Savvy entrepreneurs seem to make more money, yet find perfectly legal ways to optimise their taxes. So what do they know, and do differently to cut their tax bills?
We asked Jonathan Amponsah CTA FCCA, of The Tax Guys, to explain how some entrepreneurs manage to keep more of their hard-earned cash.
1. Claim Less Rent & Other Expenses
The idea of claiming less expenses to save tax may seem counter intuitive. After all, the more expenses you claim, the less profits you have and therefore the less tax you pay right?
Let’s say you own the premises that your business operates from. Normally if you sell the property you will pay capital gains tax at say 20% or 28%. But the rules allow you to pay only 10% if you dispose of the property as part of the disposal of your business.
However, crucially, if you have been claiming full rent, then you miss out on this 10% tax rate.
And when it comes to other expenses, savvy entrepreneurs avoid the common tax trap of simply incurring expenses of say £100 just to save tax of say £20. Not a great return on investment for them.
2. Having a Tax Plan
As well as having some sort of a business plan, savvy entrepreneurs also have a tax plan.
They know that unless time is devoted to prepare and plan for taxes, it’s likely that they will pay more tax than necessary. By planning ahead, they avoid the classic tax mistake I see often in the form of retrospective tax planning which doesn’t work, or no planning at all.
3. Being Efficient with Paperwork and Records
They know their time is worth more. They also want to claim all expenses without leaving any money on the table. They need to keep invoices. But collecting and keeping those pesky receipts is not a fun job.
Smart entrepreneurs use technology to save time and to avoid mistakes. Using an online accounting system is a given, while employing a PA and using some of the many apps on the market including; Auto Entry, Expensify and Receipt Bank, also helps to ensure they claim what is rightfully theirs and reduce their tax bills.
4. Using Available Tax Allowances First
I’m yet to come across a savvy entrepreneur who doesn’t ask me about tax free income and allowances. For some reasons they seem to appreciate the fact that these allowances get wasted in a year if not used. Plus, they leverage the allowances of their spouses and children.
Did you know that if you add up the income tax allowance, capital gains tax allowance, savings allowance and dividends allowance, you get a whopping £26,000 plus allowances in the year?
That’s just for starters. And if you have a spouse or a child who are not using their allowances, then that’s a potential tax-free income of £78,000 (26,000 x 3).
Here in the UK, children as young as 13 can take up part time work, whilst 16 year olds who are not in education can work up to 40hours a week. But do go easy on them re the hours. For more info and rules on employing children, see this page of Gov.uk.
5. Claiming Generous Tax Reliefs
Although busy and always looking for the next problem to solve, these entrepreneurs are also aware of the generous tax reliefs HMRC gives them. They don’t miss out on them claiming them.
Imagine being able to claim £230 expenses when you’ve only spent £100.
Or being able to get investment but ensuring that the investor’s cash is protected by between 30% and 60%. Well, that’s what the Research & Development tax relief, and the two enterprise investment schemes; Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) give entrepreneurs.
Most business owners seem to miss out on these reliefs but not these savvy business owners.
6. Engaging Specialist Tax Advisers
Most business owners naturally and right turn to their accountants for all things tax. Accountancy and tax are two different professions although there are many similarities.
Savvy entrepreneurs normally have both an accountant and a tax adviser. This is because they know that accountants are like GPs who are good and know all the general rules, but tax advisers are like surgeons who are specialists in their field and know the exceptions to the rules.
So, whilst an accountant will rightly tell you that entertainment is not tax deductible, a tax adviser will usually lift the rocks and find you some exceptions to the general rule that entertainment is not allowed for tax.
7. Embracing Tax Efficient Pensions
Savvy entrepreneurs think long term and make use of tax efficient retirement planning.
So instead of merely contributing to a pension scheme (which they get tax relief for by the way) and leaving the funds in there, they use vehicles like SSAS or SIPPS to help them leverage the funds and get a 2nd bite of the tax cherry.
These pension schemes subject to certain rules are then used to buy say a commercial property and the rental income gets additional tax benefits. Not bad is it?
8. Rewarding Staff Tax Efficiently
When it comes to rewarding staff, ambitious entrepreneurs go beyond the normal payroll and PAYE taxes. They use approved share schemes and staff suggestion awards to encourage their staff to get involved and to reward them tax efficiently. There are two kinds of staff awards:
- Encouragement Awards – For good suggestions, or to reward your employees for special effort
- Financial Benefit Awards – For suggestions that will save or make your business money.
Encouragement awards are tax free up to £25. But financial benefit awards are exempt up to £5,000. That’s right £5,000.
But before you go ahead and pay your staff tax free income, please note that as with all tax reliefs and tax exemptions, there are conditions to meet. Speak to your tax adviser first.
The other tax efficient reward scheme they use is the various share option schemes including Enterprise Management Incentive (EMI) Share Option Schemes.
Why is this tax efficient? Because when staff sell their shares, they pay 10% tax instead of 20, 30 or 40% if they meet the strict conditions. But again, please beware that these rules come with strings attached and always seek advice.
9. Preserving Business Property Relief
A common but expensive mistake I see among many business owners is lack of planning around how their businesses should be passed-on tax free when they are not here.
Subject to some conditions, the rules allow your life’s work to be enjoyed tax free by your loved ones. But if you do not have a Will or if in your Will you have passed the business to say your spouse, you are wasting this generous tax relief.
Savvy entrepreneurs avoid this mistake and ensure their life’s work does not go to waste.
10. Paying 29% Less Tax When Selling Their Business
Whether it’s time to put their feet up and retire or to cash in on their investment before moving onto the next entrepreneurial adventure, these business owners avoid paying 29% more tax by ensuring that they get the 10% tax rate.
They sell their shares instead of the assets in their company or they move the assets into another company subject to certain conditions (if the buyer is interested in the assets) and then sell the shares in this new company to get the best of both worlds for both buyer and seller.
So why sell the shares instead of the assets?
Because the company owns the assets. If it sells the assets it will pay corporation tax at, say, 19%. The entrepreneur then needs to extract the cash from the company to go on that lavish holiday or buy the yacht.
Let’s be conservative and say they pay 20% income tax. That’s 39% (19% + 20%) potential tax rather than 10%.
There you have it. The 10 things savvy entrepreneurs do to reduce their tax bills.
Please note that as with all tax matters, always speak to a tax adviser first. The fees they charge you are often mitigated by the tax they can save you having to pay.
This guide has been written exclusively for ByteStart by Jonathan Amponsah CTA FCCA, an award-winning chartered tax adviser and accountant who advises business owners on entrepreneurial tax reliefs. Jonathan is the founder and CEO of The Tax Guys.
Last updated - 4th March, 2019