Six ways to reduce your income tax bill ...
... especially for Small Business
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 (Sole Traders only)
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.
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 above). 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. Also in the recent Finance Act 2011 the chancellor has made it more tax beneficial to form a limited company because he decreased the Corporation tax rate but increased the National Insurance rates!
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 £600 per month 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 £100,000 on any new capital equipment plus 20% on any new equipment above that amount. You can still claim 20% on equipment carried forward from a previous year. This can really help to reduce your taxable profit. 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 but don't forget this Annual Investment Allowance of £100k is been reduced to £25,000 from April 2012.
6. Working Tax Credit and 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.
Read more in our 'Little Black Book' - sign-up for a free download ! »