There are a number of tax planning opportunities for business owners that are permitted in a limited company. But cutting taxes is no way to avoid taxes! It involves taking advantage of the allowances, expenses, reliefs and planning opportunities that are already available in the UK tax system. Too many company owners are paying more tax than they should because they aren’t claiming all their allowable expenses, they don’t know about all the tax reliefs, or they wait until the end of the financial year to get their tax planning done. These mistakes can be avoided through good bookkeeping and accurate company accounts. They also provide a director with an understanding of profits, cash flow and future tax obligations. Therefore, how can company owners legally lower their taxes? This guide covers the practical options available and emphasises the need to keep good records, ensure that you meet HMRC requirements and ensure that you manage your tax affairs professionally.
1. Everyone is entitled to claim all legitimate business expenses.
One of the easiest ways to lower taxable company profits is to correctly claim all allowable business expenses. In the case of limited companies, the company is usually entitled to make a general deduction for revenue expenses that qualify for the deduction. But the cost has to be for a valid business purpose and comply with the rules in place.
They may be:
- Professional accounting costs
- Running costs of office and business buildings.
- Certain employee costs
- Business-related software
- Business insurance
- Relevant travel costs
- Some professional subscriptions
What’s important is that an expense shouldn’t be deducted just because it feels like it’s a business expense. HMRC has guidelines regarding whether expenses are considered to be for business use. There are certain costs that are expressly excluded, such as some types of entertaining of clients. This is made much easier by good bookkeeping.
2. Business Records are kept up-to-date.
When it comes to tax planning, the first step is to have accurate financial records. When bookkeeping is inadequate, company owners may be unaware of their accurate profit situation. They may also be missing proper costs or finding themselves liable for taxes at the last moment.
The directors can keep track of:
- Income received
- Business expenses
- Outstanding invoices
- VAT obligations
- Payroll costs
- Company profitability
- Available cash
It also provides a better basis on which to base accurate tax filing. City Gate Accountants offers bookkeeping and accounting solutions tailored to help businesses keep their financial records well-organised. It is a blend of experienced accounting experts and contemporary cloud accounting options. It’s not only about compliance for company owners. They can also help to make better financial choices throughout the year.
3. Consider Capital Allowances
Purchasing equipment, or other business property, can present opportunities for tax relief. Capital costs are not accounted as normal revenue costs. But businesses may be able to apply capital allowances to assets that are used in their business. HMRC names the following assets as examples of what can be considered: equipment, machinery and some business vehicles. For instance, if a business buys equipment for use in the business, they should ask themselves if they can claim capital allowances on the purchase. Not all transactions involving the purchase of assets are tax treated the same. The laws may vary according to the asset type, how it’s utilized, and the situations of the business. Professional guidance can therefore help to keep incorrect claims at bay.
4. Salary and Dividend Planning.
Business entrepreneurs generally have an income from the business that is made up of salary and dividends. These payments will, however, have varying tax and accounting implications. The salary will be handled in accordance with the company’s payroll system. Employers will have to accommodate relevant income tax and national insurance. Dividends are different. They can not be used as your normal business expenses to reduce your Corporation Tax. The company will also need to have enough profits to distribute to the shareholders. This doesn’t just mean that directors can select the one that appears to be cheaper to them. It will depend on the profits of the company and the tax position of the director in his personal circumstances. Company owners can evaluate the company’s overall situation prior to making choices with the assistance of professional tax planning.
5. Investigate Tax Reliefs that are available.
Certain firms can take advantage of certain tax reliefs based on their activities and investments.
HMRC lists a number of reliefs available to limited companies, such as:
- Capital allowances
- Relief for research and development.
- Patent Box
- Some of the reliefs in the creative industries
- Trading loss relief
- A few reliefs on qualifying assets
- Marginal Relief for qualifying circumstances
It is based on the company’s situation and the applicable laws. That’s why it’s better for directors not to duplicate another company’s tax plan. Not every relief will be suitable for every business. But company owners shouldn’t claim until they have checked their own activities, expenditure and financial condition.
6. Use Losses Properly
Every business does not necessarily make a profit each year. If a company is facing a trading loss, they may wish to consider using that loss under the Corporation Tax rules. Trading losses are a relief that HMRC accepts that can help to reduce the tax liability of a company. The treatment and the timing of losses can be complex, though. For instance, it may be necessary for a business to consider whether a loss is available to offset profits in another period or whether it is better to use another option available. This is an area where correct documentation and sound tax planning advice can be of huge value.
7. Review Pension Contributions
Employer pension contributions are legitimate employer remuneration arrangements. Guidance from HMRC sheds light on the concept of allowable pension contributions, where they comply with the conditions, such as that expenses must be incurred wholly and exclusively in the trade. Company pension contributions may thus be included in the longer term financial planning for some directors. But pension law is complicated, especially if you are making substantial contributions. However, before making significant contributions company proprietors need to take into account their particular circumstances and obtain suitable expert advice.
