Tax doesn’t have to be an end-of-year nightmare.
Does your tax bill blindside you, not because you’re bad with money, but you didn’t factor in the real cost of doing business, like taxes? If yes, then regular tax planning helps unlock capital for reinvestment and expand your business.
What are Tax Planning Strategies?
A tax planning strategy identifies areas where you can legally minimise your tax liability. This can help to support your financial and strategic goals and puts you in control of your tax affairs.
Instead of simply paying your tax at the end of the year, tax planning is proactive and allows you to take advantage of allowances and reliefs.
For businesses with profits over £250k that want to scale, implementing a tax planning strategy is a necessity. It prevents unexpected tax bills, improves cash flow, and supports reinvestment.
Are Tax Planning Strategies Illegal?
No. Business tax planning strategies are not illegal; they simply take advantage of tax rules and enable your business to use them to its advantage.
It is only illegal if you try to reduce your tax liability by deceit or concealment. Which is why it’s important to have a trusted personal tax consultant who can ensure you are compliant.
At M Squared Accountancy Ltd, we tell you what to do and when to do it, which takes the headache of tax out of your hands.
What are the Four Basic Tax Planning Variables?
There are four basic tax planning variables that can be used to reduce your tax liability.
These are:
- The Entity Variable (who does the transaction).
- The Time Period Variable (when it happened).
- The Jurisdiction Variable (where it happened)
- The Character Variable (the type of income or gain).
Why is a Tax Strategy Important?
There are many benefits of tax planning for your business, including improving cash flow by timing payments efficiently. Or increasing profitability by allowing for reliefs and deductions to keep more of what you earn (you did work hard for it after all, Most of the time anyway).
What Taxes do Business Owners Need to Pay?
Depending on your circumstances, here is a list of taxes you or your business may need to pay:
Corporation Tax
Limited companies must pay Corporation Tax on profits annually.
VAT
Value Added Tax (VAT) is added to most products and services if your business is VAT-registered.
If your business earns a taxable turnover of more than £90,000, you must register for VAT.
Capital Gains Tax
This tax is when you sell (or ‘dispose of’) something that’s increased in value. The tax is taken from the gain you make on the profit.
Income Tax or Dividend Tax
Sole traders or those who are self-employed pay income tax on profits. For directors or shareholders in a limited company receiving dividends, you may pay a dividend tax if your income exceeds a certain amount.
NI Contributions
National Insurance is to be paid by employers, employees and self-employed. The rate of the contribution depends on your employment status and how much you earn.
Business Rates
Business rates apply to most non-domestic properties.
Payroll
If you have staff, you will need to pay them, and PAYE is a way of deducting income tax and National Insurance contributions before wages or pensions are paid. New rules are simplifying PAYE for millions and making it easier to manage your tax.
Tax Planning Strategies
It’s good that you or your business is in a position to pay taxes (because you’re successful). And while you’re happy to pay your taxes, there are ways to optimise your tax to grow your business.
Tax Reliefs and Credits
Tax reliefs reduce the amount that is subject to tax. Tax credits reduce your actual tax bill after it has been calculated.
There are various tax reliefs and credits that can be taken advantage of, such as Green Tax Credits, Capital Allowances, and R&D Tax Credits.
Let’s say your business has an annual profit before tax of £300,000, and the standard UK Corporation Tax rate is 25%, then without relief, this would be £75,000. However, if you spend £60,000 on research and development, under the R&D Tax Credits, you can get a deduction of, for example, 186% of qualifying costs. This would equal £111,600.
Therefore, your original taxable profit of £300,000, takeaway the £111,600 deduction, would leave a profit of £188,400. Therefore, your new Corporation Tax bill would now be £47,100 instead of £75,000. A saving of £27,900!
Pension Contributions
Pension contributions qualify for tax relief and reduce the amount of income or profit that’s taxed.
If you are a company director, you can make additional pension contributions and extract profits from the business.
Defer Income
This allows you to pay tax at a different time and take advantage of lower tax rates or allowances.
You can do this by delaying invoicing, prepaying expenses, delaying asset sales, or postponing bonuses or commissions.
Accelerate Expenses
Like deferring income, you can purchase items in the current accounting year to reduce your profitability and reduce your tax bill. This not only provides tax savings but helps with cash flow (and you get to buy that shiny new piece of equipment)!
Optimise Business Structure
Higher earners tend to pay less tax as a limited company rather than a sole trader.
Register for VAT Early
Do you really need to be VAT registered when you’re running a limited company? It’s a question that pops up a lot, and the answer isn’t always straightforward!
If your taxable turnover (sales subject to VAT) exceeds £90k in a 12-month period, then yes, you’re legally required to register for VAT. But, even if you’re not hitting that threshold, you may want to register.
Why? Because VAT registration allows you to claim back the VAT on business expenses, which could save you money in the long run.
Tips for Tax Planning
To avoid the panic of surprise tax bills that mess with your cashflow, undertake tax planning to make this a less headache-inducing task!
- Always submit your tax within the deadlines to avoid penalties (and stress).
- Set money aside, so it is there for your tax bill
- Claim relief at the right time
- Use accounting software to keep your records accurate
- Seek professional help if you’re stuck (and stop winging it and start running your business like a savvy CEO).
How Accountants can Help Your Business With Tax Planning
Accountants stay up to date with the latest tax laws and ensure you submit your taxes on time.
We can advise you on how to optimise your tax to reduce your tax bill and use it to grow your business instead.
So, if you are ready to make a change for the better in your business, get in touch. We would love to help you!
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