Managing taxes effectively is essential for small business owners who want to maximize their profits and minimize unnecessary expenses. By understanding the available tax reliefs and deductions, business owners can significantly reduce their tax bills. Here are some top tax-saving tips for small businesses in the UK.
2.1 Claim All Allowable Expenses
One of the most straightforward ways to reduce your tax liability is by claiming allowable business expenses. These are expenses that are necessary for running your business and are deductible from your profits before tax is calculated. Examples of allowable expenses include:
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Office supplies: Stationery, printing costs, and other supplies used in day-to-day business operations.
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Travel expenses: This includes fuel, parking, and public transport costs incurred for business purposes.
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Staff wages and salaries: Payments made to employees for their work, including National Insurance contributions.
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Rent: If you rent an office space, the rent you pay can be claimed as an expense.
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Utilities: Gas, electricity, and other utility costs for your office or business premises.
2.2 Take Advantage of Tax Reliefs
Tax reliefs can significantly reduce the amount of tax you pay. Some of the most popular tax reliefs for small businesses include:
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Research and Development (R&D) Tax Credits: If your business engages in innovative activities, you may be eligible for R&D tax credits. This relief can provide a cash sum or a reduction in your corporation tax bill.
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Annual Investment Allowance (AIA): AIA allows businesses to claim 100% of the cost of capital assets, like machinery and equipment, against taxable profits. The limit for AIA is currently £1 million, so it’s a great way to reduce your taxable income if you’re investing in business assets.
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Capital Allowances: These allow businesses to deduct the cost of purchasing assets, such as equipment and vehicles, from their taxable income.
2.3 Structure Your Salary and Dividends Effectively
Many small business owners opt to pay themselves a combination of salary and dividends. Salary is subject to income tax and National Insurance contributions (NICs), but dividends are taxed at a lower rate. For the 2023/24 tax year, the dividend tax rates are as follows:
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Basic-rate taxpayers: 8.75%
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Higher-rate taxpayers: 33.75%
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Additional-rate taxpayers: 39.35%
By taking a smaller salary and paying yourself in dividends, you can reduce your overall tax liability. However, it’s important to ensure you are paying yourself in accordance with company regulations and maintaining a reasonable level of salary for tax purposes.
2.4 Claim Tax Relief for Home Office Costs
If you work from home, you may be able to claim a proportion of your home-related costs as business expenses. These could include:
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A share of your electricity, gas, and heating costs
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Internet and phone bills
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Council tax and rent, if you use a dedicated room for business
The amount you can claim depends on the size of the room used for business purposes and how often it’s used for work. You can claim these expenses through your self-assessment tax return or, for limited companies, through your company accounts.
2.5 Utilize the Flat Rate VAT Scheme
For small businesses with a turnover of less than £150,000 (excluding VAT), the Flat Rate VAT Scheme could save you time and money. This simplified scheme allows you to pay a fixed percentage of your turnover to HMRC, rather than calculating VAT on each individual sale and purchase.
The fixed percentage you pay depends on the type of business you run. For example, the flat rate for many businesses is 12.5%, but it may be different for some sectors, so it’s worth checking if this scheme is beneficial for you.
2.6 Make Pension Contributions
One of the best ways to reduce your tax liability is by contributing to a pension scheme. Employer pension contributions are deductible from your business profits, meaning they can reduce your corporation tax bill.
There are many ways to structure pension contributions. For example, if you’re self-employed or run a limited company, you can contribute to a personal pension plan, which can reduce your taxable income.
2.7 Use Tax-Free Benefits
As a small business owner, you can offer tax-free benefits to employees or directors. These can include:
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Mobile phones: Providing a mobile phone for business use is tax-free, provided it’s used primarily for business purposes.
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Bicycle schemes: The government runs a cycle-to-work scheme, allowing employees to buy a bike tax-free for commuting to work.
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Health insurance: Providing health insurance for employees is a tax-free benefit, provided it meets the relevant requirements.
By offering these benefits, you can reduce your overall tax bill while providing additional value to your employees.
Conclusion
Taxation doesn’t have to be a headache for small businesses in the UK. By understanding the available deductions, reliefs, and strategies, you can reduce your tax burden and keep more of your hard-earned money. It’s always advisable to work with a qualified accountant to ensure you’re taking full advantage of the tax-saving opportunities available to you.