You want to make lots of money. You don’t want to pay lots of tax.
You know how to run your business. You didn’t swallow the latest tax guidelines from HMRC.
You want to minimise your tax legally. You don’t want to be on the wrong side of the law.
Sounds familiar? Of course it does. Whether you are just starting out and want to think through your tax saving plans from the outset, or if you’ve built a successful company and you’re sitting on an unexpected level of profits – you are not alone. 99% of entrepreneurs want to do what they can to lower the amount of tax they pay in a legal way.
The good news for you is that there are a surprisingly large number of ways that you can chip away at your tax liabilities. Not all of them will save you megabucks, but collectively they can make a real difference for you.
This article doesn’t constitute formal financial advice, but it can get you started. If you do want to take proper advice from a qualified accountant, let us know here.
And now, without further ado, 11 tax savings tips for your limited company.
1. Understand the Difference Between Tax Minimisation & Tax Evasion
Tax minimisation is the legal practice of reducing one’s tax liability. This can be done through a variety of means, such as investing in tax-efficient products or taking advantage of tax breaks and allowances.
Tax evasion, on the other hand, is the illegal practice of deliberately avoiding paying taxes. This can be done through a variety of means, such as hiding income from the tax authorities or failing to declare all of one’s income. Tax evasion is a criminal offence and can result in heavy fines or even imprisonment.
Differences Between Tax Avoidance and Tax Evasion
Tax minimisation is legal while tax evasion is not.
An example of tax minimisation might include investing in a pension plan. Pension plans are exempt from taxation, which means that any money invested in them will not be subject to income tax or capital gains tax. This can help to reduce one’s overall tax liability.
An example of tax evasion would be failing to declare all of one’s income on their taxes. This would involve deliberately underreporting one’s income in order to pay less in taxes. This is a criminal offence and can result in heavy fines or even imprisonment.
2. Use a Qualified Accountant
Understanding how to structure your taxes one the reasons to be using a fully qualified accountant.
It’s their job to understand the rules of the game and to proactively make suggestions based on your situation to help reduce your tax bill legally.
They can help you reduce your tax bill by ensuring that you are claiming all of the deductions and credits to which you are entitled. They can also help you structure your affairs in a way that minimises your tax liability. For example, an accountant can help you choose the most advantageous business structure for your company.
Good accountants help you plan for your taxes in a way that minimises the amount of tax you will owe. For example, an accountant can help you maximise the use of tax reliefs such as the Research & Development scheme.
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3. Set Up a Company Pension Scheme
A company pension scheme can help reduce UK taxes for SMEs by providing a tax-efficient way to save for retirement.
You can contribute company income to your pension pot before taxes are taken out. Your company will also get money back from the government as a tax break because employer contributions are considered an allowable business expense.
Pension contributions are one of the methods your limited company can get a tax break. This means that you do not have to pay as much money in taxes.
As the company director of your own limited company, you can contribute to your director’s pension as both the employer and an individual. It is possible to get tax relief on both contributions.
As a general rule, it’s more tax efficient for the company to make the contributions as you’ll save on corporation tax too.
4. Take Advantage of Capital Allowances
Capital allowances are tax reliefs that businesses can claim on certain types of expenditure. The main types of expenditure that qualify for capital allowances are plant and machinery, vehicles, and commercial property.
Basically, if you buy something that meets the criteria, then it can reduce your tax bill.
5. Use the Research & Development Tax Scheme
Research and Development (R&D) tax credits are a financial incentive designed to encourage companies to invest in innovation and new product development. In the UK, R&D tax credits are administered by HMRC and are available to companies of all sizes.
The basic principle behind R&D tax credits is that companies should be rewarded for investing in innovation, which is seen as a key driver of economic growth. The incentive takes the form of a reduction in the amount of corporation tax that a company has to pay on its profits.
The work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology. It cannot be an advance within a social science, like economics, or a theoretical field, such as pure maths.
6. Look at the Flat Rate VAT Scheme
This is a simplified way of paying VAT for small businesses.
With this scheme, businesses pay a fixed percentage of their annual turnover instead of completing extensive paperwork like with other VAT schemes.
With the Flat Rate Scheme, businesses keep the difference between the amount of VAT (value-added tax) paid to HMRC (Her Majesty’s Revenue and Customs) and the amount of VAT paid by customers.
Businesses that pay a flat rate usually cannot get VAT back on purchases (although there are some exceptions for capital assets worth over £2,000).
7. Don't Miss Deadlines
If you miss the deadline for filing your Self Assessment tax return, you may be charged a late filing penalty. The penalty is £100 if you file your return more than three months late, and increases the longer you delay filing. In addition to the late filing penalty, you will also be charged interest on any unpaid tax.
As well as being charged a late filing penalty, you will also have to pay HMRC interest on any unpaid tax. The interest rate will be added to your bill from the date that the tax was due until the date that it is paid.
If you owe HMRC money and do not pay by the deadline, you may be liable for additional penalties. These can include a surcharge on the amount owed, as well as further interest charges. If you continue to fail to pay what you owe, HMRC can take further action, which could ultimately result in bankruptcy. Although that’s a pretty severe scenario.
8. Make Use of Employee Benefits
Pension schemes are a type of long-term savings plan that allows employees to save money for their retirement. When an employee contributes to a pension scheme, they receive tax relief on their contributions. This means that the amount of money they contribute is reduced by the amount of income tax they would have paid on it. For example, if an employee is in the 20% income tax bracket, they would only pay 80p for every £1 they contribute to their pension scheme.
Other benefits might include:
- Company cars
- Health insurance
- Travel and entertainment expenses
- Childcare
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9. Remember to Claim Costs from Before you Incorporated
If you spent money setting your business up before you were trading, you can claim this back.
It includes things like:
- Computers
- Software
- Website costs
- Travel costs
- Other professional services
- Insurances
- Advertising
- Travel & Accommodation
Remember to keep a track of these, to make sure you get back what you’re owed!
10. Claim Business Mileage
There’s really no excuse not to track and claim back your business mileage.
A few years back, it used to be a bit fiddly, needing you to remember to write things down as and when you used your car for commercial use.
These days though, since you need to have bookkeeping software in place, many of them have a phone app that you can set to record your car journeys automatically.
All you need to do is flick back through them from time to time and mark which were personal and which were business.
It’s worth doing as you can claim back 45p a mile for the first 10,000 miles and this soon adds up.
11. Claim All Applicable Business Expenses
Make sure you’re claiming back all the eligible expenses you are entitled to.
You can claim back things such as:
- Professional services charges
- Bank charges
- Computer costs
- Workwear
- Rent
- Motoring expenses
- Insurance
- Postage
- Advertising
And many more! One of the reasons it makes sense to have a quality accountant is because they can advise you on the full range of expenses you can include so you don’t miss out.
Tax Saving Tips - Final Thought
So there you have it, from employee benefits, to expenses, to claiming back the money you spent before you incorporated, you’re now equipped to start driving down that tax bill and putting more of your hard-earned money in your own back pocket.
And if you want to get some expert advice, then get in touch and we’ll hook you up with a free consultation with a fully qualified chartered accountant.
We hope you enjoyed the article!