According to research, almost a third of all new small businesses will fail within their first year, mostly due to financial difficulties. It is vital to keep costs as low as possible during the first year, or longer if possible, so you can re-invest your profit. Reducing your tax bill legitimately should be one of the main priorities and here are some suggestions.
• When you first start your small business, consider whether trading as a limited company would be advantageous. A sole trader is responsible for all the debts and liabilities of the business, whereas you have less liability in a limited company. You may also have tax advantages, as Corporation Tax rates are lower than income tax will be for higher rate earners. This will depend on how much profit you have.
• Claim for as many expenses as possible, but be aware that there are rules for claiming expenditure and HMRC won’t allow all claims. The expenses which people often mistakenly believe are allowable include entertaining. This isn’t eligible even if your business relies on it. Some expenditure will have an element of personal use, including your car and telephone. HMRC will allow you to claim just the percentage which was incurred for the business.
• Keep accurate business records and submit your self assessment tax returns in a timely manner to avoid penalties and interest charges. Late submission of tax returns, poorly kept business records and late payment of tax all attract penalty charges with interest added.
• Paying yourself a salary is crucial so you can pay your personal bills. However, the way in which you draw a salary will depend on the structure of your business. If you have formed a limited company which is making a profit, you can take a salary up to the amount of the tax-free personal allowance and take the remainder as dividends. However, strict rules apply to a limited company and it’s advisable to seek professional advice.
• Claim all allowable tax relief on equipment used for the business. Machinery or business equipment may be eligible for capital allowances and you might be able to claim tax credits if you are involved in specified research and development projects. There are all kinds of tax reliefs, allowances and credits available so you may want to find some professional help.
Although there are various tax reliefs and allowances on offer for a small business owner, it is crucial to remain compliant with tax regulations at all times.
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