The humble 3-letter word ‘tax’ has the ability to give even the most level-headed business person the jitters. However, small businesses shouldn’t shy away from learning about tax. Being knowledgeable about tax puts you in a strong position whereby you avoid costly mistakes and tackle tax with preparation.
The tax pot
At the risk of sounding like a parent of an easy-spender teen, you should put money aside for tax. Tax bills shouldn’t be nasty surprises if you’re on top of your accounting. You should have a pretty good idea of what’s coming, and therefore you can put aside that money from business income.
By putting aside money from income in to a dedicated account to pay Value Added Tax (VAT), Pay As You Earn (PAYE), or your own Self Assessment return you should never have a tax cash flow problem.
This of course means that you need insight into what you’re actually doing in accounting terms and where tax liabilities lie. The only way you can do this is by using accurate records. Cloud accounting software, such as Pandle, makes this considerably easier. Use them regularly and your records will be easy work.
Many small businesses and business owners run in to trouble when it comes to claiming expenses. They either don’t claim enough, or claim incorrectly, therefore paying more tax than they should. Some people even think expenses are an opportunity to take the mickey. At worst you’ll end up heavily fined or paying over the odds in capital gains tax down the line.
Importantly, for expenses to work for your business in terms of tax you need to know how to categorise them, and also have evidence of their existence (e.g. receipts).
If you’re self-employed, use the guidance here.
Understand tax allowances
Tax allowances don’t usually carry over. So if you don’t use them, you lose them. For an individual with income tax, savings allowance, dividends allowance and capital gains tax allowance that could altogether add up to £26,000 each year in wasted allowances. Therefore consider how you can use these most effectively across you and your business.
Understand tax breaks
It’s a fallacy that there’s no such thing as a tax break. For small businesses owners and entrepreneurs there are actually quite a few. For example, Entrepreneurs Relief and SEIS Relief are just two examples.
Know which status suits you and your business best
It may be that you started out as a sole-trader and have grown. Or you may have quite a different structure from how you started out. Each year you should review your business structure and decide if it is still the most appropriate in terms of tax. Compare the different options (such as sole trader versus limited company) and run a quick calculation to see which structure would serve you best.
This is particularly true if you’ve found yourself increasingly using the ‘gig economy’. Make sure you’re not in fact an employer in the eyes of HMRC or you could face some nasty tax implications.