8. Make plans for Corporation Tax in the year.
Don’t start planning for Corporation Tax when it arrives! Instead, it would be better to keep track of taxable profits during the accounting period. Having the business managed by regular management accounts will enable directors to see the performance of the business before the year ends. They may also point out some unusual expenses, fluctuating profit margins, and tax requirements. City Gate Accountants’ services include management accounts, Corporation Tax, accounting and business tax planning. Such forward planning can assist company owners make informed decisions rather than responding to an unforeseen tax bill.
9. Tax Planning Is Not Tax Avoidance
An often-held belief is that minimizing one’s tax liability requires dodging the law. This is poor tax planning. Legal tax planning involves the application of appropriate deductions and relief based on your personal circumstances. Tax avoidance schemes can involve considerable dangers, especially when complicated structures have been set up for the sole purpose of obtaining a tax benefit. It is important, therefore, for company owners to base any commercial decision-making on correct accounting records.
10. Avoid Common Accounting Errors
A number of common accounting errors may complicate your tax planning.
These include:
Personal and Business Transactions
Using company money to purchase anything on a personal level may lead to accounting and tax errors. Directors need to keep all personal and business transactions apart whenever they can.
Forgetting to Retain Receipts
In order to prove business expenses without any issues, it is essential to retain receipts. Accounting digitally will help with storage.
Deducting Every Expense for Tax Purpose
Not all business expenditures decrease the total amount of Corporation Tax due. The distinction between revenue and capital expenditures is especially crucial.
Putting off Bookkeeping till the Year End
Late bookkeeping leads to concealing cash flow issues and missing expenses. Bookkeeping regularly provides better information to the directors.
Confusing Dividends with Salary
Dividends have a different tax regime than salary payments and need distributable profits and documentation to justify them.
An Example for Illustration
Take the case of an owner of a limited company whose primary preoccupation during the year is the generation of sales. The performance of the company is excellent, but there is little record-keeping throughout the year except near the end of the year when the accounts are prepared for that period. There are various genuine expenses that have not been recorded. In addition, there is no clarity with regard to the tax payable profit for the year. A more prudent practice is that of consistent record-keeping and tax planning. A realistic scenario is illustrated here. The purpose of this is to ensure that what is due is claimed.
How Can City Gate Accountants Help?
Tax planning is most effective when integrated with accounting and bookkeeping. Corporation Tax, VAT, and payroll services are just some of the things offered by City Gate Accountants. In addition to providing accounting and bookkeeping, they also offer business tax planning and HMRC compliance support. Such services can be of use for limited company owners since it offers a more unified way to manage finances. Accounting professionals are able to evaluate financial data and advise on any possible problems. Among other benefits there are clear prices, professional consultants, individual advice and cloud accounting systems.
Conclusion
The tax burden of company owners can be minimized by fully utilizing the regulations available to them. The basic principles are simple – keep good records, claim allowable expenses, look at the available tax credits, know the various tax reliefs and plan accordingly. Yet tax regulations may become more complex with the growth of the company or the increase in the complexity of its finances. Therefore, good accounting becomes essential in tax planning. Good bookkeeping along with good company accounts and tax planning, helps limited company owners in making sound decisions without being against HMRC regulations. City Gate Accountants will be able to offer you professional accounting advice if your business needs help in accounting, Corporation Tax, bookkeeping and business tax planning.
FAQs
Is there any legal way for the owners of an organization to minimize their taxes?
Yes. Limited companies can minimize their tax through the deduction of business expenses and capital allowances.
Does expenditure incurred by businesses reduce Corporation Tax?
Certain business expenditures that qualify may lead to a reduction in the taxable profit earned by the firm. Nevertheless, such expenses should satisfy certain criteria.
Can dividends be tax deductible to limited companies?
Not at all. Because dividends are the payment of profits to the shareholder, and not normal business expenses, they are not tax deductible.
Are pension contributions able to help lower a company’s tax liability?
It is possible that they can. Pension contributions by an employer may be regarded as a business expense depending on the fulfillment of certain criteria.
What tax reliefs are available for limited companies?
This will depend on what activities the company is engaging in. Some examples are capital allowances, Research & Development relief, Patent Box, trading loss relief and special industry reliefs.
How does bookkeeping assist in saving taxes?
Bookkeeping helps to determine valid expenses and keep relevant documentation. Bookkeeping may be beneficial for tax planning since directors have financial data available to them all year round.
When should a business undertake tax planning?
Tax planning should ideally take place during the financial year and not just before the deadline for Corporation Tax.