If you want to stay on the right side of HMRC, which we strongly advise, as a small business owner or sole trader you have to pay tax. However, there is no reason to pay more tax than you need to. You can do various things to minimise your tax bill but, if you run a profitable business, there will always be tax to pay. And though tax avoidance is smart business practice, tax evasion is a crime and knowing the difference is important.
Tax evasion is the illegal evasion of taxes by individuals, corporations, and trusts, whereas tax avoidance is the legal use of tax laws to reduce your or your company’s tax burden.
As someone who is self-employed or running a small business, there are many ways in which you can minimise the amount of tax you need to pay, without straying outside of the boundaries of the law. Below we have highlighted 10 things you can do to reduce your tax bill…
1. Know your industry
Keeping on top of your industry knowledge is not just important for improving the knowledge of your trade. Follow trade bodies and associations, read their newsletters. A lot of industries benefit from special dispensations and allowances approved by HMRC. Make sure you know what they are, and when new ones are brought in so that you can make use of them.
2. Select the correct VAT scheme
VAT is something which confuses many business owners, and it is easy to end up paying more than necessary. For the right business, the Flat Rate VAT scheme can be an unexpected source of profit. In the basic sense the scheme has you pay a single flat rate of VAT on your turnover. HMRC has a list of flat rates for different industries. You pick the one most applicable for your specific business and industry and apply the percentage to your quarter gross turnover.
Though you can no longer reclaim VAT on most of your purchases, you are permitted to retain the difference between what you charge your customers. So, if your flat rate is 15% and you are charging your customers 20% VAT then 5% of that is yours to keep, simple!
P.S HMRC even offer an extra 1% off in your first year when signing up. Yes, that’s right, HMRC is handing out discounts!
To join the VAT flat rate scheme, your business must:
If you’re unsure about whether your business qualifies for this scheme, get in touch and we’d be happy to explain it in more detail.
3. Don’t just work from home, make your home work for your business!
HMRC offer tax relief on a variety of work-related spends. Figuring out which expenses you could claim for is the first step in lowering your tax bill. If you are self-employed and work from home you may be eligible to claim expenses on the costs of running your home, as it is your office it can fall into your operating costs. Things you might be able to claim for are, but not limited to:
- Council tax
- Mortgage interest
- Heat and light
- Internet and phone costs
- Household repairs and maintenance
There are many ways to divide your costs, for example, one way is to divide by the number of rooms you use for business or the amount of time that you spend working from home. If you have one or more rooms in your home that are dedicated to working your expenses could equal higher “Use of Home” claims.
You can use https://www.gov.uk/simpler-income-tax-simplified-expenses/working-from-home for a simple way to calculate your allowable expenses using a flat rate which is based on the hours you work from home every month.
Currently, the standard Personal Allowance is £12,500 of tax-free income. As it is a personal allowance that means anyone is entitled to it. Look at your family, is there anyone able to carry out duties within the business? By employing family members for minor tasks, you effectively double up on your personal allowance for every family member added. This is known as income shifting.
5. Be efficient in how you pay yourself
When you are a small business owner, paying yourself is not necessarily as simple as transferring some money into your account. There are many ways in which you can receive funds, and more than one can be used simultaneously. Depending on your business one may be better suited than the other.
It may be worth looking into incorporating your business if you haven’t already. This would mean setting your business up as a limited company which results in you being recognised as a director. As a director you can withdraw part of your earnings in the form of dividends, the key here is that the first £2000 of dividends are tax-free, and your tax rates after are much lower. The basic rate tax is only 7.5% and additional and higher rate is 32.5% and 38.1%. This can make a huge difference.
6. Using a company car
If you often use your car as part of your work, it is likely more tax-efficient to register it as a company vehicle. Additionally, you can lower your tax rate further by choosing a low-emissions car. These are taxed at a lower percentage than cars with higher CO2 ratings.
7. Be organised
In order to claim all those valuable expenses, you need to be able to provide proof of transaction. Many business owners miss out because they don’t keep good enough records and so their claims are denied. Make sure you keep a detailed record of your expenses including any receipts and invoices. This will ensure that you won’t be denied by HMRC when it comes to claiming them.
8. Put money aside throughout the year
When you are self-employed you no longer have the tax deducted from your monthly salary, instead, you pay a lump sum of tax. It is important to remember to set aside money every month as this lump sum could build to a considerable amount, which could be a challenge to pay in one go Effectively you should be paying it in advance. Think of it like this, the money isn’t yours anyway, it belongs to HMRC, you are just keeping it safe until they come to collect it.
9. Annual losses
Many business owners are unaware that if you make a loss in one tax year, you can carry it forward into the next and offset it against a profitable year. This then decreases your total taxable income for that tax year. By doing this you have the chance to increase your non-taxable income in order to make up for the loss in the previous year.
10. Don’t do it alone
Though we may be slightly biased when suggesting this, we think getting an accountant can be one of the best ways to lower your tax bill. The simple reason is, we are accountants and that’s what we are trained to do.
Regulations and legislation changes all the time and keeping up with this is a full time job. We can save you from this job, so that you can put your valuable time back into your business, focusing on what you’re great at.
As you can see, there are numerous things you can do to keep you tax bill to a minimum, and it’s an ongoing process. To get the most out of your business you should try to do as many of the above as possible. Even though it may seem that some will only save you a small amount in isolation, it all adds up. Contact us on to see how we can help you shave money off your next tax bill.