Running a business comes with a lot of responsibility, but managing your tax liabilities is amongst the most important. Many business owners dread having to deal with end-of-year accounts and filing tax returns, but financial management doesn’t have to be as taxing as you think. To streamline your company’s approach to tax, take a look at these top tips for SMEs.
1. Choose the Right Business Structure
Your business structure has a major impact on your tax liability, so it’s important to choose the most tax efficient option for your trading pattern. As a sole trader, for example, your business profits are subject to income tax and your personal assets are tied up with your trading profits. Similarly, if you form a partnership, each partner will be subject to individual taxation. In contrast, registering your enterprise as a limited company means you’ll pay corporation tax on your profits, but your personal assets will be kept separate from company finances.
2. Take Money Out for Tax Efficiency
If you decide to register your business with Companies House, you’ll need to determine the most tax efficient way to take money out of the firm. As well as paying corporation tax on business profits, anyone drawing a salary will be subject to income tax as the usual rates. However, paying yourself a relatively low salary as a director of the company and taking more funds out as dividends can reduce your overall individual tax liability.
3. Get Professional Advice
As you can see, there are a range of complex issues that need to be addressed if you want to reduce your tax liability. By getting advice from reputable tax advisers like Azets, you can ensure that you’re complying with the relevant legislation and guidance, while maximising your tax efficiency. Whether you need advice on capital allowances, employee share schemes, VAT registration or any other tax-related matter, or post Brexit advice, an accounting firm will be able to provide you specialist insight and assistance.
4. Consider Setting Up a Company Pension
Making regular pension contributions is an effective way to plan for the future, but it can also reduce your tax liability in the short-term. If you pay into a pension as a sole trader, for example, you shouldn’t need to pay tax on the contributions you make. For limited companies, establishing a company pension scheme can be an effective way to reduce your taxable revenue and provide staff with employee benefits. Remember – as a director, you’re an employee of the company too, so there are many ways you can benefit from setting up a company pension.
5. Use Tax-Free Benefits in Kind
Although a significant number of employee benefits are taxable, there are many which are tax-free. By utilising these, you can reduce your tax liability and reward your employees for their hard work and loyalty. What’s more – as a director, you can be a recipient of these tax-free benefits in kind too. Currently, tax-free benefits in kind include certain childcare arrangements, the cost of bicycles for commuting, vehicles used only for business purposes, relocation expenses and car parking.
Understanding Your Tax Liability
Tax laws are complicated and can take time to understand, which is why business owners can save money and resources by working with professional accountants and tax advisers. As tax legislation is updated regularly, getting expert advice can ensure you remain compliant with the relevant regulations at all times, which will avoid potential penalties and give you peace of mind. Additionally, experienced accountants and advisers will be help you navigate your way through the tax system as you grow your business and become subject to a different set of rules.