Business owners and sole traders often pay more tax than they need to, but there are lots of acceptable ways to reduce your tax bill. Claiming tax relief on expenses, restructuring your business, or using tax allowances are just a few ways you might be able to save on the amount of tax you currently pay. In this article we go through some of the most common tax-saving tips for small businesses.

The kind of tax your business needs to pay depends on your business structure. As a sole trader there’s no legal separation between you and the business, so you’ll pay income tax and National Insurance on all your profits even if you don’t take them out the business.

In a limited company it can be a bit more complicated because it is a separate legal entity. The company will pay Corporation Tax on its profits, and then you’ll pay tax separately on any money you take out the business for yourself.

Although this means you’ll need to submit different types of tax returns, it can also help you be more tax efficient depending on the amount of profit you make. This is because you could potentially take a director’s salary at or below the threshold for paying National Insurance, and then take the rest of your income as dividends (paying tax at a lower rate, and no NI).

Changing your business structure might not be the best option for everyone, so consider how this will affect you and your needs.

The question of business expenses is probably one of the most frequently asked for any accountant – and for a very good reason! Businesses only pay tax on the profits they make, not the full amount of income they receive – so working out which expenses you can claim tax relief on can make an enormous difference to your tax bill.

 
The rules for claiming can seem quite confusing though (probably because they are), so lots of businesses tend to be overly cautious and miss out on tax relief they’re eligible for.

The list of what you can claim is extremely long and varied so it’s well worth asking for advice, but as a starting point it includes:

• Travel and subsistence
• Using your car for business
• Vehicles (especially eco-friendly options)
• Using your home as an office or workspace
• Buying equipment
• Uniforms
• Marketing
• Staff costs
• Legal and financial advice (such as accountancy fees!)

The assets in your business are things it owns or leases in order to carry on trading, such as equipment, vehicles, cash, and even the fact that customers recognise your brand. Assets are valuable because they allow a business to function, but you might also be able to claim tax relief on them.

Capital allowances when you buy assets

Long-term assets (sometimes known as ‘fixed’ or ‘capital’ assets) are things that you reasonably expect to use in your business for longer than 12 months. Typical examples include company cars, machinery, or software.

Claiming capital allowances lets you deduct the value of an asset from your profits, helping to reduce your tax bill. There are different types of capital allowance, so you might claim in the year you bought the asset, or over a longer period of time.

Tax relief when you dispose of assets

Disposing of an asset might mean that you’ve sold it, swapped it for something else, or been compensated for it in another way. If you dispose of an asset and get back more than it cost, then you’ve made a profit – also known as a ‘gain’.

You might need to pay tax on this gain, but the amount you pay (and whether or not you’re entitled to tax relief) depends on your business structure.

Sole traders

Being a sole trader means there’s no (legal) difference between you and the business, so you may need to pay Capital Gains Tax on any gains you make, just like any other individual. The good news is that there’s a tax-free allowance for capital gains, which is separate to your personal allowance – known as the Annual Exempt Amount.

Limited companies

Capital Gains Tax doesn’t apply to limited companies – the company will pay Corporation Tax on any gains it makes, and won’t be eligible for the Annual Exempt Amount.

Registering for VAT is mandatory once turnover reaches the £90,000 registration threshold in a 12-month period, but some businesses can benefit from using a particular VAT scheme over another.

For instance, the VAT Flat Rate Scheme (FRS) allows you to pay VAT as a percentage of your turnover, rather than working out the difference between what you pay and what you collect. This might mean that your VAT bill is lower than it would be using the standard scheme.

 
Some businesses also find it tax-efficient to register for VAT voluntarily, even if turnover hasn’t yet reached the threshold. This can happen if the type of goods and services you sell are subject to VAT at a lower or zero rate, but the things you buy are subject to VAT at the standard rate. It would mean that your business consistently paid more VAT than it received, so registering would allow you to claim back the difference.

Donations are great news for charities, but they can also have tax relief benefits for those making them. The type of relief available varies depending on the business structure you operate, so we’ll deal with individuals (which includes sole traders) and companies separately below.

Tax relief for individuals making charitable donations

Sole traders aren’t legally separated from their business, so any donations you make are considered to come from you as an individual. The same applies if you donate as a private individual, even if you happen to run a limited company – because the donation comes from you and not the business.

If you make a declaration allowing the charity to claim Gift Aid on your donation, they’ll be able to claim an additional 25p for each £1 you donate, without it costing you anything extra. So, donate £100, and they’ll get £125.

