If you have a business, you’re always trying to think of ways to reduce your tax bill. We get lots of clients who speak to friends and other business owners and come up with some interesting suggestions – some of them legitimate and some of them not! However, for the small business, here’s five tried and tested ways to reduce your tax bill:
No. 1: Sole trader or limited company?
The means by which you trade can affect the amount of tax you pay. If you trade as a sole trader or partnership, you will pay income tax and class 4 national insurance, as well as class 2 national insurance. If you trade as a limited company, you will pay corporation tax. The basic rate of income tax and the small company's rate of corporation tax are the same, 20%, so the saving is in national insurance. However, there are many other factors which will determine whether trading through a limited company is right for you.
No. 2: Salary or dividend?
If you do trade through a limited company, the natural way of rewarding yourself for your efforts is salary, as would be the case with any employees you have. However, if you pay yourself a market salary, then there may be tax savings available if you reduced your salary to a lower level and took the rest of your remuneration as dividend income. As in (1) above, there are also quite significant factors to take into account.
No. 3: Pay your spouse
Lots of small family businesses rely on the goodwill and support of family members to trade profitably. However, in situations where your spouse works in the business, they may be able to be paid a wage for the work they do in a tax efficient way. If done correctly, it may even count towards their pension entitlement.
No. 4: Use of home claim
Many small businesses operate from the home of the owner, and there is a legitimate claim which can be made by the owner for tax relief on the use of their home for running the business.
No. 5: Use an accountant!
No seriously! Dealing with your own tax affairs can save you professional fees, but that may be false economy, particularly as HMRC's approach to errors can be unforgiving. We’ve also highlighted the mess some businesses can get into without guidance. We provide free telephone and email advice to all our clients, as well as a monthly newsletter with advice and information, and are more than happy to chat through any aspects which you may be concerned about. Popular topics tend to be the tax effects of capital investment (particularly vehicles), employment issues (including employment vs self employment), and VAT.
So there you are, 5 simple tips to reduce your tax bill.
