1. Tax Relief if you make a loss in your business

You can carry forward losses to future years or carry back losses to previous years.For carrying back losses the rules are restricted and different depending on whether you are a Sole Trader or a limited company.

If you can carry back losses you can get a tax refund and if you carry forward losses you will have less tax to pay in the future.

2. Tax Relief

If you make a loss in your first year of business there are a few ways you can save tax .

Most businesses make a loss anyway in their first year as they are setting up the business. You then set off the losses in your business against the tax you paid in your previous PAYE job. You can even do this if you've left your job in the previous tax year.

This can be quite attractive especially if you were paying tax at 40%. You could get quite a large tax refund. Alternatively if you make a loss in your business you can set it off against any capital gains or rental income.

*Sole Traders only.

3. Forming a limited company

This might not be a wise choice in your first years of business and especially if you are trying to set your losses off against your other income (as mentioned previously).

In the long run however, you will protect yourself and your business and as your profits increase you will make substantial savings every year if you convert to a limited company.

4. Employment

You can employ a non tax paying family member (you have to make sure they work in your business) and so reduce your profit and tax.

Also, if you are a limited company you can pay yourself tax free and the rest as a dividend.

5. Capital (equipment) allowances

The tax man is becoming very generous in this area.

You can claim up to 100% tax relief on any new capital equipment (except cars).

Also, when you first start your business you can bring any equipment you already own into the business – it all helps to reduce your (taxable) profit.

6. Working Tax Credit & Children’s Tax Credit

If you do make losses or have reduced profits not only have you the benefit of saving tax and national insurance but you also have the advantage of receiving tax credits from the revenue.

Working tax credits
If your profits are very low or you are making losses you could claim working tax credits. This is a great way to get money from HMRC especially in those hard times.
Children’s tax credits
In addition to working tax credit if you’ve got children you will receive children’s tax credits. Even if you’ve got a fairly good profit you could still receive substantial children’s tax credit although this will depend on your spouse’s income too.
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