Intuit QuickBooks Small Business Index, December 2024
TAX AND PENSIONS
Tax tips for small business owners
Paying tax is an unavoidable part of owning a business. From large corporations to small sole traders, keeping up to date with your tax payments is essential to staying in business. But how can you reduce the tax you owe each year?
The tax you owe depends on a variety of factors, such as your income, business expenses and more. If you own a small business, or are considering starting one, it’s essential to know how much business tax you need to pay.
In this article, we’ll share our tax tips for small business owners. From learning which expenses are tax-deductible, to avoiding late penalties from HMRC, alongside using accounting software to make preparing your taxes easier.
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Tax basics for business owners
Before we go into our money-saving tips, here is some essential tax information for beginners. The types of tax you pay will depend on whether you’re a sole trader or limited company.
If you’re a partnership or sole trader, adding partners to your business may save tax.
What taxes do sole traders pay?
Sole traders and partners will pay income tax on earnings. It’s important to keep your business and personal expenses separate, to make paying tax easier.
Income tax is paid on personal income, such as your salary, and can be paid through your business's PAYE system. Sole traders will pay income tax based on the profits of their business, which are included in a Self Assessment tax return.
If you’re a sole trader, take note of your profits - you may still wish to pay Class 2 National Insurance voluntarily, to build up an entitlement to state benefits.
What taxes do limited companies pay?
Corporation tax is a type of tax that is applied to limited companies.
It must be paid no later than 9 months after the accounting period ends for your business, usually on or around the 1st of January. The main rate for Corporation Tax generally being set at 25% for companies with profits over £250,000, and a Small Profits rate of 19% for companies with profits under £50,000.
Limited companies are expected to send a company tax return to HMRC. If your NIC and PAYE payments are low enough, you may be able to pay these quarterly.
If you are the director of a limited company, you will also be required to file a Self Assessment tax return. You must also pay tax or National Insurance through the PAYE system if you earn a salary from your limited company. A tax-efficient way to take money out of your business is through a mix of salary and dividends.
When do I need to pay my tax?
A tax year will generally begin on the 6th of April and run until the 5th of April the following year, although each type of tax may have a different day for due payments. For example, if you are VAT registered, this tax needs to be paid monthly.
As a sole trader, Self Assessment tax needs to be paid by the 31st of January.
Top tips to help reduce your tax bill
You can help reduce your overall tax bill with some of the following methods.
As a small or new business, it is good practice to begin using all of these methods as soon as possible. Getting a good idea of how to reduce your tax bill legitimately in the early stages of your business will set you up for better success in the future.
Claim back deductible expenses
There are many regular business expenses that you are legally allowed to ‘write off’ as tax-deductible expenses. However, these expenses must be wholly and exclusively for business use. This will generally include:
Office costs
Everything from the cost of equipment, such as stationary and computers to phone and internet bills, can be deducted from your tax bill.
If you’re investing in equipment for your business, such as tools or software, you can claim tax relief faster if you buy it closer to the end of the financial year.
Travel expenses
Bus fares, train tickets, fuel, parking, or any other costs incurred by travelling for work. This can include travelling to meetings, exhibitions, or work-related events.
However, travelling between work and home is not a tax-deductible expense. QuickBooks offers a business mileage tracker app to track your travel expenses.
Clothing
If the clothing you wear for work can only be worn at work, for instance, medical scrubs, then you may be able to write this off as a tax-deductible expense.
It is important to remember that clothing that could be used for a variety of purposes, such as a suit, cannot be written off as tax-deductible.
Staffing costs
The salaries of your staff are also tax-deductible, as well as any additional payments made to contractors. If your small business has employees, using payroll software can help you stay on top of tax.
Financial outlay
Any additional charges such as banking charges, insurance premiums, or contactless payment charges.
Office or workplace running costs
This can include your electricity bill, ground rent, maintenance fees, or any other costs incurred by the day-to-day running of your workplace. If you work from a home office, you may be able to claim tax relief for working from home.
Marketing
The cost of marketing your business is also deductible. This could be the cost of marketing campaigns, website maintenance, and advertising.
Read our separate blog for a full list of allowable expenses if you’re self-employed.
You can also look into tax-free benefits in kind for your staff, such as mobile phones, recreational activities, or certain types of transport or fuel. You can find out the latest rules for Benefit in Kind in our article about the New Tax Year changes.
Meet tax deadlines to avoid penalties
It is vital that you submit your Self Assessment tax returns on time.
As a sole trader, this will always be the 31st of January each year, though these dates can be different depending on the type of business you own. You can find out more about the deadlines for Self Assessment here and add them to your diary.
Your accountant should advise you on when your tax bill is due, but it is the responsibility of the business to ensure tax is paid on time.
