7 tax saving tips for small businesses

A significant number of small businesses in the UK do not take full advantage of HMRC approved or endorsed tax breaks. If implemented correctly these tax breaks could save a lot of money. We have listed below 7 tax saving tips that are commonly available to small businesses and their owners.

Employment allowance

The Employment Allowance allows eligible employers to reduce their National Insurance liability. The allowance is currently £4,000 per tax year. An employer can claim less than the maximum if this will cover their total Class 1 NIC bill.

The allowance is available to employers that have employer NIC liabilities of under £100,000 in the previous tax year. The allowance can only be claimed once across all employer’s PAYE schemes or connected companies.  There are currently a number of excluded categories where employers cannot claim the employment allowance.

High dividend / low salary approach

Director shareholders want to ensure that they pay the combined lowest rate of tax possible when extracting money from their companies. For many years, directors have followed a high dividend low salary extraction strategy to pay themselves in the most tax-efficient manner.

There are also other profit extraction options such as paying interest on any funds directors may have loaned their company and using or re-examining tax-free benefits. Director shareholders looking at implementing this high dividend low salary strategy should ensure that they take at least a minimum amount of salary that will ensure sufficient contributions for State Pension purposes.

Recovery Loan Scheme

The Recovery Loan Scheme was launched on 6 April 2021 following the closure of previous COVID-19 loan schemes. This scheme will provide further support as businesses recover and grow following the disruption of the pandemic and the end of the transition period. The scheme allows businesses of any size to access loans and other kinds of finance between £25,000 and £10 million. The scheme is currently expected to remain open until 31 December 2021.

Once received, the finance can be used for any legitimate business purpose, including growth and investment. The government guarantees 80% of the finance to the lender to ensure they continue to have the confidence to lend to businesses.

Utilise capital allowances

Most day to day business expenses can be deducted from business income when calculating your taxable profits. However, the rules are different for ‘capital’ expenditure.

The new super-deduction tax break applies on qualifying capital asset investments from 1 April 2021 until 31 March 2023 and allows businesses to deduct 130% of the cost of any qualifying investment on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances. This means that for every £1 businesses invest they can reduce their tax bill by up to 25p.

An enhanced first year allowance of 50% on qualifying special rate assets has also been introduced for expenditure within the same period. This includes most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances.

SME R&D Tax Relief

The Research and Development (R&D) tax credits scheme offers businesses the ability to invest in new technologies and scientific development in exchange for generous tax reliefs. Businesses investing in R&D projects can benefit from a significant reduction in their Corporation Tax bill.

Small and Medium-sized Enterprises (SME) can claim R&D tax credits of 230% on qualifying expenditure. This effectively means that for every £100 a company spends on qualifying R&D, they can deduct £230 from their profits when calculating profits chargeable to Corporation Tax. For loss making companies using the SME scheme the tax credit is fully payable (subject to certain restrictions).

Flat Rate Scheme annual review

Using the VAT Flat Rate scheme, businesses pay VAT as a fixed percentage of their VAT inclusive turnover. The actual percentage used depends on the type of business. The scheme has been designed to simplify the way a business accounts for VAT and in so doing can reduce the amount of VAT to be paid as well as reduced administration costs of complying with the VAT legislation.

The scheme is open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT.

Staff parties

The cost of a staff party or other annual entertainment is generally allowed as a deduction for tax purposes. If you meet the various criteria outlined below then there is no requirement to report anything to HMRC or pay tax and National Insurance. There will also be no taxable benefit charged to employees.

An annual Christmas party or other annual event offered to staff generally is not taxable on those attending provided that the average cost per head of the function does not exceed £150. Note, that the event must be open to all employees and there can be more than one annual event.

All costs including VAT must be taken into account. This includes the costs of transport to and from the event, food and drink and any accommodation provided.

If you would like more information on any of these tax reliefs, please get in touch.