It's natural to want to save tax on the money your business makes. Tax planning can identify the best opportunities to reduce taxable income and the tax rates that apply so that you pay less tax.
Planning to pay less tax
Effective tax planning is the best way to reduce tax liabilities. That means planning well in advance, looking for opportunities to save tax from initial business start up through to eventual exit. It also means looking at the whole picture, to see how you can pay less tax both within the business, on your personal income and in terms of potential inheritance tax.
However, saving tax isn't the whole story: it's important not to get carried away. Start with your overall business and personal objectives, and then look for opportunities to pay less tax - not the other way round.
Save tax: key opportunities
The simplest way to save tax is to ensure you are taking full advantage of tax allowances and reliefs. Using an appropriate level of debt financing allows you to save tax by setting interest payments against taxable profits. You may be able to reduce tax bills significantly by making sure you claim all your business mileage, or taking advantage of research and development tax credits.
You can save tax by using the right business structure, whether you are a business start up or need to change the way your existing business has been set up. That should include thinking about the best way for the business to hold any assets (such as property) in order to reduce tax bills.
You'll pay less tax if you can extract cash from the business in the most tax-efficient way. With relatively low capital gains tax rates and generous Business Asset Disposal Relief, converting income into capital gains can substantially reduce tax bills. You may also save tax by taking payments as dividends rather than salary, or taking advantage of tax relief on pension contributions.
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Simple ideas to reduce tax
There's a whole range of simple ways you may be able to reduce tax.
You may be able to reduce tax bills significantly by employing your spouse or transferring assets. Looking at the whole family's tax position and long-term plans is a key part of personal tax planning to reduce tax liabilities.
Other ways to save tax can include:
- Buying a more fuel-efficient car, to both save tax and reduce your motoring costs.
- Reducing tax bills on salaries by making use of tax-efficient employee benefits such as providing low-interest loans.
- Timing major purchases to bring forward tax savings.
- Using the right VAT accounting scheme to both simplify VAT returns and help you pay less tax. Smaller businesses may want to voluntarily register for VAT to ensure any VAT paid can be reclaimed.
Opportunities to save tax increase the more complex your business is. The larger the amounts of money involved, the more cost-effective it can be to develop strategies to reduce tax liabilities.
