Note from the Editor: Although this guest post doesn’t cover technology, I felt the topic was of interest to our readers in the UK.
A lot of people often overlook the fact that saving money can also help you to build your business; it’s one of the most often ignored principles of not just business, but life: if you save money on something, you have more money available to invest into opportunities that will, or can, grow your business/make you money.
Which is what I’m going to talk about today; exactly how you can use 3 simple strategies to reduce the amount of tax you pay, which will at the same time provide you with more money to invest in marketing/business development!
I’m not going to go into the marketing side of things (we have plenty of free marketing resources you can find here); I will let you concentrate on that, but what I will do, is show you three simple, effective ways that you can reduce the amount of tax you pay.
Are you self employed?
Firstly, are you self employed? The basic rate of income tax is the same as the small profits rate of corporation tax (20% as of April 2011), but it could still be beneficial, and profitable, to incorporate your Sole Trader, or Partnership business, and extract funds via dividends.
The reason for doing this is that dividends do not attract National Insurance contributions, so by incorporating, you will (at the very least) save money on Class 4 National Insurance Contributions.
In some cases, you can actually reduce the amount of tax you pay on profits by up to 30%! Which means 30% of your current tax bill could be used to invest in your business! To highlight this, have a look at the example below.
Say Sole Trader A and Limited Company A both have profits of £27,475. After the owner of the Sole Trader has taken the maximum he can for the year, without having to pay income tax (£7,475), that leaves taxable profits of £20,000. Roughly, the Sole Trader will pay £5,822 in income tax and National Insurance Contributions.
Limited Company A, also takes the maximum salary he can of £7,000 (without paying income tax or NI). That then leaves taxable profits of £20,745, which is taxed at the small profits rate of corporation tax, so Limited Company A pays £4,149 tax. You may then use the rest of the profits (£15,851) to either invest in the business, or you can take it as dividends – completely tax free! (Until you hit the higher rate threshold at £35,000 or £42,475 inc. personal allowance)
So there you have it – if your Sole Trader has profits of £20,000, then you are £1,673 better off! The savings can get higher, the higher your profits are!
Claiming back tax on interest income
If you have a low income/turnover, it could be worthwhile submitting a tax repayment form (HMRC form R40) to reclaim any tax you’ve paid on interest income from your bank account(s).
All you need to do is fill out form R40 with your income details, and then HMRC will calculate the refund due to you and send you a cheque – not bad for just a few minutes work! You can make a claim for up to the last 6 tax years, and your claim must be made no later that 31 January, 5 years after the end of the tax year to which it relates. So, for example, claims for 2010/11 must be made by 31 January 2017.
You can find form R40 here.
Reclaiming VAT if you use your home as part of your business
If you operate all, or part, of your business from the comfort of your own home, it is possible to claim the VAT back on certain household costs. For example, if you have 10 different rooms in your home, but use one as an office, then you can claim 10% of the VAT back on your heating and lighting costs.
Also, if you have a separate phone line for your business, you can claim back all the VAT on this. If, however, you have a personal telephone line, but also use it for business, you can claim a relative percentage of the VAT back on this. For example, if you use your personal telephone line 10% of the time for business, then you can claim 10% of the VAT back on your telephone costs. This depends on use. You can claim more, so please speak to your accountant.
You can also claim the VAT back on essential decoration, and office furniture, or anything else known as a ‘fixed asset’.
How Keepers Can Help You
If you are serious about reducing the amount of tax you pay, or increasing the amount of money you have available to invest, (or both!) then Keepers Accountancy are currently offering completely free, no-obligation consultations in which we actually guarantee to either save or make you money in just one hour! Click here to learn more.