Tips on saving tax for small business owners

No one likes paying tax, least of all small business owners, so here are some tips for ways to reduce your tax bill or claim back tax already paid.

These tips are taken from the Tax Guide, which contains detailed information on all aspects of tax for businesses and individuals.

Keep careful records – apart from the legal requirement, it could help you pay less tax. Note down all the expenses you could claim if you are self-employed or if you let out property.

Don’t be late sending in your tax return – The tax return must be sent back by 31 January 2006 to avoid an automatic penalty.

Send tax return early – If you are within PAYE and owe less than £2,000 tax for the year ending 5 April, send back your tax return by 30 September (or 30 December if you e-file) so the tax can be collected in instalments through PAYE during the year to 5 April, instead of in one go on 31 January.

Always check tax forms – such as a Tax Calculation or Coding Notice to make sure your tax inspector has got the sums right.

Payments on account are based on last year’s tax bill – If you expect your income to be lower this year or your allowances and reliefs to be higher, you can make reduced payments.

Investigate the past – It may not be too late to claim an allowance or deduction you have forgotten about.

If you want to give money to charity, think about payroll-giving schemes and Gift Aid – you’ll get tax relief on the gifts, large or small, regular or one-off.

Higher rate relief on Gift Aid donations made during the current tax year can be carried back to the last year – This is worth doing, if you were a higher rate taxpayer last year but not this, or if it would increase the amount of age allowance you can claim for last year.

Think about giving quoted shares, land or buildings to charity – You will get income tax relief at your highest rate of tax and there’s no capital gains tax on the gift.

If you are both employed and self-employed, or you switch from being an employee to self-employment (or vice versa) during the tax year, you may pay too much in Class 1,2 and 4 National Insurance contributions. – Claim a refund or ask to defer some payments until the position becomes clear.

Company or sole trader? – Despite changes to the way small companies are taxed, many small businesses (with profits up to £50,000) a year can still save tax by operating as a company rather than as a sole trader or partnership.

Claim all your expenses – You can still claim as an expense for your business something you use partly for business and partly in your private life, for example, using your home for work, sharing the car.

Car expenses – If your turnover is less than the VAT threshold, you can opt to use Inland Revenue authorised mileage rates as a basis for claiming car expenses. This saves some record-keeping and saves tax if your actual expenses would be less.

Capital allowances – Small and medium-sized businesses qualify for 40 per cent first-year capital allowances on spending on plant and machinery. You may be able to claim a 100 per cent capital allowance in the year you buy new energy-saving or water-saving equipment for your business. You do not have to claim all the capital allowances you are entitled to. It may save you more tax to claim less and carry forward a higher value to the next year when your profits may be higher or your personal allowances lower. Unless you can claim 100 per cent capital allowances, you will get tax relief more quickly if you can claim spending as an allowable expense (a revenue item) rather than a capital outlay. If you need to spend on an item to make it fit to use, this spending will count as capital. Make sure you do the minimum work needed and defer until later extras that can count as revenue spending.

Starting a business – When you first start your business, claim capital allowances on any equipment you already own but take into the business, for example, a car, desk and so on.

Employing a spouse – If you are married and run your own business, consider employing your spouse if his or her tax rate would be lower than yours. The salary paid to your spouse must be in line with the work done.

If you employ someone – there is no income tax or National Insurance on their earnings up to the primary threshold. Provided they earn at least the lower earnings limit, they will build up state pension.

If you make a tax loss in your business – there are several ways this can be used to reduce tax on other income or gains. Losses may also increase the amount of tax credits you can claim.

Working from home – Following a test case, where working from home uses furniture and equipment normally found in a home, there is no breach of residential use and business rates are not due. However, structural alterations, hiring staff, using specialist equipment and customers visiting your home-business could justify a charge for business rates.

If your profits are low – think twice before deciding not to pay Class 2 National Insurance contributions. They are a good value way of building up rights to state benefits such as retirement pension and incapacity benefit.

Whether interest on a loan counts as an allowable expense depends on how the money is used not its source – Instead of overdrawing your business account or getting a business bank loan, a cheaper option might be extending the mortgage on your home. The part of the interest relating to business use is allowable and the Revenue assumes repayments pay off the personal debt before the business part.

Work on a let property or business premises that once counted as an improvement (capital expenditure) may due to technological advances now be accepted as a repair (allowable expense) – for example, replacing old windows with double glazing. If you are replacing an old feature with a modern equivalent, try claiming and ask your tax office to confirm that the expense is allowable.

Try to use the tax-free allowance for capital gains tax every year – you can’t carry over unused allowances to other years. Think about selling some shares showing a profit and buying them back within an ISA to make a gain that uses up the allowance or choosing investments designed to produce a capital gain on a set maturity date.

Converting space into a residential asset – you can claim a 100 per cent capital allowance on the cost of converting space above shops and businesses into flats.

Asset taper relief – an asset used in a business can qualify for business asset taper relief even if it was not your own business.

If you own a small business or farm, take professional tax advice on inheritance tax – There are extensive tax reliefs, which can mean you pay little or no capital gains tax or inheritance tax, but they need careful planning.

Related Topics

Tax & Vat

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