How Can Your Business Cut Down on Tax?

All businesses are subject to a number of taxes, and if you understand them better you will have a better ability to plan for them. Below are the synopses of the main taxes:

• Income tax, which is deducted from gross salary payments during payroll. Income tax is deducted at a rate of 20%, 40% or 50%, depending on the earnings. Most individuals can earn 8,105 per year free of income tax
• National Insurance payments, which are paid by both the employee (deducted from the gross salary) and the employer (an additional expense on top of the salary).
• VAT (value added tax). Companies which turn over exceed 77,000 or more per year must register for VAT. VAT is charged on top of your net invoice amount at the rate of 20%. VAT can also be claimed from purchases your company makes – you only pay the difference between the VAT you charge to your clients and the VAT you pay via purchases.
• Corporation tax is an annual payment based on the profit that your company makes. Your profit is calculated by deducting expenditure from the income. The current corporation tax rate for small companies is 20%, and is payable on your profit each year.

Tax avoidance entails using 100 percent legal means to reduce your tax bill, which is something you have every right to do. The major way to reduce your tax bill is to reduce your taxable income by taking full advantage of allowable deductions. You could pop over to this site to know more. That said, many expenses incurred while running the business can be offset against company profits, thus reducing corporation tax. This includes:

– Travel costs – you can claim the costs of travelling to and from a client together with a car parking costs and congestion charges.

– Sustenance – you can claim for meals and refreshments purchased whilst working with a client

– Business trips – if you’re away from home on business purposes you can claim for accommodation costs, such as hotels or B&Bs.

– IT equipment – it can be claimed if it has been purchased solely for business use.

– Phone and broadband – you can claim for mobile phone and broadband costs when they are used for business purposes.

– Professional memberships and subscriptions – HMRC publishes a list of accepted professional bodies for which you can claim back the membership fee.

– Dedicated home office – If you work mostly at your client’s but manage your business from the home office you can claim 4 per week which adds up to 208 per year.

Another example of minimising a tax bill is paying yourself a small salary and taking profits as dividends instead. You can earn up to 7,500 tax and National Insurance free and by taking profit as dividends instead you will be paying corporation tax that is lower than the income tax.

Setting up a pension scheme will also reduce the corporation tax paid on the profits or you’ll receive tax relief on your personal contributions depending on the chosen pension scheme.

Donations to charity are tax deductible expenses as well. These donations can reduce your taxable income and lower your tax bill.

Close to year-end shift income and expenses. For example, allocate income into the next year to decrease this year’s taxes.

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