Tax isn’t just about filling out a return so you can pay any tax due on your income without getting trouble; it’s also about making tax savings, a crucial aspect of financial planning for business owners.
By taking advantage of these tax-saving strategies, you can minimise your tax liability while maximising your savings.
Claim all allowances and deductions
First, make sure you’re claiming all the allowances and deductions you’re entitled to. This includes claiming your tax-free allowances for capital gains tax (applicable when you sell an asset for a profit) and dividends tax.
If you have employees, you can reduce your employer’s National Insurance contributions by up to £5,000 a year by making use of the employment allowance to maximise your tax savings.
You may also be able to claim capital allowances for equipment and machinery purchases — the annual investment allowance lets you write off the entire value of eligible purchases (up to £1 million) in the same tax year you made the purchase.
You’re probably already familiar with allowable expenses, the value of which you can offset against your pre-tax profit, reducing your tax bill. You can claim for things like business-related travel, accommodation and meals.
Just make sure the expenses you claim for are solely for business purposes, and keep meticulous records of the purchase so you can show them to HMRC if they ask you to back up your claims.
Research and development tax credits
If you run a limited company that is engaged in research and development (R&D) activities, you may be able to make additional tax savings by claiming for expenditure related to your research project.
There are two R&D tax relief schemes: one for SMEs and one for larger companies, the former offering a potential tax deduction of 186% and the latter a 20% tax credit.
You can claim R&D tax relief and credits on a wide range of costs, including:
- staff costs
- sub-contractors & externally provided workers
- consumables
- software costs
- utility bills attributable to the projects claimed
- experiments and clinical trials
- data licences and cloud computing.
To qualify as R&D, your research project must make or attempt to make a new and unique development in the world of science and technology. Read our guide to R&D tax savings for more detail.
It’s time to think about your business structure
Most businesses in the UK are either sole traders or limited companies, so we’ll assume you’re one of the two. Did you know that each type of business has very different tax treatment?
For starters, sole traders face income tax on their profits — that’s because they are the business, legally speaking. That means the higher end of their profits could face a tax rate (as of the 2023/24 tax year) of 45%.
However, they do benefit from the personal allowance, which shields their first £12,570 of profit from income tax.
Limited companies, on the other hand, face corporation tax, which is charged at 19% on profits above £50,000, and 25% for profits above £250,000 — companies making between the two limits can apply for marginal relief to bring down their effective tax rate down to somewhere between the two.
There is no tax-free allowance for corporation tax equivalent to the personal allowance, but companies enjoy more tax relief schemes, such as R&D tax credits and tax relief for creative industries.
What does all that mean for you? Broadly speaking, it means that high-earning sole traders may benefit from incorporating their business and paying corporation tax; small companies may benefit from the opposite to take advantage of the personal allowance for income tax.
However, bear in mind that company directors can pay themselves in dividends, which are taxed more generously than regular income, to make considerable personal tax savings.
Creating a business tax plan is an art unto itself. Let us help you create a strategy to maximise your tax savings. Get in touch with us today.