If you’re a higher or additional rate taxpayer then you’ll be able to reclaim the difference between the tax you paid on the donation and what the charity received, when you submit your Self Assessment tax return.

• Higher-rate taxpayers pay tax at 40%, so they can claim 20% tax relief on the amount they donate
• Additional rate taxpayers who pay 45% tax can claim 25% tax relief on their donations

The amount of tax relief available for taxpayers who live in Scotland is a bit different.

Tax relief when a limited company gives to charity

Your company can claim tax relief on the value of any donations it makes to charity, helping to reduce its bill for Corporation Tax. This relief is claimed by deducting the donation’s value from your profits before paying tax. There isn’t a limit on how much you can donate, as long as it doesn’t create a loss.
 

Some tax allowances are applied to your income automatically, so it’s not always obvious that other options are available, and some allowances and reliefs must be applied for separately. It makes it a bit tricky to work out what you might be entitled to, so we’ll go through some of the most common ones.

It’s not an exhaustive list though, so double-check with your accountant (and tell them everything – even if you think it’s unimportant!).

The tax-free trading allowance

The trading allowance is a good example of an automatic allowance, enabling individuals (not companies!) to earn up to £1,000 tax free self-employment or property income in a tax year.

You’ll only need to report your income and pay tax on it if your self-employed or property earnings are more than the threshold, at which point you can choose whether to claim:

• The £1,000 allowance
• Tax relief against your business expenses

Choose the one which reduces your tax bill the most!

Marriage Allowance

If you don’t use all of your tax-free Personal Allowance, the Marriage Allowance lets you transfer part of it to your husband, wife, or partner, helping to reduce their tax bill. Unlike some types of tax allowance, this one isn’t awarded automatically, so you’ll need to apply online.

You can also apply through your Self Assessment tax return if you normally submit one (so this one is only for individuals, not for limited companies).

R&D tax credits for limited companies

If you operate a limited company which spends money on research and development, you may be able to claim R&D tax relief. Tax credits are generally available for R&D focused on creating or enhancing products, services, and processes.

Tax allowances don’t usually carry over so if you don’t use them in the year, they’re gone – however…

If your business makes a loss one year, you may be able to carry this and offset it against profits in the previous (or following) year. This reduces the amount of profit you made in that year, helping to reduce your tax bill, or even earning you a nice tax rebate if you’ve already paid the bill.

As well as helping you save for the future, you might also be able to claim tax relief on contributions you make into a pension scheme. The amount of relief available depends on what rate of tax you pay.

Your pension provider will automatically claim 20% in tax relief on your contributions (even if you pay the 19% Starter Rate in Scotland). You’ll be able to claim additional relief if you pay tax above the 20% basic rate. The amount of additional relief you can claim is the difference between the tax rate you pay, and the basic rate.

For example, an additional rate taxpayer in England pays tax at 45%, so would be able to claim 25% tax relief.

Extra relief for pension contributions from limited companies

If you operate a limited company, then the business can also make contributions into your pension. Employer pension contributions are an allowable expense for limited companies, so the company can claim tax relief against its bill for Corporation Tax.

These contributions are also exempt from employer’s National Insurance so, depending on your circumstances, you might decide to pay into your pension rather than taking the equivalent salary from your company and paying employer’s NI on anything above the threshold.

Keeping all your money in a current account might mean it’s not reaching its tax-free interest potential. ISAs, Enterprise Investment Schemes (EIS), and Venture Capital Trusts are just a few examples of tax-efficient ways to save and invest – depending on your circumstances and business structure.

If you’re a sole trader (and paying tax on all your profits, even if you don’t actively withdraw them from the business), this could be particularly useful. Always take advice if you’re not sure.

Excellent bookkeeping is behind nearly every single tax-saving tip. Keeping good records will help you monitor your finances more closely, make well-informed decisions, and (crucially) ensure you report all your finances correctly.

Review suppliers, look at customers who are always late paying their bill, and manage your cash flow. From claiming expenses to checking how much you can take as a dividend; your bookkeeping has the answers!

Putting money aside to pay your tax bill

Good financial records can also make it easier to keep an eye on how your tax bill is shaping up (so you can put money aside and avoid any nasty surprises).

Learn more about our online accounting services for businesses. Call 020 3355 4047 to chat to the team, and get an instant online quote.