Taxes can be tricky for many business owners, especially if you aren’t a financial expert. With a bit of tax planning, you can make things a whole lot easier for your limited company. Tax planning isn’t just a fancy term—it’s basically about managing your money smartly. In this guide, we’ll break down some simple strategies anyone can use, no matter your financial background.
We’ll start with the basics, like understanding what taxes you need to pay and keeping good records. Then, we’ll talk about how to handle your money flow so you’re ready for tax time.
But wait, there’s more! We’ll also chat about getting advice from the pros, finding ways to save money on taxes, and planning for retirement.
Plus, we’ll touch on why it’s important to review your business setup and always file your taxes on time.
Lastly, we’ll give you some practical tips specific to the UK to help lower your tax bill as a limited company owner. With these tricks up your sleeve, you’ll be ready to tackle taxes like a pro!
Taxes to be aware of when tax planning
Understanding the ins and outs of taxes in the UK can be a bit overwhelming, especially for limited company owners. But fear not! Let’s break it down in a simple way.
Corporation Tax:
What is it? Corporation Tax is all about the profits your company makes.
Rate: The standard rate of Corporation Tax is 19% on profits below £50,000.
Example: If your company made £40,000 in profits, you’d pay £7,600 in Corporation Tax (£40,000 x 19%).
Value Added Tax (VAT):
What is it? VAT is a is added to goods and services at each stage of production, distribution or sale.
Rate: The standard VAT rate in the UK is 20%, but there are also reduced rates of 5% and 0% for some goods and services.
Example: You run a limited company providing services subject to the standard VAT rate. If you invoice a client for £1,000, you’d charge an additional £200 in VAT, making the total bill £1,200. You’d then pay the £200 to HM Revenue and Customs (HMRC) after deducting any VAT you’ve paid on your business expenses.
Payroll-Related Taxes:
Employer’s National Insurance (NI): If you have employees, you’ll need to pay Employer’s NI contributions and deduct Income Tax from their salaries.
Rate: Employer’s NI contributions typically run around 13.8% of your employees’ earnings, depending on their income.
Example: If your employee earns £2,000 per month, you’d pay £276 in Employer’s NI (£2,000 x 0.138).
Employee’s Income Tax: Limited companies must deduct Income Tax from employees’ salaries and pay it to HMRC on their behalf. The amount deducted depends on the employee’s income and tax code.
Example: If your limited company employs someone with a monthly salary of £2,500 per month, you’d deduct Income Tax based on their tax code, which determines how much tax-free income they’re entitled to.
Business Rates:
What is it? These are taxes on business premises and depend on the property’s value.
Rate: The rate depends on the rateable value of the property and the local council’s multiplier.
Example: If your limited company operates from a commercial property, the local council will determine the rateable value of the property. The rateable value, when multiplied by the local council’s multiplier, determines your business rates. If the rateable value is £20,000 and the multiplier is 0.5, your business rates would be £10,000.
Tax Planning Strategies for Success
Taxes can be a complex topic, especially for business owners who are not tax experts. However, tax planning is a crucial aspect of managing your limited company’s finances effectively. In this article, we’ll break down the essential tax planning strategies in a way that’s easy to understand and implement, regardless of your financial background.
Understand Your Tax Obligations:
First things first, get familiar with the taxes your limited company deals with – corporate income tax, Value Added Tax (VAT), and those payroll taxes. Knowing what’s due and when ensures you stay on top of your filing requirements and avoid any nasty surprises come tax season.
Keep Accurate Records:
Next up is organisation. It’s not the most exciting topic, but it’s key to successful tax planning. Whether you use accounting software like Xero, prefer to stick to spreadsheets or want to hire an account (like us!), keeping your financial records organized is essential. It allows you to track income, expenses, and other financial transactions with ease. Plus, when it comes time to calculate your tax liability, having tidy records ensures accuracy and minimises the risk of errors.
Monitor Your Cash Flow:
Cash flow management is crucial for any business, and it’s especially important when it comes to tax planning. Consistent cash flow enables you to cover your tax payments when they become due, preventing any last-minute financial stress. Make it a habit to set aside a portion of your revenue for taxes as you go. This proactive approach ensures you’re prepared for tax season and reduces the likelihood of being caught off guard by unexpected tax bills.
Seek Professional Advice:
Tax laws can be complex and subject to change. Seeking professional advice from a tax expert or accountant like us can provide you with valuable insights and guidance on how to optimise your tax position. They can help you identify opportunities to reduce your tax liability, stay compliant with tax regulations, and make informed financial decisions.
