Smart SME’s understand and use all available ethical and legal means to hammer down their yearly tax bill . Every company exists to make a profit, and while infringing upon the letter or spirit of the law will attract raised eyebrows from HMRC, legitimate and effective tax planning should certainly be on the annual agenda for every SME owner.
Below are some tax efficiency pointers that can help all SME’s cough up no more than their fair share of tax:
- Keep adequate records. It all starts with proper book keeping. Smaller companies often have somewhat hap-hazard accounting practices. Keeping robust accounting documentation is very important for every SME – not only is this a legal requirement, but well preserved accounts will assist with the overall tax planning process.
- Maintain lower salaries and top up with dividends. Higher salaries paid to staff and directors not only take a direct bite out of the company’s Profit & Loss statements, but are also subject to associated national insurance contributions (paid as a percentage of salary). Lower salaries therefore automatically mean less national insurance contributions payable by both the employee and the company. Consider topping up salary by way of dividends wherever possible. Not only do dividends attract no national insurance, but the dividend sum attracts far less tax (and in some instances can be tax free altogether).
- Employ family members on lower wages. A certain amount of annual salary is completely tax free (the figure changes every year – visit HMRC for more information on the current figure). This means that this figure can be paid by the company without it having to stump up additional national insurance tax. Again, additional dividends may be payable to top up the lower base salary in a tax efficient way. The family member or employee must also be a shareholder of the company to be able to receive dividend payments.
- Plan dividend payments according to nuances in the budget. Every year, the chancellor of the exchequer announces a budget which normally kicks in the following April. In many cases a company could plan reduced tax payments around specific budget changes relating to tax rates. So, if a change announced in the budget would affect taxable dividends (and lower the taxes due) – it would simply be prudent and tax efficient for the company to wait until the new tax rate kicked in before the dividends were paid.
- Know your tax write offs. Every business should know every last pound of expenditure that could be legitimately written away against profits. While a lot of these will be common sense knowledge that the majority of business owners may have an awareness of, a good accountant can certainly suggest additional write offs to help keep the tax bill down.
- Be aware of reliefs and allowances available to your business. Understanding precisely which reliefs your business qualifies for can help take a nice chunk out of a nasty tax bill. There are a myriad of reliefs and allowances available to SME’s based on various factors such as location, industry and expenditure type. For instance, capital allowances can be claimed on new plant and machinery, and there are other allowance categories such as the Annual Investment Allowance (AIA) that can be further explored.