We all want to pay less tax. But if you’re running a small business, the liabilities soon add up. You’ll pay income tax, national insurance contributions, corporation tax, and tax on dividends. You may even have to shell out for employee benefits, such as company cars and health insurance. Speak to one of our specialist advisers for tailored solutions to saving money in your business.
Here, we look at five simple ways you can save on your small business tax and keep more of your hard-earned cash:
1. Personal allowances
If you want to pay less tax, it’s important to know exactly what tax relief you’re entitled to. Investing your money wisely and making the most of your tax-free allowances can help you shave a big chunk off your annual tax bill. Here are a few tax-breaks you may be able to take advantage of:
Personal allowance. We each get a tax-free personal allowance of £12,500. However, high earners will lose £1 for every £2 they earn over £100,000. That means if your adjusted net income is more than £125,000, your personal tax-free allowance falls to zero.
Savings allowance. You’re also entitled to some tax-free income on any interest you accrue from savings. The current allowances are £1,000 for basic rate taxpayers and £500 for higher-rate taxpayers.
Individual Savings Account (ISA). You can invest up £20,000 a year in an ISA without incurring any capital gains tax, dividend tax or income tax. What’s more, any interest you earn from your ISA is completely tax-free.
Allowable expenses. If you’re running your own business, there are several costs you can claim as allowable expenses. Things like travel, heating and lighting your premises, and remunerating your staff are all tax-deductible.
Income from assets. If you’re a property developer or buy-to-let landlord, some of your earnings may come from capital gains. If so, you can take advantage of the capital gains tax-free allowance. As of April 2020, it stands at £12,300.
Speak to a personal accountant to find out the best way to save with your personal allowances.
2. Dividend income
One of the most tax-efficient ways to extract money from a company is through dividend payments. If you’re a small business owner or you have shares in a company, you can choose to take part of your annual income as a dividend. If a portion of your earnings comes from shares, you’ll qualify for a dividend allowance of £2,000. Depending on your tax bracket, you’ll also make savings on anything over and above that amount. Here’s how it works:
Each of us has a tax-free dividend income allowance of £2,000.
If you’re a basic rate taxpayer, you’ll pay 7.5% on any dividend income you accrue above your allowance.
For higher rate taxpayers that rises to 32.5%, and for additional rate taxpayers, 38.1%.
3. Pension contributions
Another way to reduce your tax bill is to pay more of your earnings into your pension pot. Each of us has an annual tax-free allowance on pension contributions of £40,000. That means you can accrue up to £40,000 in pension savings each year without paying a penny in tax. But there is a caveat. If your earnings exceed a certain threshold, you may see your annual allowance begin to shrink. Here’s what you need to know:
If you earn more than £200,000 a year and your adjusted income (your earnings plus your pension contributions) exceeds £240,000, you’ll begin to eat into your allowance.
For every £2 you earn over and above the threshold, you’ll lose £1 of your annual allowance.
The minimum tapered annual allowance is now just £4,000. So high earners could lose as much as £36,000 of their tax-free pension allowance.
4. Benefits in Kind
If you run a small business, Benefits in Kind (BiKs) are a great way to reward staff for their hard work, loyalty, and dedication. By offering benefits in place of a pay rise you could save yourself thousands of pounds in taxes every year.
BiKs can have benefits far beyond simple cost savings, too. Perks like free childcare and flexible working hours have been shown to improve employee morale, increase staff retention, and even help you attract a better quality of candidate to fill vacant roles. Here are a few tax-free benefits you can offer your employees:
Pension contributions
Childcare vouchers
Flexible working hours
Business mileage payments
Workplace parking
Cheap or free canteen meals
Bikes and cycling safety equipment
Electric cars and charging facilities
5. Hire an accountant
The tax landscape is shifting all the time, and in recent years there has been a raft of new rules and regulations. High earners and small business owners have been hit particularly hard, with changes to tax relief on pensions, benefits and income. By far the best thing you can do to cut your annual tax bill is to speak to an experienced accountant.
Services including a small business audit can help ensure your business is compliant with financial regulation. Accountants will also keep you abreast of any legislative changes, ensure you meet all the necessary compliance, and best of all, help you make the most of any tax breaks.