Thirteen tax saving tips for small businesses

The Tax Faculty at the ICAEW recommends thirteen tax-saving tips to ensure your business pays less tax. Are you using all of these methods to minimise the amount of tax your business pays?

1. Make sure that you have claimed all the tax relief that you are entitled to for purchases of plant and machinery

A tax deduction for the cost of buying office furniture, computer equipment and other tools is given by capital allowances.

In the year of purchase, the relief is a ‘first year allowance’, which for acquisitions in the period 1 April 2006 to 31 March 2007 is 50% of the cost. For the previous year it was 40%.

It is important to check these rates if you are doing your own tax as they vary frequently. After the first year, you get a ‘writing down allowance’ of 25% a year on the balance of the cost.

2. If you buy a computer or other item of equipment which may have a life of four years or less, it may be worthwhile making a ‘short life asset’ election when you claim capital allowances

This will mean that you get tax relief for the full cost of the item much more quickly in the event that you sell or scrap it within that period – ask your Chartered Accountant or HM Revenue &Customs for further details.

3. Tax relief for cars with emission levels below 120mg/km is given more quickly than for other less environmentally friendly cars

If you are thinking about replacing your business vehicles, this is worth bearing in mind.

4. Consider whether you would be better off trading as a partnership, limited liability partnership or a limited company rather than as a sole trader

Tax is not the only consideration, but it is true that you may save tax by incorporating your business in the right circumstances.

5. If your spouse (or indeed any other person) is helping you out with some of your business tasks – administration, packing up goods for sale, running errands – consider whether you can afford to pay them a small salary

If this is above the National Insurance lower earnings threshold (£4,368), but below the level of the income tax personal allowance (£5,035), this has several advantages: there is no tax or National Insurance to pay by either of you, it is fully tax deductible in your business, and the recipient gets a credit on their National Insurance record which counts towards their entitlement to certain State benefits.

Beware, you do need to go through the proper procedure of setting up a payroll.

6. If you have a job as well as running your small business, then you may already be paying enough National Insurance to allow you to claim exemption from the need to pay Class 2 weekly NIC of £2.10 per week

You may also be liable to Class 4 NIC at only 1% on your business profits, but working this out and claiming any refunds can be complex, so once again professional advice is a good idea.

7. If your business profits are below £4,465, you can claim exemption from Class 2 NIC on the grounds of small earnings

But think carefully before opting out of this, as the cost is only £2.10 a week and it counts towards your entitlement to state benefits.

8. Remember that payments into a pension scheme qualify for tax relief

9. If you use your home for business purposes, then you will be able to claim a deduction to cover part of your home running costs

This will often be a deduction of between £2 and £10 per week, although larger amounts will be allowed if they can be justified.

10. Make sure that you claim your entitlement to the Small Business rate Relief

This is a new relief, introduced from 1 April 2005, which allows small businesses a reduction of up to 50% of their full charge for rates.

It does need to be claimed though and the deadline for 2005/06 is 30 September 2006.

11. Consider voluntarily registering your business for VAT

If you register you can claim back VAT; you don’t have to exceed the turnover limit, but remember that your competitors might not be charging VAT or your customers might not be able to reclaim it, which would put you at a competitive disadvantage.

If you’re not registered, you can claim income tax relief for costs including VAT.

12. If a ‘low’ wage is to be paid to a spouse or other family member, that wage should ideally equal or exceed the current Lower Earnings Limit for the whole tax year, so that the employee retains their entitlement to contributory benefits

It is, of course, necessary to complete a P11 and then P14 once the Lower Earnings Limit (not just the earnings threshold) is reached.

13. Use a Chartered Accountant!