Tax is one of the necessary evils of owning your own business. With the freedom of being the director of a company, comes the responsibility to submit the correct information to HMRC – before the deadlines. Entering the world of business can be confusing, and adding different tax structures on top of that is downright baffling. Due to this, some companies are paying more tax than they need to.
There are certain ways you can (legally!) save on the amount of tax you are currently paying – which can be a lifesaver for many businesses.
Tax Allowance and Reliefs
Maybe the simplest way to save on tax is to check that you’re taking full advantage of tax allowances and reliefs. You may be able to save money and reduce your tax bills by claiming all business mileage, or by taking advantage of research and development tax credits.
To find out more about what tax allowances you can claim contact our team at firstname.lastname@example.org or call us on 0800 0430 007.
The Right Business Structure
The way you set up your company has a significant impact on the amount of tax you will pay.
While many small business are set up as sole traders or partnerships, they would actually save money by operating as a limited company. There are significant differences between how each structure pays tax.
This differs for each industry and how an individual company plans to operate, and who with. See here for a comprehensive list of the differences between a sole trader and a limited company.
If you’re operating as a limited company, you could be missing out on savings by not taking payments as dividends. Paying a low salary topped with dividends has been an effective method for many small businesses over the years.
But remember, the salary should be paid as a director’s fee rather than as a wage to avoid National Minimum Wage regulations.
Smart Finance Management
Once you’ve started earning from your own company, it can be tempting to pay off your mortgage ASAP. Instead, it might be in your best interest to just hold your mortgage-paying horses.
In order to pay off a mortgage you might have to take dividends from your company which could in fact get taxed 25 percent more. So, when you really think about it, is it worth incurring a 25 percent cost so you can save interest which in some cases can be as low as 1.5 percent?
Instead, consider leaving this money in your company for as long as possible – if you decide to ever close down the company or sell it on, these funds could be released to you with only 10 percent tax.
Tax Efficient Investments and Payments
Your current bank account may not be the wisest place to keep your money. ISAs can provide a tax free income for a certain amount. The annual contribution limit for an ISA is £15,240 per individual.
Other tax efficient investments include Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT).
You can invest up to £200,000 in a VCT each tax year, which gives you 30% tax relief on the initial investment. After 5 years you may be able to reinvest your initial investment and obtain a further 30% tax relief. For those with EIS investments you can invest up to £1m and get 30% tax relief if you hold them for 3 years.
How are you saving money? Leave a comment in the section below with your best tax saving tips!
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About The Author
We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!