As an entrepreneur, being savvy with your money is essential if you want to hold on to more of your hard-earned cash. While paying taxes is unavoidable, there are a number of ways in which business owners can reduce their tax payments, freeing up more money to further invest and grow the company.
Make the most of tax-free allowances
Don’t underestimate the value of basic tax reliefs and allowances, as they can make you some substantial savings. By making the most of tax-free allowances on your basic income, dividend income, capital gains and savings income, you may receive over £28,000 a year free of tax. As a business owner, this is money that can then be spent elsewhere.
Before you extract profit from your company, there are some considerations to be made if you want to reduce your taxes as much as possible. Taking dividends instead of a salary or making contributions to a pension can help keep your tax bill down. As the top rate of income tax is at 45% for some types of income, finding other ways to pay yourself, rather than taking an actual income, could help save you money. Consider selling any assets or realising capital gains instead so you have a source of cash while reducing the amount of tax you’re paying out.
Make the most of Entrepreneurs' Relief
There are substantial tax savings to be made using entrepreneurs’ relief, when selling shares or part of your business. Business owners get a reduced capital gains tax rate of 10 per cent on qualifying business assets. You can claim as many times as you like up to the value of £10 million during your lifetime, as long as you own at least 5% of the ordinary share capital of the company.
Contribute to a pension
Making pension contributions can also be tax-efficient. Paying directly into a pension, or making company contributions to an employee’s pension, will reduce corporation tax as this way there will be less money in the business to be taxed on.
Reward your staff
The Enterprise Management Incentive (EMI) aims to help small businesses retain the right staff. Rewarding employees with tax advantaged share options gives them an incentive to work for you and could help you grow the business. Employees aren’t required to pay income tax on the shares if they are purchased at market value.
Make the most of expenses
It may feel like a chore, but keeping hold of all of your receipts and claiming expenses can help you make tax savings. HMRC stipulates that anything you claim for must be purely for business use, but there are lots of things that come under this category. Whether it’s office costs, travel, clothing or food, all of these expenses add up. Business owners should also make use of the annual investment allowance, which allows you to deduct the full value of an item bought for business use from your profits before tax.
Enterprise Investment Scheme (EIS)
EIS offers a range of tax reliefs to investors who purchase new shares in smaller, higher-risk trading companies. Through the scheme, you get tax relief on 30% of the amount you wish to invest. The scheme will pay out a dividend each year, as long as there is a profit.
Employ your partner
We each have a personal tax allowance, meaning we can earn a certain amount before we are taxed on the rest. Making the most of a partner or child’s allowances too will double your potential tax-free income. This will also help you spread some of the income you decide to take from the business.
Tax can be a tricky matter, but understanding what relief is available to you will help reduce your tax bill, meaning you can spend the savings you make on further business development and growth. A good tax accountant will help you understand the general rules and find ways to reduce your tax bill, identify all available tax reliefs and effectively help you with your tax planning.