Everyone desires to minimize their tax payments. However, for small business owners, financial responsibilities can quickly accumulate. Apart from income tax, national insurance contributions, corporation tax, and tax on dividends, there may be additional expenses for employee benefits like company cars and health insurance. For personalized strategies to effectively save money in your business, consult one of our expert advisors for the best tax saving tips.
Tax Saving Tips for Small Businesses (UK)
In this blog, we will explore five straightforward methods to help you reduce your small business tax burden and retain a greater portion of your well-deserved earnings:
Consider Personal Tax-Free Allowances:
Maximizing your personal allowances is key to reducing your tax burden and optimizing your finances. By understanding the tax relief you’re eligible for and making smart investment choices, you can significantly lower your annual tax bill. Here are a few tax breaks that may be available to you:
- Personal allowance: Each individual is granted a tax-free personal allowance of £12,500. However, if your adjusted net income exceeds £100,000, this allowance decreases by £1 for every £2 earned, resulting in zero allowance for incomes above £125,000.
- Savings allowance: You’re entitled to tax-free income on the interest earned from your savings. The current allowances are £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers.
- Individual Savings Account (ISA): With an ISA, you can invest up to £20,000 annually without incurring capital gains tax, dividend tax, or income tax. Additionally, any interest earned from your ISA is completely tax-free.
- Allowable expenses: If you’re a business owner, there are various costs you can claim as allowable expenses, such as travel expenses, premises-related expenditures (e.g., heating and lighting), and staff remuneration. These deductions can help lower your taxable income.
- Income from assets: Property developers and buy-to-let landlords may earn income through capital gains. Utilizing the capital gains tax-free allowance can be advantageous in such cases. As of April 2020, the allowance stands at £12,300.
For personalized guidance on maximizing your personal allowances and finding the most effective tax-saving strategies, it’s recommended to consult with a personal accountant. They can provide tailored advice based on your specific circumstances and help you make the most of available opportunities.
Concentrate Dividend Income:
Dividend payments offer a highly tax-efficient method for withdrawing funds from a company. Whether you’re a small business owner or a shareholder, opting for dividends allows you to receive a portion of your annual income. If your earnings include shares, you can take advantage of the dividend allowance, currently set at £2,000. Additionally, depending on your tax bracket, you can realize significant savings on any amount exceeding this threshold. Here’s a breakdown of how it operates:
- Tax-free dividend income allowance: Each individual benefits from a tax-free dividend income allowance of £2,000.
- Basic rate taxpayers: If you fall within the basic rate tax bracket, any dividend income beyond your allowance will be subject to a 7.5% tax rate.
- Higher rate taxpayers: For individuals classified as higher rate taxpayers, the tax rate on dividend income above the allowance increases to 32.5%.
- Additional rate taxpayers: Individuals falling into the additional rate tax bracket face a tax rate of 38.1% on dividend income exceeding the £2,000 allowance.
By understanding these rates and thresholds, you can make informed decisions regarding dividend payments, optimizing your tax savings. It’s always prudent to consult with a tax professional to ensure compliance with relevant regulations and to devise the most tax-efficient strategy for your specific circumstances.
Rewarding Pension Plans:
Boosting your pension contributions is another effective method to reduce your tax liability. Each individual benefits from an annual tax-free allowance of £40,000 on pension contributions. This means you can accumulate up to £40,000 in pension savings each year without incurring any tax. However, there is an important limitation to consider. If your earnings surpass a specific threshold, your annual allowance may start to diminish. Here’s what you should be aware of:
- Threshold for allowance reduction: If your annual income exceeds £200,000 and your adjusted income (including pension contributions) goes beyond £240,000, your allowance will begin to decrease.
- Reduction rate: For every £2 earned above the threshold, £1 will be deducted from your annual allowance.
- Minimum tapered annual allowance: The lowest level at which the annual allowance can taper down is now set at £4,000. This means high earners could potentially lose up to £36,000 of their tax-free pension allowance.
By understanding these thresholds and reduction rates, you can effectively plan your pension contributions to optimize your tax savings. It is advisable to consult with a financial advisor or pension specialist who can guide you in making informed decisions based on your individual circumstances.
Different Benefits in Kind (BiKs):
For small business owners, Benefits in Kind (BiKs) present an excellent opportunity to recognize and appreciate the hard work, loyalty, and dedication of your staff. By providing benefits instead of a traditional pay increase, you can potentially save substantial amounts in taxes annually.
However, the advantages of BiKs extend well beyond mere cost savings. Offering perks such as complimentary childcare or flexible working hours can have a profound impact on employee morale, enhance staff retention rates, and even attract high-caliber candidates for open positions. Here are some tax-free benefits you can consider offering to your valued employees:
- Childcare vouchers
- Pension contributions
- Cheap or free canteen meals
- Business mileage payments
- Bikes and cycling safety equipment
- Flexible working hours
- Workplace parking
- Electric cars and charging facilities
For More Tax Saving Tips in the UK, Contact Affinity Associates
The tax landscape is constantly evolving, with a multitude of new rules and regulations emerging in recent years. This has significantly impacted high earners and small business owners, particularly regarding changes to tax relief on pensions, benefits, and income. To effectively reduce your annual tax bill, the most prudent step you can take is to consult with an experienced accountant at Affinity Associates.
We are among the best accounting services providers in the UK with years of experience and teams of experienced tax and financial experts. If you are a small business and want to save on tax, then contact Affinity Associates today for more best tax saving tips. You can also call us at +44 20 8903 2077.