How to be tax efficient

Taxes can be confusing at the best of times. For small business owners in particular, it can seem like a mess of forms, codes, and legislation. 

Navigating this mess can be so complicated, it’s difficult to know if you’re being as efficient with your taxes as you could be. 

If you feel like this applies to you, then don’t worry. Because we’re here to help with some simple advice about how to be tax efficient.

Specifically, we’ll be talking about:

• Income tax allowance
• Dividends
• Capital gains tax allowance
• Savings interest allowance
• Hiring a professional accountant

If you take a salary from your business, you’ll have to pay income tax.

If you want to be tax efficient you should know what tax rate you’ll have to pay. It varies depending on how much earn, like this:

• Personal Allowance – you won’t be taxed on anything you earn up to £12,570.
• Basic rate – you’ll be taxed 20% on anything you earn between £12,571 and £50,270.
• Higher rate – you’ll be taxed 40% on anything you earn between £50,271 to £150,000.
• Additional rate – you’ll be taxed 45% on anything you earn over £150,000.

If you live in Scotland, it’s the same idea but with slightly different rates.

If you’re self-employed, you have a £1,000 trading allowance. This means the first £1,000 you earn won’t count toward your taxable income.

Following on from our last point, a huge part of being tax efficient involves claiming business expenses.

A business expense is any money spent on services or equipment that’s vital to your business operations. You can deduct those expenses from your taxable income, reducing the amount of income tax you’ll have to pay. 

For small business owners, in particular, there are a lot of expenses that can be claimed. Common tax-deductible business expenses include:

• Bank fees and interest
• Rent
• Utilities
• Insurance
• Company car
• Equipment or equipment rental
• Software
• Supplies
• Membership fees
• Meals
• Travel
• Subscriptions
• Advertising
• Legal fees
• Maintenance and repair

Even if you’re working from home, you can claim tax relief on any expenses that are vital for your business operation. Things like:

• Home office space (as long as it’s your main place of business)
• Mortgage interest
• Security system
• Property taxes
• Maintenance, repairs or upkeep
• Business phone line (separate from the home line)
• Insurance

For more information about business expenses, check out the HMRC website.

If you have a limited company, you can pay yourself dividends alongside an actual salary. The benefits of this is that the first £2,000 you get in dividends is tax free.

After that, dividends are taxed at a rate that depends on your income tax rate. 

• If you pay a basic tax rate, you’ll have to pay 7.5% dividend tax.
• If you pay a higher tax rate, you’ll have to pay 32.5% dividend tax
• If you pay an additional tax rate, you’ll have to pay 38.1% dividend tax. 

Being aware of these rates means you can pay yourself an income, along with dividends, while limiting the amount you’ll be taxed overall. 

Capital gains tax is a tax you’ll have to pay when you sell something for more than you got it. 

You’re only taxed on the profit from the sale, not the whole amount. 

For example, if you buy a property for £40,000, then sell it for £50,000, you’ll only be taxed on the £10,000 profit you made from the sale. 

You only have to pay capital gains tax on when you sell things like:

• most personal possessions worth £6,000 or more, apart from your car
• property that’s not your main home
• your main home if you’re renting it, using it for business, or it’s really big
• shares that are not in an ISA or PEP
• business assets

When it comes to tax efficiency, you should know that you won’t have to pay tax on profits up to £12,300, or £6,150 for trusts. This is called your personal allowance.

Beyond that, the capital gains tax rate you pay will vary depending on your income tax rate and the kind of thing you’re selling. 

If you lose money on a sale, you can also report that loss to HMRC, and they’ll deduct that amount from your total taxable profits. 

If you have savings, you can earn interest on those savings. And some of that interest might not be taxed depending on your income tax band. This is called your personal savings allowance:

• If you’re in the basic income tax band, the first £1,000 of interest you earn is tax free. 
• If you’re in the higher tax band, the first £500 is tax free. 
• If you’re in the additional tax band, you won’t be eligible for any personal savings allowance. 

Remember, when figuring out your income tax band, the interest you’ve made from your savings counts toward your total taxable income. 

If you earn less than £17, 570 annually, you’ll also get a starting rate for savings. This means you can earn up to £5,000 in interest from your savings before having to pay any tax on it. 

Again, this will depend on your other incomes. 

After you reach your personal income allowance (£12,570 per year), every £1 more you earn will be taken from your starting rate for savings. 

For example:

• You’ve earned £13,000 a year from income and £500 from interest on your savings.
• You’re now £430 over your personal allowance, so you’d remove that from your starting rate. 
• Your starting rate is now £4,570.
• That £500 interest from savings is still within the starting rate, so you won’t need to pay tax on it. 

Knowing how your savings interact with your income is a great way to become more tax efficient, and can help you get the most out of your total earnings.

You can find out more information about savings tax on the HMRC website. 

One of the easiest ways to be efficient with your taxes is to hire someone who does this sort of thing for a living. 

They’ll be able to organise your accounts for tax season, deal with HMRC on your behalf, and give you valuable insights into the most efficient tax strategies. 

The Countingup business current account makes it easy to manage all your financial data in one simple app. 

The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. You’ll receive real-time insights into your cash flow, profit and loss reports, tax estimates, and the ability to create invoices in seconds.

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward.