When the word tax is mentioned, everyone who’s not an accountant cringes a little inside, but the matter of fact is, your tax liability is something you can’t escape from and sooner or later, you need to face it head on and figure our a way to manage it.
Yes, tax liability can be difficult to wrap one’s head around, especially when trying to determine the legalties but there are steps you can take to correctly manage the amount of tax you pay whilst also remaining compliant.
Here we offer seven tips to help you manage your tax liability, focussing particularly on corporate tax liability, with some reference to self-employment where necessary.
1 – Correctly Account for All Business Expenses
We all know running a business costs money, but it’s not just the business side of things that incurs costs. Simple things such as travelling to meetings, providing lunch for the team and investing in new stationery or equipment are all overheads which build up on a monthly basis but can slip through the net on your personal statement if you use your own card whilst out and about.
All of these business expenses can be tax-deductible – providing they are used solely for business use and the correct records are kept to claim on them – so make sure you correctly account for them.
2 – Optimise Your Salary Structure
For business owners, the key to saving on tax is paying yourself a salary in two parts. Part of your salary should be paid through PAYE with tax being paid only when you break the threshold of £12,570, and the rest should be paid as dividends.
The reason this is effective in reducing your tax liability is that dividends are only taxed at 19%, where as income tax increases the larger your salary is.
3 – Giving is Receiving (i.e. Charitable donations)
Companies are eligible for tax relief for qualifying donations made to charities. The donations are deductible from the company’s profits in the same tax year as the donation was made. This offsets the amount a company pays through Corporation Tax.
There’s a huge focus on businesses giving back, so making the decision to donate to charity is recommended regardless of the implication it has on your tax liability.
4 – Pension Contributions
An employer can give decide on the size of the contribution they make to their registered pension scheme, regardless of the related salary. For tax relief to be granted on an employer’s contribution, it must be deducted as an expense when calculating the profits, which will therefore result in the company’s profit being reduced, as such lessening the corporation tax.
NB: An employer pension contribution will not be tax deductible if the contributions were made for non-business purposes.
5 – Review your VAT payments
Providing your company turnover does not exceed £150,000 per year, and you work for clients who are also VAT registered, applying for the VAT flat rate scheme could be beneficial for cutting costs.
Using the Flat Rate Scheme for VAT means you add up all of your sales, including any VAT you’ve charged to your customers, applying a fixed percentage to those sales. The flat rate can be between 6.5% and 14.5% depending on your business and industry. For the first year on the scheme, you also receive a 1% discount on your rates.
However, you cannot claim back the majority of the VAT on purchased goods and expenses for your business. This is except for capital asset purchases which are over £2,000 including VAT.
6 – Make Use of the Annual Investment Allowance
The Annual Investment Allowance (AIA) allows you to claim 100% tax relief for capital expenditure on plant and machinery. Qualifying expenditure applies from £200,000 to £1,000,000.
Assets that qualify for AIA fall into the categories as listed:
- Office equipment, including PC hardware, software and furniture
- Integral features of buildings (e.g. lifts and escalators)
- Fixtures including air conditioning or fitted kitchens and bathrooms
- Agricultural machinery
- Machines for business purposes
- Lorries or Vans for distinct business and moving purposes.
The AIA spending limit was temporarily increased to £1,00,000 between 1st January 2019 and 31st December 2021, it is assumed that it will go back to £200,000 after this period. Businesses therefore have just under a month to use the AIA scheme to maximum capacity before the temporary limit ends.
7 – Use Your Accountant Wisely
Making the most out of your accountant is key – especially when it comes to tax liability. Not only do you want to ensure you are reducing your costs, but you need to make sure you’re doing it compliantly.
The difficulty with looking at tax liability is there are a lot of tips, tricks and schemes to help you save on tax but questions and queries around eligibility make it hard to know if you can take advantage of the suggestions.
Always take your accountants advice. It’s not a matter of just saving the most – but a matter of being on the right side of the law. Your accountant is well prepared to make sure you’re running your business cost-efficiently and luckily for you, they are experts at ensuring you remain compliant.
We’re not limited to 7…
These are just seven of the ways to help manage your tax liability, but you are not limited to only these seven tips. There are always new schemes that you and your business can take advantage of, that is why it’s important to stay up to date with all the changes.
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