A small business owner's guide to taxes

Business ownership entails paying taxes. In order to stay in business, all companies, even sole traders, must keep up with their tax payments. 

Your business's tax rate will be determined by factors such as income and profits, expenses, salaries, and more. Those who own small businesses or are considering starting a new one should take the time to understand how their taxes should be paid. Besides learning which expenses are tax deductible, you may also discover ways to reduce your tax liability.

Using this post from Zyla Accountants, you'll learn about important tax tips for small businesses, such as how to deduct expenses, how to meet tax deadlines, how to improve cash flow, and how to avoid future tax bills with accounting software and accounting professionals.

As a small business owner, what taxes are you required to pay?

Depending on their business model and legal status, small businesses may have to pay a number of taxes.

A tax year generally begins on the 6th of April and ends on the 5th of April the following year, although there may be variations based on the type of tax. The following is an overview of the different types of taxes you may encounter:

Corporation tax (Limited Companies)

Companies that are limited are subject to corporation tax. The main rate for Corporation Tax is set at 25% for companies with profits over £250,000, and the Small Profits Rate is set at 19% for companies with profits under £50,000, and must be paid no later than 9 months after the accounting period ends for your business, usually on or around the 1st of January.

HMRC expects limited companies to file a company tax return. If you earn a salary from a limited company, you will also have to file a Self Assessment tax return and pay tax or National Insurance through the PAYE system.

Income tax

The earnings of sole traders and partners are subject to income tax. Your business's PAYE system can be used to pay income tax on personal income, such as your salary. Taxes are paid by sole traders based on their business profits, which are included in their Self Assessment tax return.

Tax reduction tips to help you save money

Use some of the following methods to reduce your tax bill. Small and new businesses should begin using all of these methods as soon as possible. In the early stages of your business, getting a good idea of how to reduce your tax bill will help you succeed.

Recover deductible expenses

Tax-deductible expenses include a number of regular business expenses, but they must be solely used for business purposes. The following will generally be included:

Office costs

Tax deductions can be claimed for everything from phone and internet bills to stationary and computers.

Costs associated with travel

The cost of bus fares, train tickets, fuel, parking, and any other expense incurred while traveling for work. Meetings, exhibitions, and work-related events are eligible for tax deductions, but travel between work and home is not.

Clothing

Clothing that you wear only at work, like medical scrubs, may be deductible as a tax deduction. Remember that clothing that can be used for multiple purposes, such as a suit, cannot be deducted on your taxes.

Staffing costs

Any additional payments made to contractors are also tax-deductible.

Financial outlay

Charges associated with banking, insurance premiums, or contactless payments.

Office or workplace running costs

The costs you incur to run your office on a daily basis can include electricity bills, ground rent, maintenance fees, and more.

Marketing

You can also deduct the cost of marketing your business. A marketing campaign, website maintenance, or advertising campaign could fall under this category.

Make sure you meet tax deadlines in order to avoid penalties

You must submit your Self Assessment tax returns on time. Depending on what type of business you own, the 31st of January will always be the date to remember as a sole trader. Your accountant should advise you when your tax bill is due, but it is the business's responsibility to ensure taxes are paid on time.

Penalties for late filing

Tax returns filed late will be subject to various penalties depending on how late they were filed. Here are a few:

  • 1 day late will incur a £100 penalty

  • 3 months late may incur a penalty of £10 a day, for a maximum of 90 days.

  • 6 months late will either incur a further 5% penalty on all tax owed, or a £300 fixed penalty, depending on which figure is greater.

  • 12 months late will also incur either a further 5% penalty on all tax owed, or a £300 fixed penalty, depending on which figure is greater. In exceptional cases you could be made to pay 100% of the tax you owe.

Late payment penalties

The longer you delay paying your tax, the higher the penalty fee you'll owe. 

  • 30 days late will incur a 5% penalty on all tax due on that date.

  • 5 months late will be an additional 5% of tax due on that date.

