Tax planning tips for small businesses

Ralph Hearn, Partner at Wellers, shares what you need to know to efficiently plan for your company’s tax return

For many small business owners, tax is one of the most challenging areas of running a business. And with good reason, too – the tax system is complicated.

Unfortunately, that can lead to problems. In 2016, it was estimated that UK citizens overpaid not far off £5 billion in tax by not taking advantage of tax breaks and relief. We hear a lot about tax avoidance, but in truth many legitimate opportunities to save money on tax are not used, mainly down to a lack of awareness.

Good planning can help small businesses identify areas where they can save money on tax, money which can then be reinvested in the business. But there are other equally compelling reasons to take tax planning seriously, such as ensuring you are compliant with rules and regulations.

The start of a new tax year is an ideal opportunity to turn over a new leaf and take a fresh look at how you can plan your taxes to the benefit of your business. Here are five tips to get you started.

1. Start on next year’s taxes, now

Putting off accounts and tax returns to the last minute not only creates stress and panic, it also leads to mistakes and lost opportunities to save money. Most cases where HMRC refuse an expenses claim is because it has not been evidenced correctly.

Keeping books up to date on an ongoing basis is more efficient and secure. Nowadays, there are lots of cheap and readily available accounting apps perfect for small businesses which make the job even easier.

2. Review your business classification

If you are a sole trader or a partnership, it may be worth considering the potential tax benefits of setting up a limited company. As a sole trader, all business profits are subject to Income Tax plus National Insurance deductions. Limited company profits are subject to Corporation Tax, which is considerable less than Income Tax plus NIC.

Of course, in a limited company, you will also have to pay Income Tax and NIC on anything you take out as a salary, although this can be managed by withdrawing dividends instead.

3. Maximise deductions

The system of allowable deductions from tax is complex, but the various reliefs and allowances are there to be used.

Tax deductions fall into two main camps, although this is not exhaustive. Expenses cover all the things you might need to do to run a business, such as pay for utilities, travel, equipment and general office purchases. As a rule of thumb, for every £1 you spend on expenses, you can deduct 20p from your taxable profits. Working from home offers considerable expense deductions for sole traders.

The other main group is capital allowances, which allow companies to offset major expenditure on things like high value equipment and research and development against tax.

4. Look into flat rate VAT

In the normal course of things, VAT liability is calculated as the difference between the VAT a business charges to customers and the VAT it pays on its own purchases.

If you have a turnover of more than £150,000, however, you can join the Flat Rate VAT scheme. The amount of VAT paid to HMRC is pegged at a fixed percentage, depending on your industry. Whatever the difference is between that fixed rate and what you charge your customers, you keep, so some companies are able to make a tidy profit from it.

5. Seek advice

The best way to improve your tax planning and administration is to seek professional third party advice. Tax is complicated, and the money you spend on a specialist can be well worth it in the savings you make.

At Fiducia Wealth, we believe that effective financial planning is an ongoing process. Real results are achieved by in the long term through careful assessment and reevaluation against strategic goals. For more information about us, visit

Further reading on tax

Ben Lobel

Ben Lobel

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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