Tax planning is a critical aspect of running any successful business, large or small. Tax is a major cost, so thinking strategically about how to minimise your liabilities while staying compliant with tax laws can make a big difference to your bottom line.
Here are four essential things that every small business owner should know about tax planning.
The structure of your business matters
At what point should you switch from being a sole proprietor to a limited company (LC)? There are different reasons to make this switch, including the limited liability protection you get as a business owner from things like personal responsibility for debts and law suits.
Another reason is to reduce your tax liability. As a sole proprietor, all your earnings are taxed as Income Tax via self-assessment. As an limited company, you fall under the Corporation Tax regime.
The rule of thumb is that the more your business earns, the more tax efficient it is to be an LC. But it’s not entirely straightforward. The basic rates of both Income Tax and Corporation Tax, for example, are both very similar at the moment (20% and 19% respectively, up to roughly £50,000). With Income Tax, you have to pay NIC contributions as well. But as the director of an LC, you will have to pay Income Tax and NIC on any salary or dividend you pay yourself over and above the personal allowance (£12,570).
Over the basic rate ceiling of £50,271, however, Income Tax doubles to 40%, while Corporation Tax gradually increases up to a maximum of 25% (on revenue over £250,000). That’s when switching to an LC becomes more attractive. But the key takeaway is that the structure of your business makes a difference, and it’s worth getting expert advice on how to organise your plans for growth in the most tax-efficient way.
Take full advantage of all tax deductions and credits you are entitled to
Tax deductions and credits are there for a reason. For small businesses, most available tax breaks are there either to help control business costs and therefore encourage growth, or to encourage spending in certain areas (such as capital spending on equipment, or research and development). Tax deductions reduce your taxable income, while credits directly reduce the amount of taxes you owe. It’s well worth researching what you are entitled to, or taking advice from an accountant.
Be meticulous in your record-keeping
Again, it’s essential for all businesses, big and small, to maintain robust, organised financial records. These should include income statements, expense receipts, payroll records, and asset depreciation schedules. For small businesses, maintaining accurate records can be challenging if you don’t employ an accountant. There are compliance reasons why you should. But accurate record-keeping is also the foundation of successful tax planning. If you want to take full advantage of all the deductions and credit you are entitled to, for example, you need to have the records to demonstrate your entitlement.
Hiring an accountant is the best way to be efficient with your taxes
For a small business, hiring an accountant feels like yet another business expense you can ill afford. But if you really want to achieve some solid tax savings through efficient planning, it’s a sound investment. From advising you on the most tax efficient structure for your business to informing you about all the deductions and credits you are entitled to, and through to keeping those all important records and making the right submissions, having an accountant managing your taxes for you can save your business a lot of money in the long term.
