay tax on dividends based on your income tax band (current rates can be found here) and you’ll get a certain amount for free (currently £2,000 per year).

Any amounts you pay yourself as PAYE salary can be deducted from your profits (saving money on your company tax bill).

This is one of the biggest advantages of a limited company and by paying yourself a salary only equal to the threshold and taking the rest as dividends will usually save you a lot of money over the course of a year.

What’s more, you can pay yourself a dividend as often as you wish providing that the correct paperwork has been drawn up each time.

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Good accountants can save you on your tax bill

A good accountant will save you money as they will be fully up to speed on all the current tax efficiency procedures and be aware of how you can take advantage of them.

The exact 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 efficiency step.

What Percentage Should A Small Business Save For Taxes?

This is a question that new business owners often ask. It can be quite daunting to know your business is generating a bill that won’t be payable for some time.

In fact, some taxes are due months after they were incurred. In the case of corporation tax, any money owed doesn’t need to be paid until 9 months and 1 day after the end of your accounting period.

That means tax you incur now, may not be payable for another 21 months!

While that sounds great in principle, it does mean you have to set aside enough money to cover your future payments. Failure to do this can be catastrophic to your business. Any missed payments will almost certainly incur financial penalties or legal action.

As a minimum, a small business should be saving around 20% of its monthly profits to pay a corporation tax bill. The exact amount will depend on the rates applicable to that business. This can be checked here.

Keep in mind that your business may have other taxes and fees to pay. You as an individual may also have to pay further money on your self-assessment. It is, therefore, worth keeping a close eye on how much tax you need to pay and when, so you can always ensure you put enough money aside.  

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Using Accounting Software To Calculate Tax Payments

Thankfully, it is now much easier to keep on top of your finances, and implement different tax efficiency strategies you wish to by using online accounting software.   Using such software gives you numerous benefits:

  1. It helps you fulfil all your bookkeeping requirements
  2. It saves money on your accountancy fees as everything will be better organised
  3. It automatically calculates tax as you go, helping you plan your finances better
  4. You’ll usually get alerts when bills are due, so you never miss a payment

It’s easy to see why so many people are using accounting software. Most software will also help to create all the legal documentation you need (such as records of dividends paid).

Previously, people would need to do this manually or pay an accountant to do it so it’s both a time and cost saving.

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