As a business owner, it’s important to be aware of the various strategies you can use to reduce your tax bill. By taking advantage of the numerous deductions and reliefs that are available, you can significantly lower the amount of money you owe in taxes each year. The money you save can be put towards improving and expanding your business, too! Here are five of the most effective strategies for minimizing your tax liability:
1. Make Use of Capital Gains Tax Reliefs
If you’re disposing of assets such as shares or property that have appreciated in value, you may be liable for capital gains tax or CGT. However, some reliefs can reduce or eliminate your tax bill.
For example, if you’re selling your main home, you may be exempt from capital gains tax on profits. Your main home is exempt from CGT. Also, each person can be exempt from annual capital gains tax for profits up to £12,300. That means if your losses and gains amount to this value or below, you have no tax to pay. Even though gains do not carry into the next year, losses can be carried over indefinitely. So you can use any losses from last year to offset your gains in the future.
There are also a number of other reliefs available for businesses, so be sure to speak with an accountant or a capital allowance advisor to see if your company is eligible.
2. Claim Research and Development Tax Credits
Suppose your business is engaged in research and development (R&D). In that case, you may be able to claim tax credits of up to 13% of eligible expenses. This credit is available to companies of all sizes, so even if your R&D budget is relatively small, it’s still worth claiming.
To quality, your R&D activities must aim to make an advance in science or technology, so speak with an accountant or tax advisor to ensure your activities qualify. Small businesses have more incentive to engage in research and development since companies with less than 500 staff and a balance sheet total of less than 86 million euros can deduct an additional 130% of their qualifying costs from their yearly profit. With the regular 100% deduction, this is a total of 230% deduction. If the company incurs losses, it can claim tax credits worth up to 14.5% of the surrenderable loss. However, remember that you will not be liable if you’re a subcontractor to another company.
You also have to consider if you have external investors, affiliated companies, or partner companies. They may change your status as a small or medium-sized enterprise, especially since you must include a partner or connected company figures in your balance sheet.
3. Utilize the Annual Investment Allowance
The annual investment allowance, or AIA, allows businesses to deduct the cost of certain qualifying assets from their taxable profits. The AIA is currently set at £1 million per year, meaning businesses can deduct up to £1 million of expenditure on plant and machinery from their taxable profits. This allowance is particularly beneficial for small businesses as it can allow them to write off a significant portion of their investments immediately. The permanent limit was £200,000, but it has been temporarily set to £1 million until March 31, 2023.
4. Make Use of Small Business Rates Relief
If your business occupies premises with a rateable value below £51,000, you may be eligible for small business rates relief, or SBRR. This relief provides a reduction in the amount of business rates you’re liable for, which can lead to substantial savings for small businesses. In some cases, businesses may even be eligible for 100% rate relief.
5. Consider Incorporating Your Business
If your business is unincorporated—that is, it’s a sole proprietorship or a partnership—you’ll be taxed personally on its profits at rates from %20 up to 45%. On the other hand, corporation tax will apply instead at rates up to 19% if you incorporate your business as a limited company. This can lead to significant tax savings and should be considered if your business is profitable. Another benefit of doing this is that incorporation makes your business more attractive to do business with since it implies permanence, or at the very least, longevity. This opens up grant and funding opportunities.
Of course, incorporating your business isn’t right for everyone, and you must consider several factors before making the switch. Be sure to speak with an accountant to determine whether incorporation makes sense for your business.
Reducing your tax bill as a business owner requires planning and foresight. However, by utilizing some or all of the strategies mentioned above, you can significantly lower the amount of taxes you owe each year without breaking the law. Work with an accountant or a tax specialist familiar with the taxation law to ensure you’re taking advantage of all available deductions and reliefs.