Top tax saving tips for small businesses

  1. When setting up as a sole trader, you can claim against your profits for items used in your business even if they were purchased prior to commencement of trade.
  2. A director of a limited company can withdraw a total of £45,000 during 2016/2017 without having to pay any additonal income tax or national insurance.
  3. The Annual Investment allowance at 100% is £200,000 p.a. from 1 January 2016. It is essential to plan purchases carefully to maximise the relief available, particularly where the accounting year end spans the date of the change.
  4. Consider your method of drawings from the business. If a limited company, paying a small salary up to the personal allowance and the balance as dividends is normally the most efficient method, however this is not always the case.
  5. Put any mobile phone you have in the business name and all costs of the phone are deductible (you do not have to split business vs non-business calls). Only one phone per employee/director.
  6. In most cases it is best to run your own vehicle personally and claim milage using HMRC authorised milage rates, where you trade via a limited company this will avoid large taxation charges on the use of company cars in most cases.
  7. If you work from home you will be able to claim a deduction to cover part of your home running costs. HMRC allow (a modest) £4/week flat rate without requiring any evidence. If you spend a significant amount of time working from home then it is likely you will be able to claim more using the “appointment method”. Please contact us for futher information if you would like help with this.
  8. Married couples/civil partners should ensure that their finances are arranged to utilise each personal allowance £11,000 basic for 2016/17 and lower rate tax bands (£32,000 for 2016/2017). It might be sensible to transfer income producing assets to a spouse to take advantage of their lower taxable income.
  9. Make contributions into a pension scheme. Pension contributions tend to be deductible expenses for the company, and suffer no immediate tax charge on the individual. Where an individual’s adjusted net income for 2016/2017 is more than £100,000, their personal allowance will be reduced by £1 for each £2 of excess. Consider making individual pension contributions to preserve personal allowances. Individuals could save £4,400 in 2016/2017 at 40 per cent, or more if relief is available at 45 per cent. This is because adjusted net income is reduced by individual pension contributions. However, the impact of pension anti-forestalling rules and the reduced annual allowance needs to be borne in mind. It may therefore be advantageous to transfer income-producing investments to a spouse.
  10. Use a salary sacrifice scheme to pay for employees childcare costs of up to £243 per month tax free. Childcare voucher schemes are tax free for the employee and the business operating the schemes incur no Employer’s National Insurance. For higher rate taxpayers joining schemes after 6 April 2011 the level of the tax exemptions may be limited but this will be determined by a “basic earnings assessment” carried out by the employer.
  11. Capital Gains Tax – you each have an exemption for Capital Gains (£11,100 for 2016/17). It makes sense to use this if you can. If you intend selling assets, it may be worth transferring them into joint names or spreading the disposal over 2 years. The rate at which Capital Gains Tax is payable will depend on a number of factors but broadly basic rate tax payers will pay 10% and higher rate taxpayers will pay 20%. Please note that for disposals of interest in residential properties, the rates are 18% for basic rate taxpayers and 28% for high rate taxpayers. In some circumstances the capital gains tax rate can be reduced to as little as 10%. With the capital gains tax rates significantly lower than the 45% top band of income tax there are a number of planning opportunities.
  12. Where you work for only one client or a number of clients on short term engagements you may have to consider the impact of IR35. IR35 was legislation introduced to ensure that there was no avoidance of tax by the use of limited companies. Broadly where the relationship between the worker and client would have been one of employment had the limited company not have been imposed between the worker and the client then IR35 could apply. This would mean that there would be significant extra national insurance charges etc. imposed on the worker. Factors such as the use of a substitute, holiday pay and mutualilty of obligation would be some of the relevant factors used to ascertain whether the worker comes within IR35. Please contact us to discuss if you think that this may be relevant to you.
  13. Automatic penalties are now imposed if you do not file your Self Assessment Tax Return on time. Do not forget there is an automatic £100 fine if you do not file your return by 31 January following the end of the tax year (by 31 October if you are filing paper returns). Further daily penalties mean that a tax return that is over 6 months late costs cover £1,300.