VIDEO: How to save on business taxes in the UK?
Our clients, Ania and Wojtek, run a small shop together. They contacted us at the beginning of 2022 due to the very high taxes they were paying to HMRC. Every year, the company generated increasing profits, but also every year, there was more and more tax to pay.
The clients had their own accountant who correctly handled their HMRC filings, but they never received any advice from her that would help them reduce their very high annual tax burden.
The business was run as partnership (a partnership), which means that the partners filed their annual returns using a self-assessment (each of them submitted their own return).
From savings to tax optimization and cost reduction
As soon as we were provided with the details of Ania and Wojtek's business, it became clear to us that they should have made significant changes to their business operations from an accounting and tax perspective a long time ago.
Change of Business Structure
The shop's income was so substantial that running the business as a partnership became completely unprofitable, because even though the company was developing beautifully, a large portion of the earnings was consumed by taxes.
We suggested to the clients that they register as an LTD company (limited liability) and explained how this would improve their financial situation.
The higher a company's income, the more beneficial it is to operate it as an LTD company. This allows for much more flexible management of earnings, and as a result, significant tax savings can be achieved.
Our clients' business was well-developed and generating substantial profits, which is why it should have been operating as a limited.
The advantages of running an LTD company and for which types of businesses this structure is most suitable, we have described in an article that you can read here.
Maximizing available tax reliefs
During our analysis of clients' expenditures, we observed their underutilization of available tax reliefs. This was largely due to the company being operated in a disadvantageous structure. We explained to clients how they could save a significant amount of money.
- Remuneration for LTD directors/owners at a level that avoids income tax and National Insurance contributions (National Insurance Contribution – NIC), which are tax-deductible;
- Opportunity to pay out company profits as dividends, including a tax-free dividend allowance (up to £2,000 per director – rate for 2022/23), with the remainder taxed at a rate lower than income tax, at 8.75% (basic rate for 2022/23);
- Utilizing tax-free savings allowances (up to £6,000);
- Tax-free contributions to a Personal Pension Plan;
- Leasing electric company cars for directors, which are very low-taxed and reduce corporation tax (Corporation Tax – CT) as a business expense;
- Purchasing company equipment using super-deduction (the ability to deduct 130% of the value of new fixed assets purchased); this scheme is valid until March 31, 2023.
You can read about the most efficient ways to extract funds from the company for directors here.
Better sales control
First and foremost, we meticulously managed the accounting for Ani and Wojtek's company, because real control over a business's financial situation depends on well-maintained accounting.
Real control over a company's financial situation depends on well-maintained accounting
We prepared accurate financial reports with a particular focus on the Profit and Loss report (you can find an article on how to avoid financial problems in a company here, and an article on how to check financial liquidity – on our sister portal Mamona). Their analysis provided us, among other things, with information that the company had inflated transport costs for its goods due to very poor control and accounting of sales. This had to change, so we also recommended user-friendly accounting software to our clients.
The Right Accounting Software is a Necessity
Good software for recording income and company settlements is fundamental. Ania and Wojtek didn't use any; they simply collected their receipts and handed them over to their accountant. Besides being tedious and inconvenient, it's important to remember that soon every company will be required to file and maintain digital accounting under the Making Tax Digital (MTD) program – using appropriate software recognized by HMRC.
For our clients, the matter was already quite urgent, as the time was fast approaching when they needed to be registered for VAT, and for such companies, filing with HMRC via MTD is already mandatory. You can learn more about MTD here.
At our company, we use XERO software and recommend it to all our clients. On our website, you can find a free XERO course in video episodes, which is worth checking out.
Tax Savings Must Be Planned
An initial discussion about tax savings resulted in a long-term collaboration. Ania and Wojtek utilized all our advice and opened an LTD company, which in the long run will bring them higher income with lower taxation than before. They also asked us to manage their accounting.
Unfortunately, we couldn't help our clients save on taxes for the 2021/22 tax year, because nothing can be changed in the past. Company income and expenses must be monitored continuously, and tax optimization should be planned in advance.
However, the settlement for the next tax year will look completely different, because thanks to the tax optimization carried out by TaxOne, Ania and Wojtek will have significantly less to pay to HMRC.
Remember! Tax savings are only possible when a company has regularly and meticulously maintained accounting, because it is the foundation of all future business plans and the key not only to tax optimization, but also to a true insight into the company's situation and, consequently, to continuously monitoring its financial status.
