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.
Get help from the Association of UK Accountants
We, at the Association of UK accountants, can help you pay less tax. You can contact us anytime on Debitoor's accountant list or directly on our website. We are ready to help!
