The Importance of Being Tax Efficient

Being tax efficient is key to business success, regardless of employee numbers or turnover. Whether you’re an  established limited company, a new start-up or sole trader, reducing your tax burden legally has several advantages. Not least among these is ensuring you have more money to invest back into your business and grow. 

Here we look at some of the elements you need to be focused on when managing the accounts, all of which should make you more tax efficient. 

Claiming Expenses

While it should be a given for most business owners, it’s surprising the number of people who miss out on important allowable expenses that can reduce that final tax burden. In some cases, this is down to overlooking what is allowed, in others, it’s just a case of not being aware of the rules. This is why it’s always a good idea to work with a professional accountant. 

Ideally, you should keep a clear record of everything that you need to purchase and have to pay for in relation to running your business. Failing to do so could mean that your business is missing out on significant savings when it comes to that all-important tax return. 

Tax Efficiency Begins With Better Tax Planning 

For limited companies with a sizable turnover, it’s also important to plan for the near future. This is  another reason it’s critical to work with a chartered accountant. From April 2023, for example, the corporation tax rate for some businesses rises from 19% to 25%. A good tax accountant will be able to advise and help you in minimising your tax burden when this change takes effect. 

Super-Deduction Tax Relief

If you’re planning on investing in new plants and machinery for your business, there’s another change to the tax relief rules that is important. The Super-Deduction Tax Relief gives you a 130% reduction as first-year relief on capital investments. This was previously just 18%; the increase runs to March next year. It effectively allows you to get a reduction in tax of 24.7 pence for each pound that you spend. 

Pensions Can Make Limited Companies More Tax Efficient

If you run a limited company, then adding a pension contribution facility to your business is also a good idea. It can help you be more tax efficient  and reduce your tax burden. In short, employer pension contributions (the amount you add to what an employee is paying) are considered a business expense. They can therefore be offset against your corporation tax payments. 

R&D Tax Credits

The government is trying to encourage more investment into research and development. It has made this a lot more tax-friendly for businesses in recent times with R&D Tax Credits. This relief applies if you’re taking part in any project that’s concerned with advancing technology or improving our scientific knowledge. SMEs can deduct an extra 130% of qualifying costs from their profit on top of the usual 100%. If you don’t make any profit you can claim back a repayable tax credit of 14.5%. 

Is it Tax Efficient to Pay Your Corporation Tax Early?

Finally, if you are a limited company, you may think paying any tax early is a bad idea. However, with corporate tax, you can get interest payments back on what you pay early (at the moment this is 0.5%). Depending on the turnover of your business, this can mean a significant tax reduction over time. However you might find that you can access a business savings account with a higher interest rate than this. Depending on the amount you can commit, some have rates of up to 2% or even higher. In that case, keeping your taxes in your savings account as long as possible could be a better option.

Working with a Chartered Accountant

Whilst DIY tax accounting is possible, it is time consuming, taking you away from other areas of your small business. Additionally, without the correct knowledge and expertise, mistakes can easily be made and the consequences can be costly. If you want to reduce your tax liability legally and have more money to invest in your business, it’s critical to work with a professional team of chartered accountants. Want to find out more?

Contact the team at Neil Smith Accountancy in Essex today.