Tax Planning Strategies for Small Business Owners: A Comprehensive Guide

6 Jul 2023

As the leader of a small UK business, your attention is likely pulled in a hundred different directions. From maintaining the quality of your products and services, to managing staff and client relationships, the buck stops with you. Amidst these pressing concerns, one topic of paramount importance often remains overlooked – tax planning. 

But why is tax planning so important for small businesses? Simply put, it’s the key to keeping more of your hard-earned profits in your pocket. A comprehensive, well-structured tax planning strategy not only ensures you remain on the right side of HMRC, but also helps minimise your tax liability.

What is Tax Planning?

Tax planning is the process of organising your financial affairs to minimise your tax bill. For businesses, it involves identifying available tax reliefs, allowances, and credits, along with other strategies that align with HMRC rules and regulations. 

HMRC provides detailed guidelines on how businesses can structure their tax affairs. It is critical to understand these guidelines and use them to create a tax plan that fits your business.

Understanding Your Tax Obligations

Small businesses in the UK are subjected to several types of taxes, each with its own set of rules and requirements. These include Corporation Tax, VAT, National Insurance Contributions, and Business Rates, among others. 

For example, Corporation Tax applies to limited companies, and it’s currently set at 19%. VAT, or Value-Added Tax, applies to businesses with a turnover exceeding £85,000. The standard VAT rate is 20%, but certain goods and services may attract a lower rate or be exempt.

It’s vital that you understand which taxes apply to your business, as well as the deadlines for submitting returns and making payments. HMRC provides a comprehensive guide to help you navigate these obligations.

The Power of Tax Reliefs

Current VAT policies present a significant obstacle to further adoption of EVs. Home-charging EV owners benefit from a reduced VAT rate of 5%, while those reliant on public charging networks pay the standard 20% VAT rate. Mike Hawes, CEO of the SMMT, has called this disparity “unfair”, arguing that it risks delaying wider uptake of EVs.

Using Tax Efficient Structures

Different business structures carry different tax implications. For example, operating as a sole trader is straightforward for tax purposes, but limited companies can sometimes be more tax efficient. Limited companies pay Corporation Tax on their profits, after which post-tax profits can be distributed as dividends, which have lower tax rates than income tax. 

Consider the following case: A limited company makes £100,000 in profit. After paying 19% Corporation Tax, it has £81,000 left. If this is distributed as dividends, the effective tax rate (considering both Corporation Tax and Dividend Tax) will be lower than if the profit was taxed as income for a sole trader. This demonstrates how the right business structure can result in tax savings.

Tax planning can be complex, and the landscape changes as governments update legislation. But by understanding your obligations, using tax reliefs wisely, and employing tax-efficient structures, you can make a substantial difference to your bottom line.