Tips On Tax Reduction For Businesses

Every business owner needs to pay taxes. However, the amount they have to pay will vary depending on the company’s sales, profits and size. By being aware of the different taxes and what determines the amount payable, you can reduce your overall tax bill. Here we share some top tips on tax reduction for businesses.

Understanding what taxes businesses pay 

To get started, it is imperative that business owners have an understanding of which taxes their company will need to pay. Read on for an overview of the main taxes businesses pay.

Corporation Tax 

Corporation tax is one of the most important taxes a business will need to deal with if they are registered as a limited company (sole traders do not need to pay corporation tax). This tax is required based on a business’ profits across the financial year. Corporation tax needs to be paid within nine months and one day of the end of the business’ accounting year. Whilst the amount can vary depending on the different tax brackets and thresholds, corporation tax is 19% for FY 2022 of the business’ profits; rising to 25% for FY 2023. A marginal rate may apply depending on taxable profits.

Income Tax 

Whilst income tax is not owed for the business itself, business owners will need to pay this tax on their personal income from the business, whether this be in the form of a salary or dividends. The current income tax brackets in the UK are as follows:

Income Tax Rates

• £12,571- £50,000 – 20%
• £50,001 – £150,000 – 40%
• Over £150,000 – 45%

Directors of limited companies must pay income tax through the PAYE system, whereas sole traders will pay their income tax through their self-assessment tax return. The amount paid will be based on the profit the business makes.

Dividend Tax 

If a company pays dividends, the first £2,000 is tax free, but all additional dividends are taxed at the following rates, depending on the income tax based on the individual:

• Basic rate taxpayer – 8.75%
• Higher rate taxpayer – 33.75%
• Additional rate taxpayer – 39.35%

If a shareholder’s only income is from dividends, they can use their personal allowance in addition to the dividend allowance. In the current tax year, you can earn the £12,570 personal allowance, plus the £2,000 dividend allowance, meaning you can earn £14,570 from shares before tax needs to be paid. Tax can also be reduced further by transferring shares into a stocks and shares ISA.

National Insurance Contribution 

There are four different types of National Insurance contributions which are:

• Class 1 – Paid by employers and employees
• Class 2 – a flat rate which is paid by those who are self employed
• Class 3 – a voluntary contribution often paid by those who want to complete their National Insurance record so that they’ll be eligible for benefits
• Class 4 – paid on the profits made by the self employed each year

It is important that business owners know which National Insurance contributions apply to them and their business.

Additionally, those companies that have employees will need to pay payroll tax which is a monthly tax paid to HMRC through the PAYE system for all employees that earn more than £120 per week. The amount owed depends on the employees’ salaries.

VAT 

Value Added Tax is the additional tax placed on certain goods and services in the UK. A company needs to register for VAT if or when the company’s turnover exceeds £85,000 within the same financial year. Companies can still register for VAT if their turnover is below this amount, however it is not a requirement and needs to be thought out carefully. The due date to submit and pay VAT returns in the UK is the 7^th day of the second month, following the reporting period.

VAT standard rate is currently set at 20%, but there are some exceptions to this rule. If a company is VAT registered, they must charge their customers VAT on top of their standard prices. However, they will also be able to reclaim VAT that they pay on business expenses.

Business rates

Business rate bills are sent out by the local authorities to all businesses that run from non-domestic properties. These rates are calculated on the property’s “rateable value” which is its estimated value on the open market if the property was to be sold.

Capital Gains Tax 

Capital Gains Tax may apply if a business makes a profit after selling or disposing of a business asset. These assets can include land, fixtures, machinery, shares, trademarks, and even a business’ reputation. Capital Gains Tax applies to sole traders and partnerships only. Limited companies don’t need to pay this as they will be paying corporation tax on the profits from selling their assets.

Ways to reduce your tax bill 

Small business rates relief 

If your property’s “rateable value” is less than £15,000 and this is your business’ sole site, you may be able to receive business rates relief. If this is applicable to your company, you will need to contact your local council.

Charity Donations 

Donations to a charity from an individual, sole trader or partnership to the UK are tax free. The tax goes to yourself or the charity, depending on whether you donate through Gift Aid or straight from your wages. If you complete a self-assessment and pay income tax above the 20% basic rate, you can claim the difference between the tax you’ve paid on any donations made through Gift Aid and what the charity got back.

The rules are slightly different for limited companies. A limited company instead pays less corporation tax when it donates to charity. This tax relief is calculated by deducting the value of the donations from your total pre-tax profits.

Allowable Business Expenses

There are certain business expenses that have an allowance to help businesses manage some of the running costs involved in owning a business, by deducting the expense from any taxable income or profits. Allowable expenses include:

• Travel costs
• Certain office costs
• Clothing, e.g. uniforms
• Advertising and marketing
• Financial costs
• Staff, including salaries, bonuses, pensions, and benefits
• Training courses

Limited companies can deduct these expenses from their pre-profit tax and those that are self employed can list the expenses on their self assessment tax return.

Annual Investment Allowance (AIA)

AIA gives you tax relief on large purchases on things that you purchase and keep within your business, such as plant and machinery purchases. There are criteria that you have to meet in order for it to be eligible, and items that are leased cannot be included. In order to claim for AIA, you must claim in the accounting period you bought the item. You also may need to pay additional tax if you sell an item after claiming AIA.

Research & Development (R&D) tax relief 

R&D tax relief helps companies that are working on innovative projects within science or technology. Your R&D work must be part of a specific project that is within the science or technology world, has had to overcome uncertainty, has tried to overcome this uncertainty, and is something that could not be easily worked out by a professional in that field.

SME R&D relief allows companies to deduct an additional 130% of their qualifying costs from their yearly profits, meaning a total 230% deduction, whereas larger companies can apply for Research and Development Expenditure Credit (RDEC) which is a tax credit of 13% of your qualifying R&D expenditure.

Additional tax tips for small businesses

Meet your tax deadlines

Make sure all your tax deadlines are met to avoid any unnecessary and potentially hefty penalties. You can find out all of the deadlines on the HMRC website, and these should be added to your calendars.

Claim for allowances

When you submit your tax return, you must ensure you are claiming for any allowances that are applicable to you. If you don’t, you could miss out. See the list above for just some of the allowances that you may be eligible for. There are also other tax reliefs that are specific to different industries and should be something you research.

Keep accurate records

It is vital that you keep detailed records and that everything is constantly kept up to date. If not, you will be creating more work for yourself and could end up having to pay fines in the future.

Ensure you have the money to cover the taxes 

Keeping accurate records also means you have a good idea of how much tax you will owe at any one time, enabling you to ensure this money is available to cover the taxes. If the business doesn’t have access to the money in order to pay these taxes, it could lead to severe issues.

Use accounting software 

If you are still using spreadsheets to manage your business’ accounts then the risk of mistakes is substantially higher. You never want to have to deal with issues caused by an inaccurate tax return due to human error. Accounting software like Quickbooks or Xero can help to prevent this problem. Although this will require an investment, it will be worth it. They can help save you time and money, reduce errors, and automatically create reports to help you to thoroughly understand your business’ finances.

Whilst there is no avoiding tax, there are ways you can ease the burden of tax and free up cash to use in other areas of the business. Calculating your taxes can feel like an overwhelming tax to many business owners. However, if you take the time to fully understand the tax obligations your business has and keep on top of your finances, this task will feel less daunting.

If you need any advice when it comes to business tax, ensure you reach out and hire a professional. To learn more about taxes which will impact your business, get in contact with a member of the Wright Vigar team.