Late filing penalties
If you file your tax return late, you will be subject to varying penalties depending on how late your tax return was filed. These are as follows:
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
If you miss your tax payment deadline, the penalty fee you owe will increase incrementally the longer it goes unpaid.
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.
Read our separate blog to find out more about how to avoid late tax penalties.
Maintain accurate accounting records
As a legal requirement, you and your business should maintain an accurate record of your yearly finances to ensure your tax obligations are met.
VAT-registered businesses should already be signed up for Making Tax Digital.
Having a record of your business finances allows you to determine which expenses are tax-deductible, meaning you will likely save money on your overall tax bill as a result of keeping an accurate accounting record.
You can use QuickBooks’ accounting software for limited companies and sole traders to keep on top of your financial records. With QuickBooks, you can also:
Send invoices
Manage your expenses
Prepare VAT returns
Hire an accounting professional
You should hire an accounting professional if it’s appropriate for your business.
For small businesses, it may be feasible to handle accounting on your own for a short time. But as your business grows, it may become necessary to allow an accountant to help handle your business finances and offer tax tips.
A dedicated accountant will be able to identify money-saving opportunities within your business and will allow you to stay on top of your business finances and tax obligations throughout the year.
Find a certified accountant through our finder tool.
Claim any allowances you are entitled to
There are a number of capital allowance schemes you are entitled to as a business. These include:
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.
If your business makes a loss during the year, for example on property income or selling assets, you may be able to claim some tax relief on your tax return.
Also, ensure you’re making the most of any tax credits you’re legally entitled to. If you or your business employees earn a relatively low wage, you or they may be able to claim Working Tax Credits, Universal Credits, or Child Tax Credits.
Turning your income into capital can also save tax if you’re selling the business.
Improve cash flow with VAT accounting
For VAT-registered companies, employing VAT conscious payment strategies can help your business better handle yearly finances and improve your cash flow.
You may also consider increasing the frequency of your VAT return submissions. If your business usually receives repayment from HMRC following your yearly VAT return submission, you can offset this overpayment by completing monthly VAT returns instead of annual or quarterly returns.
This method may not be suitable for all businesses, as the monthly workload of your accountant will increase. You should also consider whether the potential financial gains from submitting VAT returns more frequently outweigh the cost of waiting until the end of a tax year to receive your repayment from the HMRC.
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.
You can find out more about what VAT is and how it relates to Making Tax Digital.
Do all businesses pay VAT?
Some businesses 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?
Your business should submit quarterly VAT returns every 3 months at the end of what is known as your ‘VAT accounting period’, with the deadline to submit your quarterly VAT returns being 7 days after an accounting period ends.
You can find out more information about registering for VAT online in our blog post.
Be prepared to pay business tax
Our final tax tip is essential to any business, and one you should be prepared for regardless of the size of your business. Using cash flow forecasting tools can help you plan ahead for tax, so you have enough saved for your tax return bill.
Firstly, as a sole trader, you are given a tax-free personal allowance of £12,570 per year. This means that if your business earns this amount or below you are not obligated to pay any income tax, but if you earn £12,571 you will have to pay the basic income tax rate of 20% as of April 2023.
As a sole trader, tax should be made payable at the end of each tax year, and you are expected to pay this in full within 30 days of the payable date to avoid any penalties. This means your company should have this amount to hand and ready to pay the HMRC.
For example, if your company earns profits of £43,000 per year, then you will be expected to pay £8,170 in tax. This amount should have been saved throughout the year by your accountant. Ensuring that you are ready to pay the full amount on time will help your company avoid unnecessary penalties.
Our final tax tips
With the above tax information, you and your business can help to reduce your yearly tax bill.
It is best practice to employ these techniques from the very start of your business to ensure your early costs are reduced as much as possible. As your business begins to grow, you will save even more money year-on-year as a result of useful tax-reducing tips.
We do not recommend using tax avoidance schemes, as they can result in penalties from HMRC if their only purpose is to reduce your tax!
It is also essential to pay your employees the National Minimum Wage.
Remember, this information on tax offers general information for sole traders and small businesses. For specific tax guidance for your business, you should always hire a professional accountant to streamline your VAT and TAX process and offer bespoke tax advice for your business.
QuickBooks provides businesses with the best way to keep track of their accounting with our simple and easy-to-use accounting software for sole traders, limited companies, and accountants. Discover our plans & pricing page to find out how you can save money on your yearly tax bill.
The information on this website is provided free of charge and is intended to be helpful to a wide range of businesses. Because of its general nature the information cannot be taken as comprehensive and they do not constitute and should never be used as a substitute for legal, accounting, tax or professional advice. We cannot guarantee that the information applies to the individual circumstances of your business. Despite our best efforts it is possible that some information may be out of date. Any reliance you place on information found on this site or linked to on other websites will be at your own risk.
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