Taxation is a necessity for any business, but can be a particularly tricky and complex process for small or new businesses.
While a good chartered accountant and regular communication with the local tax office is best practice for long-term tax efficiencies and calculation accuracy, this article offers 5 tips to help you legitimately reduce your tax liabilities as a small business owner:
1. Pay Efficiencies as a Director/Shareholder
Many business owners pay themselves a low salary plus dividends as an effective means of compensation. Generally, Director’s salaries are paid as Director’s Fees instead to avoid National Minimum Wage regulations.
The maximum tax-free salary allowance for a director or shareholder in the 2013/14 tax year is £7,690. The Director/shareholder can then be paid dividends to a maximum of £30,384 over the year at the 25% tax rate – dividends paid above and beyond this would incur a minimum of 40% tax rate.
2. Be Company Car Smart
If you require a vehicle and plan to register it to the business, you may wish to consider recent tax law changes and the introduction of special tax allowances reliefs for ‘qualifying Low Emissions Cars’.
Lower Co2 emissions vehicles offer more tax relief and lower benefits charges for employees – which can also be used as an attractive benefit to prospective employees. Cars that have zero Co2 emissions can even be 100% tax deductible for the business and produce no taxable benefits charges for the employee using the car. Likewise, if a car is not essential and a van could do the job just as well, some vans can be tax free for employees provided they are used exclusively for work and commuting.
3. Tax Efficient Investments & Other Payments
As a company Director, shareholder or owner, your investments and payments into pensions should be given significant consideration and attention. Since pension contributions provide tax relief at your marginal tax rate, you could save up to 60% in tax (subject to the annual maximum amount of £50,000 in 2013/14).
Other tax-free (subject to the allowance threshold) and tax efficient income and investments include ISAs, Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs).
An ISA annual contribution limit is £11,280, of which £5640 can be in cash, a VCT allows you to invest up to £200,000 which gives you 30% tax relief on the initial investment in return if you hold for 5 years. With an EIS investment, up to £1m can be invested also in return for 30% tax relief if you hold it for 3 years.
4. Enlist the Help of an Expert
Taxes are not to be taken lightly – late or inaccurate payments can result in major penalties, fines.
Many specialist consultancies and chartered accountants offer affordable, regular advice and services to assist with management of accounts and taxes.
5. Ensure the Company Structure is Right
The way your company is setup has a major impact on the amount of tax you are liable for. Even though many small and micro businesses operate as partnerships or sole traders, incorporation as a limited company could save many businesses and owners a significant amount of cash in lower tax and NI payments. As a guide, a company with profitability greater than £20,000 should consider incorporation – this in turn allows for greater flexibility and efficiency with pay and dividends structure among other short and long term tax benefits.
About the Author: Nicholas Moores is a professional writer for Plus Accounting – chartered accountants and providers of business financial services based in Brighton, England.