Best Tax-Saving Tips for Small Businesses in the UK

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As a small business owner in the UK, managing your finances can be challenging. On top of running day-to-day operations, you also have to deal with tax obligations. However, with proper planning and knowledge about tax-saving strategies, you can reduce your tax burden and keep more money in your pocket. Apart from increasing your profits, tax-saving tips can also free up cash flow to reinvest in your business and help it grow.

In this blog, we will discuss the best tax-saving tips for small businesses in the UK to help you minimize your tax bill and maximize your business’s financial health.

What taxes does my business pay?

This is the most fundamental question that small business owners need to know the answer to. In the UK, businesses are subject to various types of taxes, including income tax, corporation tax, and value-added tax (VAT). Other taxes, such as National Insurance contributions and business rates, also apply depending on your business type and size.
  • Income Tax: Sole traders and partners in a partnership pay income tax on their business profits. The rate of income tax depends on your total taxable income, including any non-business-related earnings.
  • Corporation Tax: Limited companies are liable for corporation tax on their profits. The current corporation tax rate in the UK is 19%.
  • VAT: If your business has a turnover of more than £85,000 in a 12-month period, you are required to register for VAT and charge your customers accordingly.
  • National Insurance Contributions (NICs): Business owners with employees need to pay NICs, which consist of Class 1 NICs for employees and Class 2 and 4 NICs for self-employed individuals.
  • Business Rates: If you own or lease a business property in the UK, you need to pay business rates. The amount depends on the rateable value of the property and its location.

Tax Saving Tips for Small Businesses (UK)

Now that you know the types of taxes your business is subject to, it’s time to explore some tax-saving strategies. These are perfectly legal ways to reduce your tax liability and keep more money in your business.

Keep Accurate Records

Maintaining accurate records is crucial for any small business owner. It not only helps with managing day-to-day operations but also plays a vital role in claiming tax deductions. Make sure to keep receipts, invoices, and bank statements organized and up-to-date to support your tax claims.

Claim All Allowable Expenses

One of the most effective ways to reduce your taxable profits is by claiming all allowable business expenses. These include office rent, utility bills, employee salaries, marketing costs, and professional fees. Make sure to keep records of all business-related expenses to support your claims.

Take Advantage of Tax Reliefs and Allowancess

In addition to claiming allowable expenses, there are various tax reliefs and allowances available for small businesses in the UK. For example, the annual investment allowance allows you to claim a 100% deduction on qualifying capital expenditures up to a certain limit. Other reliefs, such as research and development tax credits, can also help reduce your tax liability.

Consider Incorporation

If you are currently operating as a sole trader or in a partnership, it may be worth considering incorporating your business into a limited company. By doing so, you will become subject to corporation tax instead of income tax, which can result in significant tax savings.

Make Use of Tax-Free Benefits

As an employer, you can offer your employees tax-free benefits such as childcare vouchers, cycle-to-work schemes, and pensions. These not only provide valuable perks for your employees but also reduce your business’s National Insurance contributions.

Plan Your Capital Gains

If you plan to dispose of any assets that have increased in value, such as property or stocks, it’s essential to plan your capital gains carefully. By taking advantage of tax reliefs and exemptions, you can reduce the amount of capital gains tax you owe.

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Claimable expenses for small businesses in the UK

Small businesses in the UK can claim various expenses to reduce their taxable income and, ultimately, their tax liability. Claimable expenses can vary based on the nature of the business and the specific circumstances, but here are some common expenses that small businesses in the UK can typically claim:

Office Expenses:

  • Rent and utilities for business premises.
  • Office supplies and stationery.

Employee Costs:

  • Salaries, wages, and bonuses.
  • Employer National Insurance contributions.
  • Pension contributions for employees.

Travel and Accommodation:

  • Travel expenses, such as fuel and public transport costs.
  • Accommodation costs for business trips.

Marketing and Advertising:

  • Costs related to advertising and marketing your business.

Professional Fees:

  • Fees for accountants, solicitors, and other professional services.
  • Membership fees for professional organizations.

Insurance:

  • Business insurance, such as public liability or professional indemnity insurance.

Telephone and Internet:

  • Costs related to business phone lines and internet services.

Repairs and Maintenance:

  • Costs for repairing and maintaining business equipment or premises.

Training and Development:

  • Expenses related to training and development of employees.

Cost of Goods Sold (COGS):

  • The cost of purchasing or manufacturing the goods that your business sells.

Home Office Expenses:

  • If you work from home, you may be able to claim a portion of your household expenses, such as rent, utilities, and council tax, that are directly related to your business use.

Mileage:

  • If you use your personal vehicle for business purposes, you can claim mileage expenses.

Entertainment and Meals:

  • Business-related entertainment and meal expenses are subject to certain restrictions.

