The last quarter of the current financial tax year is a good time to reflect on your business or personal income and to look at your likely earnings for the tax year 2013-2014. Chartered accountant and tax expert Robert Stone says that it’s all about finding the most efficient ways of reducing a tax bill without resorting to complicated tax schemes or running the risk of incurring HM Customs and Revenue’s wrath.
“Why pay more tax than you need to when there are plenty of legitimate ways to make the most of your finances,” said Robert Stone. “It’s just a matter of careful planning and knowing what allowances or tax reliefs you can claim. However, it is important to get proper advice, because everyone’s circumstances are different.”
For example, if a business is making a loss from trading, it may be better to carry the loss forwards to the new tax year. Alternatively, it can make financial sense to bring forward expenditure before the end of a tax year, so that you receive the tax benefits one year earlier. This is particularly relevant currently as corporation tax is due to fall from 23 per cent to 21 per cent in April this year.
Seven tax saving tips for small businesses in Somerset
If you take a loan out for your business, make sure you claim the tax relief on it by paying the money immediately into your business bank account. Don’t forget to inform your accountant when you have done this.
Any business which is VAT registered can reclaim VAT on up to 25p out of the fixed mileage rate of 45p per mile for business motoring. For example, if you pay £4,500 fixed mileage rate to an employee driving a car with a 1600cc petrol engine, then you could reclaim £283 of VAT. Make sure you keep the correct records and get VAT receipts, and if you have never put in a claim before, you could claim for the past three years.
Did you know that if you are a basic rate taxpayer you receive 20 per cent pension tax relief. So if you make a payment of £8,000, the government makes a tax contribution of £2,000, which makes the total contribution £10,000. Non taxpayers get basic rate tax relief, so if you make the maximum payment of £2,880, then HMRC adds a contribution of £720, making the gross contribution £3,600. Better still, if you are aged between 55-75, you can take a tax free lump sum of 25% (£900) of the £3,600 pension fund. So for the cost of £2,880 you now have £3,600 in your pension fund, plus a cash lump sum of £900.
At present, small businesses can claim 100 per cent capital allowances when buying plant, machinery and equipment in any year, up to a maximum of £250,000. Even if you buy equipment on the last day of your accounting period and start to use it, you still receive relief for the accounting year in which you bought the item. So make sure you do make the purchase before your year end and not one day after, otherwise you will have to wait another year before you get the tax relief.
You can reduce the tax and National Insurance charge on your profits by paying your spouse/civil partner or your children a wage – if they have no income and are working for you in your business.
This is the ideal moment to review your business structure and to decide whether it is right for you. Before the start of the next tax year consider whether you should remain a sole trader (which was ideal for when you were starting out), or whether you should incorporate your business into a limited company. There are costs involved, but the potential tax and National Insurance savings for a sole trader, with profits of £35,000, is £2,343.
If you are paying tax on investment income, you can use your ISA allowance of up to £11,520 in the current tax year of which up to £5,760 can be in cash and the remainder as stocks and shares. The income from an ISA is tax free as is the capital growth.