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How to reduce your tax bill

Ibrahim Aziz of Numerion Associates explains how companies can avoid overpaying their tax liability.

Recent research carried out by the Small Business Tax Action Report found that small businesses will overpay an estimated £7.15 billion in taxes over the coming year, equating to around £1,500 for each of the 4.5 SMEs in the UK.

It goes without saying that no one wants to pay more tax than they have to, and with many small businesses still riding the waves of the recession, this is an area that companies should be looking at closely to reduce their outlay. Of course, living in a civilised society everyone must pay tax; but it is worth researching the various reliefs and schemes available to make sure you are not paying more than your fair share.

Business structure

Tax legislation is constantly changing, so if you have been trading for many years you should make it a priority to ensure that you are operating in the most tax efficient manner, taking advantage of the various rates available.

Depending on what you want to do with the company, the stage of your business and risk environment that you operate in, a corporate structure may well minimise the overall tax payable.However, if you are currently working as a self-employed individual you may want to consider operating through a limited company structure which will minimise the impact of the 50% income tax rate.

The effective marginal rate for personal profits exceeding the higher rate threshold in the 2011/12 tax year is 42% (40% income tax plus 2% National Insurance contributions). This increases to 52% if you exceed the additional higher rate threshold. Whilst the mainstream Corporation Tax rate has just been reduced to 24%, the small profit rate remains at 20%. The small profit rate relates to taxable profits not exceeding £300,000 and the mainstream Corporation Tax rate for profits in excess of £1.5m.

Profit extraction

When it comes time to pay yourself there are two ways that most business owners opt for; by salary or dividends - with many choosing to do a combination of both. However, it is important to be aware that this involves two different levels of taxation. A salary payment, including any Employer’s National Insurance, is an allowable deduction in arriving at the company’s taxable profit - and hence reduces the Corporation Tax payable. A dividend on the other hand, is not allowable for Corporation Tax purposes and is treated as a distribution of profits after taxation.

Tax is just one of the many challenges faced by businesses in the current economic climate. It can be one of the biggest cash outflows and not only reduces dividends and the amount payable for owners, but also leaves fewer funds for future growth and investment. Taxation procedures are complex and fluid, but the different forms of tax relief are important to commercial success. They are also legitimately there to be claimed, so do your homework and seek professional advice to ensure that you aren’t harming your business by paying more than you owe.

Ibrahim Aziz is the managing partner of Numerion Associates

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