The main difference between the tax you pay as an individual and the one you pay as a company is the way you factor in your expenses. When you get paid as an employee, you pay tax on your gross income. Your expenses as an individual come from your post-tax income. In the case of a company, however, its expenses can be deducted before any tax becomes due.
As far as HMRC goes, you can claim anything as an expense as long as it is used in the running of the business. But how do you figure out which expenses will qualify? There are lots of lists available online that give you a rough idea, but you might miss out on things such as R&D tax credits and capital allowances if you start doing your business tax return yourself.
Using professional accountants for this purpose makes a lot more sense as they will do the number crunching for you. Accountants can accurately figure out which expense qualifies and which don't. This can be especially useful if you make an expense for business as well as personal use. Lawrence Grant accountants specialise in corporation tax planning with the express purpose of reducing your tax bill. We do this by exploring every avenue of claims, rebates, and allowances to ensure your business pays no more tax than is legally required.
Split Your Income Correctly
There are a couple of ways by which you can pay yourself as a director of a company. You can pay yourself a salary, in the form of dividends, or by claiming expenses and benefits from the company. The best way to go about it is often to employ all three. However, all of these have separate rules and regulations such as having tax rates.
For example, to get paid a salary, you first need to get registered as an employee with HMRC using the PAYE system. You can then draw a salary that can make you eligible for your tax-free Personal Allowance of up to £12,570 if you have no other income. Likewise, you can also claim up to £2000 as Dividend allowance.
Understand that as the director of your own company, you're in a unique position when it comes to both corporate and personal tax planning. You have much more flexibility over your income and how it's paid out from the company than does a conventional employee, so pay attention to how you split your salary and dividends to ensure that you're benefiting from the best tax rate. Figuring out the best combination can become difficult sometimes which can often require the need to hire a professional accountant.
Know Your Business Expenses and What's Allowed
Businesses must spend money to make money. The good news is that many of those expenses can be written off on your corporation taxes. Every allowable expense can be used to reduce your overall profit (and thereby your tax bill). But there is a slight difference in terms of what they can be claimed as. Short-term expenses that usually happen during the course of a financial year of a business can be claimed as expenses. Some of them are given below:
- Accountancy fees
- Advertising and marketing costs
- Bank and other financial charges
- Business insurance
- Business mileage/travel expenses
- Charitable donations
- Employee expenses
You can claim the following as capital allowances as these are considered fixed assets if they are used solely for business activities.
- Equipment expenses
- Fixed assets such as real estate purchases
- and business vehicles
You get the idea – there are many, many potential business expenses that can be claimed to lower your company's income and reduce your corporation tax. However, in corporation tax planning, it's important to work with an accountancy firm capable of identifying the most advantageous expenses and capital allowances for your specific business.
No one relishes the idea of paying HMRC every year, but did you know that there's a benefit to paying your taxes early? That's right – one of the most important corporate tax-saving tips is to pay up early. In this situation, HMRC will actually give you a portion of that amount back in the form of interest on the early payment of your tax bill.
As of April 2021, the rate of this interest is 0.5% which is applied to the tax amount you pay early. This is known as credit interest. The time frame during which this interest is applied is between the date you make the tax payment and the date when they are due.
Claim Your Work From Home Expenses
For contractors and small business owners, working from home is a reality even without COVID-19 lockdowns. The good news is you can claim lots of expenses as business expenses if you work from home. This applies to rent, utilities, internet bills, and even furniture if some part of those expenses were incurred for business activities. For example, if you spend two days working from home, you may be able to claim two days worth of rent and utilities as business expenses.
However, it's critical that you have the right strategy here, as a misstep, such as falsifying claims, could lead to additional costs in the form of penalties or increased tax liability. Expert accountants at Lawrence Grant can help ensure that you're able to claim all of your relevant expenses while avoiding potential tax-related problems.
VAT Flat Rate Scheme
Are you registered for VAT? If so, the VAT Flat Rate Scheme could benefit your small business if you qualify. This requires your business to have an annual turnover of less than £150,000. It's supposed to simplify the process by reducing the amount of paperwork that comes with filing VAT returns. The flat rate can range anywhere between 4% and 16.5% depending on what your business classifies as. You also get to reduce your rate by 1% in the first year of your VAT registration.
Of course, the scheme may not be the right path for your business. Contact us for more information about the scheme, what it might mean for your business, and to schedule a consultation to help determine if this is the right corporate tax savings plan for you or if other steps are better suited.
Training and Development Costs
If you are investing in training and developing the skill set of yourself or your employees, you can claim those costs as business expenses which might make them tax-deductible. Course fees, tuition fees, travel and accommodation fees related to your training and development, the costs of conferences, and industry shows – these are just some of the things that can be claimed as business expenses that can ultimately reduce your tax bill.
However, ascertaining how partial claims work can get tricky if you decide on pursuing leisure activities while on a business trip. Having the sound advice of an expert accountant will certainly help you claim as much expenses as possible.
Upgrade Your Business Equipment
No matter what industry you might occupy, the right equipment is key. Computer systems, tools, vehicles – these are just some of the things that you may be able to claim in your corporate tax saving plan if they are directly related to business needs through the annual investment allowance. You may be able to claim a portion of these expenses if they have been partially used for business activities.
And don't forget: this is something that can be claimed every single year by offsetting the full cost of the purchase against your business's income. Expert accountants can determine which expenses fall under yearly expenses and which fall under capital expenses when it comes to business equipment.
The Key to Leveraging These Benefits
The single most important piece of tax planning advice is this: Have the right accountancy expertise on your side. Attempting to go it alone in the world of corporate taxes can often end up costing you a lot more than what you might have spent on accounting fees. Did we tell you that you can claim those too? Accountants go through your financials to understand how best to reduce your overall tax liability. The presence of expertise and experience, therefore, becomes crucial.
Whether you're a sole business owner or you're heading a rapidly-growing startup, we're happy to provide the professional guidance and expertise required to navigate the complicated world of corporation taxes. Contact us today to schedule your consultation.