Here are five tips for planning and reducing the amount you pay in tax.
1) Know all the different taxes payable by your business
The first thing you need to do is to ensure that you have identified all the different taxes your business is liable for. Most businesses would have to account for VAT, PAYE/NIC, corporation tax, capital gains tax and income tax. Knowing which taxes you are liable for is the first step you need to take if you plan to minimise your liability. It is always advisable to employ the services of a professional and qualified accountant, because there are many pitfalls to avoid in tax planning.
2) Take advantage of deductions
There are many deductions that you may not know you have available to you. Taking advantage of deductions allows you to deduct business costs from gross income. Some deductions that small business owners should research and take advantage of are home office deductions (if you work from home), travel expense deductions and entertainment expense deductions. It is remarkable the amount of expenses which small business owners forget to include in calculating their taxable income because they have poor record keeping.
3) Know how to classify your business
Before setting up your business, you need to consider the form of legal entity to use in running it. A business owner should know of the different types of business there are. Different types of business classifications face different tax liability and rates, so it’s best to research and decide which type of business is best for you. Common options are Sole Trader, partnership and limited liability company.
4) Controlling the timing of certain transactions
In the UK the tax year runs from 6th April to 5th April each year. Allowances available as an offset against income or capital gains cannot usually be carried over from year to year. So it is very important to plan your transactions in such a way as to enable you to make use of all available allowances. You could also look at deferring certain transactions to enable you to benefit from a change in the allowance rules etc.
5) Taking money out of your business
You might wonder why this matters as this is the money made from the sweat of your brow. However, the form of legal entity you choose for running your business and how you classify money withdrawn from your business may be crucial in how you minimise your tax liability. If you are a sole trader or in a partnership, there really is no choice in how you classify the money withdrawn from the business as all the profits of the business will be taxable on you personally. If however your business is a limited company, you have the choice of withdrawing money as income or dividends. These two options are taxed at different rates, with dividend income typically taxed at a lower rate than earned income.
There is simply too much for a business owner to consider, especially where your focus should be on running the business. So why don’t you leave all these to a trusted and competent advisor?
If you’re not 100% sure you are paying the lowest amount of tax possible, give me a call. Dial 020 7692 0914 and ask for Ayo.
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