The UK has seen the fastest growth in self-employment in Western Europe over the past couple of years. As a sole trader or small business, it's important to have a good grasp on your business finances, how you and your employees are compensated, and what this means for tax purposes. There are a number of ways you can minimise your tax, but first:
What are the differences between employees and the self-employed?
So what does this mean for your tax? Self-employed individuals can be exempt from PAYE (pay-as-you-earn) - a withholding tax on income and employee income payments. Determining whether you and/or your employees fall in this category is a first step in reducing tax on your business.
What else should a new business do to minimise their tax?
- Choose the right structure for your business – Most businesses start out as sole traders (self-employed) but once they start making profits, they convert to limited companies. This is because sole traders pay more tax than company structures.
- Choose the best VAT scheme - You might be better off with Flat Rate or Cash Accounting.
- Get an Accountant and use accounting software (Debitoor) – the penalties and fines for getting your tax wrong can be huge!
- Employ your family – Children can legally work from the age of 13, which means they can perform activities that are relevant and justifiable in your business. Each member of your family has a tax free allowance of £10,600 (2015/16).
- Avoid earning more than £100,000 – For all ages, the personal allowance reduces where taxable income is above £100,000 – by £1 for every £2 of income above this limit, so that the personal allowance is lost once taxable income exceeds £121,200 (2015/16).
- Pay into your pension – Currently, you can pay up to £40,000 per year into your pension.
- Pay dividends – Directors will generally take a low director's fee and receive the rest of their income in dividends.
- Claim expenses – You may well have an office at home and use your car for business.
- Use company assets – Sometimes, the Benefit in Kind Tax works in your favour, so you could get the business to buy the assets for your use. For example: a commercial vehicle or computer equipment.
- Buy assets – You should be able to buy assets with a loan or on Hire Purchase and you will receive the tax relief as soon as you take delivery.