This usually happens because other activities, such as releasing a new product to market or getting new clients, always take priority for many start-ups and new business owners. There are also many cases in which professionals starting their own business don’t have the required skills or find it difficult to juggle with the many aspects of running a business on their own, such as sales, invoicing and chasing payments, IT maintenance, filing tax returns and keeping on top of statutory obligations. Considering all this, there is no surprise that almost half of small businesses in the UK worry about applying tax rules incorrectly, according to a February 2013 research from the Office for Tax Simplification (OTS).
The good news is, no matter how dull or complicated they might seem, tax returns are not that difficult to understand. Here is some key tax advice to take into consideration in order to properly manage your tax obligations.
Tax planning is essential
Efficient tax planning is vital for keeping your tax bill to a minimum, allowing your business to use the maximum of cash flow available to grow. Planning your tax liability is not some complex scientific process, but rather a way to be aware of the different tax obligations you have and know your options, depending on where you want to take your small business in the future. The key is finding the right balance between corporation, shareholder (owner) and employee taxation.
A tax efficient business structure
The structure you choose when setting-up your small business has consequences on your tax liability as a business owner. As an example, the higher income tax rate for self-employed business owners is set at 40% in 2013-14, with an additional rate of 45% for earnings exceeding the £150,000 threshold, while main corporation tax rates for limited companies is set at 21% for 2014. Depending on the net profit you are predicting for your small business, it is usually more tax efficient to operate as a limited company rather than in a partnership or as a sole trader.
The most tax efficient way to pay yourself
It is a commonly asked question among small business owners which of the two is the most tax-efficient way of releasing cash from their business: dividends or payments under the form of salary. In terms of both personal and company tax liability, dividends are always more tax efficient than salaries, no matter how much salaries would reduce your company’s corporation tax. On the other hand, salaries do have the advantage of providing national insurance contribution which give entitlement to a state pension and might be preferred by some business owners for quicker access to profits.
In most cases, a mix of low-salary (limited to the tax-free personal allowance of £9,440) and dividends proves to offer significant savings compared with an all-salaries scenario (up to 15% in tax savings, taking into account both personal and company taxation). This way you maintain benefits of both systems, while ensuring your business has enough cash flow to develop throughout the year.
Make the most out of tax deductions and allowances
It is as simple as that: the more tax deductible expenses your business has, the less corporation tax you pay. In order for tax deductions to apply, expenses need to be made exclusively in the course of business and recorded properly in your books. Here we can include pension contributions, travel expenses and mileage, telephone expenses and office equipment purchases, use of home as office, subscriptions to professional publications, journals and training.
Another way to look at reducing your tax bill is offering tax-free benefits to your employees, instead of offering increased salaries as incentives. Again, pension contributions, mobile phones, travel expenses and eye tests for your employees are completely tax deductible. Under certain conditions, you can also provide refreshments in the office, meal tickets, childcare vouchers or annual company parties with certain tax reliefs.
Take advice from a professional tax accountant
If you have any difficulty in calculating your tax liability or are in need of more technical tax advice, you can always go directly to the HMRC, ask your accountant or find a tax consultant that can answer all your tax-related questions. Tax accountants specializing in working with small businesses provide valuable tax advice in the sector and are also in a position to keep you up to date with the latest tax legislation and help you with your tax administration.
There is no need to struggle with your tax returns all by yourself.