Efficient tax spending is vital in the success of small-to-medium businesses (SMEs). Having hundreds or thousands extra in your annual budget will let you invest that money into developing your business. Although you might not believe it, there are actually multiple ways in which the average business can cut their business tax, but here are eight ways to get you started.
Save with Relevant Life Insurance
Here are the savings to be made by UK professionals with a relevant life policy compared to personal life insurance:
- 20% basic tax rate – 40% saving
- 40% higher tax rate – 49% saving
- 50% highest tax rate – 58% saving
Relevant life insurance is designed to enable company directors to arrange death-in-service benefits for both themselves and employees. A relevant life policy is an excellent way of being tax efficient when compared to standard life insurance policies.
There is reluctance by group life providers to arrange group life cover for fewer than five people. So, small businesses and high-earning individuals, especially, can gain from relevant life policies.
Relevant life policies are taken out on a single life basis where any money from a claim is paid out by a discretionary trust to avoid probate delay and minimise the threat of inheritance tax.
And your company owns the policy, which means the premiums can be tax deductible, saving 20% corporation tax as well as not having to pay the premiums from your already taxed income. Relevant life insurance will also not count against your pension allowance. Try our relevant life calculator to understand how you could save.
You Should Consider Flat Rate VAT
Having an accountant at your beck and call is simply not affordable for some small businesses. And a common consequence of this reality is that you might be losing out on hundreds or even thousands of pounds by not adopting the most efficient VAT strategy.
Before trying to register for VAT, you should be aware that you are only obliged to register for VAT if your annual taxable turnover is in excess of £82,000. For SMEs that expect to earn less than £82,000 a year, it is simply not worth it to register. You will either have to add 20% to all of your costs or else remove 20% from your turnover.
Flat rate VAT represents an appealing alternative for SMEs that generate annual taxable revenue within the range of £82,000 to £150,000. Instead of painstakingly calculating the VAT your pay and receive, you can pay a fixed percentage.
While you will not be able to claim back tax on spending, the clear appeal of the flat rate VAT scheme’s fixed percentage is that you could cut VAT by anywhere from 5.5% to 9.5%. Once a part of the scheme, your business will not have to leave until it turns over more than £230,000 a year.
Claim Home Tax Deductions
A frightening number of small businesses and self-employed professionals are unaware that HMRC will afford you tax deductions when you work from home. A use of home claim will entitle you to claim back a deductible percentage of a range of different costs, including council tax, utilities, insurance, mortgage interest, and more (click here for the HMRC guide).
What you can claim will vary from case to case. For example, however, a room that represents a 5% floor size within your home, and is used exclusively for business purposes, will enable you to claim back 5% on all tax-deductible costs. Rooms with mixed usage will require a more complex approach to calculation, but will be worth it to save the money.
Take Advantage of Personal Tax Allowances
For a time, at least, families are often in an excellent position to minimise tax payments. From April 2015 onwards, UK personal tax allowance will rise from £10,000 to £10,600. You might be able to find roles within your business for family members, with each able to use their personal tax allowance to minimise costs. Student children could even work part-time jobs for you rather than another business.
As an example, business owners should consider getting a company car rather than paying for it with their personal bank balance. The rationale is that a company car can be considered as a benefit-in-kind and will enable greater tax savings. Please be aware, however, that you should notify HMRC from the outset, otherwise you could be charged heavily in your annual tax bill.
Find an Accountant You Trust
There are some excellent accountants in the UK who are extremely knowledgeable and will be able to help your cut tax costs. Do not just think of accountants as another cost to your business. A good accountant will understand the nature of your business and its finances, thus enabling them to figure out how to help you pay less tax. So long as you make a net saving, the accountant has absolutely been worth their fee.
Knowing everything from the wider world that relates to your business is simply impossible. Therefore, you need to question every bill that you might receive from government organisations and representatives.
For example, you might move into your first office and receive a bill for rates. In this instance, do not just pay the bill. Throughout the UK, there are office-size tiers that determine how much of a rates contribution that SMEs have to make. With a little research, you might be able to apply for complete relief.
Explore the Many Possibilities
UK-based SMEs have a wealth of opportunities to claim tax relief and incentives to boost their business – it’s just a matter of exploring the possibilities. Business rate relief was already mentioned as an example, but that is only the beginning.
For example, move to one of the UK’s 24 enterprise zones and your business could be eligible for incentives. Tax relief of 225% is available for SMEs that spend on research and development. Start-ups can encourage investment by offering tax relief to investors. Basically, there are multiple ways to cut business tax. Just look at the options to see what fits.
Disclaimer: Information in regard to tax treatment and basis of reliefs are dependent on current legislation. Individual circumstances are not guaranteed and may be subject to change. This is to be used as a guide only and we always recommend speaking to a qualified tax advisor. The Financial Conduct Authority do not regulate trusts.