10 ways to save on taxes: Tips for small business owners
- Low Salary and High Dividends.
This is the most common method of reducing your personal income tax liability and corporation tax (business) liability. The income tax rate payable on dividends is less than that payable on a PAYE salary, and you won’t have to pay any NIC contributions on those dividends either.
- Transfer funds to your pension plan
To reduce corporation tax bill, as a director, you can transfer monies from the business bank account into your pension plan. This will increase your pension costs and in turn reduce the profits on which you will have to pay corporation taxes. Certain limits will apply to the amount of pension you can transfer, and other considerations must be sort before you transfer.
- Cycle to work- Salary Sacrifice
The Cycle to Work Scheme is an incentive released by the Government set out in the Cycling and Walking Investment Strategy published in 2017. It is a salary sacrifice for employees of the business, meaning it will reduce your income tax and national insurance liability. This is a fantastic scheme to be a part of as whilst saving tax on your earnings you are also saving the planet through reducing your carbon footprint! There are different ways that you can join the scheme and different rules for those that are self-employed, so before you sign up, make sure you choose the best plan for your business.
- Gifts to your employees
Money you sent to buy a gift to your employees, if they cost £50 or less, are tax deductible business expenses. They are called trivial benefits and cannot be in the form of cash or cash voucher.
- Make use of your Annual Investment Allowance (“AIA”)
You can claim capital allowances when you buy assets that you keep to use in your business, including business vehicles, equipment and machinery. In most cases you can deduct the full cost of these items from your profits before tax using your Annual Investment Allowance (AIA). The capital allowance you can claim has been raised up to £1,000,000 (1 January 2019 – 31 December 2020) for sole traders, partnerships and limited companies. Any AIA claimed must be submitted as part of your annual self-assessment, partnership and company tax return respectively.
- Research & Development Tax Relief
Research and Development (R&D) relief is for companies that work on innovative projects within science and technology. It can be claimed by a range of companies that seek to research or develop an advance in their field. To qualify for R&D relief the project does not need to be successful. Please refer to the Research & Development Tax article on our website for further information
- Seed Enterprise Investment Scheme (SEIS)
Seed Enterprise (“SEIS”) is designed to help your company raise money when it’s starting to trade. It does this by offering tax reliefs to individual investors who buy new shares in your company. You can receive up to £150,000 through SEIS investments. There are various rules you must follow and criteria to meet so that investors can claim and keep SEIS tax reliefs relating to their shares.
- The use of your home
When an employee works from home for some or all of the time, they may incur additional household costs such as heating and lighting. An employer can make payments to the employee tax-free and without any liability for NIC, to help to meet those additional costs. The current fixed allowance is £4.00 per week/£208 per year, without obtaining any supporting evidence of the additional costs.
- Marriage allowance
Marriage Allowance lets you transfer up to £1,250 of your Personal Allowance to your husband, wife or civil partner. This can reduce their tax liability by up to £250 in the tax year (6 April to 5 April the next year).
You can apply if:
-You’re married or in a civil partnership,
-Do not pay income tax or your income is below your Personal Allowance; and
-Your partner pays income tax at the basic rate.
VAT might be an advantage to your business if you’re a small business or just starting up. If your sales are low and you are predominantly buying VAT (UK) supplies, then you are entitled to claim back these additional costs from HMRC. Even if your sales don’t meet the income threshold necessary to be compulsory VAT registered, it may still be beneficial to voluntarily register.