Utilise Deductions and Credits:
Deductions and tax credits are your best friends when it comes to lowering your tax bill. Deductions allow you to subtract certain expenses from your taxable income, reducing the amount of profit subject to taxation. Common deductions include costs related to running your business, such as office rent, supplies, and employee wages. Tax credits, on the other hand, directly reduce your overall tax liability. Examples include research and development tax credits or energy-efficient equipment credits. Identifying and utilising these deductions and credits can significantly lower your tax bill and improve your bottom line.
Plan for Retirement:
While retirement might seem like a distant dream, planning for it now can have significant tax benefits. Contributing to a retirement plan not only helps secure your financial future but can also lower your current tax liability. Many pension schemes and Individual Savings Accounts (ISAs) offer tax advantages, such as tax-deductible contributions and tax-deferred growth. By contributing to these plans, you not only save for retirement but also reduce your taxable income, ultimately lowering your tax bill.
Review Your Business Structure:
Your business structure can have a significant impact on your tax liability. For example, operating as a limited company offers certain tax advantages, such as lower tax rates on profits and the ability to claim business expenses. However, there may be instances where changing your business structure could result in greater tax savings. Not sure if you should be a limited company? Check out our video
Sole Trader OR Limited Company – How to decide. Consulting with a tax advisor can help you evaluate your options and determine the best structure for your specific circumstances. It’s essential to weigh the potential tax benefits against any other considerations, such as legal and financial implications.
File on Time:
Finally, filing your tax returns accurately and punctually is essential to avoid penalties and interest charges. Missing tax deadlines can result in costly consequences that can negatively impact your business’s financial health. Stay organised and keep track of important filing dates to ensure you meet all your tax obligations on time. Check out our blog:
How to Stop Leaving Your Tax Return to the Last Minute. If you’re unable to file by the deadline, consider
filing for an extension to avoid penalties for late submission. By staying on top of your tax filings, you’ll maintain good financial standing and avoid any unnecessary headaches down the line.
Tax Planning Tips to Reduce Your Tax Bill
UTILISE TAX-EFFICIENT EXPENSES:
First up, make sure you’re claiming all those juicy
tax free business expenses. Whether it’s office rent, employee salaries, utilities, or office supplies, every penny counts. By deducting these expenses, you can slash your taxable profits and keep more of your hard-earned cash.
MAKE USE OF ALLOWABLE DEDUCTIONS:
Next, don’t forget about allowable deductions. Things like capital allowances on equipment and machinery can make a big dent in your taxable profits. So, be sure to take full advantage and watch those tax bills shrink.
REVIEW YOUR SALARIES AND DIVIDENDS:
Now, let’s talk about finding the right balance between salaries and dividends. Dividends are often taxed at a lower rate than salary income, so tweaking the mix can lead to some serious tax savings. It’s all about finding what works best for you and your company. Check out our YouTube video to find out the most tax efficient way of
Paying Yourself as a Limited Business Owner!
RETAIN PROFITS IN THE COMPANY:
Ever thought about keeping those profits in the company instead of dishing them out as dividends? It’s a smart move that can defer personal tax liabilities and save you money in the short term. Plus, it gives your company a nice financial cushion to fall back on.
CONSIDER RESEARCH AND DEVELOPMENT (R&D) TAX CREDITS:
If your company is diving into R&D activities, you could be in for some sweet tax credits. These credits can reduce your corporation tax liability or even score you a cash refund. So, if you’re innovating and pushing boundaries, make sure you’re taking advantage of this valuable incentive.
EMPLOY TAX-EFFICIENT EMPLOYEE BENEFITS:
Don’t forget about your hardworking employees! Offering tax-efficient benefits like pensions or childcare vouchers not only keeps your team happy but can also lower your company’s overall tax bill. It’s a win-win for everyone involved.
STAY COMPLIANT AND KEEP ACCURATE RECORDS:
Last but not least, let’s talk about staying on the right side of the taxman. Keeping accurate financial records is essential for compliance with tax regulations. Trust us, you don’t want to mess around with inaccurate records or non-compliance – the penalties can be a real nightmare. So, stay organised, stay compliant, and keep those tax headaches at bay.
Why is tax planning so important?
Now, you might be wondering, why bother with all this tax planning stuff? Well, let me tell you – tax planning isn’t just about saving money. It’s about maximising your profits and ensuring the long-term success of your business. By strategically managing your taxes, you can free up valuable resources to reinvest in your company, fuel growth, and achieve your financial goals. Plus, staying on top of your tax obligations keeps you in the good graces of the tax authorities, avoiding any nasty surprises down the line. So, whether you’re a small start-up or a growing enterprise, smart tax planning is key to your financial health and prosperity.
And there you have it – your roadmap to reducing your tax bill and maximising your profits as a UK-limited company. With these smart strategies in your arsenal, you’ll be well on your way to financial success. Happy tax planning!
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