  • More than 11 months will add a further 5% penalty. 

Ensure that accounting records are accurate

To ensure your tax obligations are met, you and your business should maintain an accurate record of your yearly finances.

When you keep an accurate accounting record of your business finances, you can determine which expenses are tax deductible, allowing you to save money on your overall tax bill. 

Engage the services of an accountant

As soon as possible, you should hire an accounting professional. Initially, you may be able to handle accounting on your own for your small business, but as your business grows, an accountant will be required to handle your finances.

Your accountant can identify money-saving opportunities and keep you on top of your business finances and tax obligations throughout the year.

Make sure you claim all allowances you are entitled to

As a business, you are eligible for a number of capital allowance schemes. Among them are:

  • Annual Investment Allowance (AIA): There is an allowance of up to £1,000,000 in the UK for qualifying expenses related to office equipment, hardware, software and furniture purchased for your business. This will allow you to deduct the full cost of an item when you calculate the taxable profits of your business.

  • Writing Down Allowance (WDA): You may benefit from an annual deduction in value up to 18% for a majority of items used for business purposes, such as an 18% relief on plant and machinery purchases, or a 6% tax relief on thermal insulation added to your building or electrical and lighting systems. You can find detailed information on WDAs on the government website.

  • Enhanced Capital Allowances (ECA): You could claim up to 100% of the cost of specific items back as enhanced capital allowance (ECA) within the first year of purchase, this type of allowance is also known as first-year allowances. ECA is limited to designated items featured on the governments energy technology product list and first year allowances for energy saving product list.

  • Research and  Development Allowance:  As a trader, RDA provides up to 100% relief on expenses incurred through research and development costs as a year 1 tax relief. RDA is applicable to qualifying capital expenditure used on research and development activities for your business. You can discover more information on the meaning of research and development through the gov.uk website.

With VAT accounting, you can improve your cash flow

Businesses that are VAT registered can benefit from VAT-conscious payment strategies. 

Consider increasing the frequency of your VAT return submissions as well. When you submit monthly VAT returns instead of annual or quarterly returns, you can offset the overpayment you receive from HMRC following the submission of your annual VAT return. However, this method may not be suitable for all businesses since your accountant's workload will increase, and you should also consider whether submitting VAT returns more frequently can outweigh the cost of waiting until the end of a tax year to receive your refund.

What is VAT?

Value Added Tax (VAT) is a type of tax applied to the majority of products and services sold by VAT-registered businesses within the UK. Your business must legally register for VAT if your annual taxable turnover exceeds £85,000, but you may also register for VAT if your taxable turnover is below this figure.

Are all businesses required to pay VAT?

There are some businesses that cannot register for VAT. If your business exclusively sells tax-exempt goods or services such as insurance, health services, or education services, then you are not eligible for VAT registration.

How often should my company file VAT returns?

VAT returns are due every 3 months at the end of what is known as your 'VAT accounting period', with the deadline for submitting your quarterly VAT returns being 7 days after the end of the accounting period.

Prepare to pay taxes

Whatever the size of your business, you should be prepared for this final point.

As a sole trader, you are entitled to a tax-free personal allowance of £12,570. If your business earns less than this amount, you won't have to pay income tax, but if you earn more than £12,571, you will have to pay 20% basic income tax. 

To avoid penalties, sole traders must pay their tax in full within 30 days of the payable date at the end of each tax year. As a result, your company should have this amount ready to pay HMRC.

If your company earns profits of £43,000 per year, you will have to pay £8,170 in taxes. Your accountant should have saved this amount throughout the year, and ensuring that you are ready to pay the full amount on time will help your business avoid penalties. 

Wrapping up

With the above tips, you and your business can greatly reduce your yearly tax bill. You should use these tax reducing techniques from the beginning of your business to ensure your early costs are as low as possible, and as your business grows, you will save even more money year-over-year.

Contact Zyla Accountants today for support.

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