Bank Charges and Interest:

  • Bank charges and interest on business loans or overdrafts.

Bad Debts:

  • Debts that are unlikely to be recovered can be written off as expenses.

Capital Allowances:

  • Tax relief on certain capital assets, such as equipment and vehicles.

Research and Development (R&D) Costs:

  • Expenses related to R&D activities may be eligible for tax relief.

VAT (Value Added Tax):

  • VAT paid on eligible business expenses can often be reclaimed, depending on your VAT registration status.

Health and Safety Costs:

  • Expenses for maintaining health and safety in the workplace.

Charitable Donations:

  • Donations made to registered charities.

It’s important to keep accurate records of all your expenses, including receipts and invoices, to support your claims. Small businesses should also be aware of specific rules and limitations for each expense category and seek professional advice or consult with an accountant to ensure compliance with tax laws and regulations. 

Tax laws and regulations can change, so it’s essential to stay updated with the latest information from HM Revenue and Customs (HMRC) 

Tips for Utilizing Flat Rate VAT Scheme

The Flat Rate VAT scheme is an optional method of accounting for VAT that can benefit small businesses in the UK. Under this scheme, instead of claiming input tax on business expenses, you pay a fixed percentage of your gross turnover to HM Revenue & Customs (HMRC). This simplifies the VAT process and can result in lower VAT payments if your business has a low amount of expenses. Here are some tips for utilizing the Flat Rate VAT scheme:
  • Choose the right VAT flat rate percentage for your business type
  • Keep track of your gross turnover and report it accurately to HMRC
  • Be aware of the conditions under which you can leave or are required to leave the scheme

Tax-saving hacks for e-commerce businesses in the UK

E-commerce businesses in the UK have unique tax-saving opportunities due to their online nature. With a few simple hacks, you can save money on taxes and improve your business’s bottom line.
  • Take advantage of the VAT Mini One Stop Shop (MOSS) for selling digital services to customers in other EU countries
  • Consider overseas expansion to take advantage of lower tax rates in some countries
  • Use tax-free allowances and reliefs available for e-commerce businesses, such as the Annual Investment Allowance
  • Keep accurate records of your sales and expenses to claim all allowable deductions

How Small Business Owners Can Reduce Their National Insurance Contributions

As mentioned earlier, small business owners are subject to paying National Insurance Contributions (NICs) for themselves and their employees. However, there are several ways in which you can reduce your NICs and keep more money in your business:

First and foremost, make use of any relief or exemption that you are eligible for, such as the Employment Allowance, which reduces your Class 1 NICs by up to £4,000 per year. Additionally, consider employing family members or taking dividends instead of a salary to reduce your overall National Insurance liability.

Secondly, keep a close eye on your employees’ salaries. If an employee’s salary falls below the Primary Threshold (£9,568 for the tax year 2021-22), you do not need to pay NICs for them. Consider restructuring salaries and bonuses to take advantage of this threshold.

Furthermore, the Flat Rate VAT scheme, as mentioned earlier, can also result in lower NICs for small businesses. By paying a fixed percentage of your gross turnover towards VAT, you reduce your profit and, therefore, your NIC’s liability.

VAT Accounting and Boosting the Flow of Cash in Your Business

When it comes to running a small business in the UK, one of the most important aspects is managing your finances and optimizing tax savings. Value Added Tax (VAT) is an indirect tax that is charged on goods and services at various stages of production and distribution. It’s essential for businesses to understand VAT accounting as it can significantly impact their cash flow.

Understanding VAT Registration

If your business’s taxable turnover exceeds £85,000 in a 12-month period, you must register for VAT. However, even if you are not required to register, it may be beneficial to do so voluntarily. This allows you to claim back VAT on expenses and potentially increase your cash flow.

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Using the Cash Accounting Scheme

The Cash Accounting Scheme is an optional method of accounting for VAT that can benefit small businesses with a turnover of £1.35 million or less per year. Under this scheme, you only need to account for and pay VAT when the customer pays you, rather than when you issue an invoice. This can help improve your cash flow by delaying the payment of VAT until you have received the money from your customers.

However, it’s important to note that you can only claim input VAT once you have paid the supplier.

Conclusion

As a small business owner in the UK, there are many tax-saving opportunities available to help reduce your overall tax liability. By understanding and utilizing strategies such as claiming allowable expenses, utilizing schemes like Flat Rate VAT and Cash Accounting, and taking advantage of tax reliefs and exemptions, you can save money on taxes, improve your cash flow, and ultimately grow your business.

It’s crucial to stay up-to-date with changing tax laws and consult with a professional accountant or tax advisor to ensure you are maximizing your tax savings while remaining compliant with HMRC regulations.

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