Tax planning tips you need to know as a small business

/ Posted By - Bradleys Accountants / Categories - Advice for Small Businesses, Tax Planning

As a small business owner, doing your taxes is probably one of your least preferred activities. At the same time, it needs to be done accurately because improper tax filing could attract the HMRC’s ire and increase your tax bill beyond what is necessary.

Luckily, several tax planning tips can reduce your annual tax burden and help you plan your cash better. In this article, we discuss our favourite tax planning advice. Let us answer some critical questions first:

How much do I have to earn before I pay taxes?

The income tax threshold is £12,570 and this is scheduled to remain at this rate until April 2028.

How is my income tax calculated?

If you operate as a sole trader, here are the tax bands you are subject to:

  • Income up to £12,570 – no tax
  • Income between £12,571 and £50,271 – 20%
  • Income between £50,271 and £150,000 (2022-23) and £50,271 and £125,140 (2023-24) – 40%
  • Net profit above £150,000 (2022-23) and above £125,140 (2023-24)- 45%

In addition, if your profits are £6,515 and above, you will be subject to Class 2 or Class 4 National Insurance. Even if you are making less profit, we recommend making some voluntary payments (if you can afford it) so that there are no gaps in your National Insurance record.

What are the corporation tax rates?

Running a business normally means you are also liable to pay corporation tax rates on the profits your business earns and these too are due to a change.

  • The financial year 2022-23, corporation tax on profits is 19%
  • From the financial year 2023-25, corporation tax changes as follows:
    • Up to £50,000 profit threshold (small profits rate) – 19%
    • Above £250,000 profit threshold – 25%
    • Profit within these two figures is charged on a tapered rate and your accountant will be able to advise you on this.

What should my tax planning strategy do for me?

As a small business, your tax planning strategy should help you:

  • Reduce your tax rate
  • Reduce your taxable income and business profit amount
  • Control the time when you pay tax
  • Avoid common errors when filing taxes
  • Claim any tax credits you are eligible for

Subscribe to our newsletter

    Subscribe to our newsletter

    What are the best tax planning tips to follow?

    Here are some reliable ways for you to optimise your tax bill as a small business:

    1. Choose the right business structure

    First, you need to determine which business structure – and, therefore, which tax structure – is most appropriate. Sole traders and partners in a traditional partnership pay income tax on business profit. In contrast, a limited company pays corporation tax on profits in addition to the personal tax liability of the company director.

    If you are a family-owned business, the right tax planning tips can help ensure the company structure is commercially advantageous and allows for effective succession planning while maximising the use of available tax reliefs.

    2. Check what reliefs you are eligible for

    Talk to your accountant about whether you can apply for the following:

    • Capital allowances (you can get a tax deduction of up to 100% of the allowable expenditure)
    • Business property relief (related to inheritance tax)
    • Entrepreneurs’ relief (you can benefit from just a 10% tax on the gains on qualifying business assets)
    • R&D claims (up to 125% on qualifying costs)
    • Patent box (profits from the patent interests could be taxed at just 10%

    3. Claim back all allowable expenses

    Your claimable expenses as a sole trader include part of the running costs of your business, including the costs of office premises, a home office and a vehicle. Specifically, if you mostly work from home, there is a flat rate allowance that you can claim for your heat, light and power. Slabs depend on how many hours you worked from home in a month:

    • 25-50 hours – £10
    • 51-100 hours – £18
    • 101 or more hours – £26

    Ask your accountant about other claims you might be entitled to make, such as the cost of protective clothing if you are a self-employed electrician or percentages towards utility bills.

    4. Leverage payroll and benefits

    There are a number of ways you can save on tax through pension contributions, share allowances and benefits that your employees get. Small Self-Administered Pension Schemes (SSAS) and Self-Invested Personal Pensions (SIPP), for instance, are free of income tax and national insurance up to certain thresholds.

    5. Pay more into your pension

    As a sole trader, your personal finances are closely linked with your small business tax plans. For instance, if you are a basic rate taxpayer, the government tops up any pension contribution you make by 20%. And if you are paying 40-45% tax, this goes up even more.

    6. Carry forward losses

    There are two systems of accounting that you can follow – cash basis and accrual basis. As a sole trader, the advantage of the cash basis of accounting is that you can carry forward losses from your current year and set them off against profits from the next, thus bringing your tax bill down. Plus, if you are winding down your business and you incur losses during the last 12 months, there is a special loss relief that you can apply for.

    7. Do VAT planning

    VAT is a complex area of tax with strict penalties for non-compliance. It is, however, possible to benefit from VAT savings through available schemes, such as the flat rate scheme, which allows businesses to pay a fixed VAT rate and keep the difference between what is charged to customers and what is paid to HMRC.

    8. Raise finance

    The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) provide small businesses with a way to raise funds through investment from larger companies. By offering tax incentives to investors, these schemes encourage larger companies to purchase shares in smaller businesses.

    Investors who meet the criteria are eligible for tax relief on income and capital gains tax on their investments. Ask your accountant about the right approach to raising capital.

    Do I need an accountant to file my taxes?

    Technically, you can file everything on your own. Chances are, you will struggle with identifying deductions, getting set up for MTD, or finding your way around accounting software. Bradleys Accountants, for instance, can help you with all these and more – and the fees you shell out will more than repay themselves in saved tax bills, greater financial efficiency and reduced hassle.

    How do I avoid the last-minute tax panic?

    As they say, a job well begun is a job half done. Start talking to your accountant early in the year about your income goals as a business so that you get tax advice tailored to those goals. Keep scrupulous records of every transaction – and on that note, switch to cloud accounting software. It is easier than you think, and by following the tax planning tips we studied in this article, you will never have to worry about a lost invoice or a wrongly-added column of figures again.

    Over to you

    In short, there are several ways to bring down your tax bill as a small business, no matter what industry you are in. Of course, every business is unique, so it is best to work with a tax accountant who can chalk out the best tax planning advice for your particular needs. And remember – do not leave tax discussions till the last minute!

    By having regular conversations with your accountant, you can avoid the pre-deadline panic and implement smarter accounting strategies all year round. Need help? Bradleys Accountants is just one phone call away. Ring us at 020-8303-1287.

    Related Articles

    What is spend visibility?: Strategies for improving…
    | Advice for Small Businesses

    Did you know that only one in ten UK finance decision-makers has complete spend visibility … Read more

    Breaking down the SEIS/EIS risk-to-capital condition for…
    | Advice for Small Businesses, Business start-ups

    The SEIS/EIS risk-to-capital condition is a relatively new entrant to the SEIS/EIS investment checklist, introduced … Read more

    How do I raise funds for my…
    | Advice for Small Businesses

    Starting a small business is an exciting and arduous journey. There is never a dull … Read more


    Subscribe to the newsletter

    Know about latest accountancy updates, company news and business growth tips. Every month, in your inbox

      Subscribe to our newsletter