Five Ways to Save On Your Company’s Tax Bill
No business owner likes having to go through the strenuous cycle of taxes. To this end, there are a few techniques that you, as a business owner, could use for the purpose of decreasing your tax liability significantly? Yes, there are such techniques and they are…well…legal. Here are five of them:
Setting up the Business
When you talk about a business, the matter of incorporation is always up for debate. However, the question arises: does incorporation has any benefits when it comes to the tax liability and rates. If you have got your business registered as a sole trader, then you’ll have to pay tax based on the income tax rates for individuals. If you’ve got a company, however, then your business will be liable for corporation tax. The corporation tax is expected to decrease to 17per cent by the year 2020. The income tax rate, on the other hand, depends majorly upon the kind of earnings that you’re making. Higher the earnings from the business, higher the tax rate that would be applicable on you, as an individual. This rate of individual tax can go up to as much as 40 percent for high rate taxpayers.
A business’ income tax liability is calculated on the basis of its net income, right? Well, we all know how expenses reduce a business’ figure for net income. From coffee to business travel, any expense that has been incurred in the name of the business is, thus, deductible from the company’s net income—for tax purposes at least—thus reducing the company’s income tax bill significantly. To make this happen, however, it’s important for you to collect the receipts for all relevant business expenses.
You cannot claim EVERYTHING that you’ve spent for your business, though. For example, you can claim a deductible expense for the mileage on your employee’s car but not on your own. To understand, exactly, what is a deductible expense and what is not, it’s recommended for you to hire a tax attorney to take care of the job for you. A good tax attorney will ensure that everything that should be deducted is deducted!
Making payments into pension plans can be an excellent way for businesses to reduce their tax liabilities. However, the fact of the matter is that there are a number of tax guidelines that need to be adhered to in this regard. A technique commonly used by companies to reduce their tax liabilities involves them using their retained earnings for the purpose of contributing directly to a pension. This reduces a company’s tax liability; owing to how there is a significant reduction in taxable income. The director, however, won’t be able to access the pension fund until they are five years old, but they will be entitled to tax reliefs.
There’s a limit, however, to the amount of money you can put into a pension fund each year. The current annual allowance is £40,000 which needs to be kept in mind.
If you are the owner of a limited company, the fact of the matter is that the earnings of your business are not yours. What does that mean? Well, if your business is a limited company, it means that it is a separate, legal entity. Therefore, you will need to give yourself a salary—and declare it in your own tax statements—before the calculation of your company’s tax liability is done.
Many small business owners like to reward themselves with not only salary but dividends as well. When you talk about dividends, however, be advised that they are to be drawn out from the income of the business. If there is no income of the business to show, there are no dividends that you can claim for yourself. Regardless of what the case might be, the salary you take out for yourself will significantly reduce the tax liability of your company.
If you’re a business owner who owns more than five percent of the company, then you might be eligible for entrepreneur’s relief. What is the entrepreneur’s relief? Well, according to it, business owners will be able to get a reduced tax on capital gains, of 10 percent, whenever they are selling all or a part of the company. This relief has also now been extended to such scenarios when disposals are made to family members.
When you talk about saving tax for a company legally, the fact of the matter is that these five techniques form only the brink of the iceberg. It’s advisable for you to hire a good attorney, therefore, so that you might be able to save more legally!