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How to pay less tax legally

There are many challenges when you run a business. One part of running a business that causes headaches is paying taxes. This article looks at how you can pay less tax as a tradesperson or business owner. All legally of course!

When it comes to tax, there are two types of businesses – sole traders and limited liability companies. And there are three ways that you can receive income:

  • Profits (sole traders only)
  • Through payroll under PAYE (both types)
  • Dividends (limited liability companies only)

We understand that rising taxes might be a concern and you might be asking yourself ‘how can I pay less tax’. Well, in this guide, we give you some pointers to help navigate through the maze.

If you’re a sole trader, you might want to go ahead and check out our other guide specifically on paying less tax as a sole trader.

Tip 1: Claim every expense that you can

The good news is you can save on the amount of tax you pay. This relies on you claiming a deduction for all the money spent on running your business. But these must all be genuine business expenses.

Not everything you spend can be claimed against tax, but a surprising amount can be. The biggest sin you can commit is to lose invoices for costs that you could have claimed. This is because it in money moving straight from your pocket to the taxman.

Expenses you can claim include:

  • The cost of all materials used for jobs
  • Staff costs, including employer’s national insurance
  • For cars and vans, a fixed rate per mile provided no capital allowances (see below) have ever been claimed for the vehicle. The mileage rate for cars and vans is 45p per mile for the first 10,000 business miles then 25p per mile (2021/22 tax year). This covers all vehicle-related costs
  • Software or app costs (but not if purchased as opposed to rented)
  • Accounting costs
  • Advertising
  • Travel expenses (but not from home to the office or depot), vehicle insurance, repairs and servicing, parking, and breakdown cover
  • Public liability, employer, and professional indemnity insurance. Note that public liability insurance is compulsory
  • Finance and legal fees including bank charges, search fees, valuer’s fees etc. plus any stationery and postage
  • Protective clothing or uniforms (which can be normal clothing but with the company logo)
  • Training to keep you or your staff up to date
  • Fees for memberships of professional associations
  • Premises costs for heat and electricity based on the number of hours per month worked at home with 25 to 50 leading to a claim of £10/month, 51 to 100 hours at £18/month and 101 or more hours at £26/month
  • Premises costs, based on the proportion of the property used by the business

However, there are a few costs you can’t claim for including:

  • Assets that have an ongoing use (e.g. tools, but see capital allowances below)
  • If costs relate to both private and business use, you can only claim for the business usage
  • You can’t claim for entertaining customers or prospects or giving them gifts except when these are branded
  • You can’t claim for training where you learn a new skill

You can also claim CIS deductions you experienced as a subcontractor which come straight off your final tax bill.

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Tip 2: Don’t miss out on capital allowances

Assets purchased (like good tools) that will be useful for 2 years or more cannot be claimed as a normal business expense. These are known as “capital items”. These are claimed under the “capital allowances” system.

You can’t make a claim for land, things used for education and training, something that isn’t used in the business (e.g. something for your home) or for anything that will last 20 years or more.

There are different types of capital allowances and sometimes you need to keep track of a “pool” of assets from one year to the next. It’s all quite complicated as the government keeps changing capital allowance. But it can save a lot of tax.

You will likely need help from an accountant or else to be really committed to learning a lot about the subject.

Tip 3: Weigh up all the options to benefit yourself

For people operating limited liability companies, you will need to strike a balance between how much you pay yourself under PAYE (salary) and how much you pay yourself through dividends.

You need to understand all about national insurance (NI) contributions and how they impact the level of your state pension. This means you don’t pay NI on dividends, but you do on a salary.

You should pay yourself at least a salary of around £8k. But you need to be careful as HMRC might object and you will lose pension rights if you don’t.

Make sure to speak with a professional accountant to make the right call.

Other areas where you can save tax are:

  • Pension contributions (up to £40,000 in 2021/22). Of course, you can’t access your pension until you are older
  • Providing mobile phones, childcare or childcare vouchers. It’s tax free for you and can be claimed against tax by the business
  • Making charitable donation through your limited company can reduce your corporation tax bill
  • Paying a reasonable rent for use of your home office. It’s taxable but saves NI. However, you can’t then also claim for home expenses
  • Paying yourself interest if you as a director has loaned the company money. The £1k personal savings allowance (£500 for higher rate taxpayers) is tax free with no NI too
  • There is no tax payable where the business provides a cycle and cyclists’ safety equipment or workplace nurseries
  • There is a tax saving where the business provides low emission cars with CO2 emissions of 75g/km or less

Tip 4: Don’t be late to pay your tax to HMRC

Penalties are charged for late PAYE, VAT and annual self-assessment or corporation tax returns. In addition, you will be charged interest if the late return means you pay taxes late.

If your last trailing 12 months of sales exceed £85,000, then you must register for VAT and charge your customers VAT from that point onwards. If you miss this, you will have to pay HMRC VAT on your sales even though you didn’t charge or receive it!

There are also severe and escalating penalties for failing to file CIS returns on time.

All in all, penalties can be painful. They may also lead to an HMRC investigation, which will take lots of time and cost. It’s best to make sure you know the rules and to do everything by the book.

Don’t forget to read our post on filing business taxes which guides you through the process so you can stay on top of your taxes.

Tip 5: Take professional advice

Tax is complicated, particularly for the trade industry. In this short article, it has not been possible to cover the more complex areas of claiming for home costs, fully claiming vehicle costs etc.

To get a full overview on how to pay less tax in the UK, it’s good to sit down with an accountant. They will be able to set you off on the right track and can save you a lot of time and money.

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do dividends reduce corporation tax

How can I save money when running my business?

Running your business can be a challenge but there are many ways you can save money. Our money saving tips for businesses guide covers a range of different options to help reduce the amount of money you spend. Examples include:

  • Raising your prices: The more you charge for your services, the higher your profits will be. Just remember to not overcharge your customers or you’ll struggle to find work
  • Claiming for business expenses: Deducting business expenses can reduce your Corporation Tax
  • Joining Checkatrade: As a Checkatrade member, you can save thousands on business essentials including the cost of van leasing, tools, and materials

Want some tips to grow your business? Check out our free ‘Grow your business’ guide.

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